HSBC Holdings plc Annual Report and Accounts 2024 Accounts 2023 Our ambition is to be the preferred international financial partner for our clients. Our purpose, ambition and values reflect our strategy and support our focus on execution. Opening up a world of opportunity Contents Strategic report 1 Performance in 2023 2 Highlights 4 Who we are 6 Group Chairman’s statement 8 Group Chief Executive’s review 11 Our strategy 14 ESG overview 20 Board decision making and engagement with stakeholders (Section 172(1) statement) 24 Remuneration 25 Financial overview 30 Global businesses 37 Risk overview 40 Long-term viability and going concern statement Environmental, social and governance (‘ESG’) review 42 Our approach to ESG 44 Environmental 75 Social 87 Governance Financial review 100 Financial summary 111 Global businesses and legal entities 130 Reconciliation of alternative performance measures Risk review 136 Our approach to risk 140 Top and emerging risks 145 Our material banking risks Corporate governance report 239 Biographies of Directors and senior management 262 Board committees 279 Directors’ remuneration report Financial statements 318 Independent auditors’ report 329 Financial statements 341 Notes on the financial statements Additional information 435 Shareholder information 444 Abbreviations HSBC Holdings plc Annual Report and Accounts 2023 Cover image: Opening up a world of opportunity We connect people, capital and ideas across the world. By unlocking the true power of our international networks, we are able to deliver our purpose of opening up a world of opportunity. This Strategic Report was approved by the Board on 21 February 2024. Mark E Tucker Group Chairman A reminder The currency we report in is US dollars. Our approach to ESG reporting We embed our ESG reporting and Task Force on Climate-related Financial Disclosures (‘TCFD’) within our Annual Report and Accounts. Our TCFD disclosures are highlighted with the following symbol:  TCFD Constant currency performance We supplement our IFRS Accounting Standards figures with non-IFRS Accounting Standards measures used by management internally that constitute alternative performance measures under European Securities and Markets Authority guidance and non-GAAP financial measures defined in and presented in accordance with US Securities and Exchange Commission rules and regulations. These measures are highlighted with the following symbol: Further explanation may be found on page 29. IFRS 17 ‘Insurance Contracts’ From 1 January 2023, we adopted IFRS 17 ‘Insurance Contracts’, which replaced IFRS 4 ‘Insurance Contracts’. Comparative data have been restated. For further details of our adoption of IFRS 17, see page 100. None of the websites referred to in this Annual Report and Accounts 2023 for the year ended 31 December 2023 (including where a link is provided), and none of the information contained on such websites, are incorporated by reference in this report. Read more on our values and strategy on pages 4 and 11. @HSBC linkedin.com/company/hsbc facebook.com/HSBC HSBC Holdings plc Annual Report and Accounts 2023 Strategic report Performance in 2023 Financial performance indicators Our financial performance indicators demonstrate our continued focus on the delivery of sustainable returns for our shareholders and providing a strengthened platform for growth. They also provide insight into the performance that has driven the outcomes of our financial targets. Read more on our financial performance in 2023 on pages 2 and 27. For an explanation of performance against our key Group financial targets, see page 25. For a reconciliation of our target basis operating expenses to reported operating expenses, see page 133. For our financial targets we define medium term as three to four years and long term as five to six years, commencing 1 January 2024. Return on average tangible equity 14.6% (2022: 10.0%) Profit before tax $30.3bn (2022: $17.1bn) Operating expenses $32.1bn Target basis operating expenses up 6% to $31.6bn (2022: $32.7bn) Common equity tier 1 capital ratio 14.8% (2022: 14.2%) Dividend per share $0.61 (2022 dividend per share: $0.32) Strategic performance indicators Our strategy supports our ambition of being the preferred international financial partner for our clients. We are committed to building a business for the long term, developing relationships that last. Read more on our strategy on pages 11 to 13. Read more on multi-jurisdictional client revenue on page 111. Read more on how we set and define our ESG metrics on page 16. Read more on our definition of sustainable finance and investment on page 49. We no longer report the metric ‘Asia as a percentage of Group tangible equity’. Net new invested assets $84bn Generated in 2023, of which $47bn were in Asia. (2022: $80bn generated, of which $59bn were in Asia) Wholesale multi-jurisdictional client revenue 61% Wholesale client revenue generated by clients banking with us across multiple markets. Digitally active Commercial Banking customers 83% (2022: 78%) Gender diversity 34.1% Women in senior leadership roles. (2022: 33.3%) Sustainable finance and investment $294.4bn Cumulative total provided and facilitated since January 2020. (2022: $210.7bn) HSBC is one of the world’s leading international banks. We have a clear strategy to deliver revenue and profit growth, enhance customer service and improve returns to shareholders. HSBC Holdings plc Annual Report and Accounts 2023 1 Highlights Financial performance reflected net interest income growth, and we continued to make progress against our four strategic pillars. Financial performance (vs 2022) – Profit before tax rose by $13.3bn to $30.3bn, primarily reflecting revenue growth. This included a favourable year-on- year impact of $2.5bn relating to the sale of our retail banking operations in France, which completed on 1 January 2024, and a $1.6bn provisional gain recognised on the acquisition of Silicon Valley Bank UK Limited (‘SVB UK‘) in 2023. These were partly offset by the recognition of an impairment charge in 2023 of $3.0bn relating to the investment in our associate, Bank of Communications Co., Limited (‘BoCom’), which followed the reassessment of our accounting value- in-use. On a constant currency basis, profit before tax increased by $13.8bn to $30.3bn. Profit after tax increased by $8.3bn to $24.6bn. – Revenue rose by $15.4bn or 30% to $66.1bn, including growth in net interest income (‘NII’) of $5.4bn, with rises in all of our global businesses due to the higher interest rate environment. Non-interest income increased by $10.0bn, reflecting a rise in trading and fair value income of $6.4bn, mainly in Global Banking and Markets. The associated funding costs reported in NII grew by $6.2bn. The increase also included the impact of the strategic transactions referred to above, partly offset by disposal losses of $1.0bn relating to repositioning and risk management activities in our hold-to-collect-and-sell portfolio. – Net interest margin (‘NIM’) of 1.66% increased by 24 basis points (‘bps’), reflecting higher interest rates. – Expected credit losses and other credit impairment charges (‘ECL’) were $3.4bn, a reduction of $0.1bn. The net charge in 2023 primarily comprised stage 3 charges, notably related to mainland China commercial real estate sector exposures. It also reflected continued economic uncertainty, rising interest rates and inflationary pressures. ECL were 33bps of average gross loans, including a 3bps reduction due to the inclusion of loans and advances classified as held for sale. – Operating expenses fell by $0.6bn or 2% to $32.1bn, mainly due to the non- recurrence of restructuring and other related costs following the completion of our cost to achieve programme at the end of 2022. This more than offset higher technology costs, inflationary pressures and an increase in performance-related pay. We also incurred a higher UK bank levy and a charge relating to the Federal Deposit Insurance Corporation (‘FDIC’) special assessment in the US. Target basis operating expenses rose by 6%. This is measured on a constant currency basis, excluding notable items and the impact of the acquisition of SVB UK and related investments internationally. It also excludes the impact of retranslating the prior year results of hyperinflationary economies at constant currency. – Customer lending balances rose by $15bn on a reported basis, but fell by $3bn on a constant currency basis. Growth included a $7.8bn reclassification of secured loans in France from held for sale, an addition of $8bn from the acquisition of SVB UK, and higher mortgage balances in HSBC UK and Hong Kong. These increases were more than offset by a reduction in wholesale term lending, notably in Asia, and from business divestments in Oman and New Zealand. – Customer accounts rose by $41bn on a reported basis, and $13bn on a constant currency basis, primarily in Wealth and Personal Banking, reflecting growth in Asia, partly offset by reductions in HSBC UK, reflecting cost of living pressures and the competitive environment, despite an increase of $6bn from the acquisition of SVB UK. There was also a reduction due to the sale of our business in Oman. – Common equity tier 1 (‘CET1’) capital ratio of 14.8% rose by 0.6 percentage points, as capital generation was partly offset by dividends and share buy-backs. – The Board has approved a fourth interim dividend of $0.31 per share, resulting in a total for 2023 of $0.61 per share. We also intend to initiate a share buy-back of up to $2.0bn, which we expect to complete by our first quarter 2024 results announcement. Outlook – We continue to target a return on average tangible equity (‘RoTE’) in the mid-teens for 2024, excluding the impact of notable items (see page 25 for information on our RoTE target for 2024). Our guidance reflects our current outlook for the global macroeconomic environment, including customer and financial markets activity. – Based upon our current forecasts, we expect banking NII of at least $41bn for 2024. This guidance reflects our current modelling of a number of market dependent factors, including market-implied interest rates (as of mid-February 2024), as well as customer behaviour and activity levels, which we would also expect to impact our non-interest income. We do not reconcile our forward guidance on banking NII to reported NII. – While our outlook for loan growth remains cautious for the first half of 2024, we continue to expect year-on-year customer lending percentage growth in the mid-single digits over the medium to long term. – Given continued uncertainty in the forward economic outlook, we expect ECL charges as a percentage of average gross loans to be around 40bps in 2024 (including customer lending balances transferred to held for sale). We continue to expect our ECL charges to normalise towards a range of 30bps to 40bps of average loans over the medium to long term. – We retain a Group-wide focus on cost discipline. We are targeting cost growth of approximately 5% for 2024 compared with 2023, on a target basis. This target reflects our current business plan for 2024, and includes an increase in staff compensation, higher technology spend and investment for growth and efficiency, in part mitigated by cost savings from actions taken during 2023. – Our cost target basis for 2024 excludes the impact of the disposal of our retail banking business in France and the planned disposal of our banking business in Canada from the 2023 baseline. Our cost target basis is measured on a constant currency basis and excludes notable items and the impact of retranslating the prior year results of hyperinflationary economies at constant currency. We do not reconcile our forward guidance on target basis costs to reported operating expenses. – We intend to continue to manage the CET1 capital ratio within our medium- term target range of 14% to 14.5%. – Our dividend payout ratio target remains at 50% for 2024, excluding material notable items and related impacts. We have announced a further share buy- back of up to $2.0bn. Further buy-backs remain subject to appropriate capital levels. 2 HSBC Holdings plc Annual Report and Accounts 2023 Strategic report Strategic report ESG highlights Transition to net zero – In January 2024, we published our first net zero transition plan, which is an important milestone in our journey to achieving our net zero ambition – helping our people, customers, investors and other stakeholders to understand our long-term vision, the challenges, uncertainties and dependencies that exist, the progress we are making and what we plan to do in the future. The plan includes details on our sectoral approach, and on our implementation plan to embed net zero across key areas of our organisation. – Our net zero transition plan provides an overview of the progress we have made to date and what we plan to do next, although we acknowledge there is still much more to do. It will form the basis of further work on our journey to net zero over time, and we expect to review and update it periodically. – Following the recent launch of the Partnership for Carbon Accounting Financials (‘PCAF’) accounting standard for capital markets, we have now set combined on-balance sheet financed emissions and facilitated emissions targets for two emissions-intensive sectors: oil and gas, and power and utilities, and report the combined progress for both sectors. We recognise that data, methodologies and standards for measuring emissions and for target setting will continue to evolve. – Since 2020, we have provided and facilitated $294.4bn of sustainable finance and investment, which was an increase of $83.7bn in the past year. Of our sustainable finance and investment progress to 31 December 2023, $258.3bn related to green and sustainable activities and $36.1bn related to social activities. – Within our own operations, we have made a 57.3% reduction in our absolute greenhouse gas emissions from a 2019 baseline. Build inclusion and resilience – In 2023, 34.1% of senior leadership roles were held by women. We have a target to achieve 35% by 2025, which we are on track to achieve, although we recognise that progress in the past year has not been as fast paced as we would like. We also continued to work towards meeting our ethnicity goals. – We continue to make the banking experience more accessible in both physical and digital spaces. We are working to ensure that our digital channels are usable by everyone, regardless of ability. We also expanded our efforts to support customers with disabilities in our branch spaces. Act responsibly – We aim to be a top-three bank for customer satisfaction. In 2023, we were ranked as a top three bank against our competitors in 58% of our six key markets across Wealth and Personal Banking and Commercial Banking, but we still have work to do to improve our rank position against competitors. – We published guides to help our buyers and our suppliers better understand our net zero ambitions. The guides provide further details to support suppliers in understanding our sustainability expectations, as set out in our supplier code of conduct. – We continued to raise awareness and develop our understanding of our salient human rights issues. In 2023, we provided practical guidance and training, where relevant, to our colleagues across the Group, on how to identify and manage human rights risk. Strategic transactions – During 2023, we continued to acquire businesses that allow us to build scale and enhance our capabilities. In March, we acquired SVB UK, and subsequently launched HSBC Innovation Banking, which includes SVB UK and new teams in the US, Hong Kong and Israel, as well as in Denmark and Sweden, to deliver a globally connected, specialised banking proposition to support innovation businesses and their investors. – As part of our ambition to be a leading wealth provider in Asia, we entered into an agreement to acquire Citi’s retail wealth management portfolio in mainland China. This acquisition comprised the assets under management and deposits, and the associated wealth customers. We also announced a partnership with the fintech Tradeshift to launch a joint venture focusing on embedded finance solutions and financial services applications. – We continue to make good progress on our strategic disposals. The planned sale of our banking business in Canada received government approval and is expected to complete in the first quarter of 2024. We completed the sale of our retail banking operations in France on 1 January 2024, as we reshape the organisation to focus on our international customer base. In addition, we announced the planned sale of our retail business in Mauritius, and also completed the sale of our operations in Greece, the merger of HSBC Bank Oman with Sohar International, and the sale of our New Zealand retail mortgage loan portfolio. – While we remain committed to the sale of our business in Russia, the sale became less certain. As a result, the business is no longer classified as held for sale, the previously recognised loss has been reversed, and a broadly offsetting charge relating to recoverability was recognised in the fourth quarter of 2023. – We remain committed to consider the payment of a special dividend of $0.21 per share as a priority use of the proceeds from the sale of our banking business in Canada in the first half of 2024. The remaining proceeds will accrue into CET1 capital in consideration for organic growth and investment, and we intend to use any excess capital to supplement share buy-backs. Upon completion, the sale is expected to result in an initial increase in the CET1 ratio of approximately 1.2 percentage points. HSBC Holdings plc Annual Report and Accounts 2023 3 Highlights Who we are Our values Our values help define who we are as an organisation, and are key to our long-term success. We value difference Seeking out different perspectives We succeed together Collaborating across boundaries We take responsibility Holding ourselves accountable and taking the long view We get it done Moving at pace and making things happen HSBC is one of the largest banking and financial services organisations in the world. We aim to create long-term value for our shareholders and capture opportunity. Our strategy Our strategy supports our ambition of being the preferred international financial partner for our clients, centred around four key areas. Focus – Maintain leadership in scale markets – Double-down on international connectivity – Diversify our revenue – Maintain cost discipline and reshape our portfolio Digitise – Deliver seamless customer experiences – Ensure resilience and security – Embrace disruptive technologies and partner with innovators – Automate and simplify at scale Energise – Inspire leaders to drive performance and delivery – Unlock our edge to enable success – Deliver a unique and exceptional colleague experience – Prepare our workforce for the future Transition – Support our customers – Embed net zero into the way we operate – Partner for systemic change – Become net zero in our own operations and supply chain by 2030, and our financed emissions by 2050 For further details on progress made in each of our strategic areas, see pages 11 to 13. Our global reach Our global businesses serve around 42 million customers worldwide through a network that covers 62 countries and territories. Our customers range from individual savers and investors to some of the world’s biggest companies, governments and international organisations. We aim to connect them to opportunities and help them to achieve their ambitions. For further details of our customers and approach to geographical information, see page 110. Assets of $3.0tn Approximately 42m Customers bank with us Operations in 62 Countries and territories We employ approximately 221,000 Full-time equivalent staff 4 HSBC Holdings plc Annual Report and Accounts 2023 Strategic report Strategic report 41% 35% 24% Wealth and Personal Banking Commercial Banking Global Banking and Markets Customers Employees Investors Communities Regulators and governments Suppliers Our global businesses Wealth and Personal Banking (’WPB’) We help millions of our customers look after their day-to-day finances and manage, protect and grow their wealth. Revenue by global business1 Commercial Banking (‘CMB’) Our global reach and expertise help domestic and international businesses around the world unlock their potential. Global Banking and Markets (’GBM’) We provide a comprehensive range of financial services and products to corporates, governments and institutions. Building strong relationships with our stakeholders helps enable us to deliver our strategy in line with our long-term values, and operate the business in a sustainable way. Our stakeholders are the people who work for us, bank with us, own us, regulate us, and live in the societies we serve and the planet we all inhabit. These human connections are complex and overlap. Many of our employees are customers and shareholders, while our business customers are often suppliers. We aim to serve, creating value for our customers and shareholders. Our size and global reach mean our actions can have a significant impact. We are committed to doing business responsibly, and thinking for the long term. This is key to delivering our strategy. Our stakeholders We serve our customers through three global businesses. 1 Calculation is based on revenue of our global businesses excluding Corporate Centre. Corporate Centre had negative revenue of $199m in 2023. For further details of how we are engaging with our stakeholders, see page 15. For further details, see page 30. For further details, see page 32. For further details, see page 34. On pages 30 to 36 we provide an overview of our performance in 2023 for each of our global businesses, as well as our Corporate Centre. In each of our global businesses, we focus on delivering growth in areas where we have distinctive capabilities and have significant opportunities. Each of the chief executive officers of our global businesses reports to our Group Chief Executive, who in turn reports to the Board of HSBC Holdings plc. HSBC Holdings plc Annual Report and Accounts 2023 5 Who we are Group Chairman’s statement In 2023, reported profit before tax was $30.3bn, which was an increase of $13.3bn compared with 2022. This was due mainly to higher revenue and a number of notable items. Our three global businesses delivered good revenue growth, and we ended the year with strong capital, funding and liquidity positions. We remain committed to sharing the benefits of our improved performance with our shareholders. The Board approved a fourth quarterly dividend of $0.31 per share, bringing the total dividend for 2023 to $0.61 per share. Furthermore, in 2023 we announced three share buy-backs worth a total of $7bn and, today, have announced a further share buy- back of up to $2bn. The planned sale of our banking operations in Canada received final approval from the Canadian government at the end of last year. Subject to completion of the transaction, which is expected in the first quarter of 2024, the Board will consider a special dividend of $0.21 per share, to be paid in the first half of 2024, as a priority use of the proceeds. With this anticipated transaction and the completion of the sale of our retail banking business in France last month, our focus has moved to investing for growth, while maintaining efficiency. Two examples of growth opportunities last year were the agreed acquisition of Citi’s retail wealth business in mainland China, which will help accelerate our Wealth strategy, and the acquisition of SVB UK, following the difficulties experienced by its US parent entity. Acquiring SVB UK was opportunistic, but the deal made excellent strategic sense for HSBC, and it also helped to protect clients, safeguard jobs and maintain financial stability. Technology and sustainability are two of the trends transforming banking and the world around us. The opportunities from generative AI are among the most transformative within my working life. We are actively exploring a number of use cases, while also working to manage the associated risks. Meanwhile the global climate challenge is becoming increasingly acute. Our presence in many of the sectors and markets where the need to reduce emissions is the greatest provides us with an opportunity to work with our clients to help address it. This is set out in our first net zero transition plan. The Board discussed and contributed to the net zero transition plan in depth. We believe that it is a realistic and ambitious assessment of the long-term journey ahead, as we continue to work with our clients on their transitions to a low-carbon future. It is clear there will be many uncertainties and dependencies, and that our approach will need to continue to evolve with the real world around us. The global economy performed better than expected in 2023, but growth remained sluggish and the economic environment was challenging for many of our customers. Although inflation fell globally, core inflation levels and interest rates remained elevated. There was also significant variability in growth from market to market and increased volatility within the banking sector. Our core purpose of ‘opening up a world of opportunity’ underlines our focus on helping our customers and clients to navigate this complexity and access growth, wherever it is. Mark E Tucker Group Chairman Against a challenging global economic and political backdrop, HSBC’s strategy has delivered improved financial performance and increased returns for shareholders Many of our customers and colleagues are living through very difficult times. Higher interest rates have had a significant impact on businesses and households, and we will remain conscious of this with interest rates expected to begin to fall back in 2024. The wars between Russia and Ukraine, and now between Israel and Hamas, are absolutely devastating. Our thoughts are with all those impacted, including our colleagues in those parts of the world, and their families and friends. Their resilience, professionalism and care for one another during these most testing of times has been, and is, exceptional. Progress and performance Turning to our performance, I want to again pay tribute to my colleagues. The record profit performance that we delivered in 2023 was supported by the impact of interest rates on our strong balance sheet, but it was also testament to the tireless efforts of our people around the world. I would like to thank them sincerely for their hard work, dedication and commitment to serving our customers. 6 HSBC Holdings plc Annual Report and Accounts 2023 Strategic report Strategic report We also announced in December that David Nish intends to retire from the Board at the 2024 AGM. David has made an invaluable contribution to the Board over the past eight years, particularly in recent years as Chair of the Group Audit Committee and as Senior Independent Director. I would like to thank him warmly for his consistent counsel and guidance. I am pleased that Kalpana Morparia, Ann Godbehere, Brendan Nelson and Swee Lian Teo joined the Board during 2023. Each of them brings experience and expertise that is an asset to the Board. Specifically, Ann’s extensive public-listed company board experience means that she is ideally placed to take over as Senior Independent Director, while Brendan’s UK and international financial expertise and significant experience as audit chair at UK-listed companies will be particularly valuable as he takes over leadership of the Group Audit Committee. Macroeconomic outlook Looking ahead, 2024 is likely to be another eventful year. The slowing of inflation in the second half of 2023 means that monetary tightening now appears to be coming to an end. However, current inflation levels in many economies remain above their targets. As central banks continue to try to bridge this gap, voters head to the polls in a significant number of countries across the globe. The timing and outcomes of these elections will impact the decision making of governments and have geopolitical, as well as fiscal, implications. We will monitor the results closely, and take a long-term view of strategy, purpose and capital allocation, while cognisant of any short-term challenges. Among these potential challenges are the increased uncertainties due to wars in Europe and the Middle East, and disruption to global trade and supply chains caused by these and attacks on shipping in the Red Sea. However, we remain cautiously optimistic about economic prospects for 2024. We expect growth to slow in the first half of the year and recover thereafter. We also expect the variable economic growth that has characterised recent years to continue. The economies of south and south-east Asia carry good economic momentum into 2024. India and Vietnam are currently among the fastest-growing economies in the world, benefiting from competitive labour costs, supportive policies and changing supply chains. Chinese companies are among those increasingly looking towards these and other markets, as China’s economic transformation towards high-quality growth and domestic consumption continues. China’s recovery after reopening was bumpier than expected, but its economy grew in line with its annual target of around 5% in 2023. We expect this to be maintained in 2024, with recently announced policy measures to support the property sector and local government debt gradually flowing through to the wider economy. Hong Kong’s growth has moved along at a slower but healthy pace and is likely to remain in line with pre-pandemic levels. As Asia continues to grow, a significant opportunity is emerging to connect it to another high-growth region. The Middle East region performed very well economically in 2023 and the outlook remains strong for 2024, notwithstanding the risks arising from conflicts in the region. As countries like Saudi Arabia and the UAE continue to diversify their economies, new opportunities are created to connect them to Asia, and Asia to them. The US economy grew more quickly than expected in 2023 in the face of higher interest rates. Growth is likely to be lower in 2024, although it should remain higher than in Europe where growth remains subdued. The UK economy, which entered a technical recession at the end of 2023, has nonetheless been resilient. Headline inflation should fall in the first half of the year, with core inflation following by the end of 2024. This will of course determine the pace of interest rate cuts. I would like to end by reiterating my thanks to my colleagues for all that they have done, and all that they continue to do, for HSBC. Their tireless efforts are reflected by our improved financial performance and increased returns for shareholders in 2023 – and I look forward to them securing the foundations for our future success. Mark E Tucker Group Chairman 21 February 2024 ”Acquiring SVB UK was opportunistic, but the deal made excellent strategic sense for HSBC, and it also helped to protect clients, safeguard jobs and maintain financial stability.” Board operations Our work on sustainability was one of the many topics discussed with our shareholders at our 2023 Annual General Meeting (‘AGM’) in May. Ahead of that, Noel and I were pleased to meet with Hong Kong shareholders at our Informal Shareholders’ Meeting. At both meetings, we also discussed the resolutions that were requisitioned by shareholders on the Group’s strategy and dividend policy. Shareholders expressed strong support for the Group’s current strategy by voting overwhelmingly with the Board and against these resolutions at the AGM. This enabled the Board, my colleagues and our shareholders to focus on our shared objectives of serving our customers, driving stronger performance, and creating more value for our investors. In 2023, the Board held meetings in London, Birmingham, Hong Kong, Paris, New York, Mumbai and Delhi. We also returned to Beijing and Shanghai last month. On each occasion, the Board engaged with clients, colleagues, government officials and regulators – with these discussions underlining that HSBC continues to have a key role connecting the world’s trade and finance hubs. There were a number of changes to the composition of the Board last year. At the 2023 AGM, we said farewell to Jackson Tai, who made an important, extensive and lasting contribution to the success of HSBC during his time as a non-executive Director. His leadership in strengthening risk and conduct governance and oversight was particularly critical through a period of significant change. HSBC Holdings plc Annual Report and Accounts 2023 7 Group Chairman’s statement Group Chief Executive’s review 2023 was a very good year for HSBC. I would like to start by paying tribute to my colleagues for all that they did last year, and in the preceding three years. As I have said before, they have fully embraced our core purpose of ‘opening up a world of opportunity’ in all they do – from helping clients and customers to expand to new markets or move overseas, to digitising our business and helping our people to be their best, to our ongoing work on the transition to net zero. Our performance last year was great credit to them. We delivered strong revenue growth across all three global businesses, supported by higher interest rates, which enabled us to deliver our best return on average tangible equity in more than a decade. As well as improving financial performance, our strategy is increasing shareholder returns. I am pleased that we have rewarded our shareholders for their loyalty with the highest full-year dividend per share since 2008, as well as three share buy-backs in 2023 totalling $7bn. In total, we returned $19bn to shareholders by way of dividend and share buy-backs in respect of 2023. In addition, we have today announced a further share buy-back of up to $2bn. Our record profit performance in 2023 reflected the hard work of the last four years and the inherent strength of our balance sheet, supported by interest rates. Noel Quinn Group Chief Executive As we move into 2024, I am confident that there are opportunities ahead for us and our clients that can help us to sustain our good performance going into the next phase of the interest rate cycle. The environment does, however, remain challenging. The wars in Europe and the Middle East are beyond comprehension on a human level, and my thoughts remain with all those impacted. Both conflicts also still have the potential to escalate further. That would first and foremost deepen the humanitarian crisis, but also likely lead to another wave of market and economic turmoil. Interest rates are expected to fall this year, which we believe should in turn help to increase economic activity. The outlook currently remains uncertain, however, and many of our customers remain concerned about their finances. In the midst of these challenges, we will stay focused on what we are here to do – which is to serve our customers and clients, and help them with any financial difficulties they face. Financial performance Our results are a testament to the way we stayed focused in 2023. Reported profit before tax was $30.3bn, which was $13.3bn higher than in 2022. This included a number of notable items, including a favourable year-on-year impact of $2.5bn relating to the sale of our retail banking operations in France and a $1.6bn provisional gain on the acquisition of SVB UK. These were offset by a valuation adjustment of $3.0bn relating to our investment in BoCom, which followed the reassessment of our accounting value-in- use in line with recent market developments in mainland China. This adjustment has no material impact on our capital, capital ratio and distribution capacity, and therefore no impact on our share buy-backs or dividends. We remain confident in the resilience of the Chinese economy, and the growth opportunities in mainland China over the medium to long term. Reported revenue grew by 30% or $15.4bn, driven by an increase in net interest income of $5.4bn from all three global businesses. Non- interest income increased by $10bn, reflecting increased trading and fair value income of $6.4bn, mainly in Global Banking and Markets, and the favourable year-on-year impact from the impairment relating to the sale of our retail banking operations in France and provisional gain on the acquisition of SVB UK. In 2023, we delivered a return on average tangible equity of 14.6%, or 15.6% excluding strategic transactions and the impairment on our investment in BoCom. Return on average tangible equity 14.6% (2022: 10%) Profit before tax $30.3bn (2022: $17.1bn) 8 HSBC Holdings plc Annual Report and Accounts 2023 Strategic report Strategic report Our three global businesses performed well. In Commercial Banking, profit before tax was up by 76% to $13.3bn on a constant currency basis, driven by revenue increases across all our main legal entities. Within this, Global Payments Solutions revenue increased by 78% or $5.4bn on a constant currency basis, driven by higher margins reflecting higher interest rates and repricing. Fee income increased by 4% due to growth in transaction banking and higher volumes in cards and international payments, while our trade business performed well relative to the market and we increased our market share. Global Banking and Markets delivered profit before tax of $5.9bn, up 26% compared with 2022, on a constant currency basis. Revenue grew by 10% on a constant currency basis, due to higher net interest income in Global Payments Solutions and Securities Services. In Wealth and Personal Banking, profit before tax of $11.5bn was $6.1bn higher than in 2022, on a constant currency basis. Revenue was up by 31% or $6.4bn on a constant currency basis, reflecting growth in Personal Banking and in Wealth, as well as the positive year-on-year impact relating to the sale of our French retail banking business. Within this, Wealth revenue of $7.5bn was up 8% or $0.6bn on a constant currency basis, with good growth in private banking and asset management. Reported costs for 2023 were down by 2% compared with the previous year, as lower restructuring costs offset higher technology spending, inflation, higher performance- related pay and levies. On a target basis, costs increased by 6%, which was 1% higher than previously guided due to levies including a charge relating to the FDIC special assessment levy in the US. Our reported cost-efficiency ratio improved to 48.5% from 64.6% in 2022, supported by higher net interest income. Our 2023 reported ECL charge of $3.4bn was $0.1bn lower than in 2022. This primarily comprised stage 3 net charges, notably related to mainland China commercial real estate sector exposures, and reflected the continued uncertainty within the global economy. After good capital generation in 2023, we ended the year with a CET1 ratio of 14.8%. We are able to pay a fourth interim dividend of $0.31 per share, bringing the total 2023 dividend to $0.61 per share, which is the highest since 2008. From transform to sustain and grow Looking forward, supportive interest rates and good underlying business growth have given us strong momentum. We continue to target a mid-teens return on average tangible equity. We are also, however, mindful of the interest rate cycle and the subsequent impact on net interest income. In 2023, we increased the size and duration of our structural hedges to reduce the sensitivity of banking net interest income to interest rate movements and help stabilise future earnings. We also see a number of growth opportunities within our strategy that play to our strengths. The first is to further grow our international businesses, which remains our biggest differentiator and growth opportunity. International expansion remains a core strategy for corporates and institutions seeking to develop and expand, especially the mid-market corporates that HSBC is very well-positioned to serve. Rather than de-globalising, we are seeing the world re-globalise, as supply chains change and intra-regional trade flows increase. Our international network and presence in markets that are benefiting like the ASEAN region and Mexico help us to capitalise on these trends. As a result, our market-leading trade franchise facilitated more than $850bn of trade in 2023, while we are the second biggest payments company by revenue and we processed around $500tn of payments electronically in 2023. This helped to grow wholesale multi- jurisdictional client revenue from customers who bank with us in more than one market, by 29% in 2023. With multi-jurisdictional corporate customers in Commercial Banking generating around five times as much client revenue as an average domestic customer, we continue to focus on growing this further, especially in the mid-market segment where we have a competitive advantage and there is still potential to further extend our market leadership. ”I am confident that there are opportunities ahead for us and our clients that can help us to sustain our good performance going into the next phase of the interest rate cycle.” The second is to diversify our revenue. Building our wealth business to meet the rising demand for wealth management services, especially in Asia, has been a strategic priority. Last year, we attracted net new invested assets of $84bn, following $80bn in 2022 and $64bn in 2021, underlining the traction that we have gained. Our agreement to acquire Citi’s retail wealth management portfolio in mainland China helps accelerate our plans. Another trend is the increasing demand for seamless, integrated, cross-border banking services, which innovation is helping us to deliver. We now have 1.3 million Global Money customers, up from 550,000 in 2022, and grew revenue from Wealth and Personal Banking international customers by 41% last year, from $7.2bn to $10.2bn. Critically, there was a 43% increase in new-to-bank international customers compared with 2022, driven by the new international proposition that we launched and continue to develop. As in wholesale, these international customers generate higher revenue, bringing in around three times as much as average domestic-only customers. The third is continued growth in our two home markets. Our business is built on two very deep pools of liquidity in Hong Kong and the UK, which underpin our exceptional balance sheet strength and, therefore, all that we do as a business. Hong Kong and the UK are both also very profitable, well- connected markets. We are well positioned to capitalise on our positions as the number one bank in Hong Kong and a leading bank in the UK. Hong Kong’s connectivity, both globally and to mainland China, are helping us to grow our franchise. We have increased our market share in trade in Hong Kong by 6.6 percentage points over the last three years, according to HKMA data. Meanwhile new-to-bank customers in Hong Kong increased by 36% over the same period as we have capitalised on the return of visitors from mainland China. In the UK, we have good traction in Commercial Banking and continue to grow market share in Wealth and Personal Banking. We are the leading bank for UK large corporates, with more than 70% market penetration last year, according to Coalition Greenwich. Euromoney also named us as the best bank in the UK for small and medium-sized enterprises, as digitisation helped to grow new-to-bank clients through Kinetic. We also increased our market share of UK mortgage stock, from 7.4% in 2020 to 8% in 2023, according to Bank of England data. As economic conditions improve and we continue to invest, we are confident in our ability to grow further in these critical markets. HSBC Holdings plc Annual Report and Accounts 2023 9 Group Chief Executive’s review We have also continued to diversify our profit generation geographically across multiple markets. The positions that we have as a leading foreign bank in mainland China, India, Singapore, the UAE, Saudi Arabia and Mexico – all of which are also well connected to our international network – mean we are well placed to capture opportunities in these fast-growing economies. This was again evident as they all grew reported profits significantly in 2023, with mainland China (excluding associates), India, and Singapore each contributing in excess of $1bn of profits to the Group. It is critical that we maintain tight cost discipline. This was challenging in 2023 in a high inflation environment, and will likely remain so in 2024. At the same time, we need to invest in growth, so we remain very focused on maintaining tight underlying costs. The sale of our French retail banking operations completed on 1 January 2024, and the planned sale of our banking business in Canada remains due to complete in the first quarter of 2024. A number of smaller exits remain underway as we continue to look at opportunities to reshape our portfolio. At the same time, our acquisition of SVB UK enabled us to create a bigger, new proposition in HSBC Innovation Banking, which combines deep sector specialisms with our balance sheet strength and global reach, ensuring we continue our long history of supporting entrepreneurs. Driving cost savings enables us to invest in technology, which is the fourth opportunity. The digitisation of our business continues to improve customer experience and increase efficiency. Using AI to help price complex structural options in our Foreign Exchange business has cut execution times down from hours to minutes. We have also identified hundreds of opportunities to leverage generative AI, and will focus our efforts on use cases with tangible benefits for the Group and our customers. Innovation also creates new avenues for growth. We recently launched Zing, which is our open market mobile platform focused on cross-border payments, initially available in the UK. It offers similar capabilities as Global Money does to our international Wealth and Personal Banking customers, but is targeted at non-HSBC customers and allows us to drive growth beyond our traditional customer footprint. Underpinning all of this is our work to build a stronger performance culture, improve colleague experience and prepare our workforce for the future. This is important because achieving our ambitions depends on our 220,000 colleagues feeling motivated and believing in our strategy. In our most recent staff survey, I was pleased that the number of colleagues seeing the positive impact of our strategy in 2023 was up 11 percentage points on 2020, which is also above the financial services sector benchmark. Finally, helping to finance the substantial investment needs of our customers in the transition to net zero is a growing commercial opportunity, as well as a necessity to mitigate rising financial and wider societal risks. Our first net zero transition plan shows how we intend to finance and support the transition to net zero and collaborate globally to help enable change at scale. It also sets out our roadmap for implementing net zero, which we will do by supporting our customers, embedding net zero into the way we operate and partnering for systemic change. We understand that our approach – including our own transition plan – will need to evolve over time to keep pace with both the evolving science and real economy decarbonisation across the sectors and geographies we serve. Thank you On a personal note, one of the most enjoyable parts of 2023 for me was spending time with many of my colleagues around the world. Reconnecting with them, and seeing first- hand their passion for serving our customers, pride in HSBC and ambitions for the future, was energising and inspiring. Leading HSBC is a privilege, and my colleagues are the main reason why. 2023 was a very good year for HSBC. We now have an opportunity to ensure that it becomes part of a longer-term trend of ongoing good performance and to secure the foundations for future success. I am confident that we have the opportunities, the platform and the team to enable us to get it done. Noel Quinn Group Chief Executive 21 February 2024 In 2023, we continued to build in areas we expect to drive future growth. We brought in $84bn of net new invested assets in wealth. We grew multi-jurisdictional wholesale revenue by 29% from $15.8bn in 2022 to $20.4bn in 2023. Future growth levers 10 HSBC Holdings plc Annual Report and Accounts 2023 Strategic report | Group Chief Executive’s review Strategic report Multi-jurisdictional customers Domestic-only customers Percentage of wholesale revenue from multi-jurisdictional customers Multi-jurisdictional customers 61% International customers Domestic-only customers Percentage of WPB revenue from international customers Multi-jurisdictional Non-resident and resident foreigner 40% 21% 19% International customers WPB – build our international and wealth propositions We continued to build our international and wealth propositions, taking advantage of the growth of wealth assets globally but especially in Asia. We amassed $84bn in net new invested assets in 2023, bringing total wealth invested assets to $1,191bn, an increase of 17% from 2022. In 2023, our international strategy generated good results. We continued to attract international customers, who are either multi-jurisdictional, non-resident or resident foreigners, from our top 11 markets1. We increased new-to-bank customers2 in this segment by 43% since 2022, bringing total international customers to 6.7 million. These customers also each generated approximately three times the income compared with domestic customers. As a result, we increased revenue in this segment by 41% compared with 2022. Customers increasingly demand seamless banking across geographies. We continued to enhance Global Money, our mobile proposition that allows customers to spend and send money in multiple currencies. The product gained traction with more than 750,000 new customers in 2023, taking total customers to over 1.3 million. 1 Top 11 markets include the UK, Hong Kong, Mexico, the US, India, Singapore, Malaysia, the UAE, Australia, mainland China and the Channel Islands and the Isle of Man. 2 New-to-bank customers includes both new to bank customers and those customers who have opened an account in a new market, including those who already bank with us in one or more other markets. Focus Wholesale – double down on leadership in international connectivity Our strategy We are implementing our strategy across the four strategic pillars aligned to our purpose, values and ambition. Our strategy remains anchored around our four strategic pillars: ‘Focus’, ‘Digitise’, ‘Energise’ and ‘Transition’. We delivered a good set of results in 2023 supported by the interest rate environment and the execution of our strategy. Our reported profit before tax was $30.3bn and we achieved a reported return on tangible equity of 14.6%, or 15.6% excluding the impact of strategic transactions and the impairment of our investment in BoCom. In our global businesses, WPB revenue increased by 31% on a constant currency basis, including a favourable year-on-year impact relating to the sale of our retail banking business in France. In CMB, revenue increased by 40% on a constant currency basis, including a provisional gain on the acquisition of SVB UK. In addition, revenue in GBM increased by 10% on a constant currency basis. Our strength in international connectivity remains one of our key differentiators. We seek to partner with our clients as they expand internationally, and capitalise on opportunities arising from the reconfiguration of global supply chains. In 2023, we grew wholesale multi-jurisdictional client revenue1 by 29% since 2022, supported by the interest rate environment. These customers also generate more revenue with us. In CMB, multi-jurisdictional corporate clients generate approximately five times the revenue of a domestic-only corporate customer. In addition, there was increased collaboration across markets. In GBM, cross- border client revenue from clients managed in the West and booked in the East increased by 39% from 2022. Our ambition is to maintain strong, resilient returns through the interest rate cycle. As such, we are prioritising growing capital- light, fee-income generating businesses, such as transaction banking. In 2023, we processed around $500tn electronic payment transactions, ranking second by Global Payments Solutions revenue in the first half of 20232. We also facilitated over $850bn in trade and have been ranked first in revenue since 20182. 1 For further information and the basis of preparation for multi-jurisdictional client revenue, see page 134. 2 Global Payments Solutions and trade revenue rankings sourced from Coalition Greenwich. HSBC Holdings plc Annual Report and Accounts 2023 11 Our strategy In addition to Hong Kong and the UK, five markets in particular represent growth opportunities for us. We aim to be the leader within the affluent and international customer segments in mainland China, India, Singapore and the UAE, and we are a market leader within retail banking in Mexico. These markets delivered strong results in 2023, with mainland China excluding BoCom, India and Singapore each delivering over $1bn in profit before tax. The UAE and Mexico each delivered profit before tax of over $0.8bn. Mainland China We have a strong client franchise in mainland China capitalising on our role as a bridge to support clients’ international needs. We were ranked number one in foreign exchange by FX Markets Asia in 2023. We entered into an agreement to acquire Citi’s retail wealth management portfolio, and supported by our expanded onshore Global Private Banking and our Pinnacle proposition, we grew our wealth invested assets by 53% compared with 2022. India We aim to continue growing our wholesale franchise by taking advantage of corporate supply chains. In 2023, we were ranked number one by Euromoney in cash management in India. We are also tapping into the wealth pools of the Indian diaspora with the launch of onshore Global Private Banking. In 2023, we were the top foreign bank for non-resident Indians in wealth1. Singapore Our ambition is to be the primary wholesale offshore booking centre and wealth hub within the ASEAN region. In 2023, we were recognised by AsiaMoney as the Best International Bank in Singapore. Additionally, we grew our retail franchise, with a 76% increase in new-to-bank WPB international customers compared with 2022, supported by the launch of our new customer onboarding journey. UAE We are growing our institutional and international wholesale business from a strong foundation. In 2023, we were ranked number one in equity and debt capital markets in MENAT2. Within wealth, following the launch of onshore Global Private Banking, we grew our wealth invested assets by 35% from 2022. We also grew international new-to-bank customers by 51% since 2022. Mexico Within our wholesale businesses, we continue to capitalise on trade flows between Mexico and North America. In 2023, we were ranked number one by Euromoney within trade finance in Mexico. In our wealth and retail businesses, we remain focused on delivering improved customer experience and growing our Global Private Banking business. In addition, over half of WPB client acquisitions in 2023 were referred by the wholesale businesses through our Employee Banking Solutions proposition. Diversify our revenue 1st Foreign exchange ranking in mainland China Source: FX Markets Asia 1st Cash management ranking in India Source: Euromoney 76% Increase in new-to-bank WPB international customers in Singapore compared with 2022 35% Increase in wealth invested assets in the UAE compared with 2022 51% WPB client acquisition from wholesale referrals in Mexico 1 Source: Indian Mutual Fund Industry 2 Source: Dealogic Focus continued Maintain leadership in scale markets We continued to take advantage of our strengths, especially our leading positions in our scale markets: Hong Kong and the UK. Hong Kong We have a well established business in Hong Kong, with $544bn in customer deposits and market leadership in a number of product areas1. In 2023, profit before tax was $10.7bn, an increase of 80% on a reported basis. In our wholesale businesses, we focused on maintaining our leading position across multiple products. In trade finance, our market share was 25.7%, an increase of 6.6 percentage points from 20202. We also continued to solidify our leadership position and grow our WPB business through the launch of a new Premier Elite proposition and acquisition of new customers, with new-to-bank WPB customers increasing by 36% from 2020, reaching 634,500 in 2023. HSBC UK HSBC UK has a universal franchise with $340bn in customer deposits. We are a market leader across multiple CMB products, including trade finance and cash management, according to Euromoney and Coalition Greenwich. We aim to take advantage of our international network to maintain this position in CMB and grow our international presence in WPB. Profit before tax was $8.3bn in 2023, an increase of 84% on a reported basis, including a $1.6bn provisional gain on the acquisition of SVB UK. We continued to grow our CMB business and achieved a market penetration of more than 70% within the large corporate banking segment in 20233. In our WPB business, we opened over 1 million new current accounts and continued to grow our mortgage stock market share in the UK, reaching 8.0% in 2023, an increase of 0.6 percentage points since 20204. 634,500 New-to-bank WPB customers in Hong Kong 25.7% Share of the trade finance market in Hong Kong2 >70% UK large corporate banking market penetration in 20233 8.0% HSBC UK’s mortgage stock market share4 1 Including deposits, assets, card spend and insurance. Source: Hong Kong Monetary Authority (‘HKMA’), Hong Kong Insurance Authority. 2 Source: HKMA, 31 December 2023. 3 Source: Coalition Greenwich Voice of Client – 2023 European Large Corporate Cash Management Study. 4 Source: Bank of England. 12 HSBC Holdings plc Annual Report and Accounts 2023 Strategic report | Our strategy Strategic report Energise Inspire a dynamic culture We are opening up a world of opportunity for our colleagues by building an inclusive organisation that empowers and energises them. We intend to accomplish this by building a stronger performance culture, improving colleague experience and preparing a workforce for the future. Our success is underpinned by our colleagues. In a changing world, we empower our colleagues by providing clarity of our strategy and opportunities for them to develop and have fulfilling careers. Our 2023 employee Snapshot survey showed that 73% of our colleagues see the positive impact of our strategy, a 3 percentage point increase from 2022, and a 11 percentage point improvement from 2020. The survey also showed that 81% of our colleagues feel confident about HSBC’s future, a 4 percentage point increase from 2022, and also a 11 percentage point improvement over 2020. We remain focused on creating a diverse and inclusive environment. In 2023, 34.1% of senior leadership roles were held by women, and we are on track to achieve our ambition of 35% by 2025. We also set a Group-wide ethnicity strategy to better represent the communities we serve, with 3.0% of leadership roles in the UK and US held by colleagues of Black heritage in 2023, against our ambition of 3.4% by 2025. Additionally, in 2023, over 37.8% of our senior leaders have identified as being from an Asian heritage background. In the following ‘ESG overview‘ section, we outline how we put our purpose and values into practice. Transition Support the transition to net zero In 2020, we set out our ambition to become a net zero bank by 2050. Since then, we have taken a number of steps to execute on our ambition and manage climate risks. In January 2024, we published our first net zero transition plan, which provides an overview of the progress we have made to date and the actions being taken and planned to embed our net zero ambition across HSBC. It sets out how we intend to harness our strengths and capabilities in the areas where we believe we can support large-scale emissions reduction: transitioning industry, catalysing the new economy, and decarbonising trade and supply chains. To support our customers through the transition to net zero and to a sustainable future, in 2020, we set out an ambition to provide and facilitate $750bn to $1tn of sustainable finance and investments by 2030. In 2023, we provided and facilitated $83.7bn of sustainable finance and investments, bringing our cumulative total since January 2020 to $294.4bn. As part of our ambition to align our financed emissions to achieve net zero by 2050, we have set on-balance sheet or combined financed emissions targets for a number of emission-intensive sectors. Work continues on the integration of ESG and climate analysis into HSBC Asset Management’s actively managed product offerings to help ensure the ESG risks faced by companies are considered when making investment decisions and to assess ESG risks and opportunities that could impact investment performance. We also made progress in our ambition to become net zero in our own operations and supply chain by 2030. In 2023, we reduced our absolute greenhouse gas emissions in our operations to 293,333 tonnes CO2e, which represents a 57.3% reduction from our 2019 baseline. For further details on our climate ambition, see the following ‘ESG overview’ section. Digitise Improve customer experience and efficiency while investing in innovation In 2023, we made progress on our goal to become a digital-first bank, and our customers have been increasingly adopting our digital services. In CMB, 83% of customers were digitally active, an increase of 5 percentage points since 2022. Our net promoter score for onboarding wholesale international clients in the last quarter of 2023 improved by 12 points when compared with the first three months of the year. At 54%, more than half of WPB customers were mobile active, an increase of 6 percentage points from 2022. Furthermore, a total of 75% of WPB’s international customer accounts were opened digitally in 2023, an increase of 30 percentage points from 2022. We are also focused on building future-ready business models by investing in open-market propositions. In 2023, we announced a partnership with Tradeshift to launch a new embedded finance solution in the first half of 2024, which will provide payment and financial services embedded into trade, e-commerce and marketplace experiences. In January 2024, in the UK we launched Zing, a mobile platform enabling cross-border payments available to non-HSBC consumers. We are also investing in innovative technologies for the future. In 2024, we plan to both concentrate our efforts and increase our investment in artificial intelligence (‘Al’). At present, we employ Al in areas such as fraud detection and transaction monitoring. We also launched Al Markets, a digital service that utilises natural language processing to enrich the way investors interact with global markets. Additionally, we are in the process of piloting numerous generative Al use cases in areas like developer augmentation, creative content generation and knowledge management, and have identified hundreds more potential opportunities. In 2023, our costs were up by 6% on a target basis. Our aim is to maintain cost discipline by driving efficiencies in our operations and reinvesting cost savings in areas that will drive future growth. We are prioritising investments in transaction banking, wealth and international propositions, and product innovation. At the same time, we continue to reshape our portfolio through exits and bolt-on acquisitions. We completed our exit from our retail banking operations in France, our WPB business in New Zealand, and our businesses in Greece and Oman. Further exits from Canada, Russia and Armenia are underway as well as in our retail banking business in Mauritius. These exits will pave the way for investments in growth and efficiency areas such as HSBC Innovation Banking, which was launched after the acquisition of SVB UK. We also entered into an agreement to acquire Citi’s retail wealth management portfolio in mainland China in August 2023, and completed our purchase of SilkRoad Property Partners, a real estate fund manager in January 2024, which will be integrated into our asset management business. Focus continued Maintain cost discipline and reshape our portfolio HSBC Holdings plc Annual Report and Accounts 2023 13 Our strategy We are taking steps to incorporate environmental, social and governance principles throughout the organisation, supporting the success of our customers, people and other stakeholders. Our approach We are guided by our purpose: to open up a world of opportunity for our customers, colleagues and communities. Our purpose is underpinned by our values: we value difference; we succeed together; we take responsibility; and we get it done. Our approach to ESG is shaped by our purpose and values and a desire to create sustainable long-term value for our stakeholders. As an international bank with significant breadth and scale, we understand that our economies, societies, supply chains and people’s lives are interconnected. We recognise we can play an important role in helping to tackle ESG challenges. We focus our efforts on three areas: the transition to net zero, building inclusion and resilience, and acting responsibly. Transition to net zero In 2020, we set an ambition to become a net zero bank by 2050. Since then, we have made progress in support of this ambition – including providing and facilitating sustainable finance and investment for our customers, updating several of our sustainability and investment risk policies, and setting 2030 targets for financed emissions in a range of high-emitting sectors. We recognise both the commercial opportunity of taking action to transition to net zero and the potential risks of inaction by society at large. In our net zero transition plan, we provide an overview of the actions we are taking and plan to take to support our customers, embed net zero into the way we operate and partner for systemic change. We also set out how we are starting to work to integrate nature and just transition considerations into our net zero approach. We set out in more detail the steps we are taking on our climate ambitions in the ESG review on page 41. Build inclusion and resilience To help create long-term value for all stakeholders, we focus on fostering inclusion and building resilience for our colleagues, our customers and the communities we operate within. For colleagues, we focus on creating an inclusive, healthy and rewarding environment as this helps us to attract, develop and retain the best talent, and we support their resilience through well-being and learning resources. We continue to make progress towards our goals for gender and ethnic diversity. We strive to provide an inclusive and accessible banking experience for our customers. We do this by providing resources that help them manage their finances, and services that help them protect what they value. We are developing an updated global philanthropy strategy that aligns with our ESG areas of focus: ‘transition to net zero’ and ‘building inclusion and resilience’. Act responsibly We are focused on operating a strong and sustainable business that puts the customer first, values good governance, and gives our stakeholders confidence in how we do what we do. Our conduct approach guides us to do the right thing and to focus on the impact we have on our customers and the financial markets in which we operate. Customer experience is at the heart of how we operate. We aim to act responsibly and with integrity across the value chain. On page 15, we have set out ways that we have supported our stakeholders through a challenging year. ESG overview ESG disclosure map and directory Transition to net zero Our approach to the transition Read more on our approach to the transition to net zero Page 45 Supporting our customers Read more on our progress made against our $750bn to $1tn sustainable finance and investment ambition Page 49 Read more on our progress made against our ambition to achieve net zero in our financed emissions by 2050 Page 53 Embedding net zero into the way we operate Read more on our ambition to achieve net zero in our own operations and supply chain by 2030 Page 63 Partnering for systemic change Read more on how we partner externally in support of systemic change Page 68 Detailed Task Force on Climate- related Financial Disclosures (‘TCFD’) We make disclosures consistent with Task Force on Climate- related Financial Disclosures (‘TCFD’) recommendations, highlighted with the symbol: TCFD Page 69 Build inclusion and resilience Diversity and inclusion disclosures Read more on how we are building an inclusive environment that reflects our customers and communities, and our latest pay gap statistics Page 76 Pay gap disclosures Page 77 Act responsibly How we govern ESG Read more on our approach to ESG governance and human rights Page 88 Page 89 Human rights and modern slavery disclosures How our ESG targets link to executive remuneration Read more on our ESG targets embedded in executive remuneration Page 16 Pages 284 to 298 ESG Data Pack Detailed ESG information Our ESG Data Pack provides more granular ESG information, including the breakdown of our sustainable finance and investment progress, and complaints volumes www.hsbc.com/esg 14 HSBC Holdings plc Annual Report and Accounts 2023 Strategic report | ESG overview Strategic report Engaging with our stakeholders and our material ESG topics We know that engaging with our stakeholders is core to being a responsible business. To determine material topics that our stakeholders are interested in, we conduct a number of activities throughout the year, including engagements outlined in the table below. Disclosure standards such as the TCFD, World Economic Forum (‘WEF’) Stakeholder Capitalism Metrics and Sustainability Accounting Standards Board (‘SASB’), as well as the ESG Guide under the Hong Kong Stock Exchange Listing Rules and other applicable rules and regulations, are considered as part of the identification of material issues and disclosures. Supporting our customers in challenging economic times We know that many of our customers continue to face difficult financial circumstances due to cost of living pressures, and we are working to support them. As the rising cost of living has been particularly high in the UK, one of our largest markets, most of our initiatives focused on supporting our UK personal and business customers. We have enhanced our range of digital resources available on our website and we are proactively approaching those most in need – both personal and business customers – to offer targeted support and help build their financial resilience. Proactive support For personal customers in financial difficulty, we have developed our digital services with improvements to the ‘Rising cost of living’ hub on our public website in the UK. Use of segmentation data has enabled us to take a proactive approach to supporting customers and offering targeted solutions to those who are identified as being most in need. We have engaged with vulnerable customer groups through cost of living calls, targeted emails and direct mail. In 2023, we also: – offered customers the option to switch mortgage rates early, extend their mortgage term with an option to reverse it at a later date, or pay interest only for six months, as part of our commitment to the new UK Mortgage Charter; – offered a temporary reduction of fees on arranged overdrafts to help those most in need pay less; – held over 1,000 financial well-being webinars, including 227 cost of living sessions for 50,000 customers and colleagues; – helped more than 37,000 customers identify £2.9m in potential benefits by providing access to a benefits calculator tool via our website; and – helped more than 130,000 customers generate a financial fitness score, and obtain tips on how to improve their financial resilience using our online financial fitness tool. In the UK, CMB has continued to support commercial banking clients exhibiting signs of financial vulnerability. We reviewed client needs on a case-by-case basis and provided solutions including repayment holidays, extending loan repayments and offering extensions to collection periods. The use of data and front-line insights has improved our ability to identify financially vulnerable customers. In 2023, we contacted targeted clients to help improve awareness of the support available, including communicating with over 178,000 SMEs and proactively making over 43,000 outbound calls. Increasing understanding of fraud and scam risk and education on how to protect against becoming a victim continues to be another key area of focus. In 2023, we also: – held fraud and scam awareness webinars to highlight recent trends and case studies, attended by approximately 4,300 customers; – sent 2.1 million emails and 300,000 letters in quarterly campaigns to share our insights and enhance understanding of key fraud topics and trends; and – published 44 articles and alerts on the HSBC Fraud and Cyber Awareness mobile app, covering a broad range of topics as well as any emerging threats and trends. For further details of our work to support vulnerable communities and customers see page 85. For further details on our conduct and product responsibilities, see the ESG review on page 96. Our stakeholders How we engage Material topics highlighted by the engagement1 Customers Our customers’ voices are heard through our interactions with them, surveys and by listening to their complaints. – Customer advocacy – Cybersecurity – Employee training – Diversity and inclusion – Employee engagement – Supporting our customers – financed emissions – Embedding net zero into the way we operate – Sustainability risk policies, including thermal coal phase-out policy and energy policy – Net zero transition plan – Financial inclusion and community investment – Climate risk – Anti-bribery and corruption – Conduct and product responsibility – Supply chain management – Human rights Employees Our colleagues’ voices are heard through our annual Snapshot survey, Exchange meetings, global jams, townhalls, leadership summits, and our ‘speak-up’ channels, including our global whistleblowing platform, HSBC Confidential. Investors We engage with our shareholders through our AGMs, virtual and in-person meetings, investor roadshows, conferences and our annual investor survey. Communities We engage with non-governmental organisations (‘NGOs’), charities and other civil society groups through forums, summits and roundtables supporting ESG causes such as COP28. We engage directly on specific issues by taking part in working groups. Regulators and governments We proactively engage with regulators and governments to build strong relationships through virtual and in-person meetings and by responding to consultations individually and jointly via industry bodies. Suppliers Our code of conduct sets out our ambitions, targets and commitments on the environment, diversity and human rights, and outlines the minimum standards we expect of our suppliers. We engage with key suppliers in real estate, technology and other sectors through meetings. 1 These form part of our ESG disclosures suite together with other requirements, and are not exhaustive or exclusive to one stakeholder group. For further details of our disclosures, see our ESG review and ESG Data Pack, as well as our ESG reporting centre at www.hsbc.com/who-we-are/esg-and-responsible-business/ esg-reporting-centre. HSBC Holdings plc Annual Report and Accounts 2023 15 ESG overview Our ESG ambitions, metrics and targets TCFD We have established ambitions and targets that guide how we do business, including how we operate and how we serve our customers. These include targets designed to help track our progress against our environmental and social sustainability goals. They also help us to improve employee advocacy and the diversity of senior leadership, as well as strengthen our market conduct. The targets for these measures are linked to the pillars of our ESG strategy: transition to net zero, building inclusion and resilience, and acting responsibly. To help us achieve our ESG ambitions, a number of measures are included in the annual incentive and long-term incentive scorecards of the Group Chief Executive, Group Chief Financial Officer and Group Executives that underpin the ESG metrics in the table below. For a summary of how all financial and non-financial metrics link to executive remuneration, see pages 284 to 298 of the Directors’ remuneration report. The table below sets out some of our key ESG metrics that we use to measure our progress against our ambitions. For further details of how we are doing, see the ESG review on page 41. Sustainable finance and investment2 $294.4bn Cumulative total provided and facilitated since January 2020. (2022: $210.7bn) Ambition: Provide and facilitate $750bn to $1tn of sustainable finance and investment by 2030. Net zero in our own operations3 57.3% Reduction in absolute operational greenhouse gas emissions from 2019 baseline. (2022: 58.5%) Ambition: To be net zero in our own operations and supply chain by 2030. Financed emissions4 7 sectors Number of sectors where we have set financed emissions targets, comprising five on-balance sheet and two combined financed emissions targets. Ambition: Align our financed emissions to achieve net zero by 2050. 1 For further details of our approach to transition to net zero, methodology and PwC’s limited assurance reports on financed emissions, sustainable finance and investment progress, and our own operations’ scope 1, 2 and 3 (business travel and supply chain) greenhouse gas emissions data, see www.hsbc.com/who-we- are/esg-and-responsible-business/esg-reporting-centre. 2 In October 2020, we announced our ambition to provide and facilitate between $750bn to $1tn of sustainable finance and investment by 2030. For further details and breakdown, see the ESG review on page 49. For details of how this target links with the scorecards, see page 284. 3 This absolute greenhouse gas emission figure covers scope 1, scope 2 and scope 3 business travel emissions. For further details of how this target links with the scorecards, see page 284. 4 See page 53 for further details of our targets, which include combined on-balance sheet financed emissions and facilitated emission targets for two emissions- intensive sectors: oil and gas, and power and utilities. The remaining five sectors for which we have set on-balance sheet financed emissions targets are: cement; iron, steel and aluminium; aviation; automotive; and thermal coal mining. 5 Senior leadership is classified as those at band 3 and above in our global career band structure. For further details, see the ESG review on page 77. For details of how this target links with the scorecards, see page 284. Colleagues in Canada are excluded from this disclosure to align with scorecards. 6 For further details, see the ESG review on page 79. For details of how this target links with the scorecards, see page 284. 7 The completion rate shown relates to the ‘Fighting financial crime’ training module in 2023 and covers permanent and non-permanent employees. The latest global conduct training ‘Conduct matters and taking responsibility – 2023’ was launched in December 2023 and will run through the first quarter. 8 The markets where we report rank positions for WPB and CMB – the UK, Hong Kong, mainland China, India, Mexico and Singapore – are in line with the annual executive scorecards. Our WPB NPS ranking in mainland China is based on 2022 results. Due to data integrity challenges, we are unable to produce a 2023 ranking. For further details of customer satisfaction, see the ESG review on page 91. For further details of how this target links with the scorecards, see page 284. Gender diversity5 34.1% Senior leadership roles held by women. (2022: 33.3%) Ambition: Achieve 35% senior leadership roles held by women by 2025. Black heritage5 3.0% Senior leadership roles held by Black heritage colleagues in the UK and US combined (2022: 2.5% ) Ambition: 3.4% of senior leadership roles held by Black heritage colleagues in the UK and US combined by 2025. Employee engagement6 77% Employee engagement score. (2022: 74%) Ambition: Maintain 72% in the employee Snapshot engagement index. Conduct training7 98% Employees who completed conduct training in 2023. (2022: 98%) Target: At least 98% of employees complete conduct and financial crime training each year. Customer satisfaction8 3 out of 6 WPB markets that sustained top-three rank and/or improved in customer satisfaction. (2022: 4 out of 6) Target: To be ranked top three and/or improve customer satisfaction rank. 5 out of 6 CMB markets that sustained top-three rank and/or improved in customer satisfaction. (2022: 5 out of 6) Target: To be ranked top three and/or improve customer satisfaction rank Environmental: Transition to net zero1 Social: Build inclusion and resilience Governance: Acting responsibly 16 HSBC Holdings plc Annual Report and Accounts 2023 Strategic report | ESG overview Strategic report Task Force on Climate-related Financial Disclosures (‘TCFD’) TCFD The Financial Stability Board’s Task Force on Climate-related Financial Disclosures (‘TCFD’) recommendations set an important framework for understanding and analysing climate-related risks, and we are committed to regular and transparent reporting to help communicate and track our progress. We will advocate the same from our customers, suppliers and the industry. We have set out our key climate-related financial disclosures throughout the Annual Report and Accounts 2023 and related disclosures. We recognise that further work lies ahead as we continue to develop our management and reporting capabilities. In 2023, we made certain enhancements to our disclosures. These include enhancing our merger and acquisition process to consider potential climate and sustainability-related targets, net zero transition plans and climate strategy, and how this relates to HSBC. In addition, we published our net zero transition plan. We have considered our ‘comply or explain’ obligation under both the UK’s Financial Conduct Authority’s Listing Rules and Sections 414CA and 414CB of the UK Companies Act 2006, and confirm that we have made disclosures consistent with the TCFD Recommendations and Recommended Disclosures, including its annexes and supplemental guidance, save for certain items, which we summarise below. – For financed emissions we do not plan to set 2025 targets. We set targets in line with the Net-Zero Banking Alliance (‘NZBA‘) guidelines by setting 2030 targets. While the NZBA defines 2030 as intermediate, we use different time horizons for climate risk management. For climate, we define short term as time periods up to 2025; medium term is between 2026 and 2035; and long term is between 2036 and 2050. These time periods align to the Climate Action 100+ disclosure framework. In 2023, we disclosed interim 2030 targets for financed emissions for a number of sectors as we outline on page 18. Following this, we have now set combined on-balance sheet financed emissions and facilitated emissions targets for two emissions-intensive sectors: oil and gas, and power and utilities. – The methodology and data used for financed emissions is evolving and we expect industry guidance, market practice, data availability, scenarios and regulatory disclosure requirements to continue to change, along with the shape of our own business. We expect to periodically review and, if required, update our methodologies, baselines, scenarios, and targets to reflect real economy decarbonisation and evolving guidance and data. – We do not fully disclose impacts from climate-related opportunities on financial planning and performance including on revenue, costs and the balance sheet, quantitative scenario analysis, detailed climate risk exposures for all sectors and geographies or physical risk metrics. This is due to transitional challenges in relation to data limitations, although nascent work is ongoing in these areas. We expect these data limitations to be addressed in the medium term as more reliable data becomes available and technology solutions are implemented. – We currently disclose four out of 15 categories of scope 3 greenhouse gas emissions including business travel, supply chain and financed emissions. In relation to financed emissions, we publish on-balance sheet financed emissions for a number of sectors as detailed on page 18. We also publish facilitated emissions for the oil and gas, and power and utilities sectors. Future disclosures on financed emissions and related risks are reliant on our customers publicly disclosing their greenhouse gas emissions, targets and plans, and related risks. We recognise the need to provide early transparency on climate disclosures but balance this with the recognition that existing data and reporting processes require significant enhancements. For a full summary of our TCFD disclosures, including detailed disclosure locations for additional information, see pages 69 to 74. The additional information section on page 440 provides further detail. Backing renewable connections in South America We helped to finance one of the largest transmission lines in South America, which will connect central and southern Chile to renewable energy generated in the north. Conexión is building the Kimal-Lo Aguirre initiative after winning a tender from Chile’s Minister of Energy in 2022. The project will aim to develop approximately 1,400km of critical infrastructure with the ability to carry up to 3,000 million watts of energy when scheduled to complete in 2029. We provided a $160m equity bridge loan to support China Southern Power Grid’s contribution to the project. China Southern Power Grid is the second largest electric power company in China. The funds will help unlock energy transition infrastructure required to support Chile in achieving its net zero goals. HSBC Holdings plc Annual Report and Accounts 2023 17 ESG overview Net zero implementation plan Metrics and indicators Progress to date Supporting our customers Sustainable finance and investment provided and facilitated ($bn)1 $294.4bn cumulative progress since 2020 (for further breakdown see page 49) Number of sectors analysed for financed emissions2 We have set seven financed emissions targets, comprising five on-balance sheet and two combined financed emissions targets so far (see pages 53 to 62) Thermal coal financing exposures2,3 Our thermal coal financing drawn balance exposure was approximately $1bn as at 31 December 2020 (for further details, see page 67) Embedding net zero into the way we operate Percentage of absolute operational greenhouse gas emissions reduced4 57.3% reduction in absolute greenhouse gas emissions from 2019 baseline (see page 63) Percentage of renewable electricity sourced across our operations Increase from 48.3% in 2022 to 58.4% (see page 63) Percentage of energy consumption reduced 26.3% reduction in energy consumption from 2019 baseline (see page 63) Partnering for systemic change Philanthropic investment in climate innovation ventures, renewable energy, and nature-based solutions Committed $105m to our NGO partners since 2020, as part of the Climate Solutions Partnership (see page 68) 1 The detailed definitions of the contributing activities for sustainable finance and investment are available in our revised Sustainable Finance and Investment Data Dictionary 2023. For this, together with our ESG Data Pack and PwC’s limited assurance report, see www.hsbc.com/who-we-are/esg-and-responsible-business/ esg-reporting-centre. 2 For further details of our financed emissions methodology, exclusions and limitations, see our Financed Emissions and Thermal Coal Exposures Methodology at www.hsbc.com/who-we-are/esg-and-responsible-business/esg-reporting-centre. 3 Data is subject to independent limited assurance by PwC in accordance with ISAE 3000/ISAE 3410. For further details, see our Financed Emissions and Thermal Coal Exposures Methodology and PwC’s limited assurance report at www.hsbc.com/who-we-are/esg-and-responsible-business/esg-reporting-centre. 4 Our reported scope 3 greenhouse gas emissions of our own operations in 2023 are related to business travel. For further details on scope 1, 2 and 3, and our progress on greenhouse gas emissions and renewable energy targets, see page 64 and our ESG Data Pack at www.hsbc.com/esg. For further details of our methodology and PwC’s limited assurance report, see www.hsbc.com/who-we-are/esg-and-responsible-business/esg-reporting-centre. How we measure our net zero progress TCFD We are helping the transition to a net zero economy by transforming ourselves, and supporting our customers to make their own transitions. Our ambition is to align our financed emissions to net zero by 2050 or sooner. Our net zero transition plan sets out how we intend to harness our strengths and capabilities in areas where we believe we can support large-scale emissions reduction: transitioning industry, catalysing the new economy, and decarbonising trade and supply chains. The plan also provides details on our sectoral approach, and on our implementation plan to embed net zero into the way we operate. We continue to track our progress against our ambition to provide and facilitate $750bn to $1tn of sustainable finance and investment by 2030, aligned to our published data dictionary, and our ambition to achieve net zero in our own operations and supply chain by 2030. We also recognise that green and sustainable finance and investment taxonomies are not consistent globally, and evolving taxonomies and practices could result in revisions in our sustainable finance reporting going forward. To date, we have set 2030 financed emissions targets across energy, heavy industry and transport, specifically for the following sectors: oil and gas; power and utilities; cement; iron, steel and aluminium; aviation; automotive; and thermal coal mining. Following a reduction in our exposure to the shipping sector after the strategic sale of part of our European shipping portfolio in 2023, and work undertaken to assess the materiality of our remaining portfolio from a financed emissions perspective, we have concluded that the remaining exposure as of year-end 2023 is not material enough to warrant setting a stand-alone target. This aligns with NZBA guidelines on sector inclusion for target setting. Due to ongoing data availability and quality challenges, we continue to assess our financed emissions for our real estate and agriculture sectors. We recognise that there is a significant amount of uncertainty and complexity related to the transition, and that progress in the real economy will depend heavily on external factors including the policy and regulatory landscape across markets, the speed of technological innovation and growth, and economic and geopolitical events. In addition, climate science and the availability and quality of climate data continue to evolve, and the net zero-aligned scenarios upon which we have based our approach will also update over time to keep pace with real economy developments. Emissions and broader customer data is also expected to improve, as well as approaches and standards for greenhouse gas accounting and target setting. As a result of this, we expect to regularly refine and update our analysis as well as data collection and consolidation processes to accommodate new data sources and updated methodologies and scenarios, and intend to be transparent on any changes we make and why. As an example, our ESG review includes recalculated 2019 and 2020 financed emissions figures for the oil and gas, and power and utilities sectors. In addition, periodic updates to published net zero-aligned scenarios mean that it will be important that our net zero-aligned reference scenario choice, and by extension our target-setting approach, remain in step with the evolving real economy context and is informed by the latest science. In the following table, we set out our metrics and indicators and assess our progress against them. For further details of our approach to measuring financed emissions, including scope, methodology, assumptions and limitations, see page 53. 18 HSBC Holdings plc Annual Report and Accounts 2023 Strategic report | ESG overview Strategic report Responsible business culture We have a responsibility to help protect our customers, our communities and the integrity of the financial system. Employee matters We are building a responsible business culture that values difference, takes responsibility, seeks different perspectives and upholds good standards of conduct. There may be times when our colleagues need to speak up about behaviours in the workplace. In the first instance we encourage colleagues to speak to their line manager, and our annual Snapshot survey showed that 86% of colleagues have trust in their direct manager. HSBC Confidential is our whistleblowing channel, which allows colleagues past and present to raise concerns confidentially and, if preferred, anonymously (subject to local laws). Our Snapshot survey showed that 80% of colleagues feel able to speak up when they see behaviours they consider to be wrong. We promote an environment where our colleagues are treated with dignity and respect and we act where we find behaviours that fall short. Our inclusion index measures our colleagues’ sense of belonging and psychological safety within the organisation, and in 2023 this increased to 78%. We aspire to be an organisation that is representative of the communities in which we serve. We have committed to achieving a 35% representation of women in senior leadership roles (classified as those at band 3 and above in our global career band structure) by 2025. We remain on track, having achieved 34.1% in 2023. We aspire to achieve a 3.4% representation of Black heritage colleagues in senior leadership roles across the UK and US combined by 2025. We are on track to achieve this, having increased our representation to 3.0% this year. We continue to make progress but we know there is more to be done. To ensure we set representation goals that are locally relevant, we enable our employees to self-disclose ethnicity data. We have enabled 91% of our colleagues to disclose their ethnicity, with 62% currently choosing to do so, where this is legally permissible. All employees 52% 48% Senior leadership1 34% 66% Holdings Board 47% 53% Male Male Male Female Female Female The table below outlines high-level diversity metrics. 1 Senior leadership is classified as those at band 3 and above in our global career band structure. For further details of how we look after our people, including our diversity targets, how we encourage our employees to speak up, and our approach to employee conduct, see the Social section of the ESG review on page 75. Listening to our customers We continue to listen, learn and act on our customers’ feedback. We have implemented the net promoter system, enabling us to share customer feedback with our front-line teams and allowing them to respond directly to customers. We also have dedicated global forums to promote continuous improvement of our customers’ experience. Social matters We invest in the long-term prosperity of the communities where we operate. We aim to provide people, especially those in marginalised and vulnerable communities, with the skills and knowledge needed to thrive through the transition to a sustainable future. For this reason, we focus our support on programmes that help build inclusion and resilience. We also support climate solutions and innovation, and contribute to disaster relief when needed. For examples of our programmes, see the ‘Communities’ section of the ESG review on page 86. Human rights As set out in our Human Rights Statement, we recognise the role of business in respecting human rights. Our approach is guided by the UN Guiding Principles on Business and Human Rights (‘UNGPs’) and the OECD Guidelines for Multinational Enterprises on Responsible Business Conduct. Our Human Rights Statement, and annual statements under the UK’s Modern Slavery Act, are available on www.hsbc.com/who-we-are/ esg-and-responsible-business/esg-reporting- centre. For further details of our approach, see the ‘Human rights’ section of the ESG review on page 89. Anti-corruption and anti-bribery We are required to comply with all applicable anti-bribery and corruption laws in every market and jurisdiction in which we operate while focusing on the spirit of relevant laws and regulations to demonstrate our commitment to ethical behaviours and conduct as part of our environmental, social and corporate governance. Environmental matters For details of our climate ambition and carbon emission metrics, see the ESG review on page 44. Training colleagues and partners on digital accessibility With ‘Digitise’ being one of our strategic pillars, we are committed to improving how our customers can access our online and mobile services. We review against the Web Content Accessibility Guidelines for our websites in 23 markets and mobile apps in 18 markets, and engaged with more than 10,000 colleagues, partners and companies through our digital accessibility training and awareness programme in 2023. To share best practice externally, HSBC sponsored and hosted AbilityNet’s Techshare Pro at our head office in the UK. Our work on digital accessibility was recognised through 11 awards in 2023, including in Hong Kong, where we were the only financial services provider to be recognised for our core banking apps. Group non-financial and sustainability information statement This section primarily covers Group non- financial and sustainability information as required by applicable regulations. Other related information can be found as follows: For further details of our key performance indicators, see page 1. For further details of our business model, see page 4. For further details of our principal risks and how they are managed, see pages 37 to 39. For further details of our TCFD disclosures, including alignment with sections 414CA and 414CB of the Companies Act 2006, see pages 69 to 74. HSBC Holdings plc Annual Report and Accounts 2023 19 ESG overview The Board is committed to effective engagement with all our stakeholders and seeks to understand their interests and the impacts on them when making decisions. Section 172(1) statement Board decision making and engagement with stakeholders This section, from pages 20 to 23, forms our section 172(1) statement. It describes how the Directors have performed their duty to promote the success of the company, including how they have considered and engaged with stakeholders and, in particular, how they have taken account of the matters set out in section 172(1)(a) to (f) of the Companies Act 2006. The Board continued to focus on its engagement with our key stakeholders, acknowledging that this engagement is core to being a responsible business and furthers the fulfilment of our strategy. In discharging their responsibilities, the Directors sought to understand, and have regard to, the interests and priorities of the Group’s key stakeholders, including in relation to material decisions that were taken by the Board during the course of the year. The following table includes instances where the Directors have had regard to section 172(1) factors (which are not mutually exclusive) when discussing certain matters in Board meetings and taking decisions where relevant. Some of these instances are explained in more detail in this section 172(1) statement and in the report of the Directors. During 2023, the Board continued with an active stakeholder engagement programme, meeting numerous stakeholders in several international locations. For further details of how we engaged with our stakeholders, see pages 21 and 257. On pages 22 and 23, we describe how the Board exercises its Directors’ section 172(1) duty and takes into account the impact on relevant stakeholders when making principal decisions in order to support and deliver on the Group’s strategy. Section 172(1) factor Where section 172(1) factor featured in Board considerations a Likely consequences of any decision in the long term – Group strategy – setting and monitoring – Mergers and acquisitions activity – Share capital activity – dividend and buy-back b Interests of our employees – Workforce engagement non-executive Director programme – Directors’ workforce engagement activities – Annual employee Snapshot survey c The need to foster our business relationships with suppliers, customers and others – Annual statement under the UK Modern Slavery Act and human rights disclosure approvals – Directors’ stakeholder engagement activities – Regular Board reports from Directors and executives d Impact of our operations on the community and the environment – Directors’ engagement with community initiatives – Net zero transition plan – Participation at ESG events such as COP28 and representation at the World Economic Forum e Our desire to maintain a reputation for high standards of business conduct – The Financial Conduct Authority’s new Consumer Duty obligations – Global mandatory training – Regular engagement with global regulators including presentations by the Prudential Regulation Authority and the Financial Conduct Authority to the Board f Acting fairly between members of the company – Annual General Meeting and Hong Kong Informal Shareholders’ Meeting – Retail shareholder activities and investor policies’ approvals – Directors’ engagement with top investors 20 HSBC Holdings plc Annual Report and Accounts 2023 Strategic report | Board decision making and engagement with stakeholders Strategic report Directors’ key engagements with stakeholders in 2023 Stakeholders Engagement Impact and outcomes Customers We recognise that the greater our understanding of our customers’ needs, the better we can help support them to achieve their financial aims and succeed in our purpose and strategy. – Engagement events with business customers, including customers of HSBC Innovation Banking, to discuss challenges and opportunities in key markets – Meetings with business customers to discuss plans regarding the transition to net zero – Board reporting on retail customer surveys including net promoter scores – Visits to branches in the UK, Hong Kong and India to better understand customers’ changing needs – The Board’s continued engagement with customers and potential customers around the world helps to further the Board’s understanding of their purposes and business needs, and how they can be supported to achieve their varied goals. – Meetings with customers help the Board understand how the Group can help customers transition to net zero. – Customer surveys provide insights into how the Group can drive meaningful improvements in customer propositions outcomes. – Retail branch visits help the Board see the positive impact of Group initiatives such as the No Fixed Address and Survivor Bank account propositions, and how opportunities are being realised for customers. Employees We want to continue to be a positive place to work and build careers, with the success of the Group’s strategy dependent upon having motivated people with the expertise and skills required to deliver it. – Employee events, including leadership forums, webcasts, townhalls, global jams, off-sites and employee Exchanges, as well as events that form part of the workforce engagement non-executive Director programme – Interaction with respective employee resource groups across multiple events in many jurisdictions – Participation in the annual Non-Executive Director Summit in Hong Kong – Meeting with colleagues across jurisdictions allowed the Board to hear first-hand the employee voice on important issues. – These interactions helped to ensure continued connectivity with the workforce, and inform the Board’s decision making around people-specific matters. Employee engagement also helps the Board to put into perspective employee Snapshot survey results. – Meeting with employee directors of Group subsidiaries helped to assure the Board that a consistent approach to governance has been adopted across the Group. Investors We seek to understand investor needs and sentiment through ongoing dialogue and a variety of engagements with both retail and institutional investors. – Numerous meetings with analysts and several investor roadshows to discuss interim and year-end results – Remuneration Committee Chair investor meetings with top investors and proxy advisers – Annual retail investor events such as the AGM in the UK and the Informal Shareholders’ Meeting in Hong Kong – Board meeting attendance by one of our largest investors to discuss Group strategic execution and the wider market outlook – Regular interactions with institutional and retail investors throughout the year helped the Board understand investor sentiment on material matters, such as strategy delivery and transition to net zero, and gauge investors’ continued support for the Group. Communities We seek to play an important role in supporting the communities in which we operate through our corporate social responsibility and broader engagement activities. – Meetings with charities and NGOs on topics such as financial education for rural women in India, reintroducing biodiversity and endangered species in Europe and financial inclusion and resilience of people facing homelessness in the UK – Meetings with Shelter to discuss the Group’s partnership and to hear about the impact of the Hero Partnership initiative – Forums, summits and roundtables supporting ESG causes, such as the Abu Dhabi Sustainability Week, COP28, New York Climate Week and London Climate Action Week – Meetings with members of the Sustainable Markets Initiative Council to discuss future priorities – The Directors’ participation at a range of community initiatives helped them to understand the effect the Group has on local communities as an employer, sponsor, collaborator and supporter, and helped to break down barriers for certain communities to access our products. – The Board’s interaction with, and understanding of, the communities in which the Group operates helped the Board appreciate how the Group can influence meaningful change, including by educating, encouraging broader thinking, helping to shape policy and formulating solutions, creating supportive environments, and helping to achieve net zero ambitions. Regulators and governments Maintaining constructive dialogue and relations with the relevant authorities in the markets in which we operate helps support the achievement of our strategic aims. – Various meetings across our key markets with heads of state, international leaders and government officials including ministers and ambassadors – Regular meetings with, and presentations from, our many regulators, including in the UK and Hong Kong, and elsewhere – Frequent and varied engagements between the Board and heads of state, international leaders, government officials and regulators provide an opportunity for open dialogue. It is also critical in ensuring that the Board understands and continues to meet its regulatory obligations. – Meeting with international officials allows the Board to communicate the Group’s strategy, perspectives and insights while ensuring that Directors remain abreast of political and regulatory developments. It also allows the Board to share perspectives on industry best practices. Suppliers We engage with suppliers, which helps us operate our business effectively and execute our strategy. – Regular reports and updates to the Board from the Group Chief Operating Officer on supplier matters – Meetings with key technology suppliers to discuss the Group’s innovation ambitions and how they could further support HSBC’s data requirements, including to inform and support its net zero ambitions – Meetings with key suppliers in sectors such as real estate – Meeting with our suppliers helps the Directors understand our suppliers’ challenges and how we can work collaboratively to succeed, including in digitising at scale and achieving our net zero ambitions. – It is key for the Board to understand the Group’s supply chain and how suppliers’ operations are aligned to our purpose and values. Such reporting and engagement supports the Board when approving the annual statement under the UK Modern Slavery Act. HSBC Holdings plc Annual Report and Accounts 2023 21 Board decision making and engagement with stakeholders Principal strategic decisions The Board operates having regard to the duties of the Directors, including the relevant matters set out in section 172(1)(a)-(f) of the Companies Act 2006. A key focus for the Board is setting, and monitoring execution against, the Group strategy. Principal decisions taken by the Board consider how the decision furthers the Group purpose, and aligns with one or all of the strategic pillars: ‘Focus’, ‘Digitise’, ‘Energise’ and ‘Transition’. The following examples demonstrate how the Board operated having regard to the duties of the Directors. Good governance practices adopted by the Board facilitate its key decision taking. Governance features as an agenda item at all scheduled Board meetings. Papers presented to the Board for consideration are expected to follow a template to help ensure that Directors get the right level of information to take informed decisions in keeping with their duties. The template requests authors to, among others things, describe the extent to which relevant stakeholders are engaged with, or impacted by, the matter under consideration, and whether this has influenced the recommendation to the Board. The Board is responsible for the oversight of the Group’s sustainability and ESG strategy setting and delivery, and monitors progress against execution of our net zero ambitions. Key outcomes are reviewed regularly by the Board. Directors also received training on ESG-related matters as part of their ongoing development. The Board’s understanding of the progress against the Group’s ESG strategy was informed by the ESG dashboard. The data provided in this dashboard included key metrics that help the Board to monitor progress against the Group’s ESG ambitions, including the transition to net zero, building inclusion and resilience, and acting responsibly. Additional details were provided on metrics relating to the roll-out of the Group’s supplier code of conduct, female entrepreneurship and gender diversity in senior roles. In 2023, the Board gave the Group Executive Committee feedback on the need to better define core areas of the Group’s sustainability execution programme, a Group-wide programme to enable the delivery of our sustainability agenda. The core areas included accountability, governance, capability, investment in infrastructure and data. Governance was enhanced by the establishment of the Sustainability Execution Committee, with responsibility to oversee delivery of the sustainability execution programme. This committee reports to the Group Executive Committee which receives regular updates on progress towards fulfilment of our net zero ambitions. It takes into account key stakeholder considerations and potential impacts on the Group’s strategic direction for sustainability, and reports these to the Board, helping Directors take relevant decisions. In addition, three non-executive Directors participated in climate advisory panel meetings with external subject matter experts to discuss sustainability, including the Group’s net zero transition plan. Appreciating the importance of the Group’s commitment to publish a net zero transition plan, the Board took the decision to establish a dedicated sub-group with responsibility for overseeing its finalisation, taking into consideration the implications for all our stakeholders and communication of the plan to the market. This sub-group included four non-executive Directors, the Group Chief Executive and the Group Chief Financial Officer, as well as other members of senior management. It took into consideration the short-term consequences on stakeholders, particularly for customers and investors, and balanced these against long-term benefits for the Group, the society in which we live, and the success of the company as a whole for the long term. Recommendations made to the Board by the sub-group, including stakeholder impacts, helped to inform the Board’s deliberations, leading to its final approval of the net zero transition plan, published in January 2024. As part of the Board’s responsibility to set, and monitor execution against, HSBC’s strategy, Directors take into consideration the Group’s strategies across the global businesses and legal entities. The Board continued to oversee the progression of the Group’s divestment of non-core operations while targeting select acquisitions. One such principal decision taken during the year was the acquisition by HSBC UK Bank plc of SVB UK. In considering this opportunity, the Board took into account the views of key stakeholders, including UK regulators and the government. It also considered the potential impact of the acquisition on SVB UK customers, principally that their banking services would be maintained, backed by the strength, safety and security of HSBC. The Board also considered how the acquisition would enhance shareholder value, strengthen our CMB franchise, and further its ability to serve innovation and fast-growing firms in the technology and life sciences sectors, supporting our ‘Focus’ strategic pillar. Following the acquisition of SVB UK, HSBC Innovation Banking was launched in June 2023. Senior management embarked on a programme of communication and interactions with customers, employees and investors by way of townhalls and Q&A sessions to help key stakeholders understand the rationale for the transaction and reiterate HSBC’s support for its customers. The Board continued its monitoring and oversight of the impacts flowing from its principal strategic decisions taken in the current and previous years, in particular the sale of the retail banking operations in France and the planned sale of the banking business in Canada. The Board met in order to agree amended terms to complete our France business sale. It was updated regularly, and provided input as appropriate, on actions required to ensure the successful completion of these transactions. It also liaised with relevant stakeholders such as governments, regulators, work councils, employees and customers, as necessary. In this way, the Board effectively carried out its duties and assured itself that the principal strategic decisions taken were, and continue to be, most likely to promote the long-term success of the company. During the course of the year, the Board continued a targeted focus on receiving relevant and succinct management information, including key metrics and data, to help demonstrate progress against strategic areas of interest. The Board considered how it should be informed, in the most transparent way, on the evolution of the Group’s strategy from transformation to one focused on growth. The Board has agreed key performance indicators to help keep it informed on relevant areas of strategic progress, all of which are focused on four overarching perspectives: external commitments/key outcomes; key business drivers; sustainable financial performance; and the ability to transform and license to operate. These indicators will also be used to foster a culture of performance and discipline across the organisation and will be factored into executive Directors’ scorecards. Sustainability Group strategy 22 HSBC Holdings plc Annual Report and Accounts 2023 Strategic report | Board decision making and engagement with stakeholders Strategic report Technology In support of the strategic pillar ‘Digitise’, the Board continued its oversight of the Group’s technology strategy, Vision 27, recognising that technology is an integral part of business success. In overseeing legal entity and global business strategies, the Board acts to promote connectivity of technology strategies across the organisation. To help assure the Board that the Vision 27 initiatives remained strategically aligned and appropriately resourced, it supported the appointment of a third-party professional services firm to conduct a review. The third party engaged with employees from across the global businesses and functions to explore how the organisation was executing various technological initiatives. The third party’s review was facilitated by its attendance at the newly formed technology steering committee, overseen by the Board’s Technology Governance Working Group. This steering committee comprised senior management including global business representatives to ensure that business views were well represented. The insights gained from the steering committee helped to form its reports to the Technology Governance Working Group, which in turn reports to the Board. It also attended a Board meeting in person to discuss the independent review. The findings from the report helped deepen the Board’s understanding of contributing factors to the success of Vision 27. As a result of the review and related Board discussions, in order to enhance governance around overseeing the progress of the Group’s long-term technology strategy, the Board agreed that a new Board committee will be established in 2024 in place of the Technology Governance Working Group, to be chaired by a non-executive Director. When taking its decision to approve the annual financial resource plan, the Board engaged in active deliberation, taking into account stakeholders’ perspectives, including customers, employees and investors, as well as market perception and regulatory expectations. The Board considered the alignment between the Group’s medium-term strategic and investment plans with projected performance throughout the annual financial resource plan. In addition, consideration was given to scenario analysis related to the macroeconomic and geopolitical environment to ascertain the risks – and potential mitigating actions – to best protect the Group’s financial performance and capital returns. In 2023, the Board adopted a dividend policy designed to provide sustainable cash dividends, while retaining the flexibility to invest and grow the business in the future, supplemented by additional shareholder distributions, if appropriate. To this end, in the Annual Report and Accounts 2022, the Board approved the Group’s announcement regarding its intention to revert to paying quarterly dividends from the first quarter of 2023. Following discussion at the Board, subject to the completion of the sale of the banking business in Canada, the Board agreed its intention to consider the payment of a special dividend of $0.21 per share as a priority use of the proceeds generated by the completion of the transaction. On 21 February 2023, an interim dividend of $0.23 per share for the 2022 full-year was announced, followed by interim dividends of $0.10 each on 2 May 2023, 1 August 2023 and 30 October 2023. In approving the payment of the dividends, the Board took into account the interests of the shareholders and sought to act in the best interests of the members as a whole. In addition to dividend payments, HSBC undertook share buy-backs of up to $2bn each commencing on 10 May 2023 and 3 August 2023, and commenced a further buy-back of up to $3bn on 1 November 2023. In considering the buy-backs, the Board (or the Chairman’s Committee with delegated authority from the Board) took into account its stated intention to consider buy-backs subject to appropriate capital levels, the views of its regulators with regard to its regulatory capital requirements and, in particular, the benefit to shareholders, and determined that the buy-backs would promote the success of the company. Each Board meeting starts with a culture moment – a standing agenda item for one of the Board members, on a rotational basis, to share insights into their perceptions on how the Group culture is being lived. These perceptions help the Board to fulfil its responsibility of monitoring the Group’s culture. They also serve to shape and frame discussions more generally in Board meetings. The Board regularly considers updates on people and the workforce, supported by key metrics and culture insights. These updates help the Board understand employee sentiment, including any upward or downward trends, which informs considerations of how the tone from the top is being embedded. Regular reporting to the Board and/or its committees from the Group Chief Human Resources Officer includes metrics on attrition, whistleblowing, escalations, employee understanding of strategy and pay sentiment across our legal entities. This, together with the annual Snapshot survey results, demonstrate people-related challenges and successes across the Group and legal entities. In these ways the Board broadens its understanding of the interests of our employees, which in turn helps to shape its decisions or add value when asked to approve HR policy and other people- related matters. The dedicated workforce engagement non-executive Director provides a regular report to Board meetings, which together with the Directors’ own participation in arranged employment engagement activities, strengthen the Board’s appreciation of what matters to employees, and help to inform decisions related to HR and people matters. An example of people and culture data and engagements assisting Board decision making in 2023 included the discussion held by the Board on a strategic focus around ‘the workforce of the future’ programme. This programme is looking at the key workforce skills necessary for the future, the role of technology in the workplace and development of a plan for its implementation. For further details of how we structure engagement between the Board and the workforce, see page 257. The Board took the decision in 2023 to approve HSBC’s new headquarters and to move to the new Panorama St Paul’s development. This decision was facilitated by people data gathered from the Snapshot survey and other methods that demonstrated a desire from colleagues to continue to create an agile and technologically fit-for-purpose environment to work and succeed together. The Board took this decision knowing that a new purpose-built office and the continuation of a hybrid working model would enable the Group to continue to attract top talent, and provide them with collaboration spaces to support their success and well-being. The Board concluded the new headquarters would be in the best interests of the company for the long term. For further details of the new head office, see page 99. Financial performance and capital returns People and culture HSBC Holdings plc Annual Report and Accounts 2023 23 Board decision making and engagement with stakeholders Our reward principles and commitments to colleagues The Group’s financial and strategic performance is reflected in remuneration outcomes for colleagues. Remuneration Our goal is to deliver a unique and exceptional experience to colleagues so that we sustain our performance in competitive markets. Our reward principles and commitments centre on rewarding colleagues responsibly, recognising their success and supporting colleagues to grow. Pay is a critical part of our proposition. We were encouraged by a nine percentage point improvement to 52% in colleagues’ perceptions they are paid fairly because of actions we took through 2022. The Group Remuneration Committee remain very focused on the need to improve this further. For 2024, we are putting more structure in place to improve transparency and clarity about how we make pay decisions. Rewarding colleagues responsibly Fixed pay increases for 2024 were determined based on consistent principles to help address wage inflation in the markets where we operate. As part of the 2023 pay review we introduced fixed pay ranges to help managers make fair and competitive fixed pay decisions and improve clarity for colleagues. We will award an overall global fixed pay increase of 4.4% in 2024, compared with 5.5% for the previous year, reflecting lower wage inflation in many markets. The level of increases vary by market, depending on the economic situation and individual roles. To ensure fixed pay levels provide financial security to colleagues, we established Living Wage benchmarks for every market and have been certified by the Fair Wage Network as a global Living Wage employer for 2024. This is an important commitment we make to our employees and the communities in which we operate to help ensure we pay responsibly and provide financial security. More than 95% of colleagues have private medical insurance, a retirement plan and life insurance. Recognising colleagues’ success The Group Remuneration Committee determined an overall variable pay pool for Group employees of $3,774m (2022: $3,359m). This followed a review of our performance against financial and non-financial metrics set out in the Group risk framework. Individual variable pay outcomes varied significantly depending on role, business area and performance. Our highest performers and those who role-model our values-aligned behaviours received the largest increases in variable pay compared with the previous year. Variable pay pool ($m) 3,359 3,774 2023 2022 From 2024, we will introduce a new variable pay structure for over 150,000 junior and middle management colleagues, providing more clarity around the variable pay levels for on-target performance, while retaining flexibility to differentiate outcomes for performance. Supporting colleagues to grow Guided by data and colleague feedback, the pillars of our well-being programme are mental, physical, financial and social well-being. In our 2023 employee Snapshot survey, 83% of employees said their mental health was positive, while all measures of physical well- being (exercise, sleep, nutrition) have improved. For the second year running, HSBC has been ranked top tier for mental health in the global CCLA Corporate Mental Health Benchmark. For details of how the Group Remuneration Committee sets the pool, see page 279. Remuneration for our executive Directors Variable pay for our executive Directors is driven by achievement against performance scorecards set by the Group Remuneration Committee at the start of the year to align pay outcomes with the delivery of our strategy and plan. The Committee considered carefully the impact of strategic transactions and one-offs on the Group’s financial performance in 2023. Consistent with the approach in prior years, the Committee judged that it was appropriate to assess financial performance for the purpose of the annual scorecard excluding these items, to ensure that out-turns were not impacted by one-offs. Reflecting on the overall risk management in the year and in respect of the PRA Notice relating to compliance with the UK Financial Services Compensation Scheme and related Depositor Protection rules, the Committee applied a downward adjustment of 7.5% to Noel Quinn’s annual incentive outcome. The Committee also carefully considered the executive Directors’ pay outcomes in the context of pay decisions made for the wider workforce and determined that these were an appropriate reflection of Group, business and individual performance delivered in 2023. Details of the current executive Directors’ remuneration policy can be found on pages 257 to 265 of our Annual Report and Accounts 2021. Executive Directors’ scorecard outcomes (% of maximum opportunity) 2023 annual incentive Group Chief Executive 70.24% Group Chief Financial Officer 76.75% 2021–2023 long-term incentive1 Group Chief Executive 75.00% 1 The current Group Chief Financial Officer did not participate in the 2021–2023 long-term incentive. For details of Directors’ pay and performance for 2023, see the Directors’ remuneration report on page 284. 24 HSBC Holdings plc Annual Report and Accounts 2023 Strategic report Strategic report In assessing the Group’s financial performance, management uses a range of financial measures that focus on the delivery of sustainable returns for our shareholders and maintaining our financial strength. Group financial targets Return on average tangible equity 14.6% (2022: 10.0%) In 2023, RoTE was 14.6%, an increase of 4.6 percentage points from 2022. Excluding the impact of strategic transactions and the impairment of our investment in BoCom, RoTE was 15.6%. From 2024, we intend to revise the adjustments made to RoTE to exclude all notable items, improving alignment with the treatment of notable items in our other income statement disclosures. On this basis, we continue to target a RoTE in the mid-teens for 2024. If this basis had been adopted for 2023, our RoTE excluding notable items would have been 16.2%. Our guidance reflects our current outlook for the global macroeconomic environment, including customer and financial markets activity. Target basis operating expenses $31.6bn (2022: $29.8bn) In 2023, the Group targeted cost growth of approximately 3% on a target basis. Our target basis excluded the impact of foreign currency translation differences, notable items and the impact of retranslating the 2022 results of hyperinflationary economies at constant currency, as well as cost growth from our acquisition of SVB UK and related investments internationally. In 2023, target basis cost growth was 6% compared with 2022. In addition to our targeted growth of 3%, there was an incremental rise of approximately 1%, Financial overview Executive summary Our financial performance demonstrates the execution of our strategy and the strengthened platform for growth, and in 2023 it was favourably impacted by a higher global interest rate environment. This section sets out our key Group financial targets and the progress we made towards these in 2023, and – where relevant – our expectations for 2024 and beyond. We also include a more detailed table covering further key financial metrics that we consider insightful for understanding the Group’s performance. The Group financial results that follow provide more detailed insight into the performance that has driven the outcomes of our financial targets. It covers income statement performance on both a reported and constant currency basis, and the main factors impacting the strength of our balance sheet, capital and liquidity position. primarily due to technology expenditure, which we did not mitigate. We also increased performance-related pay, which resulted in a further rise of around 1%. Costs grew by an additional 1%, primarily due to a charge relating to the FDIC special assessment. In 2024, we will target growth of approximately 5% compared with 2023, on a target basis (2023: $31.1bn). This target reflects our current business plan for 2024, and includes an increase in staff compensation, higher technology spend and investment for growth and efficiency, in part mitigated by cost savings from actions taken during 2023. Our cost target basis for 2024 excludes the direct cost impact of the disposal in France and the planned disposal in Canada from the 2023 baseline. It is measured on a constant currency basis and excludes notable items and the impact of retranslating the prior year results of hyperinflationary economies at constant currency. Capital and dividend policy CET1 ratio 14.8% Dividend payout ratio 50% At 31 December 2023, our CET1 capital ratio was 14.8%, which was higher than our medium-term target range of 14% to 14.5%. We intend to continue to manage the CET1 ratio to within this range. The total dividend per share in 2023 of $0.61 resulted in a dividend payout ratio of 50% of earnings per share. For the purposes of computing our dividend payout ratio, we exclude from earnings per share material notable items and related impacts. See page 131 for our calculation of earnings per share. We aim to retain our dividend payout ratio of 50% for 2024, excluding material notable items and related impacts. From 2024 this will be disclosed as our ‘dividend payout ratio target basis’. Interest rate management strategy Our ambition is to maintain strong, resilient returns through the interest rate cycle. As part of our balance sheet structural hedging and risk management strategy we continue to seek opportunities to stabilise future earnings and mitigate downside risk from interest rate movements. During 2023, we took actions to increase the size and duration of our structural hedge. This has the effect of stabilising our future earnings and contributed to a reduction in the sensitivity of banking net interest income (‘NII’), a new alternative performance measure introduced in 2023, from changes in interest rates. Banking NII adjusts our NII, primarily for the impact of funding trading and fair value activities reported in interest expense. It represents the Group’s banking revenue that is directly impacted by changes in interest rates. To supplement banking NII, we also provide banking NII sensitivity to demonstrate our revenue sensitivity to interest rate movements. Management uses these measures to determine the deployment of our surplus funding, and to help optimise our structural hedging and risk management actions. HSBC Holdings plc Annual Report and Accounts 2023 25 Financial overview Key financial metrics For the year ended Reported results 2023 20221 2021 Profit before tax ($m) 30,348 17,058 18,906 Profit after tax ($m) 24,559 16,249 14,693 Cost efficiency ratio (%) 48.5 64.6 69.9 Net interest margin (%) 1.66 1.42 1.20 Basic earnings per share ($) 1.15 0.72 0.62 Diluted earnings per share ($) 1.14 0.72 0.62 Dividend per ordinary share (in respect of the period) ($) 0.61 0.32 0.25 Dividend payout ratio (%)2 50 44 40 Alternative performance measures Constant currency profit before tax ($m) 30,348 16,541 17,400 Constant currency cost efficiency ratio (%) 48.5 64.8 70.0 Expected credit losses and other credit impairment charges (‘ECL’) as % of average gross loans and advances to customers (%) 0.36 0.36 (0.07) Expected credit losses and other credit impairment charges (‘ECL’) as % of average gross loans and advances to customers, including held for sale (%) 0.33 0.35 (0.07) Basic earnings per share excluding material notable items and related impacts ($) 1.22 N/A N/A Return on average ordinary shareholders’ equity (%) 13.6 9.0 7.1 Return on average tangible equity (%) 14.6 10.0 8.3 Return on average tangible equity excluding strategic transactions and impairment of BoCom (%) 15.6 11.3 N/A Target basis operating expenses ($m) 31,614 29,811 N/A At 31 December Balance sheet 2023 20221 2021 Total assets ($m) 3,038,677 2,949,286 2,957,939 Net loans and advances to customers ($m) 938,535 923,561 1,045,814 Customer accounts ($m) 1,611,647 1,570,303 1,710,574 Average interest-earning assets ($m) 2,161,746 2,143,758 2,209,513 Loans and advances to customers as % of customer accounts (%) 58.2 58.8 61.1 Total shareholders’ equity ($m) 185,329 177,833 198,250 Tangible ordinary shareholders’ equity ($m) 155,710 146,927 158,193 Net asset value per ordinary share at period end ($) 8.82 8.01 8.76 Tangible net asset value per ordinary share at period end ($) 8.19 7.44 7.88 Capital, leverage and liquidity Common equity tier 1 capital ratio (%)3 14.8 14.2 15.8 Risk-weighted assets ($m)3,4 854,114 839,720 838,263 Total capital ratio (%)3,4 20.0 19.3 21.2 Leverage ratio (%)3,4 5.6 5.8 5.2 High-quality liquid assets (liquidity value) ($m)4,5 647,505 647,046 688,209 Liquidity coverage ratio (%)4,5 136 132 139 Net stable funding ratio (%)4,5 133 136 N/A Share count Period end basic number of $0.50 ordinary shares outstanding (millions) 19,006 19,739 20,073 Period end basic number of $0.50 ordinary shares outstanding and dilutive potential ordinary shares (millions) 19,135 19,876 20,189 Average basic number of $0.50 ordinary shares outstanding (millions) 19,478 19,849 20,197 For reconciliation and analysis of our reported results on a constant currency basis, including lists of notable items, see page 111. Definitions and calculations of other alternative performance measures are included in ‘Reconciliation of alternative performance measures’ on page 130. 1 From 1 January 2023, we adopted IFRS 17 ‘Insurance Contracts’, which replaced IFRS 4 ‘Insurance Contracts’. Comparative data for the financial year ended 31 December 2022 have been restated accordingly. Comparative data for the year ended 31 December 2021 are prepared on an IFRS 4 basis. 2 In 2023, our dividend payout ratio was adjusted for material notable items and related impacts, including all associated income statement impacts relating to those items. In 2022, our dividend payout ratio was adjusted for the loss on classification to held for sale of our retail banking business in France, items relating to the planned sale of our banking business in Canada, and the recognition of certain deferred tax assets. No items were adjusted for in 2021. 3 Unless otherwise stated, regulatory capital ratios and requirements are based on the transitional arrangements of the Capital Requirements Regulation in force at the time. References to EU regulations and directives (including technical standards) should, as applicable, be read as references to the UK‘s version of such regulation or directive, as onshored into UK law under the European Union (Withdrawal) Act 2018, and as may be subsequently amended under UK law. 4 Regulatory numbers and ratios are as presented at the date of reporting. Small changes may exist between these numbers and ratios and those submitted in regulatory filings. Where differences are significant, we may restate in subsequent periods. 5 The liquidity coverage ratio is based on the average value of the preceding 12 months. The net stable funding ratio is based on the average value of four preceding quarters. 26 HSBC Holdings plc Annual Report and Accounts 2023 Strategic report | Financial overview Strategic report accrual and the impact of inflation. Reported ECL of $3.4bn decreased by $0.1bn and included charges of $1.0bn relating to exposures in the commercial real estate sector in mainland China. Reported profit after tax of $24.6bn was $8.3bn higher than in 2022. This included a higher tax expense, in part from the non- recurrence of a $2.2bn gain in 2022 resulting from the recognition of a deferred tax asset from historical tax losses in HSBC Holdings. Reported revenue Reported revenue of $66.1bn was $15.4bn or 30% higher, which included a $2.5bn year- on-year favourable impact relating to the sale of our retail banking operations in France, and the recognition of a $1.6bn provisional gain on the acquisition of SVB UK in 2023, as mentioned above. The remaining growth primarily reflected the impact of interest rate rises, mainly in Global Payments Solutions (‘GPS’) in CMB and GBM, Personal Banking and Global Private Banking in WPB, as well as Securities Services in GBM. There were also good performances in Capital Markets and Advisory and Securities Financing in GBM, as well as in life insurance and asset management in WPB. An increase in revenue in Corporate Centre was driven by Central Treasury, mainly due to the non- recurrence of adverse fair value movements on financial instruments, and valuation gains on structural hedging. Reported results (vs 2022) Reported profit Reported profit before tax of $30.3bn was $13.3bn higher. This was driven by a $15.4bn increase in revenue, primarily due to growth in net interest income, reflecting the impact of interest rate rises. The increase also included a provisional gain of $1.6bn recognised on the acquisition of SVB UK in 2023, as well as a year-on-year favourable impact of $2.5bn associated with the sale of our retail banking operations in France. This reflected an initial impairment loss of $2.3bn following the initial classification of these operations as held for sale in 2022, a reversal of $2.1bn in the first quarter of 2023 as the sale became less certain, and a subsequent impairment loss of $2.0bn as we reclassified these operations as held for sale in the fourth quarter of 2023. These increases were in part offset by an impairment charge in 2023 of $3.0bn relating to our investment in BoCom. This impairment reflected a reduction to the accounting value-in-use in line with recent market-wide developments in mainland China. For further details, see page 101. This impairment will have no material impact on HSBC’s capital, capital ratios or distribution capacity and therefore no impact on dividends or share buy-backs. Reported operating expenses decreased, primarily reflecting a reduction in restructuring and other related costs following the completion of our cost-saving programme at the end of 2022, which mitigated growth notably from higher technology spend, an increase in the performance-related pay These increases were partly offset by lower Credit and Lending revenue in CMB and GBM, mainly driven by a fall in balances and margin compression, and a decline in revenue in Equities in GBM, reflecting weaker client demand and softer market conditions. Revenue reduced in Markets Treasury due to the impact of rising interest rates on our funding costs and flattening yield curves, partly offset by increases from dynamic risk management and redeployment of asset disposals. We incurred losses on asset disposals of $1.0bn relating to repositioning and risk management activities in our hold-to- collect-and-sell portfolio in certain key legal entities. These actions are accretive to net interest income and reduce the consumption of the Group‘s financial resources. This revenue is allocated to our global businesses. Revenue in 2023 was also adversely affected by a $1.4bn impact of hyperinflationary accounting in Argentina, including the devaluation of the Argentinian peso, compared with a $0.4bn adverse impact in 2022. Basis of presentation IFRS 17 ‘Insurance Contracts’ On 1 January 2023, HSBC adopted IFRS 17 ‘Insurance Contracts’. As required by the standard, the Group applied the requirements retrospectively with comparative data previously published under IFRS 4 ‘Insurance Contracts’ restated from the 1 January 2022 transition date. For further details, see ‘Changes to presentation from 1 January 2023’ on page 100. Changes to our reporting framework On 1 January 2023, we updated our financial reporting framework. We no longer report ‘adjusted’ results, which excluded the impact of both foreign currency translation differences and significant items. Instead, we compute constant currency performance by adjusting comparative reported results only for the effects of foreign currency translation differences between the relevant periods. Constant currency performance Constant currency performance is computed by adjusting reported results of comparative periods for the effects of foreign currency translation differences, which distort period- on-period comparisons. We consider constant currency performance to provide useful information for investors by aligning internal and external reporting, and reflecting how management assesses period- on-period performance. The results of our global businesses are presented on a constant currency basis, which is consistent with how we manage and assess global business performance. Notable items We separately disclose ‘notable items‘, which are components of our income statement that management would consider as outside the normal course of business and generally non-recurring in nature. The tables on pages 112 to 113 and pages 123 to 128 detail the effects of notable items on each of our global business segments and legal entities during 2023, 2022 and 2021. Material notable items are a subset of notable items, which are excluded from our earnings per share measure for the purposes of calculating our dividend payout ratio, and from 2024 will be referred to as on a ‘dividend payout ratio target basis’. Categorisation as a material notable is dependent on the nature of each item in conjunction with the financial impact on the Group’s income statement. Management view of revenue on a constant currency basis Our global business segment commentary includes tables that provide breakdowns of revenue on a constant currency basis by major product. These reflect the basis on which revenue performance of the businesses is assessed and managed. Comparative periods Unless otherwise stated, all performance commentary that follows compares our results in 2023 with those of 2022. HSBC Holdings plc Annual Report and Accounts 2023 27 Financial overview Reported results continued Reported ECL Reported ECL of $3.4bn were $0.1bn or 4% lower. The charge in 2023 primarily comprised stage 3 net charges, notably related to mainland China commercial real estate sector exposures. ECL charges in this sector were $1.0bn in 2023. The charge in 2023 also reflected the impact of continued economic uncertainty, rising interest rates and inflationary pressures. The charge in 2022 included $1.3bn of charges related to mainland China commercial real estate exposures. For further details of the calculation of ECL, see pages 156 to 168. Reported operating expenses Reported operating expenses of $32.1bn were $0.6bn or 2% lower, primarily driven by lower restructuring and other related costs of $3.0bn following the completion of our cost to achieve programme, which concluded at the end of 2022. The reduction also included favourable foreign currency translation differences between the periods of $0.4bn, a $0.2bn reduction due to a reversal of historical asset impairments, and the effects of our continued cost discipline. There was also a favourable impact of $0.2bn due to the impact of hyperinflationary accounting in Argentina in 2023. These reductions were partly offset by increases in technology costs, the impacts of inflation, a higher performance-related pay accrual and severance payments. There was also an increase in the UK bank levy of $0.3bn, including adjustments relating to prior years, and we incurred a $0.2bn charge in the US relating to the FDIC special assessment. The number of employees expressed in full- time equivalent staff (‘FTE’) at 31 December 2023 was 220,861, an increase of 1,662 compared with 31 December 2022. The number of contractors at 31 December 2023 was 4,676, a decrease of 1,371 due to the completion of our cost-saving programme. Reported share of profit from associates and joint ventures less impairment Reported share of profit from associates and joint ventures included an impairment charge of $3.0bn relating to our investment in BoCom due to a reduction to the accounting value- in-use of the investment, resulting in a loss of $0.2bn in 2023. This compared with a profit of $2.7bn in 2022. The impact of the impairment in 2023 was partly offset by an increase in the share of profit from Saudi Awwal Bank (‘SAB’). Tax expense The effective tax rate for 2023 of 19.1% was higher than the 4.7% in 2022. The effective tax rate for 2023 was increased by 2.3 percentage points by the non-deductible impairment of investments in associates, and reduced by 1.6 percentage points by the release of provisions for uncertain tax positions and reduced by 1.5 percentage points by the non-taxable bargain purchase gain on the acquisition of SVB UK. The effective tax rate for 2022 was reduced by 12.8 percentage points by the recognition of a deferred tax asset on historical tax losses of HSBC Holdings as a result of improved profit forecasts for the UK tax group. Excluding these items, the effective tax rates were 19.9% for 2023 and 17.5% for 2022. 2023 2022 2021 2023 vs 2022 Impact of FX Reported results $m $m $m $m % % Net operating income before change in expected credit losses and other credit impairment charges (‘revenue’) 66,058 50,620 49,552 15,438 30 (2) ECL (3,447) (3,584) 928 137 4 1 Net operating income 62,611 47,036 50,480 15,575 33 (2) Total operating expenses (32,070) (32,701) (34,620) 631 2 (1) Operating profit 30,541 14,335 15,860 16,206 >100 (6) Share of profit in associates and joint ventures less impairment (193) 2,723 3,046 (2,916) >(100) — Profit before tax 30,348 17,058 18,906 13,290 78 (6) Tax expense (5,789) (809) (4,213) (4,980) >(100) Profit after tax 24,559 16,249 14,693 8,310 51 2023 2022 2021 Notable items $m $m $m Revenue Disposals, acquisitions and related costs 1,298 (2,737) — Fair value movements on financial instruments1 14 (618) (221) Restructuring and other related costs — (247) (307) Disposal losses on Markets Treasury repositioning (977) — — Currency translation on revenue notable items — (105) — Operating expenses Disposals, acquisitions and related costs (321) (18) — Impairment of non-financial items — — (587) Restructuring and other related costs 136 (2,882) (1,836) Currency translation on operating expenses notable items — (31) 113 Share of profit in associates and joint ventures less impairment Impairment of interest in associate (3,000) — — 1 Fair value movements on non-qualifying hedges in HSBC Holdings. 28 HSBC Holdings plc Annual Report and Accounts 2023 Strategic report | Financial overview Strategic report Balance sheet strength Total assets of $3.0tn were $89bn higher than at 31 December 2022 on a reported basis, and included the favourable effects of foreign currency translation differences of $58bn. Within total assets, there were $114bn of assets held for sale, mainly related to our retail banking operations in France and our banking operations in Canada, which was broadly unchanged compared with 2022. On a constant currency basis, total assets rose by $31bn, mainly from an increase in financial investments and higher trading balances, while cash and balances at central banks and derivative asset balances fell. Reported loans and advances to customers increased by $15bn. On a constant currency basis, loans and advances fell by $3bn, which included an increase in secured home loans, previously classified as held for sale in France. There was mortgage balance growth in our main legal entity in Hong Kong and in HSBC UK, although lending fell in CMB and GBM in our main entity in Hong Kong, including a reduction in commercial real estate lending. Reported customer accounts of $1.6tn increased by $41bn. On a constant currency basis, they grew by $13bn, notably from growth in WPB in our main legal entity in Asia and CMB in Europe. Loans and advances to customers as a percentage of customer accounts was 58.2%, compared with 58.8% at 31 December 2022. Distributable reserves The distributable reserves of HSBC Holdings at 31 December 2023 were $30.9bn, a $4.3bn decrease since 2022, primarily driven by $18.6bn in ordinary dividend, additional tier 1 coupon and share buy-back payments, offset by profits generated and other reserve movements of $14.3bn. Distributable reserves are sensitive to impairments of investments in subsidiaries to the extent they are not offset by the realisation of related reserves. The impairment of BoCom in 2023 did not impact distributable reserves, as its intermediate parent and direct subsidiary of HSBC Holdings, HSBC Asia Holdings Limited, was not impaired. Capital position We actively manage the Group’s capital position to support our business strategy and meet our regulatory requirements at all times, including under stress, while optimising our capital efficiency. To do this, we monitor our capital position using a number of measures. These include our capital ratios and the impact on our capital ratios as a result of stress. Our CET1 ratio at 31 December 2023 was 14.8%, up 0.6 percentage points from 2022, mainly driven by capital generation net of dividends, share buy-backs and regulatory adjustments, which was partly offset by an increase in risk-weighted assets (‘RWAs’) during the year. Liquidity position We actively manage the Group’s liquidity and funding to support the business strategy and meet regulatory requirements at all times, including under stress. To do this, we monitor our position using a number of risk appetite measures, including the liquidity coverage ratio and the net stable funding ratio. During 2023, the average high-quality liquid assets we held was $647.5bn. This excludes high- quality liquid assets in legal entities which are not transferable due to local restrictions. For further details, see page 206. Total assets ($bn) $3,039bn (2022: $2,949bn) Common equity tier 1 ratio (%) 14.8% (2022: 14.2%) Balance sheet and capital Constant currency results Profit before tax of $30.3bn was $13.8bn higher than in 2022 on a constant currency basis, primarily driven by higher revenue. Revenue increased by $16.2bn or 32% on a constant currency basis, which included a $2.6bn year-on-year favourable impact relating to the sale of our retail banking operations in France, and a provisional gain of $1.6bn recognised on the acquisition of SVB UK in 2023. The remaining increase in revenue was primarily due to growth in net interest income from the impact of global interest rate rises. There was also a good performance from Capital Markets and Advisory in GBM and higher revenue in Corporate Centre. Revenue reduced in Markets Treasury due to the impact of rising interest rates on our funding costs and flattening yield curves, partly offset by increases from dynamic risk management and the deployment of asset disposals. Markets Treasury also incurred losses on asset disposals of $1.0bn relating to repositioning and risk management activities in our hold-to-collect-and-sell portfolio in certain key legal entities. These actions are accretive to net interest income and reduce the consumption of the Group‘s financial resources. This revenue is allocated to our global businesses. ECL were $0.2bn or 5% lower on a constant currency basis. The charge in 2023 primarily comprised stage 3 net charges, notably related to mainland China commercial real estate sector exposures. ECL charges in this sector were $1.0bn in 2023. The charge in 2023 also reflected the impact of continued economic uncertainty, rising interest rates and inflationary pressures. Operating expenses were $0.2bn or 1% lower on a constant currency basis, as reduced restructuring and other related costs following the completion of our cost-saving programme were broadly offset by increases in technology costs, the impacts of inflation, and a higher performance-related pay accrual. There was also an increase in the UK bank levy, including adjustments relating to prior years, and a charge in the US relating to a special assessment of the FDIC. Share of profit in associates and joint ventures less impairment included a $3.0bn impairment of our investment in BoCom due to a revision to the accounting value-in-use of the investment, resulting in a loss of $0.2bn in 2023. This compared with a share of profit of $2.6bn in 2022 on a constant currency basis. The impact of the impairment was partly offset by an increase in the share of profit from SAB. Results – on a constant currency basis 2023 2022 2021 2023 vs 2022 $m $m $m $m % Revenue 66,058 49,871 46,079 16,187 32 ECL (3,447) (3,630) 758 183 5 Total operating expenses (32,070) (32,302) (32,244) 232 1 Operating profit 30,541 13,939 14,593 16,602 >100 Share of profit in associates and joint ventures less impairment (193) 2,602 2,807 (2,795) >(100) Profit before tax 30,348 16,541 17,400 13,807 83 HSBC Holdings plc Annual Report and Accounts 2023 29 Financial overview Constant currency profit before tax ($bn) $11.5bn 5.9 5.5 11.5 2023 2022 2021 Constant currency net operating income ($bn) $27.3bn 21.0 20.9 27.3 2023 2022 2021 International customers are those who bank with us in our 11 key markets, excluding Canada, and who bank in more than one market, those whose address is different from the market we bank them in and customers whose nationality, or country of birth for non-resident Indians and overseas Chinese, is different to the market we bank them in. Customers may be counted more than once when banked in multiple countries. Contribution to Group profit before tax $11.5bn 38% 2023 2022 2021 2023 vs 2022 Results – on a constant currency basis $m $m $m $m % Net operating income 27,275 20,884 20,972 6,391 31 ECL (1,058) (1,186) 195 128 11 Operating expenses (14,738) (14,248) (15,338) (490) (3) Share of profit in associates and JVs 65 30 36 35 >100 Profit before tax 11,544 5,480 5,865 6,064 >100 RoTE (annualised)1 (%) 28.5 13.8 1 RoTE (annualised) in 2022 included a 4.7 percentage point adverse impact from the impairment losses relating to the sale of our retail banking operations in France. To meet our customers’ needs, we offer a full suite of products and services across transactional banking, lending and wealth. WPB continued to invest in our key strategic priorities of expanding our Wealth franchise, developing our transactional banking and lending capabilities, and addressing our customers’ international needs. Performance in 2023 benefited from rising interest rates and balance sheet growth, including Wealth deposits. There was also positive growth in Wealth, including strong sales in insurance and net new invested assets growth. The results included a broadly stable ECL charge, despite ongoing macroeconomic uncertainty. Wealth and Personal Banking $84bn WPB net new invested assets in 2023, up 6% compared with 2022. 6.7 million International customers at 31 December 2023, an increase of 12% compared with 2022. We serve 41 million customers globally, including 6.7 million who are international, from retail customers to ultra high net worth individuals and their families. Launching our international proposition We launched our redesigned international proposition in February 2023 to strengthen our position as a leading banking provider for international customers, which is WPB’s fastest-growing segment representing 40% of revenue in 2023. The refresh involved six services launched across 10 international markets, with the aim of helping customers move and invest overseas easier. This included supporting our international customers, who generate around three times the average revenue of a domestic customer, so they can open an international account digitally pre- departure, gain access to a credit card in their new market with an appropriate limit, and make use of quick, competitively priced cross-border payment solutions with 24/7 global support to manage their international needs. Divisional highlights Calculation is based on profit before tax of our global businesses excluding Corporate Centre. 30 HSBC Holdings plc Annual Report and Accounts 2023 Strategic report | Global businesses Strategic report Financial performance Profit before tax of $11.5bn was $6.1bn higher than in 2022 on a constant currency basis. The growth in revenue reflected growth in both Personal Banking and Wealth. The increase also reflected a $2.4bn year-on- year impact relating to the sale of our retail banking operations in France. ECL remained broadly stable and operating expenses grew by $0.5bn. Revenue of $27.3bn was $6.4bn or 31% higher on a constant currency basis. In Wealth, revenue of $7.5bn was up $0.6bn or 8%. – Global Private Banking revenue was $0.2bn or 12% higher due to rising interest rates and deposit growth of $11bn or 15%. – Asset management revenue was $0.2bn or 13% higher, driven by an increase in assets under management of 15%, and from positive market movements. – Life insurance revenue rose by $0.1bn or 8%, mainly driven by an increase of $0.2bn in contractual service margin (‘CSM’) earnings and favourable net investment returns of $0.1bn, partly offset by a $0.3bn loss from corrections to historical valuation estimates. There was strong growth in the new business CSM, up $0.6bn or 47%, mainly in Hong Kong. In Personal Banking, revenue of $20.5bn was up $4.5bn or 28%. – Net interest income was $4.5bn or 31% higher due to rising interest rates and balance sheet growth. Mortgage lending balances rose in Hong Kong by $6bn and in HSBC UK by $5bn. Unsecured lending balances increased by $3bn, notably in HSBC UK, Mexico and Hong Kong. In addition, there was an increase of $7.8bn from a reclassification of secured loans in France from held for sale. Deposit balances remained broadly stable as growth in Asia was partly offset by outflows, mainly in HSBC UK due to higher cost of living and competitive pressures, and in our main entity in the US. Other revenue increased by $1.3bn, mainly due to a $2.4bn year-on-year impact relating to the sale of our retail banking operations in France. This was partly offset by a $0.7bn reduction in Markets Treasury allocated revenue, including disposal losses on repositioning and an adverse impact of $0.5bn due to hyperinflationary accounting. ECL were $1.1bn in 2023, down $0.1bn on a constant currency basis, as credit performance remained resilient, despite a rise in inflationary pressures. Operating expenses of $14.7bn were $0.5bn or 3% higher on a constant currency basis, mainly due to continued investments, notably in wealth in Asia, higher technology spend, higher performance-related pay and the impact of higher inflation. These increases were partly offset by a reduction in restructuring and other related costs following the completion of our cost-saving programme at the end of 2022 and ongoing cost discipline. 2023 2022 2021 2023 vs 2022 Management view of revenue $m $m $m $m % Wealth 7,524 6,970 8,812 554 8 – investment distribution 2,528 2,469 3,367 59 2 – Global Private Banking 2,252 2,016 1,777 236 12 net interest income 1,155 965 630 190 20 non-interest income 1,097 1,051 1,147 46 4 – life insurance (IFRS 17)1 1,462 1,354 — 108 8 – life insurance manufacturing (IFRS 4)1 2,512 – asset management 1,282 1,131 1,156 151 13 Personal Banking 20,463 15,939 11,648 4,524 28 – net interest 19,124 14,631 10,298 4,493 31 – non-interest income 1,339 1,308 1,350 31 2 Other2 (712) (2,025) 512 1,313 65 – of which: impairment (loss)/reversal relating to the sale of our retail banking operations in France3 4 (2,354) — 2,358 >100 Net operating income4 27,275 20,884 20,972 6,391 31 1 From 1 January 2023 we adopted IFRS 17 and have restated 2022 financial data. Data for 2021 is not restated, and ‘Life insurance manufacturing’ is disclosed on the basis of preparation prevailing in 2021, which includes our manufacturing business only. Insurance distribution of $518m is presented in ‘investment distribution’. 2 Other’ includes Markets Treasury, HSBC Holdings interest expense and hyperinflation. It also includes the distribution and manufacturing (where applicable) of retail and credit protection insurance, disposal gains and other non-product-specific income. 3 The amounts associated with the sale of our retail banking operations in France include all related impacts disclosed in notable items, which are presented across various lines in our consolidated income statement. 4 ’Net operating income’ means net operating income before change in expected credit losses and other credit impairment charges (also referred to as ‘revenue’). 2023 2022 2021 Notable items $m $m $m Revenue Disposals, acquisitions and related costs 4 (2,212) — Restructuring and other related costs — 98 14 Disposal losses on Markets Treasury repositioning (391) — — Currency translation on revenue notable items — (142) (5) Operating expenses Disposals, acquisitions and related costs (53) (7) — Impairment of non-financial items — — (587) Restructuring and other related costs 20 (357) (296) Currency translation on operating expenses notable items — — 4 HSBC Holdings plc Annual Report and Accounts 2023 31 Global businesses Contribution to Group profit before tax $13.3bn 43% Constant currency profit before tax ($bn) $13.3bn 6.3 7.5 13.3 2023 2022 2021 Constant currency net operating income ($bn) $22.9bn 12.7 16.3 22.9 2023 2022 2021 We partner with businesses around the world, supporting every stage of their growth, their international ambitions and their sustainability transitions. We deliver value to our clients through our international network, financing strength, digital capabilities and our universal banking capabilities, including our industry leading global trade and payments solutions. We aim to be a leader in the innovation economy, with the launch of HSBC Innovation Banking in 2023 enhancing our proposition to clients in the technology and healthcare sectors. During 2023, we delivered a strong revenue performance, notably in Global Payments Solutions (‘GPS’) and in collaboration revenue from GBM products. 2023 2022 2021 2023 vs 2022 Results – on a constant currency basis $m $m $m $m % Net operating income 22,867 16,283 12,699 6,584 40 ECL (2,062) (1,862) 339 (200) (11) Operating expenses (7,524) (6,894) (6,691) (630) (9) Share of profit/(loss) in associates and JVs (1) — 1 (1) — Profit before tax 13,280 7,527 6,348 5,753 76 RoTE (annualised)1 (%) 23.4 13.7 1 RoTE (annualised) in 2023 included a 3.1 percentage point favourable impact of the provisional gain recognised on the acquisition of SVB UK. Commercial Banking We operate in more than 50 markets, serving around 1.3 million customers, ranging from small enterprises to large companies operating globally including those in the new innovation economy. Backing a manufacturer in its international expansion When Polygroup, a leading manufacturing business specialising in seasonal goods, decided to expand into new international markets, it was able to take advantage of our global network and local market insights. The group, which employs more than 15,000 people across four continents, partnered with us to expand to new locations in mainland China, Indonesia and Mexico. With our broad range of banking capabilities across our international network, we were able to provide capital expenditure financing to help build new manufacturing facilities. We also supported Polygroup in improving its cash flow during off-peak seasons by extending tailor-made trade solutions delivered through an international digital platform, and we continue to support it on its ESG journey. 78% Increase in GPS revenue. 10% Increase in collaboration income from the sale of GBM products to CMB clients. Divisional highlights Calculation is based on profit before tax of our global businesses excluding Corporate Centre. 32 HSBC Holdings plc Annual Report and Accounts 2023 Strategic report | Global businesses Strategic report 2%, driven by lower average balances in our main legal entities in Asia and Europe, primarily reflecting the softer trade cycle, partly offset by wider margins in our legal entities in Latin America and the UK. In addition, there was a $28m or 3% increase in fee income. – In Credit and Lending, revenue decreased by $0.4bn or 7%, notably in our main legal entities in Asia and Europe, primarily due to margin compression. It also reflected lower balances due to softer demand from customers across these markets, and reduced exposures in the commercial real estate sector, notably in mainland China and the US. – In GBM products, Insurance and Investments and Other, revenue increased by $1.6bn, driven by incremental revenue from HSBC Innovation Banking of $2.1bn, which included the provisional gain of $1.6bn on the acquisition of SVB UK. There was also an increase in collaboration revenue from GBM products of $0.1bn, notably in Foreign Exchange. These increases were partly offset by a reduction in Markets Treasury allocated income of $0.6bn, including disposal losses on portfolio repositioning and the adverse impacts of hyperinflationary accounting of $0.6bn. The remaining increase in revenue reflected higher interest on capital held in the business, partly offset by higher HSBC Holdings interest expense. ECL were a charge of $2.1bn, compared with a charge of $1.9bn in 2022 on a constant currency basis. The increase of $0.2bn was mainly driven by higher stage 3 charges in the UK, and included provisions from HSBC Innovation Banking, and charges in the Middle East. ECL in both periods reflected charges relating to the commercial real estate sector in mainland China, although they were lower in 2023. Operating expenses of $7.5bn were higher by $0.6bn on a constant currency basis. The increase reflected incremental costs in HSBC Innovation Banking of $0.3bn including the acquisition and integration of SVB UK, higher performance-related pay, ongoing investment in technology and inflationary impacts. These increases were in part mitigated by the impact of continued cost discipline and a reduction in restructuring and other related costs following the completion of our cost-saving programme at the end of 2022. Financial performance Profit before tax of $13.3bn was $5.8bn or 76% higher than in 2022 on a constant currency basis. This was driven by an increase in revenue in all our main legal entities, primarily from a $5.3bn increase in GPS net interest income. It also included a provisional gain of $1.6bn from HSBC UK’s acquisition of SVB UK. These increases were partly offset by a rise in operating expenses as a result of the SVB UK acquisition and increases in technology costs. Revenue of $22.9bn was $6.6bn or 40% higher on a constant currency basis. – In GPS, revenue increased by $5.4bn, with growth in all main legal entities. The increase was driven by higher margins, reflecting interest rate rises and repricing actions, which were partly offset by lower average balances notably due to a market- wide reduction in the UK. There was a 6% increase in fee income, as business initiatives drove growth in transaction banking, with higher volumes in cards and international payments. – In Global Trade and Receivables Finance (‘GTRF’), revenue decreased by $0.1bn or 2023 2022 2021 2023 vs 2022 Management view of revenue $m $m $m $m % Global Trade and Receivables Finance 2,025 2,075 1,832 (50) (2) Credit and Lending 5,343 5,745 5,752 (402) (7) Global Payments Solutions 12,381 6,966 3,411 5,415 78 Markets products, Insurance and Investments and Other1 3,118 1,497 1,704 1,621 >100 – of which: share of revenue for Markets and Securities Services and Banking products 1,299 1,182 1,008 117 10 – of which: provisional gain on the acquisition of Silicon Valley Bank UK Limited 1,591 — — 1,591 >100 Net operating income2 22,867 16,283 12,699 6,584 40 – of which: transaction banking3 15,393 9,940 5,971 5,453 55 1 Includes CMB’s share of revenue from the sale of Markets and Securities Services and Banking products to CMB customers. GBM’s share of revenue from the sale of these products to CMB customers is included within the corresponding lines of the GBM management view of revenue. Also includes allocated revenue from Markets Treasury, HSBC Holdings interest expense and hyperinflation. 2 ’Net operating income’ means net operating income before change in expected credit losses and other credit impairment charges (also referred to as ‘revenue’). 3 Transaction banking comprises Global Trade and Receivables Finance, Global Payments Solutions and CMB’s share of Global Foreign Exchange (shown within ‘share of revenue for Markets and Securities Services and Banking products’). 2023 2022 2021 Notable items $m $m $m Revenue Disposals, acquisitions and related costs 1,591 — — Restructuring and other related costs — (16) (3) Disposal losses on Markets Treasury repositioning (316) — — Currency translation on revenue notable items — 1 (6) Operating expenses Disposals, acquisitions and related costs (55) — — Restructuring and other related costs 32 (266) (83) Currency translation on operating expenses notable items — (5) 7 HSBC Holdings plc Annual Report and Accounts 2023 33 Global businesses Contribution to Group profit before tax $5.9bn 19% Constant currency net operating income ($bn) $16.1bn 13.1 14.6 16.1 2023 2022 2021 Constant currency profit before tax ($bn) $5.9bn 4.1 4.7 5.9 2023 2022 2021 We are a leader in facilitating global trade and payments, particularly into and within Asia and the Middle East, helping to enable our clients in the East and West to achieve their objectives by accessing our expertise and geographical reach. Our product specialists deliver a comprehensive range of transaction banking, financing, capital markets and advisory, and risk management services. Profit before tax increased in 2023, reflecting a strong revenue performance due to rising interest rates and from Capital Markets and Advisory. This was partly offset by weaker client activity in our Equities business. We continued to invest in technology to modernise our infrastructure, innovate product capabilities and support our clients. 2023 2022 2021 2023 vs 2022 Results – on a constant currency basis $m $m $m $m % Net operating income 16,115 14,602 13,086 1,513 10 ECL (326) (573) 221 247 43 Operating expenses (9,865) (9,338) (9,255) (527) (6) Share of profit/(loss) in associates and JVs — (2) — 2 100 Profit before tax 5,924 4,689 4,052 1,235 26 RoTE (annualised) (%) 11.4 9.8 Global Banking and Markets We support multinational corporates, financial institutions and institutional clients, as well as public sector and government bodies. Leading on a $2.4bn rights issue for Link REIT Our international connectivity and balance sheet strength help support clients when they need to carry out large strategic transactions in the capital markets. In March 2023, we supported Asia’s largest real estate investment trust to complete the largest ever rights issue from a non-bank issuer in Hong Kong. We acted as sole global coordinator and lead underwriter on a $2.4bn one-for-five rights issue for Link REIT, which was conducted to strengthen its capital base and position itself for the next phase of growth. The transaction was the largest ever rights issue in the Asian real estate sector and the largest equity offering in Hong Kong since September 2021. 11.4% RoTE in 2023, up 1.6 percentage points compared with 2022. 56% Increase in GPS revenue. Divisional highlights Calculation is based on profit before tax of our global businesses excluding Corporate Centre. 34 HSBC Holdings plc Annual Report and Accounts 2023 Strategic report | Global businesses Strategic report – Global Foreign Exchange revenue was largely in line with 2022 and reflected continued elevated client activity and trading facilitation, as we captured the benefit of market-wide volatility relating to interest rate and inflation differentials. – Equities revenue fell by $0.5bn or 45%, due to lower client activity as a result of reduced market volatility. – Securities Financing revenue rose by $0.2bn or 22%, driven by higher client flows, growth in prime finance and the onboarding of new clients. In Banking, revenue increased by $1.8bn or 27%. – GPS revenue increased by $1.6bn or 56%, driven by margin growth as a result of the rising global interest rate environment and business pricing actions. – Capital Markets and Advisory revenue rose by $0.3bn or 41%, primarily from increased financing activities and higher interest rates, against a backdrop of a smaller global market fee pool. – Credit and Lending revenue decreased by $0.3bn or 12%, due to weaker client demand. – Banking Other revenue increased by $0.2bn or 91%, from higher interest on capital held in the business. In GBM Other, there was a $0.4bn reduction in revenue, mainly due to lower Markets Treasury allocated revenue, including disposal losses on repositioning, higher HSBC Holdings interest expense and the adverse impacts of hyperinflationary accounting. ECL of $0.3bn were $0.2bn lower on a constant currency basis, reflecting a favourable credit performance, including lower charges in the commercial real estate sector in mainland China. Operating expenses of $9.9bn increased by $0.5bn or 6% on a constant currency basis due to the impact of higher inflation and strategic investments, which was in part mitigated by business actions and a reduction in restructuring and other related costs following the completion of our cost-saving programme at the end of 2022. Management view of revenue 2023 2022 2021 2023 vs 2022 $m $m $m $m % Markets and Securities Services 9,008 8,874 7,684 134 2 – Securities Services 2,411 2,022 1,776 389 19 – Global Debt Markets 823 697 819 126 18 – Global Foreign Exchange 4,133 4,137 3,097 (4) — – Equities 552 1,003 1,156 (451) (45) – Securities Financing 1,116 918 827 198 22 – Credit and funding valuation adjustments (27) 97 9 (124) >(100) Banking 8,540 6,721 5,858 1,819 27 – Global Trade and Receivables Finance 669 678 626 (9) (1) – Global Payments Solutions 4,483 2,879 1,581 1,604 56 – Credit and Lending 1,970 2,231 2,332 (261) (12) – Capital Markets and Advisory 1,033 731 1,180 302 41 – Other1 385 202 139 183 91 GBM Other (1,433) (993) (456) (440) (44) – Principal Investments (4) 55 372 (59) >(100) – Other2 (1,429) (1,048) (828) (381) (36) Net operating income3 16,115 14,602 13,086 1,513 10 – of which: transaction banking4 11,696 9,716 7,080 1,980 20 1 Includes portfolio management, earnings on capital and other capital allocations on all Banking products. 2 Includes notional tax credits and Markets Treasury, HSBC Holdings interest expense and hyperinflation. 3 ‘Net operating income’ means net operating income before change in expected credit losses and other credit impairment charges (also referred to as ‘revenue’). 4 Transaction banking comprises Securities Services, Global Foreign Exchange (net of revenue shared with CMB), Global Trade and Receivables Finance and Global Payments Solutions. 2023 2022 2021 Notable items $m $m $m Revenue Restructuring and other related costs — (184) (395) Disposal losses on Markets Treasury repositioning (270) — — Currency translation on revenue notable items — 3 25 Operating expenses Disposals, acquisitions and related costs 3 — — Restructuring and other related costs 21 (252) (195) Currency translation on operating expenses notable items — (4) 20 Financial performance Profit before tax of $5.9bn was $1.2bn or 26% higher than in 2022 on a constant currency basis. This was driven by an increase in revenue of $1.5bn or 10%, notably from higher net interest income in GPS and Securities Services. ECL fell by $0.2bn, while operating expenses increased by $0.5bn or 6%. Revenue of $16.1bn was $1.5bn or 10% higher on a constant currency basis. In Markets and Securities Services (‘MSS’), revenue was marginally higher by $0.1bn or 2%. – Securities Services revenue grew by $0.4bn or 19%, from higher net interest income as global interest rates rose. – Global Debt Markets revenue increased by $0.1bn or 18%, from favourable primary market conditions and higher client trading volumes as the market environment normalised. The 2022 performance was impacted by lower primary activity and client flow due to uncertainty and challenging market conditions. HSBC Holdings plc Annual Report and Accounts 2023 35 Global businesses 2023 2022 2021 2023 vs 2022 Results – on a constant currency basis $m $m $m $m % Net operating income (199) (1,898) (678) 1,699 90 ECL (1) (9) 3 8 89 Operating expenses 57 (1,822) (960) 1,879 >100 Share of profit in associates and joint ventures less impairment (257) 2,574 2,770 (2,831) >(100) – of which: impairment loss relating to our investment in BoCom (3,000) — — (3,000) Profit/loss before tax (400) (1,155) 1,135 755 65 RoTE (annualised) (%) (1.0) 2.8 Corporate Centre Corporate Centre performance in 2023 reflected the recognition of an impairment in our investment in our associate BoCom. Additionally, the non-recurrence of restructuring and other related costs following the completion of our cost-saving programme at the end of 2022 resulted in lower operating expenses, while higher revenue included the non-recurrence of adverse fair value movements on financial instruments and the impacts of restructuring our business in Europe. Financial performance Loss before tax of $0.4bn was $0.8bn or 65% lower than the loss in 2022, on a constant currency basis. This reflected lower restructuring and other related costs and higher revenue, partly offset by the impact of an impairment of our investment in BoCom. This impairment reflects a reduction to the accounting value-in-use in line with recent market-wide developments in mainland China. For further details, see page 101. Revenue was $1.7bn or 90% higher than in 2022 on a constant currency basis. The increase was primarily from the non- recurrence of adverse fair value movements on financial instruments in Central Treasury and structural hedges, together with the non- recurrence of losses and charges associated with the disposals of our branch operations in Greece and our French retail banking business, the planned disposal of our business in Russia, and legacy portfolios. These favourable year- on-year impacts were partly offset by adverse fair value movements in 2023 on foreign exchange hedges related to the planned sale of our banking business in Canada. Operating expenses decreased by $1.9bn on a constant currency basis, primarily driven by the non-recurrence of restructuring and other related costs following the completion of our cost-saving programme at the end of 2022. These were partly offset by the recognition of a charge related to the FDIC special assessment, costs associated with the disposal of our retail banking operations in France and the planned disposal of our banking business in Canada, and a higher allocation of the UK bank levy, including adjustments related to prior years. Since 2021, the UK bank levy and any related adjustments have been allocated across our global businesses and Corporate Centre, primarily to GBM. Management view of revenue 2023 2022 2021 2023 vs 2022 $m $m $m $m % Central Treasury1 99 (742) (324) 841 >100 Legacy portfolios 3 (174) (54) 177 >100 Other2,3 (301) (982) (300) 681 69 Net operating income4 (199) (1,898) (678) 1,699 90 1 Central Treasury comprises valuation differences on issued long-term debt and associated swaps and fair value movements on financial instruments. 2 Other comprises consolidation adjustments, funding charges on property and technology assets, revaluation gains and losses on investment properties and property disposals, gains and losses on certain planned disposals, including charges relating to our business in Russia, and other revenue items not allocated to global businesses. 3 Revenue from Markets Treasury, HSBC Holdings net interest expense and hyperinflation are allocated out to the global businesses, to align them better with their revenue and expense. The total Markets Treasury revenue component of this allocation for 2023 was $(139)m (2022: $1,431m; 2021: $2,142m). 4 ‘Net operating income’ means net operating income before change in expected credit losses and other credit impairment charges (also referred to as ‘revenue’). 2023 2022 2021 Notable items $m $m $m Revenue Disposals, acquisitions and related costs (297) (525) — Fair value movements on financial instruments 14 (618) (221) Restructuring and other related costs — (145) 77 Disposal losses on Markets Treasury repositioning — — — Currency translation on revenue notable items — 33 (16) Operating expenses Disposals, acquisitions and related costs (216) (11) — Restructuring and other related costs 63 (2,007) (1,262) Currency translation on operating expenses notable items — (22) 81 Impairment of interest in associate (3,000) — — The results of Corporate Centre primarily comprise the share of profit from our interests in our associates and joint ventures and related impairments. It also includes Central Treasury, stewardship costs and consolidation adjustments. Share of profit in associates and joint ventures in 2023 included an impairment charge of $3.0bn in 2023 relating to our investment in BoCom due to a reduction of the accounting value-in-use of our investment, resulting in a loss of $0.3bn. This compared with a share of profit of $2.6bn in 2022. The impact of the impairment was partly offset by growth of $0.2bn, mainly driven by an increase in the share of profits from SAB. 36 HSBC Holdings plc Annual Report and Accounts 2023 Strategic report | Global businesses Strategic report Managing risk The global economy proved more resilient in 2023 than had been expected, supported by strong growth in the US, and a stabilisation in China’s economy, although there continues to be uncertainty and weakness in Europe. In most key markets, a fall in energy prices and other commodity prices facilitated a decrease in inflation. Central banks in most developed markets are expected to have concluded monetary policy tightening in the second half of 2023 and to start reducing interest rates in 2024. Certain emerging market central banks began reducing interest rates during 2023. However, interest rates in the medium term are likely to remain materially higher than in recent years. Geopolitical tensions are a source of significant risk, including the ongoing Russia- Ukraine and Israel-Hamas wars. Both could have significant global economic and political consequences. The Israel-Hamas war has led to renewed volatility in energy prices, and recent attacks on commercial shipping in the Red Sea and the counter-measures taken to improve security have begun to disrupt supply chains. These developments have the potential to halt or reverse the recent decline in inflation especially in Europe and North America. Sanctions and trade restrictions are complex, novel and evolving. In particular, the US, the UK and the EU, as well as other countries, have imposed significant sanctions and trade restrictions against Russia. In December 2023, the US established a new secondary sanctions regime, providing itself broad discretion to impose severe sanctions on non-US banks that are knowingly or even unknowingly engaged in certain transactions or services involving Russia’s military-industrial base. This creates challenges associated with the detection or prevention of third-party activities beyond HSBC’s control. The imposition of such sanctions against any non-US HSBC entity could result in significant adverse commercial, operational and reputational consequences for HSBC. The relationships between China and several other countries, including the US and the UK, remain complex. Supply chains remain vulnerable to a deterioration in these relationships and this has resulted in efforts to de-risk certain sectors by reshoring manufacturing activities. The US, the UK, the EU and other countries have imposed various sanctions and trade restrictions on Chinese Active risk management helps us to achieve our strategy, serve our customers and communities and grow our business safely. Key risk appetite metrics Component Measure Risk appetite 2023 Capital CET1 ratio – end point basis ≥13.0% 14.8% Change in expected credit losses and other credit impairment charges Change in expected credit losses and other credit impairment charges as a % of advances: (WPB) ≤0.50% 0.21% Change in expected credit losses and other credit impairment charges as a % of advances: wholesale (GBM, CMB) ≤0.45% 0.40% persons and companies. The approach of countries to strategic competition and engagement with China continues to develop. In response, China has imposed sanctions, trade restrictions and law enforcement measures. Further sanctions or counter- sanctions may adversely affect the Group, its customers and various markets. Fiscal deficits are expected to remain large in both developed and emerging markets, as public spending on social welfare, defence and climate transition initiatives is expected to remain high. In many countries, the fiscal response to the Covid-19 pandemic has also left a very high public debt burden. Against a backdrop of slower economic growth and high interest rates, elevated borrowing costs could increase the strains on highly indebted sovereigns. Political changes may also have implications for policy. Many countries are expected to hold elections in 2024. This may result in uncertainty in some markets in response to domestic political priorities. Sectoral risks are also a focus, and the real estate sector in particular faces challenges in many of our major markets. In mainland China, commercial real estate conditions remain distressed and signs of a material or sustained recovery are yet to emerge. Market data continues to reflect reduced investment and weak sentiment in the short term, although authorities are expanding fiscal and monetary support to the economy including specific measures to support developers and stimulate housing demand. We continue to closely monitor this sector, and take action to manage our commercial real estate portfolio risk. The impact of the rising cost of living on retail customers is a key risk for our society. Our primary concern is to ensure that we offer the right support to customers in line with regulatory, government and wider stakeholder expectations. This follows our adoption of the UK government’s Mortgage Charter released in June 2023. We engage closely with regulators to help ensure that we continue to meet their expectations regarding financial institutions’ activities to support economies during times of market volatility. Our approach to macroeconomic scenarios in relation to IFRS 9 ‘Financial Instruments’ remained unchanged in the fourth quarter of 2023 compared with the corresponding period in 2022. Adjustments to the design and narrative of the most severe downside scenario were made to reflect increased geopolitical risks. In addition, management adjustments to ECL were applied to reflect persisting uncertainty in certain sectors, driven by inflation, interest rate sensitivity and other macroeconomic risks, which were not fully captured by our models. We continue to monitor, and seek to manage, the potential implications of all the above developments on our customers and our business. While the financial performance of our operations varies by geography, our balance sheet and liquidity remained strong. For further details of our Central and other scenarios, see ‘Measurement uncertainty and sensitivity analysis of ECL estimates’ on page 156. Risk overview HSBC Holdings plc Annual Report and Accounts 2023 37 Risk overview Our risk appetite Our risk appetite defines our desired forward- looking risk profile and informs the strategic and financial planning process. It provides an objective baseline to guide strategic decision making, helping to ensure that planned business activities provide an appropriate balance of return for the risk assumed, while remaining within acceptable risk levels. Risk appetite supports senior management in allocating capital, funding and liquidity optimally to finance growth, while monitoring exposure to non-financial risks. At 31 December 2023, our CET1 ratio and ECL charges were within their defined risk appetite thresholds. Our CET1 capital ratio at 31 December 2023 was 14.8%, up 0.6 percentage points from 2022, mainly driven by capital generation net of dividends, share buy-backs and regulatory adjustments, partly offset by an increase in RWAs during the year. For further details of the key drivers of the overall CET1 ratio, see ‘Own funds disclosure’ on page 207. Wholesale ECL charges during the year reflected the default of several mainland China commercial real estate developer clients. Wholesale ECL charges fell outside of appetite in the first half of 2023, although returned within appetite during the second half of 2023, due to relatively lower defaults in the UK and most other markets. During 2023, we enhanced the coverage of interest rate risk metrics in the banking book within the Group’s appetite statement. Stress tests We regularly conduct stress tests to assess the resilience of our balance sheet and our capital adequacy, as well as to provide actionable insights into how key elements of our portfolios may behave during a crisis. We use the outcomes to calibrate our risk appetite to review and calibrate as required our strategic and financial plans, helping to improve the quality of management’s decision making. The results from the stress tests also drive recovery and resolution planning to help enhance the Group’s financial stability under various macroeconomic scenarios. The selection of stress scenarios is based upon the identification and assessment of our top risks, emerging risks and our risk appetite. In January 2023, HSBC Holdings and HSBC UK, its UK ring-fenced bank, submitted the internally modelled results of the Bank of England’s (‘BoE’) 2022–2023 annual cyclical scenario to the regulator. The BoE uses the annual cyclical scenario stress test to determine the banking sector’s ability to withstand an adverse scenario and continue to serve UK households and businesses. The results were published on 12 July 2023 by the BoE in its Financial Stability Report and indicated that both HSBC Holdings and HSBC UK are sufficiently capitalised with a CET1 capital ratio remaining well above the regulatory reference rate on both an IFRS 9 transitional basis and on a non-transitional basis. During the second half of 2023, the Group- wide internal stress test was completed alongside testing of the Group’s strategy. The concluding results of the Group-wide internal stress test provided updates to the Group Risk Committee in support of its assessment of adequacy of HSBC Holdings capital levels. The underlying conclusions drawn from this exercise will also be included in the Group internal capital adequacy assessment process (‘ICAAP‘) in the first quarter of 2024. Climate risk Climate risk relates to the financial and non-financial impacts that may arise as a consequence of climate change and the move to a net zero economy. Climate risk can impact us either directly or through our relationships with our clients. These include the potential risks arising as a result of our net zero ambition, which could lead to reputational concerns, and potential legal and/or regulatory action if we are perceived to mislead stakeholders on our business activities or if we fail to achieve our stated net zero targets. We seek to manage climate risk across all our businesses in line with our Group- wide risk management framework and are incorporating climate considerations within our traditional risk types. For further details of our approach to climate risk management, see ‘Climate risk‘ on page 221. For further details of our TCFD disclosures, see the ‘ESG review‘ on page 42. Climate stress tests To support the requirements for assessing the impacts of climate change, we continue to develop a set of capabilities to execute climate stress testing and scenario analysis. These are used to help improve our understanding of risk exposures for managing risk and business decision making. In the second half of 2023, we ran further internal climate scenario analyses. The outcomes were used to identify challenges and opportunities to our net zero strategy, inform capital planning and risk appetite, as well as to respond to climate stress tests for regulators, including the Hong Kong Monetary Authority and the Central Bank of the United Arab Emirates. For further details of our approach to climate risk stress testing, see ‘Insights from scenario analysis’ on page 225. Our operations We remain committed to investing in the reliability and resilience of our IT systems and critical services, including those provided by third parties, which support all parts of our business. We do so to help protect our customers, affiliates and counterparties, and to help ensure that we minimise any disruption to services. In our approach to defending against these threats, we invest in business and technical controls to help us detect, manage and recover from issues in a timely manner. We are working to ensure that we balance the opportunity AI presents to accelerate delivery of our strategy with the need to ensure appropriate controls are in place to mitigate the associated risks. HSBC is committed to using AI ethically and responsibly. We continue to refine and embed robust and effective governance and controls into our risk management processes to help meet the Group’s needs and increasing regulatory expectations for when AI is both developed internally and enabled through third parties. We continue to focus on improving the quality and timeliness of the data used to inform management decisions, and are progressing with the implementation of our strategic and regulatory change initiatives to help deliver the right outcomes for our customers, people, investors and communities. For further details of our risk management framework and risks associated with our banking and insurance manufacturing operations, see pages 137 and 145, respectively. Managing risk continued Top and emerging risks Our top and emerging risks report identifies forward-looking risks so that they can be considered in determining whether any incremental action is needed to either prevent them from materialising or to limit their effect. Top risks are those that have the potential to have a material adverse impact on the financial results, reputation or business model of the Group. We actively manage and take actions to mitigate our top risks. Emerging risks are those that, while they could have a material impact on our risk profile were they to occur, are not considered immediate and are not under active management. Our suite of top and emerging risks is subject to regular review by senior governance forums. During 2023, we removed Ibor transition as a top risk given the cessation of the publication of US dollar Libor in June 2023. We continue to monitor closely the identified risks and ensure management actions are in place, as required. 38 HSBC Holdings plc Annual Report and Accounts 2023 Strategic report | Risk overview Strategic report Risk Trend Description Externally driven Geopolitical and macroeconomic risks Our operations and portfolios are subject to risks associated with political instability, civil unrest and military conflict, which could lead to disruption of our operations, physical risk to our staff and/or physical damage to our assets. Conflict in certain regions and geopolitical tensions are creating a more complicated business environment. Despite expected reductions, global interest rates are nevertheless likely to remain high in 2024, which could slow the growth of the global economy and affect our credit portfolio. Technology and cybersecurity risk There is a risk of service disruption or loss of data resulting from technology failures or malicious activities by internal or external threats. We continue to monitor changes to the threat landscape, including those arising from ongoing geopolitical and macroeconomic events, and the impact this may have on third-party risk management. We operate a continuous improvement programme to help protect our technology operations and counter a fast-evolving cyber threat environment. Environmental, social and governance (‘ESG’) risks We are subject to ESG risks including in relation to climate change, nature and human rights. These risks have increased owing to the pace and volume of regulatory developments globally, increasing frequency of severe weather events, and due to stakeholders placing more emphasis on financial institutions’ actions and investment decisions in respect of ESG matters. Failure to meet these evolving expectations may result in financial and non-financial risks, including reputational, legal and regulatory compliance risks. Financial crime risk We are exposed to financial crime risk from our customers, staff and third parties engaging in criminal activity. The financial crime risk environment is heightened due to increasingly complex geopolitical challenges, the macroeconomic outlook, the complex and dynamic nature of sanctions compliance, evolving financial crime regulations, rapid technological developments, an increasing number of national data privacy requirements and the increasing sophistication of fraud. As a result, we will continue to face the possibility of regulatory enforcement and reputational risk. Digitalisation and technological advances Developments in technology and changes in regulations continue to enable new entrants to the banking industry and new products and services offered by competitors. This challenges us to continue to innovate with new digital capabilities and adapt our products, to attract, retain and best serve our customers. Along with opportunities, new technology, including generative AI, can introduce risks and we seek to ensure these are understood and managed with appropriate controls. Evolving regulatory environment risk The regulatory and compliance risk environment remains complex, in part due to the UK’s Financial Conduct Authority’s (‘FCA’) implementation of its Consumer Duty in July 2023. There continues to be an intense regulatory focus on ESG matters, including on ‘green’ products. Regulatory scrutiny of financial institutions following recent banking failures may result in new or additional regulatory requirements impacting the Group in the short to medium term. Internally driven Data risk We use data to serve our customers and run our operations, often in real-time within digital experiences and processes. If our data is not accurate and timely, our ability to serve customers, operate with resilience or meet regulatory requirements could be impacted. We seek to ensure that non-public data is kept confidential, and that we comply with the growing number of regulations that govern data privacy and cross-border movement of data. Risks arising from the receipt of services from third parties We procure goods and services from a range of third parties. Due to the current macroeconomic and geopolitical climate, the risk of service disruption in our supply chain has heightened. We continue to strengthen our controls, oversight and risk management policies and processes to select and manage third parties, including our third parties’ own supply chains, particularly for key activities that could affect our operational resilience. Model risk Model risk arises whenever business decision making includes reliance on models. We use models in both financial and non-financial contexts, as well as in a range of business applications. Evolving regulatory requirements are driving material changes to the way model risk is managed across the banking industry, with a particular focus on capital models. New technologies, including AI and generative AI, are driving a need for enhanced model risk controls. Change execution risk Failure to effectively prioritise, manage and/or deliver transformation across the organisation impacts our ability to achieve our strategic objectives. We continue to monitor, manage and oversee change execution risk to try to ensure that our change portfolios and initiatives deliver the right outcomes for our customers, people, investors and communities. Risks associated with workforce capability, capacity and environmental factors with potential impact on growth Our businesses, functions and geographies are exposed to risks associated with employee retention and talent availability, and compliance with employment laws and regulations. While high employee attrition has continued to ease generally, a small number of markets still experience heightened inflation, turnover and labour market difficulties. Failure to manage these risks may impact the delivery of our strategic objectives or lead to regulatory sanctions or legal claims. Risk heightened during 2023 Risk remained at the same level as 2022 Risk decreased during 2023 HSBC Holdings plc Annual Report and Accounts 2023 39 Risk overview Under the UK Corporate Governance Code, the Directors are required to provide a viability statement that must state whether the Group will be able to continue in operation and meet its liabilities, taking into account its current position and the principal risks it faces. They must also specify the period covered by, and the appropriateness of, this statement. The Directors have specified a period of three years to 31 December 2026. They are satisfied that a forward-looking assessment of the Group for this period is sufficient to enable a reasonable statement of viability. In addition, this period is covered by the Group’s stress testing programmes, and its internal projections for profitability, key capital ratios and leverage ratios. Notwithstanding this, our stress testing programmes also cover scenarios out to five years and our assessment of risks are beyond three years where appropriate (see page 140): – This period is representative of the time horizon to consider the impact of ongoing regulatory changes in the financial services industry. – Our updated business plan covers 2024 –2028. The Board, having made appropriate enquiries, is satisfied that the Group as a whole has adequate resources to continue operations for a period of at least 12 months from the date of this report, and it therefore continues to adopt the going concern basis in preparing the financial statements. Based upon their assessment, the Directors have a reasonable expectation that the Group will be able to continue in operation and meet liabilities as they fall due over the next three years. In making their going concern and viability assessments, the Directors have considered a wide range of detailed information relating to present and potential conditions, including projections for profitability, liquidity, capital requirements and capital resources. The Directors carried out a robust assessment of the emerging and principal risks facing the Group to determine its long-term viability, including those that would threaten its solvency and liquidity. They determined that the principal risks are the Group’s top and emerging risks as set out on page 38. These include geopolitical and macroeconomic risks (including geopolitical tensions and their impact on sanctions, trade restrictions and continued distressed Chinese economic activity), digitalisation and technological advances, financial crime risk and ESG risks, all of which have remained at heightened levels during 2023. The Directors assessed that all of the top and emerging risks identified are considered to be material and, therefore, appropriate to be classified as the principal risks to be considered in the assessment of viability. They also appraised the impact that these principal risks could have on the Group’s risk profile, taking account of mitigating actions planned or taken for each, and compared this with the Group’s risk appetite as approved by the Board. In carrying out their assessment of the principal risks, the Directors considered a wide range of information including: – details of the Group’s business and operating models, and strategy (see page 11); – details of the Group’s approach to managing risk and allocating capital; – the continued validity of our existing risk management practices, liquidity monitoring process and metric assumptions, in light of the high-profile US and Swiss banking failures in the first quarter of 2023; – a summary of the Group’s financial position considering performance, its ability to maintain minimum levels of regulatory capital, liquidity funding and the minimum requirements for own funds and eligible liabilities over the period of the assessment. Notable are the risks which the Directors believe could cause the Group’s future results or operations to adversely impact any of the above; – enterprise risk reports, including the Group’s risk appetite profile (see page 136) and top and emerging risks (see page 140); – the impact on the Group due to the Russia- Ukraine and Israel-Hamas wars; instability in China’s commercial real estate sector and strained economic and diplomatic relations between China and the US, the UK, the EU and other countries; – reports and updates regarding regulatory and internal stress testing. The 2022–2023 Bank of England annual cyclical scenario stress test results were published on 12 July 2023. The stress scenario explored the potential impacts of a global economic contraction, persistently higher inflation and interest rates in advanced economies with materially increased unemployment, and a sharp fall in asset prices. Additionally during the second half of 2023, the Group- wide internal stress test was completed, which explores a prolonged global stress, depicting macroeconomic conditions that are generally more severe than that of the 2022–2023 annual cyclical scenario. The results of both these exercises indicated the Group is sufficiently capitalised to withstand a severe but plausible adverse stress; – the results of our 2023 internal climate scenario analysis exercise. The results of this exercise further demonstrate the Group is sufficiently capitalised to withstand a severe stress. Further details of the insights from the 2023 climate scenario analysis are explained from page 225; – reports and updates from management on risk-related issues selected for in-depth consideration; – reports and updates on regulatory developments; – legal proceedings and regulatory matters set out in Note 36 on the financial statements; and – reports and updates from management on the operational resilience of the Group.  Aileen Taylor Group Company Secretary and Chief Governance Officer 21 February 2024 Long-term viability and going concern statement 40 HSBC Holdings plc Annual Report and Accounts 2023 Strategic report Environmental, social and governance review 42 Our approach to ESG 44 Environmental 75 Social 87 Governance Our ESG review sets out our approach to our environment, customers, employees and governance. It explains how we aim to achieve our purpose, deliver our strategy in a way that is sustainable, and build strong relationships with all of our stakeholders. How we present our TCFD disclosures Our overall approach to TCFD can be found on page 17 and additional information is included on pages 69 and 440. Further details have been embedded in this section and the Risk review section on pages 221 to 230. Our TCFD disclosures are highlighted with the following symbol: TCFD 41 HSBC Holdings plc Annual Report and Accounts 2023 Our approach to ESG We continue to work to incorporate environmental, social and governance principles throughout the organisation and to embed sustainability into the way we operate. About the ESG review Our purpose is: ‘Opening up a world of opportunity’. Our purpose is guided by our values: we value difference; we succeed together; we take responsibility; and we get it done. Our approach to ESG is shaped by our purpose and values and a desire to create sustainable long-term value for our stakeholders. We collaborate and aim to build strong relationships with all of our stakeholders, which include the people who work for us, bank with us, own us, regulate us, and live in the societies we serve and on the planet we all inhabit to deliver the ESG approach. Transition to net zero We have continued to take steps to implement our climate ambition to become net zero in our operations and our supply chain by 2030, and align our financed emissions to net zero by 2050. In January 2024, we published our net zero transition plan, which is an important milestone in our journey to achieving our net zero ambition. The plan will help our people, customers, investors and other stakeholders to understand our long-term vision, the challenges, uncertainties and dependencies that exist, the progress we are making towards our own transition and what we plan to do in the future. In this ESG review, we publish on-balance sheet financed emissions for thermal coal mining, in addition to other sectors we have already been reporting on, noting the challenge of evolving methodologies and data limitations. We also publish combined on-balance sheet financed and facilitated emissions for the oil and gas, and power and utilities sectors. We expect to iterate and mature our approach to supporting sector transitions over time. We also continue to work on improving our data management processes. We continue to review policy implementation as we apply our policies in practice and our operationalisation of such policies continues to be enhanced. We take a risk-based approach when identifying transactions and clients to which our energy policy and thermal coal phase-out policies apply, and when reporting on relevant exposures, adopting approaches proportionate to risk and materiality. We are also working with peers and industry bodies to help mobilise the systemic change needed to deliver action on climate change, nature and the just transition. Environmental – Transition to net zero – In January 2024, we published our net zero transition plan. This provides an overview of the progress we have made to date and what we plan to do next, although we acknowledge there is still much more to do. – We have now set combined on-balance sheet financed emissions and facilitated emissions targets for two emissions-intensive sectors: oil and gas, and power and utilities, and report the combined progress for both sectors. Read more in the Environmental section on page 44. Social – Building inclusion and resilience – In 2023, 34.1% of senior leadership roles were occupied by women, with a target to achieve 35% by 2025, although progress has not been as fast paced as we would have liked. We also continued on a journey to meet our ethnicity goals. – Employee engagement, which is our headline measure, increased by three points in 2023 and is now seven points ahead of the external financial services benchmark. Read more in the Building inclusion and resilience section on page 75. Governance – Acting responsibly – We continue to raise awareness and develop our understanding of our salient human rights issues. In 2023, we provided practical guidance and training, where relevant, to our colleagues across the Group on how to identify and manage human rights risk. – We were ranked as a top three bank against our competitors in 58% of our key six markets, although we still have work to do to improve our rank positions. Read more in the Governance section on page 87. Building inclusion and resilience Our social approach is centred around fostering inclusion and building resilience for our colleagues, our customers, and in the communities we serve. We are building a workforce that is representative of the communities that we serve and we have targets and programmes in place to ensure fair and inclusive recruitment and to support the equitable progression of under-represented groups. We also strive to create an inclusive and accessible banking experience for all of our customers, and to help them access the finance they need without unnecessary barriers. Employee resilience is central to our success, so we provide a wide range of resources to support colleagues’ mental, physical and financial well-being, as well as training and support so that they are equipped with the skills they need to further their careers. We support customer resilience with products, services and education that build their capabilities so that they can understand their finances and manage them effectively. Acting responsibly Our governance approach focuses on acting responsibly and recognises topics such as human rights, conduct and data integrity. Our policies and procedures help us to provide the right outcomes for customers, including those with enhanced care needs, which in 2023 took into account pressures from the increased cost of living. Customer experience is at the heart of how we operate and is measured through customer satisfaction and customer complaints. We are continuing our journey to embed ESG principles across the organisation, including incorporating climate risks within the risk management framework, training our workforce, incorporating climate-related targets within executive scorecards, and engaging with customers and suppliers. 42 HSBC Holdings plc Annual Report and Accounts 2023 ESG review ESG review How we decide what to measure We listen to our stakeholders in a number of different ways, which we set out in more detail within the ‘ESG overview’ on page 14. We use the information they provide us to identify the issues that are most important to them and consequently also matter to our own business. Our ESG Committee and other relevant governance bodies regularly discuss the new and existing themes and issues that matter to our stakeholders. Our management team then uses this insight, alongside the framework of the ESG Guide (which refers to our obligations under the Environmental, Social and Governance Reporting Guide contained in Appendix C2 to The Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited), and the LR9.8.6R(8) of the Financial Conduct Authority’s (‘FCA’) Listing Rules, and other applicable laws and regulations to choose what we measure and publicly report in this ESG review. Under the ESG Guide, ’materiality’ is considered to be the threshold at which ESG issues become sufficiently important to our investors and other stakeholders that they should be publicly reported. Our approach to materiality also considers disclosure standards and other applicable rules and regulations as part of our materiality assessment for specific ESG topics and relevant disclosures. Given the recent developments in the ESG regulatory environment across various jurisdictions in which we operate, combined with the relative immaturity of processes, systems, data quality and controls, our focus remains on supporting a globally consistent set of mandatory sustainability standards. We aim to continue to evolve our reporting to recognise market developments, such as the International Sustainability Standard Board (‘ISSB’) or the Corporate Sustainability Reporting Directive (‘CSRD’), and support the efforts to harmonise the disclosures. In this Annual Report and Accounts, we continue to report against the core World Economic Forum (‘WEF’) Stakeholder Capitalism Metrics, and Sustainability Accounting Standards Board (‘SASB’) metrics and will continue to review our approach as the regulatory landscape evolves. Consistent with the scope of financial information presented in our Annual Report and Accounts, the ESG review covers the operations of HSBC Holdings plc and its subsidiaries. Given the relative immaturity of ESG-related data and methodologies in general, we are on a journey towards improving completeness and robustness. For further details of our material ESG topics, see ‘Engaging with our stakeholders and our material ESG topics’ on page 15. For further details of our approach to reporting, see ‘Additional information’ on page 439. Assurance relating to ESG data HSBC Holdings plc is responsible for preparation of the ESG information and all the supporting records, including selecting appropriate measurement and reporting criteria, in our Annual Report and Accounts, ESG Data Pack and the additional reports published on our website. We recognise the importance of ESG disclosures and the quality of data underpinning them. We also acknowledge that our internal processes to support ESG disclosures are in the process of being developed and currently rely on manual sourcing and categorisation of data. Certain aspects of our ESG disclosures are subject to enhanced verification and assurance procedures including the first, second and third line of defence. Assurance assists in reducing the risk of restatement, although it cannot be fully eliminated given the challenges in data, evolving methodologies and emerging standards. We aim to continue to enhance our approach in line with external expectations. For 2023, ESG data is subject to stand- alone independent PwC limited assurance in accordance with International Standard on Assurance Engagements 3000 (Revised) ‘Assurance Engagements other than Audits or Reviews of Historical Financial Information’ and, in respect of the greenhouse gas emissions, in accordance with International Standard on Assurance Engagements 3410 ‘Assurance Engagements on Greenhouse Gas Statements’, issued by the International Auditing and Assurance Standards Board, on the following specific ESG-related disclosures and metrics: – our Green Bond Report 2023 (published in December 2023); – our progress towards our ambition to provide and facilitate $750bn to $1tn of sustainable finance and investment by 2030 (see page 49); – our on-balance sheet financed emissions for 2021 and 2022 for six sectors, our on- balance sheet financed emissions for 2020 for thermal coal mining, and our facilitated emissions for two sectors for 2019 to 2022 (see page 61); – our thermal coal financing drawn balance exposures for 2020 (see page 67); and – our own operations’ scope 1, 2 and 3 (business travel) greenhouse gas emissions data (see page 64), as well as supply chain emissions data. The work performed for independent limited assurance is substantially less than the work performed for a reasonable assurance opinion, like those provided over financial statements. Our data dictionaries and methodologies for preparing the above ESG-related metrics and independent PwC’s limited assurance reports can be found at www.hsbc.com/who-we-are/ esg-and-responsible-business/esg-reporting- centre. TCFD Our reporting around ESG We report on ESG matters throughout our Annual Report and Accounts, including the ’ESG overview’ section of the Strategic Report (pages 14 to 19), this ESG review (pages 41 to 98), and the ‘Climate risk’ and ‘Insights from climate scenario analysis’ sections of the Risk review (pages 221 to 230). In addition, we have other supplementary materials, including our ESG Data Pack, which provides a more granular breakdown of ESG information. Detailed data Additional reports ESG Data Pack 2023, including SASB Index 2023 and WEF Index 2023 UK Pay Gap Report 2023 Modern Slavery and Human Trafficking Statement 2023 Green Bond Report 2023 HSBC UN Sustainable Development Goals Bond and Sukuk Report 2023 For further details of our supplementary materials, see our ESG reporting centre at www.hsbc.com/who-we-are/esg-and-responsible-business/esg-reporting-centre. HSBC Holdings plc Annual Report and Accounts 2023 43 ESG review Environmental Transition to net zero TCFD We support the transition of our customers, industries and markets to a net zero and a sustainable future, while moving to net zero ourselves. In this section Overview Our approach to the transition We aim to achieve net zero in our financed emissions by 2050, and in our own operations and supply chain by 2030. Page 45 Understanding our climate reporting To achieve our climate ambition we need to be transparent on the opportunities, challenges, related risks and progress we make. Page 46 Supporting our customers Sustainable finance and investment Our ability to help finance the transformation of businesses and infrastructure is key to building a sustainable future for our customers and society. Page 49 Financed emissions We aim to align our financed emissions to achieve net zero by 2050 and support our clients on their transition. Page 53 Embedding net zero into the way we operate Net zero in our own operations Part of our ambition to be a net zero bank is to achieve net zero carbon emissions in our operations and supply chain by 2030. Page 63 Managing climate risk We manage climate risk across all our businesses in line with our Group-wide risk management framework. Enhancing our climate change stress testing and scenario analysis capability is crucial in identifying and understanding climate-related risks and opportunities. Page 65 Sustainability risk policies Our sustainability risk policies seek to ensure that the financial services that we provide to customers do not result in unacceptable impacts on people or the environment. Page 66 Partnering for systemic change Supporting systemic change to deliver net zero We collaborate with a range of partners to support the development of an enabling environment and mobilise finance for nature and climate. Page 68 Our approach to climate reporting Task Force on Climate- related Financial Disclosures (‘TCFD’) Our TCFD index provides our responses to each of the 11 recommendations and summarises where additional information can be found. Page 69 At a glance Our approach to transition to net zero Our net zero ambition represents one of our four strategic pillars. In January 2024, we published our net zero transition plan. It provides an overview of our approach to net zero and the actions we are taking to help meet our ambition. It sets out how we are working to embed net zero across key areas of our organisation to help ensure that we can play a role in the transition to net zero in the markets we serve. Supporting our customers To help achieve the scale and speed of change required to transition to net zero, we know we need to support our customers not just with finance, but with the services, insights and tools to help them to transition. In 2023, we continued to provide sustainable financing and investment to our customers in line with our ambition to provide and facilitate $750bn to $1tn by 2030. We report our progress against our 2030 financed emissions targets and our wider progress towards net zero by 2050, including how we plan to engage with customers in high-emitting sectors. Embedding net zero into the way we operate We take a risk-based, proportionate and iterative approach to embedding net zero into our organisation, focusing our efforts on where we can help drive material and implementable change, and applying learnings as we go along. Our approach will continue to mature over time with evolving science, methodologies, industry standards and regulatory requirements, and improvements in data and in technology infrastructure. Partnering for systemic change Our ability to achieve our own net zero ambition is heavily reliant on the mobilisation of all stakeholders, public and private, across multiple geographies. We continue to support systemic change through new and existing partnerships, and we engage through industry alliances and initiatives to help build a supportive enabling environment. Impact on reporting and financial statements We have assessed the impact of climate risk on our balance sheet and have concluded that there is no material impact on the financial statements for the year ended 31 December 2023. The effects of climate change are a source of uncertainty. We capture known and observable potential impacts of climate-related risks in our asset valuations and balance sheet calculations. These are considered in relevant areas of our balance sheet, including expected credit losses, classification and measurement of financial instruments, goodwill and other intangible assets; and in making the long term viability and going concern assessment. As part of assessing the impact on our financial statements we conducted scenario analysis to understand the impact of climate risk on our business (see page 65). For further details of our climate risk exposures, see page 221. For further details of how management considered the impact of climate-related risks on its financial position and performance, see ‘Critical estimates and judgements’ on page 343. 44 HSBC Holdings plc Annual Report and Accounts 2023 ESG review | Environmental ESG review Our approach to the transition The Paris Agreement aims to limit the rise in global temperatures to well below 2°C, preferably to 1.5°C, compared with pre- industrial levels. To limit the rise to 1.5°C, the global economy would need to reach net zero greenhouse gas emissions by 2050. We are working to achieve a 1.5°C-aligned phase-down of financed emissions from our portfolio. In October 2020, we announced our ambition to become a net zero bank by 2050 and in 2021 we included the transition to net zero as one of the four key pillars of our corporate strategy. Our starting point in the transition to net zero is one of a heavy financed emissions footprint. Our history means our balance sheet is weighted towards the sectors and regions which matter the most in terms of emissions, and whose transitions are therefore key to the world’s ability to reach net zero on time. This means we will have a complex transition, with markets and sectors at different starting points and moving at different speeds. However, it also provides us with an opportunity to work with our customers to help make an impact – in both the emissions challenge and the financing challenge. Responding to the challenges and opportunities presented by net zero requires us to work across HSBC to implement and embed our net zero approach, to manage associated risks, and to help sustain and grow value for our customers, our shareholders and our wider stakeholders. We want to make financing, facilitating and investment choices that can lead to a meaningful impact on emissions reduction in the real economy, not just in our portfolio. This requires engaging with our customers on their transitions to help finance decarbonisation in the sectors and geographies with the most change ahead. In January 2024, we published our net zero transition plan. It provides an overview of our approach to net zero and the actions we are taking to help meet our ambition. It sets out how we intend to use our strengths as an organisation to help deliver a broader impact on decarbonisation, how we are working to embed net zero across key areas of our organisation, and the principles that we aim to use to guide the implementation of our approach. Our net zero strengths We aim to rebalance our capital deployment towards achieving net zero over the coming decades. We believe we can do this best by promoting change in three key areas that play to our strengths as an organisation: transitioning industry; catalysing the new economy; and decarbonising trade and supply chains. Our implementation plan We are working to embed net zero across our organisation. This includes embedding net zero into: the way that we support our customers, both through customer engagement and the provision of financing solutions; the way that we operate as an organisation, including risk management, policies, governance and own operations; and how we partner externally in support of systemic change. It also means focusing first on the sectors and customers with the highest emissions and transition risks, and evolving and expanding our efforts over time. Our net zero principles In implementing our approach to net zero, we aim to be guided by a set of principles which are aligned with our core values: science-based, transparent and accountable; integrating nature; and just and inclusive. For further details of our approach to the transition, see our Net Zero Transition Plan 2024 at www.hsbc.com/who-we-are/our-climate- strategy/our-net-zero-transition-plan. Overview TCFD Our net zero strengths Where we believe we can best promote change Our implementation plan Embedding net zero into how we engage, operate and collaborate Transitioning industry Catalysing the new economy Decarbonising trade and supply chains Embedding net zero into the way we operate Partnering for systemic change Supporting our customers HSBC Holdings plc Annual Report and Accounts 2023 45 Environmental Explaining scope 1, 2 and 3 emissions To measure and manage our greenhouse gas emissions, we follow the Greenhouse Gas Protocol global framework, which identifies three scopes of emissions. Scope 1 represents the direct emissions we create. Scope 2 represents the indirect emissions resulting from the use of electricity and energy to run a business. Scope 3 represents indirect emissions attributed to upstream and downstream activities. Our upstream activities include business travel and emissions from our supply chain including transport, distribution and waste. Our downstream activities include those related to investments and including financed emissions. Under the protocol, scope 3 emissions are also broken down into 15 categories, of which we provide reporting emissions data for three related to upstream activities. These are: purchased goods and services (category 1); capital goods (category 2); and business travel (category 6). We also report data on downstream activities for financed emissions (category 15). For further breakdown of our scope 1, 2 and 3 emissions, see our ESG Data Pack at www.hsbc.com/esg. The availability of high-quality climate-related data, transparent reporting standards and consistent methodology will play a vital role in helping deliver the economic transformation required to limit global warming to 1.5°C at the speed and scale that is needed. We understand that our existing data, systems, controls and processes require significant enhancements to drive effective change, but we recognise the necessity to balance this with providing early transparency on climate disclosures. Our stakeholder dependency Critical to our approach is a recognition that as a bank we cannot do this alone. Our ability to transition relies on decarbonisation in the real economy – both the supply and demand side – happening at the necessary pace. Our customers and the industries and markets we serve will need to transition effectively, supported by strong government policies and regulation, and substantially scaled investment. Engagement and collaboration are therefore key to how we respond. We acknowledge that to achieve our climate ambition we need to be transparent about the opportunities, challenges, related risks we face and progress we make. Our reporting must evolve to keep pace with market developments, and we will aim to work through challenges and seek to improve consistency across different markets. Standard setters and regulators will play a critical role. Some of the limitations and challenges that our organisation, and the wider industry, currently face with regard to climate reporting are highlighted on pages 47 to 48. Scope 31 Indirect Scope 3 Indirect Scope 1 Direct Scope 2 Indirect Upstream activities HSBC Holdings Investments and financed emissions (category 15) Electricity, steam heating and cooling Company facilities Company vehicles Our own operations and supply chain See page 63 Our financed emissions See page 53 Downstream activities Purchased goods and services (category 1) Capital goods (category 2) Business travel (category 6) Understanding our climate reporting Accelerating investment in Baltic offshore wind energy Polish multi-energy company Orlen Group and Canadian power producer Northland Power have set up a joint venture to build the Baltic Power project – the first offshore wind farm in Polish waters of the Baltic Sea. In September 2023, we played a key role in supporting the construction and operation of 76 offshore turbines when we acted as a mandated lead arranger for a $3.8bn (€4.4bn) credit facility. We helped coordinate a syndicate of 25 Polish and international financial institutions to finance the project. With a target capacity of almost 1.2 gigawatts, the wind farm is expected to represent a significant step in reducing Poland’s reliance on fossil fuels and generate enough clean electricity to power the equivalent of more than 1.5 million homes annually. 1 Our analysis of financed emissions comprises ‘on-balance sheet financed emissions’ and ‘facilitated emissions’. 46 HSBC Holdings plc Annual Report and Accounts 2023 ESG review | Environmental ESG review policy and regulatory landscape, the speed of technological innovation, major economic shifts and geopolitical events. There is also a risk of government or customer net zero pledges or transition plans not turning into the necessary emissions reductions in the coming decade, or in the case of hard-to abate sectors, being pared back if technologies do not scale in time. In addition, climate science, the quality of data, and the scenarios upon which we have based our approach will change. We recognise that while we have limited control of these external dependencies, we can be clear on where we intend to focus our efforts to help drive meaningful change, and that we expect to iterate and mature our approach over time. Our internal and external data challenges Our climate ambition requires us to continue to enhance our capabilities including governance, processes, systems and controls. In addition, there is a heightened need for subject matter experts for climate-related topics as well as upskilling of key colleague groups who are supporting customers through their net zero transition. We also need new sources of data, some of which may be difficult to assure using traditional verification techniques. This challenge, coupled with diverse external data sources and structures, further complicates data consolidation. Our internal data on customer groups used to source financial exposure and emissions data is based on credit and relationship management attributes, and is not always aligned to the data needed to analyse emissions across sector value chains. As a consequence, this can result in an inconsistent basis in our financed emissions calculations. We continue to invest in our climate resources and skills. Our activities are underpinned by efforts to develop our data and analytics capabilities and to help ensure that we have the appropriate processes, systems, controls and governance in place to support our transition. We continue to increase automation of our processes, with a particular focus on developing our ESG data capabilities to help address data gaps and improve consistency. Understanding our climate reporting continued Keeping up-to-date with real economy progress Net zero-aligned scenarios are dynamic by nature; they are typically updated every few years to incorporate significant shifts that have occurred in the real economy. Key drivers of this include changes in the economic environment, new data on technology deployment across sectors and geographies, new policies, and increased investment in clean energy and/or in fossil fuels. The reference scenario we have selected to date for our published 2030 targets, for on-balance sheet and facilitated emissions, is the International Energy Agency’s (‘IEA’) NZE 2021 scenario, which is 1.5°C-aligned with limited overshoot. In September 2023, the IEA’s NZE 2023 scenario was published as an update to reflect developments since 2021. As outlined in our net zero transition plan, going forwards we intend to review each updated set of 1.5°C-aligned scenarios to further develop and enhance our understanding of the latest outlooks for evolving pathways to achieve net zero by 2050. This will help us to consider whether, how and when to iterate and update our approach to scenario selection and target setting, portfolio alignment, and policies to keep pace with the latest science and real-world developments. We anticipate standard setter and industry guidance on the treatment of updated scenarios in target- setting to emerge. We recognise that the so-called ‘hard-to- abate’ sectors, such as cement, iron, steel and aluminium, and aviation have a large dependence on nascent technologies and the presence (or not) of enabling policies and regulations. We may consider tracking progress relative to 1.5°C-aligned ambition ranges for these sectors in the future, which could include industry-specific scenarios alongside the IEA NZE scenario. Critical dependencies Progress in the real economy towards net zero will likely be non-linear and will depend heavily on external factors including the This includes sourcing more reliable data from external providers. We are also developing our processes, systems, controls and governance to meet the demands of future ESG reporting. Certain aspects of our reporting rely on manual sourcing and categorisation of data that is not always aligned with how our businesses are managed. We also have a dependency on emissions data from our clients. Given the manual nature of the process, enhanced verification and assurance procedures are performed on a sample basis over this reporting, including the first and second line of defence. Our climate models undergo independent review by an internal model review group, and we obtain limited assurance on our financed emissions and sustainable finance disclosures from external parties, including our external auditors. Policy implementation We continue to review policy implementation as we apply our policies in practice, and our operationalisation of such policies continues to be enhanced. We take a risk-based approach when identifying transactions and clients to which our energy and thermal coal phase- out policies apply, and when reporting on relevant exposures, adopting approaches proportionate to risk and materiality. This helps to focus our efforts on areas where we believe we can help drive meaningful change, while taking into account experience from policy implementation over time. An evolving approach to embedding net zero We acknowledge that our assessment of client transition plans – which to date has focused on clients in scope of our thermal coal phase-out and energy policies – is at an early stage with initial learnings on methodology and client engagement. We are also at the early stages of embedding transition plans alongside financed emissions into transaction and portfolio level business and risk processes. Our net zero transition plan provides further details of work underway and planned. Limited alignment on sustainable finance taxonomies Sustainable finance metrics, taxonomies and best practices lack global consistency. As standards develop over time and as the regulatory guidance around them evolves across jurisdictions, our methodologies, disclosures and targets may need to evolve. This could lead to differences in year-on-year reporting and restatements. We continue to engage with standard setters in different regions to support the development of transparent and consistent taxonomies to best incentivise science-based decarbonisation, particularly in high transition risk sectors. We aim to align to enhanced industry standards as they are further developed, and increase transparency across the different types of green and sustainable finance and investment categories going forward. HSBC Holdings plc Annual Report and Accounts 2023 47 Environmental Understanding our climate reporting continued Financed emissions reporting challenges The methodologies and data used to assess financed emissions and set targets continue to evolve alongside changes to industry guidance, market practice and regulation. We plan to refine our analysis using appropriate data sources and current methodologies available for the sectors we analyse. We have developed an internal recalculation policy (see page 56) to define the circumstances under which a recalculating of financed emissions is necessary to help support the consistency, comparability and relevance of our reported emissions data over time. We have now set combined on-balance sheet financed emissions and facilitated emissions targets for two emissions-intensive sectors: oil and gas, and power and utilities, and report the combined progress for both sectors. We continue to report on-balance sheet financed emissions and targets for cement, iron, steel and aluminium, aviation, automotive and in 2023 we added thermal coal mining financed emissions. Emissions related to our insurance business are partially captured within the disclosures of HSBC Asset Management, which manages the vast majority of our insurance assets. The Partnership for Carbon Accounting Financials (‘PCAF’) standard for insurance associated emissions (part C) is not applicable to our insurance business as HSBC Insurance focuses on the manufacturing of life insurance products. In November 2023, our asset management business updated its 2022 thermal coal phase-out policy and released a new energy policy. It continues to focus on its portfolios’ scope 1 and scope 2 decarbonisation target for 2030 with the aim of aligning with net zero emissions by 2050 or sooner. The commitment covers listed equity and corporate fixed income where data is most reliable and methodologies are most mature. In January 2023, we withdrew our commitment to the Science Based Targets initiative (‘SBTi’), which we had made in 2016, because we determined that it would not be feasible for us to meet SBTi’s requirement to submit a complete set of sector targets for validation by its deadline. We continue to engage with SBTi on guidance for financial institutions and we participated in SBTi’s consultation process on its revised standards during the year. Disclosure revisions We are committed to timely and transparent reporting. However, we recognise that challenges on data sourcing, as well as the evolution of our processes and industry standards, may result in us having to restate certain disclosures. In 2023, there has been an impact on certain climate disclosures, as follows: – Financed emissions: we improved our methodology for calculating financed emissions using more granular product identification to isolate exposure in scope, more consistent emission factors for estimates, and a revised aggregation method for emission intensity. Previously reported on- balance sheet numbers included non-lending exposures for market products in error. The more granular product identification will help ensure these are not included in future. – Financed emissions: to reflect these enhancements we have set out the recalculated metrics for the oil and gas, and power and utilities sectors in the financed emissions section. The oil and gas baseline for on-balance sheet financed emissions is now 28.4 million tonnes of carbon dioxide equivalent (‘Mt CO2e’) for 2019 versus 33.0 Mt CO2e reported in the Annual Report and Accounts 2022. The power and utilities baseline for on-balance sheet financed emissions is now 537.5 tonnes of carbon dioxide equivalent per gigawatt hour (‘tCO2e/ GWh’) for 2019 versus 589.9 tCO2e/GWh reported in the Annual Report and Accounts 2022. For other sectors, changes were not material enough to warrant a recalculation. – Thermal coal exposures: we have now revised the basis of preparation for our thermal coal exposures. Aligned with our thermal coal phase-out policy, we applied a risk-based approach to identify clients and report on relevant exposures. Our thermal coal financing drawn balance exposure was approximately $1bn† as at 31 December 2020. We continue to work on our 2021 and 2022 numbers based on our revised basis of preparation and expect to report on these in future disclosures. – Thermal coal power financed emissions: we have discontinued separate tracking and reporting of thermal coal power financed emissions. A review of the counterparties included within the on-balance sheet financed emissions calculation showed that the majority of thermal coal power entities in scope are included in other financed emission sector targets. We previously set separate targets to reduce on-balance sheet financed emissions for thermal coal power and thermal coal mining aligned to our thermal coal phase-out policy. We plan to maintain a financed emissions target for thermal coal mining only, and have set an absolute on-balance sheet reduction target for 2030 from a 2020 baseline. We used 2020 as a baseline to align with those applied to our drawn balance exposure targets. These targets reflect the percentage reduction that the IEA indicates in its net zero emissions scenario for global emissions to 2030. Continuing to evolve our climate disclosures We understand the need to provide early transparency on climate disclosures but we must balance this with the recognition that our existing data and reporting processes require significant enhancements. Due to ongoing data availability and quality challenges, we continue to assess our financed emissions for our real estate and agriculture sectors. We are engaging with standard setters to support the development of transparent and consistent climate-related industry standards in areas such as product labelling, sustainability disclosures, sustainable finance taxonomy and emissions accounting. Voluntary industry initiatives can also help shape action and collaboration, and often form the basis of future climate policy and regulation. For example, we supported the TCFD, which is now referenced in climate disclosure rules around the world. In 2024, we will continue to review our approach to disclosures, and enhance as appropriate. – Shipping: following a reduction in our exposure to the shipping sector after the strategic sale of part of our European shipping portfolio in 2023, and work undertaken to assess the materiality of our remaining portfolio from a financed emissions perspective, we have concluded that the remaining exposure as of year-end 2023 is not material enough to warrant setting a stand-alone target. This aligns with Net-Zero Banking Alliance (‘NZBA’) guidelines on sector inclusion for target setting. For details of assurance over our ESG data, see page 43. For details of our approach to calculating financed emissions and the relevant data and methodology limitations, see page 55. For details of our sustainable finance and investment ambition, see page 49. For details of our approach to thermal coal financing exposures, see page 67. For further details of our asset management policies, see page 67. † Data is subject to independent limited assurance by PwC in accordance with ISAE 3000/ ISAE 3410. For further details, see our Financed Emissions and Thermal Coal Exposures Methodology and PWC’s limited assurance report, which are available at www.hsbc.com/who-we-are/esg-and-responsible- business/esg-reporting-centre. 48 HSBC Holdings plc Annual Report and Accounts 2023 ESG review | Environmental ESG review We recognise that we have an important role to play in supporting the transition to a net zero global economy. As a global organisation with a presence in the regions and sectors where most significant change is needed, we are well placed to help transition industry and catalyse the new economy to reach net zero. Progress on our sustainable finance and investment ambition We aim to help our customers transition to net zero and a sustainable future by providing and facilitating between $750bn and $1tn of sustainable finance and investment by 2030. Our sustainable finance and investment ambition aims to help promote green, sustainable and socially-focused business and sustainable investment products and solutions. Since 1 January 2020, we have provided and facilitated $267.8bn of sustainable finance and $26.6bn of ESG and sustainable investing, as defined in our Sustainable Finance and Investment Data Dictionary 2023. This included 38% where the use of proceeds were dedicated to green financing, 12% to social financing, and 15% to other sustainable financing. It also included 26% of sustainability-linked financing and 9% of net new investment flows managed and distributed on behalf of investors. In 2023, our underwriting of green, social, sustainability and sustainability-linked bonds for clients decreased over the year, measured on a proportional share basis, in line with the wider bond market environment, although it remained at 15% of our total bond underwriting. On-balance sheet sustainable lending transactions increased by 7% compared with 2022. In 2023, transactions totalling $0.7bn were identified as no longer fulfilling our eligibility criteria. These were declassified and removed from the cumulative progress total, and reported as a negative entry in 2023. Continued progress towards achieving our sustainable finance and investment ambition is dependent on market demand for the products and services set out in our Sustainable Finance and Investment Data Dictionary 2023. Supporting our customers Sustainable finance and investment TCFD Sustainable finance and investment summary1 2023 ($bn) 2022 ($bn) 2021 ($bn) 2020 ($bn) Cumulative progress since 2020 ($bn) Balance sheet-related transactions provided 42.7 42.2 26.0 10.4 121.3 Capital markets/advisory (facilitated) 33.3 34.5 48.7 30.0 146.5 ESG and sustainable investing (net new flows) 7.7 7.5 7.7 3.7 26.6 Total contribution2 83.7 84.2 82.4 44.1 294.4 Sustainable finance and investment classification by theme Green use of proceeds3,4 37.1 29.0 27.1 18.9 112.1 Social use of proceeds3 8.4 6.7 11.3 9.7 36.1 Other sustainable use of proceeds3,5 10.7 12.6 11.7 8.3 43.3 Sustainability-linked6 19.8 28.4 24.6 3.5 76.3 ESG and sustainable investing7 7.7 7.5 7.7 3.7 26.6 Total contribution2,8 83.7 84.2 82.4 44.1 294.4 1 The 2023 data in this table has been prepared in accordance with our Sustainable Finance and Investment Data Dictionary 2023, which includes green, social and sustainability activities. The amounts provided and facilitated include: the limits agreed for balance sheet-related transactions provided, the proportional share of facilitated capital markets/advisory activities and the net new flows of sustainable investments within assets under management. 2 The $294.4bn cumulative progress since 2020 is subject to PwC’s limited assurance in accordance with International Standard on Assurance Engagements 3000 (Revised) ‘Assurance Engagements other than Audits or Reviews of Historical Financial Information’. For our Sustainable Finance and Investment Data Dictionary 2023 and PwC’s limited assurance report, see www.hsbc.com/who-we-are/esg-and-responsible-business/esg-reporting-centre. 3 For green, social and other sustainable use of proceeds, the capital markets products are aligned to the International Capital Markets Association’s (‘ICMA’) Green Bond Principles, Social Bond Principles or Sustainability Bond Guidelines or the Climate Bonds Initiative as applicable. The lending labelled products are aligned to the Green Loan Principles (‘GLP’) or Social Loan Principles of the Loan Market Association (‘LMA’), Asia-Pacific Loan Market Association (‘APLMA’) and the Loan Syndications and Trading Association (‘LSTA’) as applicable; or for our sustainable trade instruments, are aligned to HSBC’s internal sustainable trade instrument principles which are based on the GLP and reference the UN SDGs. Also included are facilities where HSBC identifies that the use of proceeds would meet eligibility criteria as defined and approved by appropriate governance committees but these are not labelled or marketed as green or social. 4 Included within the total cumulative contribution towards our ambition are transactions to customers within the six high transition risk sectors (i.e. automotive, chemicals, construction and building materials, metal and mining, oil and gas, and power and utilities) as described on page 223. Of which approximately $37bn is defined as green use of proceeds in line with the Sustainable Finance and Investment Data Dictionary 2023. 5 Sustainable use of proceeds can be used for green, social or a combination of green and social purposes. 6 Our sustainability-linked labelled products are aligned to either the ICMA Sustainability-Linked Bond Principles or the Sustainability-Linked Loan Principles of the LMA, APLMA and the LSTA as applicable. The coupon or interest rate is dependent on whether the borrower achieves predefined sustainability performance targets. The funds can be used for general purposes. 7 Net new flows of both HSBC-owned (Asset Management) sustainable investment funds and Wealth and Global Private Banking investments assessed against the Sustainable Finance and Investment Data Dictionary 2023. 8 Additional detailed information on our sustainable finance and investment progress can be found in the ESG Data Pack at www.hsbc.com/who-we-are/esg-and- responsible-business/esg-reporting-centre. HSBC Holdings plc Annual Report and Accounts 2023 49 Environmental Sustainable finance and investment continued Sustainable finance and investment definitions Our data dictionary defining our sustainable finance and investment continues to evolve, and is reviewed annually to take into account the evolving standards, taxonomies and practices we deem appropriate. This involves reviewing and strengthening our product definitions, where appropriate, adding and deleting qualifying products, making enhancements to our internal standards, and developing our reporting and governance. Industry and regulatory guidance on definitions for sustainable finance continue to evolve. In 2023, the Glasgow Financial Alliance for Net Zero (‘GFANZ’), NZBA and the UK government released work-in- progress definitions of transition finance. We will continue to monitor these and other developments in sustainable finance definitions. Our progress will be published each year, and we will seek to continue for it to be independently assured. Mobilising capital to support our customers In 2023, we continued to focus on providing our customers with products, services and initiatives to help enable emissions reduction in the real economy. For example, we increased our funding from $5bn to $9bn for our sustainable finance scheme that supports businesses of all sizes in China’s Greater Bay Area to transition to low-carbon operations. The scheme, launched in 2022, provides successful loan applicants access to a range of additional services including training, subsidised third-party assessments and assistance from a team with sustainable financing expertise. For our Wealth and Personal Banking customers, we launched green mortgages in Mexico, electric vehicle loans in India and a referral service to our electric vehicle leasing partner in the UK. In 2023, we introduced an internal briefing series called Net Zero in Practice, which covers new technologies relevant to the net zero transition, drawing on expertise from across the organisation and highlighting financing opportunities and case studies. We continue to be a participant in the Just Energy Transition Partnerships (‘JETPs‘) in Indonesia and Vietnam, and in the Nexus for Water, Food and Energy in Egypt. These initiatives aim to play a catalytic role in mobilising finance to accelerate the energy transition. For further details of our involvement with the JETPs, see page 68. In 2023, we won three awards at the Environmental Finance Bond Awards. We retained the Euromoney award for Best Bank for Sustainable Finance in Asia for the sixth year in a row, and won the global award for Best Bank for Public Sector Clients in recognition of our innovation in sustainability and tokenised public-sector bonds. Developing sustainable food supply chains in south-east Asia Singapore-based Glife Technologies has developed a digital business-to-business food- sourcing platform that connects farmers from marginalised communities in south-east Asia to the hospitality industry. The distribution network, served by an app, aims to improve the efficiency and sustainability of supply chains by aggregating orders and sourcing in bulk direct from farmers, in order to help control costs and reduce the risk of food waste from damage or contamination. In June 2023, we provided a working capital loan and access to our cross-border network to help Glife expand its platform into new markets, including Malaysia and Indonesia. The loan also aims to help Glife finance social projects seeking to improve food security and creating more sustainable food systems. The loan was drawn from HSBC’s New Economy fund, which is dedicated to investing in high-growth, pre-profit new economy businesses in Singapore. Our sustainable finance and investment data dictionary We define sustainable finance and investment as any form of financial service that integrates ESG criteria into business or investment decisions. This includes financing, investing and advisory activities that support the achievement of UN Sustainable Development Goals (‘SDGs’), including but not limited to the aims of the Paris Agreement on climate change. Details of our revised definitions of the contributing activities for sustainable finance and investment and how we calculate the amounts we count are available in our Sustainable Finance and Investment Data Dictionary 2023. For our ESG Data Pack and Sustainable Finance and Investment Data Dictionary, see www.hsbc.com/who-we-are/ esg-and-responsible-business/esg- reporting-centre. 50 HSBC Holdings plc Annual Report and Accounts 2023 ESG review | Environmental ESG review Sustainable finance and investment continued Helping customers to understand ESG in their investments We have launched new metrics to help our Global Private Banking and Wealth customers understand the ESG performance of their investments. In selected markets in 2023, we also introduced a sustainability preference questionnaire to help identify and understand our customers’ sustainable investing objectives and ambitions. By improving clarity on ESG performance, which traditional financial metrics fail to capture, we aim to provide customers with meaningful insights to enable them to make informed investment decisions. Examples of these metrics, available on digital platforms in selected markets, are: – ‘ESG rating and score’, which measures a company’s resilience to material long-term, industry ESG risks and opportunities, with data provided by MSCI. – ‘Carbon intensity’, which measures a company’s carbon emissions per million of revenue, with data provided by S&P Trucost. In addition, we have also introduced ‘HSBC ESG and sustainable investing classifications’, which help customers to understand and identify ESG and sustainable investing products in their investment portfolio according to HSBC’s definition. Responsible and sustainable investment We offer a broad suite of ESG capabilities across asset management, global markets, wealth, private banking and securities services, to help institutional and individual investors to generate financial returns, manage risk and pursue ESG-related opportunities. Our Asset Management business is committed to further developing our sustainable product range across asset classes, as well as enhancing our existing product suite for ESG and climate-related criteria where it is in the investors’ interests to do so. In 2023, we launched 10 funds within our ESG and sustainable strategies, which adhere to, and are classified within, our Sustainable Finance and Investment Data Dictionary 2023. HSBC Asset Management managed over $684bn assets at the end of 2023, of which $73.3bn comprise assets of funds and mandates invested in our ESG and sustainable strategies. Our ESG and sustainable investing approach across different investment products can include but is not limited to the UN SDGs, including climate. For the avoidance of doubt, assets invested pursuant to, or considered to be in alignment with, HSBC’s ESG and sustainable investing approach do not necessarily qualify as ‘sustainable investments’ as defined by the EU Sustainable Finance Disclosures Regulation (‘SFDR’) or other relevant regulations. Our ESG and sustainable investing approach is an HSBC internal classification approach used to establish our own ESG and sustainable investing criteria (recognising the subjectivity inherent in such an approach and the variables involved). It is also used to promote consistency across asset classes and business lines where relevant, and should not be relied on externally to assess the sustainability characteristics of any given product. There is no single global standard definition of, or measurement criteria for, ESG and sustainable investing or the impact of ESG and sustainable investing products. We seek to take an active stewardship role to help drive positive change in the companies on our priority list in which we invest on behalf of our customers. The priority list, which is defined in our Global Stewardship Plan, can be found at: www.assetmanagement.hsbc.co.uk/ en/institutional-investor/about-us/responsible- investing/-/media/files/attachments/uk/ policies/stewardship-plan-uk.pdf. HSBC Asset Management’s fixed income, equity and stewardship teams held over 2,000 meetings with companies in its portfolios. This included engaging with companies on the priority list across several thematic priorities, such as climate change, human rights, public health, inclusive growth and shared prosperity, biodiversity and nature, trusted technology and data, and diversity, equity and inclusion. For our private banking and wealth customers, we expanded our investment offering with the launch of eight ESG and sustainable investing mutual funds and exchange-traded funds in 2023. We also enhanced our ESG and sustainable investing structured products offering linked to indices such as the MSCI World Islamic ESG Select 8% Risk Control Index. Throughout 2023, we published regular ESG and sustainability-related market insights and updates such as #WhyESGMatters and Learning about ESG to help clients better understand the implications for their investments. HSBC Life, our insurance business, continues to expand the availability of ESG investment fund options within its investment-linked products. In 2023, eight new ESG funds were introduced across Hong Kong, France and Singapore with a range of investment themes, including environmental, circular economy and sustainable energy. In June, under the United Nations Environment Programme Finance Initiative (‘UNEP FI’) Principles for Sustainable Insurance, HSBC Life co-led a team of insurance organisations to publish an industry position paper focused on the role and opportunity for life and health insurers to help build a more inclusive and preventative healthcare model. This included examples of good industry practice to: help insurers improve access to healthcare; close the health protection gap; drive better health outcomes across populations; and mitigate potential health risks due to climate change and other environmental factors. For further details of our asset management policies, see page 67. HSBC Holdings plc Annual Report and Accounts 2023 51 Environmental Sustainable finance and investment continued TCFD Unlocking climate solutions and innovation We recognise the need to find new solutions and increase the pace of change for the world to achieve the Paris Agreement goal of being net zero by 2050. We are working with a range of partners to accelerate investment in sustainable infrastructure, natural resources and climate technology to help reduce emissions and address climate change. Sustainable infrastructure Addressing climate change requires the rapid development of a new generation of sustainable infrastructure. HSBC continues to support the FAST-Infra Initiative, which we helped conceive, working with the IFC, OECD, the World Bank’s Global Infrastructure Facility and the Climate Policy Initiative, under the auspices of the One Planet Lab. In 2023, the initiative, which aims to mobilise large-scale financing to develop sustainable infrastructure, invited pilot photovoltaic and wind power projects around the world to apply for the provisional FAST- Infra label. The label is awarded to projects that meet specific sustainability criteria. HSBC is supporting the introduction and widespread adoption of the labelling system as a standard for sustainable infrastructure assets globally. Label applicants included a solar photovoltaic project submitted by Pentagreen Capital, our sustainable infrastructure debt financing partnership with Singapore-based investment firm Temasek. The project sponsor was Citicore Solar Energy Corporation, a subsidiary of the Philippines-focused renewable energy developer and operator Citicore Renewable Energy Corporation. Pentagreen acted as lead arranger of a $100m green loan facility and committed an initial $30m to help fund Citicore’s development of six solar power projects capable of generating 490 megawatts of electricity for the island of Luzon in the Philippines. The commitment marks Pentagreen’s first investment in the construction of ready-to-build clean energy projects. In 2023, the Multilateral Investment Guarantee Agency of the World Bank Group issued HSBC Holdings a guarantee of $1.8bn in regulatory capital relief on mandatory reserves held by its subsidiary in Mexico. The benefits of the capital relief are expected to be deployed to exclusively support eligible climate finance projects in Mexico, including renewable energy, energy efficiency, clean transportation and sustainable agriculture. The HSBC Alternatives business, part of HSBC Asset Management, continued to develop its energy transition infrastructure capabilities in Asia, targeting investments in renewable energy generation, storage, grids, charging and hydrogen infrastructure. To help support the transition to green energy in North Asia, the energy transition infrastructure strategy made its first investment in solar photovoltaic power project developer Tekoma Energy. Natural capital as an emerging asset class Climate Asset Management, a joint venture we launched with climate investment and advisory firm Pollination in 2020, continues to create investment opportunities for investors to help protect biodiversity and support the transition to net zero. It offers two investment strategies that aim to build resilience across landscapes while generating returns. Its nature-based carbon strategy targets nature restoration and conservation projects in developing economies, prioritising community benefits while generating high-quality carbon credits. Its natural capital strategy invests in agriculture, forestry and environmental assets and aims to deliver impact at scale alongside long-term financial returns. On behalf of these strategies in 2023, Climate Asset Management allocated more than $400m to projects in Kenya, Uganda, Malawi, Spain, Australia and Portugal. Backing new technology and innovation At the COP28 Summit in the UAE, HSBC pledged its support for the Energy Transition Accelerator Financing Platform, which aims to scale up the development of renewable energy projects in developing countries. Established in 2021 with initial support from the Abu Dhabi Fund for Development and the International Renewable Energy Agency, the platform brings together public and private institutions. HSBC signed alongside the European Bank for Reconstruction and Development, the International Finance Corporation and the Multilateral Investment Guarantee Agency. We will work with platform partners to expand the pipeline of investable projects in core HSBC markets, including in Asia and the Middle East, bringing financing solutions that support the transition to net zero. We also became a founding member of the Global Climate Finance Centre, a newly launched UAE-based think tank created to connect public and private finance to help accelerate the transition to net zero. HSBC Alternatives made direct investments in assets that help to promote the transition to a net zero climate. The venture capital strategy invests across four themes: power transformation, transport electrification, supply chain sustainability and climate risk mitigation. The strategy raised additional funds from institutional and private wealth clients over the course of 2023. As of 31 December 2023, the strategy had deployed capital into eight start-up companies. These included US-based Electric Era, which provides electric vehicle fast-charging technology, and Israel-based SeeTree, which has developed a software platform that tracks the health and productivity of trees. 52 HSBC Holdings plc Annual Report and Accounts 2023 ESG review | Environmental ESG review Financed emissions We announced our ambition to become a net zero bank in October 2020, including an aim to align our financed emissions to net zero by 2050 or sooner. We have published initial financed emissions targets for 2030, and plan to review them in five-year increments thereafter. Our analysis of financed emissions comprises ‘on-balance sheet financed emissions’ and ‘facilitated emissions’, which we distinguish where necessary in our reporting. Our on- balance sheet financed emissions include emissions related to on-balance sheet lending, such as project finance and direct lending. Our facilitated emissions include emissions related to financing we help clients to raise through capital markets activities. Our analysis covers financing from Global Banking and Markets, and Commercial Banking. Financed emissions link the financing we provide to our customers and their activities in the real economy, and provide an indication of the associated greenhouse gas emissions. They form part of our scope 3 emissions, which include emissions associated with the use of a company’s products and services. In 2021, we started measuring financed emissions for oil and gas, and power and utilities. Following the December 2023 release of the PCAF Global GHG Accounting Standard for capital markets, we now include facilitated emissions for these sectors, in recognition of our role as service provider when customers issue debt and equity to investors. For target setting we now track the combined progress for on-balance sheet financed and facilitated emissions. In 2022, we disclosed the on-balance sheet financed emissions targets for the following additional sectors: cement; iron, steel and aluminium; aviation; and automotive. We also set a target, and now measure, on-balance sheet financed emissions for the thermal coal mining sector. As part of our financial reporting, we present the progress for these sectors against the financed emissions baselines that we now measure ourselves against. Following a reduction in our exposure to the shipping sector after the strategic sale of part of our European shipping portfolio in 2023, and work undertaken to assess the materiality of our remaining portfolio from a financed emissions perspective, we have concluded that the remaining exposure as of year-end 2023 is not material enough to warrant setting a stand-alone target. This aligns with NZBA guidelines on sector inclusion for target setting. We have announced a number of planned business disposals in recent years, and we will continue to consider how these may impact future disclosures, including recalculations. For all sectors other than oil and gas and thermal coal mining, we have set emissions intensity targets. These targets are linked to real world production and help us to deploy capital towards decarbonisation solutions. TCFD Our approach to financed emissions In our approach to assessing our financed emissions, our key methodological decisions were shaped in line with industry practices and standards. We recognise these are still developing. Coverage of our analysis For each sector, our analysis focuses on the parts of the value chain where we believe the majority of emissions are produced to help reduce double counting of emissions. By estimating emissions and setting targets for customers that directly account for, or indirectly influence, the majority of emissions in each industry, we can focus our engagement and resources where we believe the potential for change is highest. For each sector, our reported emissions now typically include all the major greenhouse gases, including carbon dioxide, methane and nitrous oxide, among others. These are reported as tonnes of CO2 equivalent, in line with NZBA guidelines. To calculate annual on-balance sheet financed emissions, we use drawn balances as at 31 December in the year of analysis related to wholesale credit and lending, which include business loans and project finance as the value of finance provided to customers. We excluded products that were short term by design, and typically less than 12 months in duration, consistent with guidance from the PCAF, to reduce volatility. For facilitated emissions we considered all capital market transactions in scope for the year of analysis. These included debt and equity capital markets, and syndicated loans. For further details of our financed emissions methodology, exclusions, and limitations, see our Financed Emissions and Thermal Coal Exposures Methodology at www.hsbc.com/who-we-are/ esg-and-responsible-business/esg-reporting- Sector Scope of emissions Value chain in scope Coverage of greenhouse gases (’GHGs’) Oil and gas 1, 2 and 3 Power and utilities 1 and 2 Automotive 1, 2 and 3 1, 2 and 3 Aviation 1 for airlines, 3 for aircraft lessors Iron, steel and aluminium 1 and 2 Cement 1 and 2 Thermal coal mining Upstream (e.g. extraction) Upstream (e.g. generation) Midstream (e.g. motor vehicle manufacture) Midstream (e.g. ore to steel) Midstream (e.g. aircraft manufacturing) Midstream (e.g clinker and cement manufacturing) Midstream (e.g. transport) Upstream (e.g. suppliers) Upstream (e.g. raw materials, extraction) Upstream (e.g. parts manufacturers) Upstream (e.g. raw materials, extraction) Downstream (e.g. fuel use) Midstream Downstream (e.g. retail) Downstream (e.g. construction) Downstream (e.g. airlines and air lessors) Downstream (e.g. construction) Integrated/ diversified Downstream (e.g. retail) All GHGs All GHGs All GHGs All GHGs All GHGs All GHGs All GHGs Key: Included in analysis (e.g. transmission and distribution) Upstream (e.g. extraction) Downstream (e.g. retail) Midstream (e.g. processing) The chart below shows the scope of our financed emissions analysis of the seven sectors, including upstream, midstream and downstream activities within each sector. The allocation of companies to different parts of the value chain is highly dependent on expert judgement and data available on company revenue streams. As data quality improves, this will be further refined. centre. HSBC Holdings plc Annual Report and Accounts 2023 53 Environmental Financed emissions continued Setting our targets Our target-setting approach to date, for on-balance sheet financed emissions and facilitated emissions, has been to utilise a single net zero reference scenario (IEA NZE 2021) to underpin both energy supply-related sectors (oil and gas, power and utilities, and thermal coal mining) and our published targets for demand-side sectors in transport and heavy industry. The impact of our capital markets activities is now reflected in our combined financed emissions targets for the oil and gas, and power and utilities sectors. Our facilitated emissions, included in our combined metrics, are weighted at 33%, in accordance with the PCAF standard. This approach dampens volatility, apportions responsibility between underwriters and asset owners, and allows for flexibility in deploying on and off-balance sheet financing in line with clients’ needs. To further reduce the inherent volatility in facilitated emissions, we apply a three-year moving average across transactions for our target metric, building up from 2019 data. This means that transactions facilitated in 2028 and 2029 will still have an impact on the 2030 progress number and will need to be taken into consideration as we manage progress towards our target. We aim to achieve our target in 2030 notwithstanding the application of a three-year average. Our approach for financed emissions accounting does not rely on purchasing offsets to achieve any financed emissions targets we set. An evolving approach We believe methodologies for calculating financed emissions and setting targets should be transparent and comparable, and should provide science-based insights that focus engagement efforts, inform capital allocation and support the development of solutions that are both timely and impactful. We continue to engage with regulators, standard setters and industry bodies to help shape our approach to measuring financed emissions and managing portfolio alignment to net zero. We also work with data providers and our clients to help us gather data from the real economy to improve our analysis. Scenarios used in our analysis are modelled on assumptions of the available carbon budget and actions that need to be taken to limit the long-term increase in average global temperatures to 1.5°C with limited overshoot. We expect that the scenarios we use will be updated periodically. We plan to refine our own analysis of financed emissions as industry guidance on scenarios, data and methodologies more broadly evolve in the years ahead. Agriculture For the agriculture sector, due to ongoing data availability and quality challenges, and lack of developed methodologies, we are not in a position to report our financed emissions or set a target at this time. We aim to build data availability and continue to work with partners and industry bodies to develop data and methodologies across a wider section of the agriculture value chain – such as farm- related and downstream emissions, including from the food and beverage sector – while assessing the make-up of our portfolio. Residential real estate For residential real estate, where our customers are consumers not corporates, our approach needs to consider financial inclusivity, and our ability to provide customers access to suitable mortgages in addition to decarbonisation aims. We expect to measure and report our residential real estate financed emissions in future disclosures. We continue to consider our approach to setting an appropriate target to measure our contribution to helping the sector transition. Commercial real estate For commercial real estate, we continue to work towards outlining a baseline and a 2030 financed emissions ambition or ambition range, starting with our major markets and where sufficient data is available to track decarbonisation progress. We expect to review our approach and coverage periodically in line with evolving data, methodologies, scenarios and real-world progress. Methodologies for embedded carbon need to be developed given the materiality of financing new property development within our portfolio, from a financed emissions perspective. Investing in battery health and monitoring solutions The global push towards electrification is accelerating the demand for systems powered by safe, reliable and sustainable batteries. In August 2023, HSBC Asset Management, as part of its climate tech venture capital strategy, helped a Germany-based analytics software start- up secure $7.8m (€7.2m) of investment in its battery monitoring platform, with HSBC Asset Management’s fund providing $4.1m (€3.8m). ACCURE Battery Intelligence uses AI, field data and modelling to forecast and manage the health and performance of batteries, and predict failures, fires and other incidents. With their software already supporting 3.5 gigawatt-hours of storage, the fundraising will help expand and develop the platform across energy, electric vehicle, transit, marine, insurance and other industries worldwide. 54 HSBC Holdings plc Annual Report and Accounts 2023 ESG review | Environmental ESG review Financed emissions continued Data and methodology limitations Our financed emissions estimates and methodological choices are shaped by the availability of data for the sectors we analyse. – We are members of the PCAF, which defines and develops greenhouse gas accounting standards for financial institutions. Its Global GHG Accounting and Reporting Standards for Financed Emissions and for Facilitated Emissions provide detailed methodological guidance to measure and disclose financed and facilitated emissions. – We have found that data quality scores vary across the different sectors and years of our analysis, although not significantly. While we expect our data quality scores to improve over time, as companies continue to expand their disclosures to meet growing regulatory and stakeholder expectations, there may be fluctuations within sectors year on year, and/or differences in the data quality scores between sectors due to changes in data availability. – The majority of our clients do not yet report the full scope of greenhouse gas emissions included in our analysis, in particular scope 3 emissions. In the absence of client-reported emissions, we estimated emissions using proxies based on company production and revenue figures. Although we sought to minimise the use of non-company-specific data, we applied industry averages in our analysis where company-specific data was unavailable through our vendor datasets. As data improves, estimates will be replaced with reported figures. – Third-party datasets that feed into our analysis may have up to a two-year lag in reported emissions figures, and we are working with data providers to help reduce this. Mapping external datasets to our internal client entities is challenging due to complex company ownership structures. – The methodology and data used to assess financed emissions and set targets are new and evolving, and we expect industry guidance, market practice, and regulations to continue to change. We plan to refine our analysis using appropriate data sources and current methodologies available for the sectors we analyse. – We remain conscious that the attribution factor used in the financed emissions calculation is sensitive to changes in drawn amounts or market fluctuations, and we plan to be transparent around drivers for change to portfolio financed emissions where possible. – To calculate sector-level baselines and annual updates, our portfolio-level emissions intensity was previously weighted by the ratio of our financing in relation to the value of the financed company. We believe this introduced volatility. We have now calculated sector level emissions intensity metrics using a portfolio-weighted approach. Due to data limitations, we are unable to obtain production data for all of our clients. We therefore calculate an emissions intensity figure using the 75th percentile to meet this data gap. – The classification of our clients into sectors is performed with inputs from subject matter experts, and will also continue to evolve with improvements to data and our sector classification approach. Our internal data on customer groups used to source financial exposure and emissions data is based on credit and relationship management attributes and is not always aligned to the data needed to analyse emissions across sector value chains. As a consequence, this can result in an inconsistent basis in our financed emissions calculations. As the sub-sector, and therefore the value chain classification is based on judgement, this may be revised as better data becomes available. Emissions are calculated at a counterparty group level and each client is mapped to a single sector. Companies with multiple activities such as conglomerates, with near to equal business activity split across multiple sectors, are excluded as these can have different activities covered by multiple sector targets. Once we define a methodology for conglomerates these may be covered according to their activity split. – The operating environment for climate analysis and portfolio alignment is maturing. We continue to work to improve our data management processes, and are implementing steering mechanisms to align our provision of finance with the goals and timelines of the Paris Agreement. For further details of our financed emissions methodology, see our Financed Emissions and Thermal Coal Exposures Methodology at www.hsbc.com/who-we-are/esg-and- responsible-business/esg-reporting-centre. Tackling operational emissions in industry We are supporting one of the largest producers of textile raw materials in Indonesia to reduce the greenhouse gas emissions in its operations. PT. Indo-Rama Synthetics Tbk, which specialises in the integrated production of spun yarn and polyester, wanted to expand its operations and meet its customer demand in a sustainable way. To help PT. Indo-Rama Synthetics Tbk invest in reducing energy consumption, we provided a $20m green loan in September 2023 so that it can install energy efficient machinery and technology in the expansion of its yarn spinning factory. HSBC Holdings plc Annual Report and Accounts 2023 55 Environmental Financed emissions continued Our approach to financed emissions recalculations The PCAF recommends that financial institutions should, in line with the Greenhouse Gas Protocol Corporate Value Chain (Scope 3) Accounting and Reporting Standard requirement, establish a recalculation policy. To adhere to this recommendation, we have defined the circumstances under which we consider a recalculation of baseline and/or progress against financed emissions target metrics is necessary to help ensure the consistency, comparability and relevance of the reported greenhouse gas emissions data over time. Our recalculation policy covers revisions of metrics linked to the targets due to changes in financed emissions accounting, such as changes to methodology, errors, and improvements to data. We expect our recalculation policy to evolve with further industry guidance. The table below outlines the action we take when key areas of change, individually or in aggregate, breach our defined significance thresholds for the baseline year metric linked to the target. Enhancements to internal or external data, such as changes to the classification of the population to a different business activity type or more, or improved quality data reported by clients, would not constitute a change to the financed emissions estimation methodology or an error. Key reasons for change What we expect to disclose Changes to the financed emissions methodology such as changes to design choices – The reasons why applying the new metrics provides reliable and more relevant information – The actions being taken to remediate same or similar errors in the future – The nature of the change(s) and errors in financed emissions accounting impacting the baseline progress metric and all prior year progress metrics disclosed as far as is practicable – The aggregate amount of any adjustments impacting the baseline progress metric and all prior year progress metrics disclosed as far as is practicable – The change in financed emissions accounting baseline progress metric and all prior year progress metrics disclosed as far as is practicable Errors such as a failure to carry out our methodology or errors in internal financial data In 2023, we improved our methodology for calculating financed emissions using more granular product identification to isolate exposure in scope, more consistent emission factors for estimates, and a revised aggregation method for emissions intensity. Previously some reported on-balance sheet numbers included non-lending exposures for market products in error. The more granular product identification will help ensure these are not included in future. To reflect these enhancements we have set out the recalculated metrics for the oil and gas, and power and utilities sectors in the table below. For other sectors, changes were not material enough to warrant a recalculation. The oil and gas baseline for on-balance sheet financed emissions is now 28.4 million tonnes of carbon dioxide equivalent (‘Mt CO2e’) for 2019 versus 33.0 Mt CO2e reported in the Annual Report and Accounts 2022. Of this change, 62% (2.9 Mt CO2e) was related to the inclusion of non-lending products in error and the remaining 38% (1.8 Mt CO2e) was due to the enhanced product mapping and streamlined approach for emissions estimates. The power and utilities baseline for on-balance sheet financed emissions is now 537.5 tonnes of carbon dioxide equivalent per gigawatt hour (‘tCO2e/GWh’) for 2019 versus 589.9 tCO2e/GWh reported in the Annual Report and Accounts 2022. This change reflects the implementation of the revised aggregation method and enhanced product mapping. Revisions Previously reported Recalculated metrics Percentage change Sector Reporting metrics 2019 2020 2019 2020 2019 2020 Oil and gas On-balance sheet financed – Mt CO2e 33.0 30.1 28.4 25.0 (14)% (17)% Facilitated (100% weighting) – Mt CO2e 29.5 N/A 43.2 N/A 47% N/A Power and utilities On-balance sheet financed – tCO2e/GWh 589.9 509.6 537.5 511.1 (9)% —% Facilitated (100% weighting) – tCO2e/GWh 360.0 N/A 420.7 N/A 17% N/A 56 HSBC Holdings plc Annual Report and Accounts 2023 ESG review | Environmental ESG review Targets and progress Financed emissions continued Sector1 Baseline 2021 2022 2022 % change vs. baseline 2030 target Unit2 Target scenario Combined on-balance sheet financed and facilitated emissions at 33% with three-year moving average Oil and gas 42.6 in 2019 37.9 31.9 (25)% (34)% Mt CO2e IEA NZE 2021 Power and utilities 513.4 in 2019 405.1 396.8 (23)% 138.0 tCO2e/GWh IEA NZE 2021 On-balance sheet financed emissions Cement 0.64 in 2019 0.70 0.71 10% 0.46 tCO2e/t cement IEA NZE 2021 Iron, steel and aluminium 1.8 in 2019 2.4 2.5 38% 1.05 (1.43)3 tCO2e/t metal IEA NZE 2021 Aviation 84.0 in 2019 85.9 86.5 3% 63.04 tCO2e/million rpk IEA NZE 2021 Automotive 191.5 in 2019 215.7 216.6 13% 66.0 tCO2e/million vkm IEA NZE 2021 Thermal coal mining 4.0 in 2020 N/A N/A N/A (70)%5 Mt CO2e IEA NZE 2021 1 Our absolute and intensity emission metrics and targets are measured based on the drawn exposures of the counterparties in scope for each sector. For oil and gas; and power and utilities, the baseline, 2021, 2022 and target type figures represent revised combined on-balance sheet financed and facilitated emissions. For iron, steel and aluminium; cement; aviation; automotive; and thermal coal mining, the baseline, 2021, 2022 and target type figures represent on-balance sheet financed emissions (no revisions applied). 2 For the oil and gas sector, absolute emissions are measured in million tonnes of carbon dioxide equivalent (‘Mt CO2e’); for the power and utilities sector, intensity is measured in tonnes of carbon dioxide equivalent per gigawatt hour (‘tCO2e/GWh’); for the cement sector, intensity is measured in tonnes of carbon dioxide equivalent per tonne of cement (‘tCO2e/t cement’); for the iron, steel and aluminium sector, intensity is measured in tonnes of carbon dioxide equivalent per tonne of metal (‘tCO2e/t metal’); for the aviation sector, intensity is measured in tonnes of carbon dioxide equivalent per million revenue passenger kilometres (‘tCO2e/ million rpk’); for the automotive sector, intensity is measured in tonnes of carbon dioxide equivalent per million vehicle kilometres (‘tCO2e/million vkm’); and for the thermal coal mining sector, absolute emissions are measured in million tonnes of carbon dioxide equivalent (‘Mt CO2e’). 3 While the iron, steel and aluminium 2030 target is aligned with the IEA NZE 2021 scenario, we also reference the Mission Possible Partnership Technology Moratorium scenario, whose 2030 reference range is shown in parentheses. 4 Our aviation unit includes passenger and cargo tonnes, converted into revenue passenger kilometre (‘rpk‘), to align with our target pathway. This is comparable to revenue tonne kilometre (rtk) using a 100kg per passenger conversion factor as we already include belly and dedicated cargo in our production figures. The conversion factor changed from 95kg per passenger in the previous disclosure to align with industry practice. 5 The thermal coal mining scope differs from the other sectors. We include solely emissions from thermal coal production and coal power generation, rather than the total emissions of a counterparty within a sector, to reflect the absolute financed emissions reduction thermal coal mining sector target. We have set out in the table below our combined on-balance sheet financed and facilitated emissions targets for the oil and gas, and power and utilities sectors. These show the revised baselines. For facilitated emissions, we track progress to target using a three-year average moving window (average of 2020, 2021 and 2022 for the 2022 progress number) and figures weighted at 33%. This means that transactions facilitated in 2028 and 2029 will still have an impact on the 2030 progress number and will need to be taken into consideration as we manage progress towards our target. We aim to achieve our target in 2030 notwithstanding the application of a three-year average. The facilitated emissions values total 17.5 Mt CO2e in 2021 and 14.4 Mt CO2e in 2022 for the oil and gas sector, and 398.3 tCO2e/GWh for 2021 and 377.6 tCO2e/GWh in 2022 for the power and utilities sector. These values are then combined with the on-balance sheet numbers for the relevant year to track progress to target. We set out the annual figures before the application of the three-year average in the facilitated emissions table on page 61. We have also set out our defined targets for the on-balance sheet financed emissions of the following sectors: cement; iron, steel and aluminium; aviation; automotive; and thermal coal mining. We disclose emissions in 2021 and 2022 and progress achieved in 2022 versus baseline for each sector. We have implemented a revised approach to calculate the sector-level intensity metric in 2023, which has been applied for the recalculated power and utilities baseline metric, and for 2021 and 2022 actual data for all intensity-based sectors. Emissions intensity is a weighted average according to the portfolio weight of each investment, as a proportion of the total portfolio value. The progress figures show the trend in financed emissions before targets were set. Targets were set for oil and gas, and power and utilities in February 2022, for thermal coal mining in December 2022, and for the other sectors in February 2023. On the following pages, we provide more granular details of our financed emissions within these sectors. When assessing the changes from 2019 to 2022, it is important to emphasise the long- term commitment that is needed to meet our 2030 interim targets, and how changes to exposure and market fluctuations impact yearly updates. Movement from one year to the next may not reflect future trends for the financed emissions of our portfolio. In the hard-to-abate sectors, where decarbonisation progress is expected to be slower, we are taking steps to engage with clients on their transition plans. As we are at the beginning of our journey to track and measure progress, we believe it would be premature to infer future trends from the 2019 to 2022 progress at this stage. HSBC Holdings plc Annual Report and Accounts 2023 57 Environmental Financed emissions continued Oil and gas For the oil and gas sector, our analysis included scope 1, 2 and 3 emissions, including carbon dioxide and methane, for upstream and integrated companies. We revised our baseline for 2019 and progress figures to reflect combined on-balance sheet financed and facilitated emissions and our revised approach. We have set a target to reduce absolute on-balance sheet financed emissions and facilitated emissions for our oil and gas portfolio by 34% by 2030 relative to a 2019 baseline. This is consistent with a global 1.5°C-aligned pathway as defined by the IEA NZE 2021 scenario. This target is unchanged with the inclusion of facilitated emissions. We plan to update our target following the periodic release of new 1.5°C-aligned scenarios in the years ahead to reflect shifts in the real economy. Our core approach as we progress towards our portfolio decarbonisation targets is to engage with major oil and gas customers to understand their transition plans and to help support and accelerate those efforts. This is in line with the Group’s energy policy, which supports the phasing down of fossil fuel sources with the highest emission intensity as well as financing restrictions for projects relating to new oil and gas fields, and infrastructure. In 2022, absolute combined on-balance sheet financed and facilitated emissions decreased by 25% to 31.9 Mt CO2e relative to the 2019 baseline, and by 16% from 2021 to 2022. This decline was achieved through a risk-weighted assets reduction strategy and aided by market conditions, with stronger oil and gas cash flows and higher interest rates resulting in reduced demand for bank debt and capital markets financing. Market dynamics will continue to create volatility in future years as we make progress towards our financed emissions target. Power and utilities For the power and utilities sector, our analysis included scope 1 and 2 emissions for upstream power generation companies. Although scope 1 emissions are most material for the sector, most companies report scope 1 and 2 emissions together making it challenging to split out the data. We revised our baseline for 2019 and progress figures to reflect combined on-balance sheet financed and facilitated emissions and our revised approach. We have set a target to reduce the financed emissions intensity of our on-balance sheet and facilitated power and utilities portfolio to 138 tCO2e/GWh by 2030. This target is unchanged with the inclusion of facilitated emissions. We have chosen an intensity- based target as electricity demand is expected to more than double by 2050 due to both population growth and electrification required to decarbonise mobility, buildings, and industry. We have focused on power generation companies because they control sector output. By engaging with them, we believe we can help drive the most material emissions impact in the real economy. Our target is consistent with a global 1.5°C-aligned pathway, as defined by the IEA NZE 2021 scenario. We plan to refresh our target following the periodic release of new 1.5°C-aligned scenarios in the years ahead. In 2022, our combined on-balance sheet financed and facilitated emissions intensity decreased by 23% to 396.8 tCO2e/GWh relative to the 2019 baseline. This reduction was driven by an increase in financing of renewable energy projects and companies, and a decrease in financing of high emissions intensity clients. Over the period from 2022 to 2021 the fall in sector portfolio financed emissions was a more modest 2%. Over the reported period, the average emissions intensity of clients for whom we helped raise funds in the capital markets was lower than for clients financed directly on our balance sheet. This means the combined on-balance sheet financed and facilitated emissions intensity from 2019 to 2022 was lower than for on-balance sheet financing alone. 45 40 30 35 25 20 15 10 5 0 2019 2020 2021 2022 2030 Mt CO2e Oil and gas Mt CO2e 2022 progress from baseline (25)% 700 600 400 500 300 200 100 0 2019 2020 2021 2022 2030 tCO2e/GWh Power and utilities tCO2e/GWh 2022 progress from baseline (23)% HSBC sector portfolio emissions HSBC sector target Key: We plan to report financed emissions and progress against our targets annually and to be transparent in our disclosures about the methodologies applied and any challenges or dependencies. However, financed emissions figures may not be reconcilable or comparable year on year in future, and baselines and targets may require recalibration as data, methodologies and reference scenarios develop. Consistent with PCAF guidance on financed emissions accounting, we only consider the outstanding drawn financing amount given this has a direct link to real economy emissions. A number of clients have material undrawn balances that, if drawn, could significantly increase the financed emissions related to those clients. We expect to assess how to manage these exposures on a forward-looking basis as we progress towards our 2030 targets. In addition, for the intensity-based sectors, the emissions intensity is sensitive to material clients and changes to drawn balances year on year can therefore influence the trend. We are developing portfolio modelling capabilities that integrate risk, profitability and financed emissions to inform decision making and determine how to best steer our portfolios to meet our financed emissions targets and commercial and strategic ambitions. As part of this we are testing and developing an analytics capability that will provide an up-to-date view of our position relative to our 2030 targets and an indication of the financed emissions impact of a transaction to consider alongside risk-return metrics. 58 HSBC Holdings plc Annual Report and Accounts 2023 ESG review | Environmental ESG review Financed emissions continued Cement For the cement sector, our analysis included scope 1 and 2 emissions for midstream companies with clinker and cement manufacturing facilities. In line with the IEA NZE 2021 scenario, we target an on-balance sheet financed emissions intensity of 0.46 tonnes of carbon dioxide equivalent per tonne of cement (‘tCO2e/t cement’) by 2030, using 2019 as our baseline. While some emissions reductions can be achieved through energy efficiency, we believe that to significantly reduce fuel and process emissions from cement manufacturing, and to meet our targets, large-scale investments are required in new technologies, including clinker substitution, alternative fuel use such as bioenergy, and carbon capture use and storage. Our 2022 emissions intensity was 10% higher than the 2019 baseline due to higher drawn balances for emissions intensive clients, but at 0.71 tCO2e/t cement in 2022, it was marginally up by 1% from 2021. Our cement portfolio is relatively concentrated in customer numbers, and even where customers have set science-based targets there is still a risk of pledges not turning into the necessary emissions reductions if technologies do not scale in time. It will be important, therefore, to regularly review progress on technology scaling across the industry over the years ahead to 2030. For cement and the other intensity-based sectors we plan to integrate net zero considerations into our transaction processes and controls and we expect this to help guide our activities towards progressive alignment of the portfolio with our 2030 targets. 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 2019 2020 2021 2022 2030 tCO2e/t cement Cement tCO2e/t cement 2022 progress from baseline 10% Iron, steel and aluminium We covered scope 1 and 2 for midstream iron, steel and aluminium production in our analysis. Due to the low significance of the aluminium sector’s financed emissions within our portfolio, we combined them with our iron and steel financed emissions. In the event that aluminium becomes a more material part of our portfolio in the future, we may consider creating a separate target for aluminium production given the varied decarbonisation pathway for this metal. For the iron, steel and aluminium sector, we target an on-balance sheet financed emissions intensity of 1.05 tonnes of carbon dioxide equivalent per tonne of metal (‘tCO2e/t metal’) by 2030, using the IEA NZE 2021 scenario as our core scenario and 2019 as our baseline. Due to the challenges of decarbonising this hard-to-abate sector, we also outline an alternative scenario from the Mission Possible Partnership (‘MPP’). The emissions intensity in 2022 rose by 38% to 2.5 tCO2e/t metal against our 2019 baseline and by 4% versus 2021. This was due to increased financing to the aluminium sector, which has a higher carbon intensity than that of steel. We aim to actively manage our portfolio to achieve our 2030 financed emissions target for our iron, steel and aluminium portfolio, taking into account the actions our customers are taking to achieve emissions reductions. Aviation In the aviation sector, we included passenger airlines’ scope 1 and aircraft lessors‘ scope 3 downstream emissions. We excluded military and dedicated cargo flights as the emissions intensity of such cargo flights is different to that of passenger airlines. This approach is in line with industry practice to ensure consistency of financed emissions measurement and target setting. Aligned with the IEA NZE 2021 scenario, we target an on-balance sheet financed emissions intensity of 63.0 tonnes of carbon dioxide equivalent per million revenue passenger kilometres (‘tCO2e/million rpk’) by 2030, using 2019 as our baseline. To reach these intensity levels and help meet our targets, we believe the sector needs significant policy support, investments in alternative fuels, such as sustainable aviation fuel, and new aircraft to reduce emissions. The industry is also adopting the unit of revenue tonne kilometre (‘rtk’) to take into account the transport of cargo for airlines in scope of the target. We will consider this as part of our methodology enhancement. At 86.5 tCO2e/million rpk in 2022, the emissions intensity increased by 3% versus the 2019 baseline and was marginally up by 1% from 2021. In 2020 there was a peak in emissions intensity due to the impact of the Covid-19 pandemic, as planes carried fewer passengers. We plan to engage with our major customers on their transition plans, as well as integrate financed emissions implications into transaction and portfolio management for the sector. 2.5 2.0 1.5 1.0 0.5 0 2019 2020 2021 2022 2030 tCO2e/t metal Iron, steel and aluminium tCO2e/t metal 2022 progress from baseline 38% 140 120 100 80 60 40 20 0 2019 2020 2021 2022 2030 tCO2e/million rpk Aviation tCO2e/million rpk 2022 progress from baseline 3% HSBC sector portfolio emissions Mission Possible Partnership (‘MPP’) pathway HSBC sector target Key: HSBC Holdings plc Annual Report and Accounts 2023 59 Environmental Financed emissions continued Automotive For the automotive sector, we looked at scope 1, 2 and 3 emissions from the midstream manufacturing of vehicles, and tank-to-wheel exhaust pipe emissions for light-duty vehicles. We excluded heavy-duty vehicles from our analysis as the target pathway derived from the IEA excludes them, as they have a different decarbonisation pathway relative to light-duty vehicles. This approach is in line with industry practice to ensure consistency of financed emissions measurement and target setting. We will consider including heavy-duty vehicle manufacturers as well as heavy-duty vehicle production at a later stage of our analysis, as data and methodologies develop. We target an on-balance sheet financed emissions intensity of 66.0 tonnes of carbon dioxide equivalent per million vehicle kilometres (‘tCO2e/million vkm’) by 2030 using 2019 as our baseline. This is in line with the IEA NZE 2021 scenario, which is a 1.5C° aligned pathway, modified to match the share of new in-year vehicle sales for light-duty vehicles. Decarbonisation of the automotive sector, and therefore our ability to meet our targets, needs large-scale investments in new electric vehicle and battery manufacturing plants, widespread charging infrastructure, and government policies to support electric vehicles. Our 2022 emissions intensity rose by 13% to 216.6 tCO2e/million vkm against our 2019 baseline and stayed level with 2021. This increase, after an 8% reduction in 2020 versus 2019, was caused by a shift in the portfolio towards companies producing more emissions-intensive vehicles. This can be the case for manufacturers that produce more sports utility vehicles or fewer electric vehicles. 300 200 250 150 100 50 0 2019 2020 2021 2022 2030 tCO2e /million vkm Automotive tCO2e/million vkm 2022 progress from baseline 13% Thermal coal mining For the thermal coal mining sector, our analysis focused on scope 1, 2 and 3 emissions in upstream companies, including those involved in extraction. The majority of our financed emissions relate to scope 3 emissions associated with coal mining. We set an absolute on-balance sheet reduction target of 70% for 2030, from an absolute 2020 baseline measure of 4.0 Mt CO2e. We used 2020 as a baseline to align with the baseline used for our drawn balance exposure targets in the thermal coal phase- out policy. The financed emissions target is aligned with the IEA NZE 2021 scenario. When calculating our financed emissions from thermal coal mining, we focused on thermal coal extraction and processing companies, and diversified mining companies. We aim to measure and focus on our customers with the most material thermal coal-related emissions in order to help drive a meaningful impact in the real economy. 10 8 6 4 2 0 2019 2020 2030 Mt CO2e Thermal coal mining Mt CO2e 2022 progress from baseline N/A HSBC sector portfolio emissions HSBC sector target Key: 60 HSBC Holdings plc Annual Report and Accounts 2023 ESG review | Environmental ESG review On-balance sheet financed emissions The table below summarises the results of our assessment of on-balance sheet financed emissions using 2021 and 2022 data. For thermal coal mining, disclosures commenced in 2020 to align with thermal coal exposure reporting metrics. The PCAF data quality score has not improved for 2022 due to limited availability of actual reported emissions from our customers. Financed emissions continued On-balance sheet financed emissions – wholesale credit lending and project finance1,2 Sector Year Scope 1–2 (Mt CO2e)† Scope 3 (Mt CO2e)† Emissions intensity4 PCAF data quality score3,† Scope 1 and 2 Scope 3 Oil and gas 2021 2.1 18.4 N/A 2.8 2.9 2022 1.3 16.2 N/A 3.2 3.2 Power and utilities 2021 8.1 N/A 407.0 2.9 N/A 2022 7.6 N/A 401.7 3.3 N/A Cement 2021 2.2 N/A 0.70 2.8 N/A 2022 4.5 N/A 0.71 2.9 N/A Iron, steel and aluminium 2021 2.0 N/A 2.4 3.0 N/A 2022 2.7 N/A 2.5 3.0 N/A Aviation 2021 2.7 0.16 85.9 3.0 3.3 2022 2.6 0.15 86.5 3.3 2.4 Automotive 2021 0.07 3.6 215.7 2.8 2.9 2022 0.12 5.4 216.6 2.7 2.9 Thermal coal mining 2020 0.17 3.8 N/A 3.0 3.0 Facilitated emissions The table below summarises the results of our assessment of facilitated emissions from 2019 to 2022 for the oil and gas, and power and utilities sectors. Applying a 100% weighting, the oil and gas values for scope 1 to 3 emissions decreased from 43.2 Mt CO2e in 2019 to 15.2 Mt CO2e in 2022. For the power and utilities sector, the values for scope 1 and 2 emissions fell from 8.5 Mt CO2e in 2019 to 3.8 Mt CO2e in 2022. For all 100%-weighted facilitated values, please refer to the ESG Data Pack. The total capital markets activity analysed applying a 100% weighting in 2019 was $22.6bn, representing 5.5% of capital markets activity at 31 December 2019. In 2020, it was $26.0bn, representing 6.2% of capital markets activity at 31 December 2020. In 2021, it was $18.1bn, representing 4.1% of capital markets activity at 31 December 2021. In 2022, it was $10.4bn representing 3.2% of capital markets activity at 31 December 2022. Facilitated emissions – ECM, DCM and syndicated loans (33% weighting) Sector Year5 Scope 1–2 (Mt CO2e)† Scope 3 (Mt CO2e)† Emissions intensity4 PCAF data quality score3,† Scope 1 and 2 Scope 3 Oil and gas 2019 1.6 12.7 N/A 2.3 2.7 2020 2.7 24.0 N/A 2.0 2.1 2021 0.90 10.5 N/A 2.9 3.1 2022 0.36 4.7 N/A 3.3 3.3 Power and utilities 2019 2.8 N/A 420.7 2.5 N/A 2020 2.1 N/A 410.1 2.5 N/A 2021 1.5 N/A 364.1 2.9 N/A 2022 1.2 N/A 358.7 2.9 N/A 1 The total amount of short-term finance excluded for the thermal coal mining sector was $0.37bn in 2020; for all other sectors it was $7.0bn in 2021 and $8.5bn in 2022. 2 The total loans and advances analysed in 2020 for the thermal coal mining sector were $2.89bn, representing 0.28% of total loans and advances to customers at 31 December 2020. For all other sectors in 2021, they were $24.1bn representing 2.3% of total loans and advances to customers at 31 December 2021 and in 2022, they were $23.6bn representing 2.6% of total loans and advances to customers at 31 December 2022. The total loans and advances analysed for the purpose of the financed emissions calculation and reporting have not been adjusted for assets held for sale. 3 PCAF scores where 1 is high and 5 is low. This is a weighted average score based on financing for on-balance sheet financed emissions. 4 Emissions intensity under the new aggregation method. 5 Due to timing differences the approach for calculating 2021-2022 facilitated emissions has been enhanced compared to that of 2019-2020. Enhancements are mainly data and process-related for the later years to include more consistent and higher quality data sources and are therefore applied prospectively in line with our recalculation policy. Small methodology changes were applied as well but these do not materially change our 2019-2020 numbers. † Data is subject to independent limited assurance by PwC in accordance with ISAE 3000/ ISAE 3410. For further details, see our Financed Emissions and Thermal Coal Exposures Methodology and PWC’s limited assurance report, which are available at www.hsbc.com/who-we-are/esg-and-responsible-business/esg- reporting-centre. HSBC Holdings plc Annual Report and Accounts 2023 61 Environmental Reducing emissions in our assets under management In July 2021, our asset management business, HSBC Asset Management, signed up to the Net Zero Asset Managers initiative, which encourages investment firms to commit to managing assets in line with achieving net zero emissions by 2050 or sooner. HSBC Asset Management continues to work towards its ambition of reducing scope 1 and 2 financed emissions intensity by 58% by 2030 for 38% of its total assets under management. These listed equity and corporate fixed income assets amounted to $193.9bn at 31 December 2019. We use 2019 as the baseline year for our calculations. Implementation of the net zero targets remains subject to consultation with stakeholders including investors, fund boards and regulators. In 2023, HSBC Asset Management worked to develop solutions for clients to address climate ambitions while investing. Further data science expertise will be added to support sustainability through the creation of a Sustainable Investment Solutions Lab. HSBC Asset Management reported an update through the Principles for Responsible Investment annual submission, as required under its Net Zero Asset Managers commitment. As part of its thermal coal policy, it fulfilled a commitment to initiate engagement with all listed issuers held in active fundamental portfolios with more than 10% revenue exposure to thermal coal. Financed emissions continued Integrating net zero into transaction and portfolio decision making In 2023, we began to embed net zero factors alongside standard risk-return and other considerations when evaluating specific transactions starting with oil and gas, power and utilities, and thermal coal mining sectors. We have been testing and developing an analytics capability that, where relevant, begins to provide front-line business teams and management with insight on the up-to- date on-balance sheet financed emissions and facilitated emissions position of a sector, the impact of a transaction where material, and implications relative to pathways in line with our 2030 targets. We continued our efforts to design and implement a differentiated approach to understand and assess the transition plans and risks of our corporate customers, including state-owned enterprises. These assessments help us to identify opportunities, manage climate risks and define areas to drive strategic engagement with each corporate customer. In 2023, we completed assessments for most customers in scope of our thermal coal phase- out policy. We also completed assessments for customers that make the most material contribution to our financed emissions in the oil and gas, and power and utilities sectors. Once completed, these assessments can be used to support business decisions in relation to our financed emissions portfolio management and alignment, and our climate risk management efforts. Our processes and controls will continue to evolve as we look at net zero considerations for sectors, customers and deals with higher climate impact and risk. These considerations include: adherence with our sustainability risk policies; climate-related credit risk; customer transition plan assessment outcomes (where relevant); reputational risk considerations; and financed and, where applicable, facilitated emissions implications (where transactions are in scope of our financed emissions disclosures and 2030 targets). We have dedicated governance, with escalation pathways for deals deemed high risk, including in terms of financed emissions implications and reputation risk. Reducing landfill waste and emissions in the Philippines We are supporting a company that is seeking to tackle the problem of overflowing landfills, which will help reduce methane emissions and create potential new jobs in the Philippines. In June 2023, we provided a subsidiary of Prime Infrastructure Capital, a sustainable infrastructure firm with services that span energy, water distribution and waste management, with a $24.5m green loan. The loan was provided to finance its acquisition and expansion of a waste management facility in Cebu, Philippines. The company has increased the facility’s capacity to treat and recycle domestic and industrial solid waste, and is developing its capabilities to convert organic and agricultural feedstock waste into sustainable, refuse-derived fuel. The funding is expected to help to divert waste away from landfill, which will reduce methane emissions generated by decomposing organic waste. 62 HSBC Holdings plc Annual Report and Accounts 2023 ESG review | Environmental ESG review Net zero in our own operations TCFD Part of our ambition to be a net zero bank is to achieve net zero carbon emissions in our operations and supply chain by 2030. Reduce, replace and remove We have three elements to our strategy: reduce, replace and remove. We plan to first focus on reducing carbon emissions from consumption, and then replacing remaining emissions with low-carbon alternatives in line with the Paris Agreement. We plan to remove the remaining emissions that cannot be reduced or replaced by procuring, in accordance with prevailing regulatory requirements, high-quality offsets at a later stage. We are working on our carbon credits strategy by engaging with a range of market participants. Our energy consumption In October 2020, we announced our ambition to reduce our energy consumption by 50% by 2030, against a 2019 baseline, and in 2023 we achieved 26.3%. We continue to work to do this by optimising the use of our real estate portfolio, and carrying out a strategic reduction in our office space and data centres. We are using new technology and emerging products to make our spaces more energy efficient. As part of our ambition to achieve 100% renewable electricity across our operations by 2030, we continue to look for opportunities to procure green electricity in each of our markets. In 2023, our fourth UK renewable power purchase agreement (’PPA’) went live in Sorbie, Scotland. A key challenge remains the limited opportunity to pursue PPAs or green tariffs in key markets due to regulations. Business travel Our ambition is to halve travel emissions by 2030, compared with pre-pandemic levels. In 2023, our travel emissions remained below 50% of our 2019 baseline, despite the lifting of international travel restrictions. We are closely managing the gradual resumption of travel through internal reporting and review of emissions, internal carbon budgets and the introduction of emissions information at the point of booking. With hybrid working embedded across the organisation, the use of virtual working practices has reduced the need for our colleagues to travel to meet with other colleagues and customers. We continue to focus on reducing the environmental impact from the vehicles we use in our global markets, and accelerate the use of electric vehicles. In 2023, we reduced the company car fleet size by 9% compared with 2022. We are now aiming to ensure that all new vehicles ordered are fully electric or hybrid vehicles where possible. Engaging with our supply chain Our supply chain is critical to achieving our net zero ambitions, and we are partnering with our suppliers on this journey. Since 2020, we have been encouraging our largest suppliers to make their own carbon commitments, and to disclose their emissions via the CDP (formerly the Carbon Disclosure Project) supply chain programme. In 2023, suppliers representing 70.6% of total supplier spend completed the CDP questionnaire, compared with 63.5% in 2022. We will continue to engage with our supply chain through CDP, and through direct discussions with our suppliers on how they can further support our transition to net zero. In 2023, we launched our supplier net zero guides, providing further details to support suppliers in understanding our net zero ambitions, as set out in our supplier code of conduct. We are developing internal decarbonisation plans for the highest-emitting procurement categories (IT hardware, real estate, data centre and servers, and telecom services), to be included in category strategies and to support future supplier selection. Focus on natural resources Alongside our net zero operations ambition, our aim is to be a responsible consumer of natural resources. Through design, construction and operational standards, we strive to ensure that, wherever possible, our premises do not adversely affect the environment or natural resources. We have identified specific focus areas including waste, paper and sustainable diets, and are exploring key opportunities to reduce our wider environmental impact over the coming decade. Our presence in environmentally sensitive areas As a global organisation, our branches, offices and data centres may be located in areas of high or very high water stress and/ or protected areas of biodiversity, as we support our customers and communities in these locations. Approximately 55% of our global offices, branches and data centres are located in areas identified as being subject to high and very high water stress, accounting for 50% of our annual water consumption. These are predominantly urban or city centre locations with large, concentrated populations. Our industry is a low user of potable water, and we have implemented measures to further reduce water consumption through the installation of flow restrictors, auto-taps and low or zero flush sanitary fittings. In addition, 0.9% of our global office, branch and data centre portfolio lies in protected areas of biodiversity. We strive through our design, construction and operational standards to ensure that, where possible, our premises do not adversely affect the environment or natural resources in these areas. Our environmental and sustainability management policies Our buildings policy recognises that regulatory and environmental requirements vary across geographies and may include environmental certification. The policy is supported by Corporate Services procedures on environmental and sustainability management, seeking to ensure that HSBC’s properties continually reduce their overall direct impact on the environment. Detailed design considerations documented in our Global Engineering Standards aim to reduce or avoid depletion of critical resources, such as energy, water, land and raw materials. Suppliers are required to adhere to strict environmental management principles and reduce their impact on the environment in which they operate. Embedding net zero into the way we operate HSBC Holdings plc Annual Report and Accounts 2023 63 Environmental Net zero in our own operations continued average carbon intensities and spend data to determine their contribution to our supply chain emissions. As more of our suppliers report their emissions, we should be able to include more accurate data and fewer industry averages in the calculation. We have applied a data quality score to the sources of data we used to determine counterparty emissions. For further details, see our GHG (Greenhouse Gas) Reporting Guidance at www.hsbc.com/esg. In 2022, we disclosed our supply chain emissions for the first time, using supplier emissions data and industry averages where actual data was not available. This approach is heavily dependent on external data sources to calculate estimates of our supply chain emissions. In 2023, emissions from our supply chain reduced by 3% compared with 2022. This is due to a reduction in spend and an increase in the availability of actual emissions data from our suppliers. Emissions have increased by 13% compared with 2019, as industry averages remain significantly elevated. Due to volatility in industry average data, we will undertake a review of our data sources and methodology during 2024. As supplier emissions reporting matures, we will be able to include more actual data and fewer industry averages in the methodology. Our initial supply chain emission figures may require updating as data availability changes over time and methodologies and climate science evolve. For further details of our methodologies and relevant environmental key facts, see the ESG Data Pack at www.hsbc.com/esg. Energy consumption in kWh in 000s 2023 2022 2019 baseline Total 772,736 797,264 913,556 UK only 209,939 222,322 281,271 Emissions from our energy and travel We report our emissions following the Greenhouse Gas Protocol, which incorporates the scope 2 market-based emissions methodology. We report greenhouse gas emissions resulting from the energy used in our buildings and employees’ business travel. Due to the nature of our primary business, carbon dioxide is the main type of greenhouse gas applicable to our operations. While the amount is immaterial, our current reporting also incorporates methane and nitrous oxide for completeness. Our environmental data for our own operations is based on a 12-month period to 30 September. In 2023, we reduced emissions from our energy consumption and travel to 293,333 tonnes CO2e, which represents a 57.3% reduction compared with our 2019 baseline. This was mainly attributed to: – travel volumes remaining low compared with pre-pandemic levels; – an increase in our consumption of renewable electricity to 58.4%; and – the reduction of energy consumption as a result of strategic footprint reductions and the implementation of over 450 energy conservation measures, which amounted to an estimated energy avoidance in excess of 12 million kWh. Emissions from business travel increased compared with 2022, due to the easing of pandemic-related travel restrictions which resulted in a return to travel. A decrease in scope 1 emissions was partly attributed to a correction in the classification of road-based business travel in the UK and India from scope 1 to scope 3. In 2023, we collected data on energy use and business travel for our operations in 34 countries and territories, which accounted for approximately 96.0% of our full-time employees (‘FTEs’). To estimate the emissions of our operations in entities where we have operational control and a small presence, we scale up the emissions data from 96.0% to 100%. We then apply emission uplift rates to reflect uncertainty concerning the quality and coverage of emission measurement and estimation. This is consistent with both the Intergovernmental Panel on Climate Change’s Good Practice Guidance and Uncertainty Management in National Greenhouse Gas Inventories and our internal analysis of data coverage and quality. Emissions from our supply chain Our calculation methodology uses supplier emissions data where we have it from suppliers, through CDP. Where we do not have actual emissions data, we use industry Greenhouse gas emissions in tonnes CO2e per FTE 2023 2022 2019 baseline Scope 1, 2 and 3 (Category 6) 1.3 1.3 2.9 Scope 1, 2 and 3 (Category 1, 2 and 6) 5.8 5.9 6.6 Energy and travel greenhouse gas emissions in tonnes CO2e 2023 2022 2019 baseline Scope 11 16,918 19,329 22,066 Scope 2 (market-based)1 167,174 223,334 392,270 Scope 3 1,090,280 1,052,264 1,139,260 Category 1: Purchased goods and services1,2 859,256 865,747 829,635 Category 2: Capital goods1,2 121,783 144,232 37,617 Category 6: Business travel1 109,241 42,285 272,008 Total 1,274,372 1,294,927 1,553,596 Included energy UK 5,909 9,264 10,432 1 Our data is now presented on an absolute value basis and not rounded values. Data in 2023 is subject to an independent limited assurance by PwC in accordance with International Standard on Assurance engagements 3410 (Assurance Engagements on Greenhouse Gas Statements). For further details, see GHG Reporting Guidance 2023 and third-party limited assurance report at www.hsbc.com/our-approach/esg-information/ esg-reporting-and-policies. In respect of data in 2019 and 2022, see our relevant Annual Report and Accounts. 2 Supply chain emissions calculated using a combination of supplier emissions data and industry averages. A data quality score is applied to this calculation where 1 is high and 5 is low, based on the quality of emissions data. This is a weighted average score based on HSBC supplier spend and is in line with HSBC’s financed emissions reporting methodology. Data quality scores can be found in the ESG Data Pack. For further details of our methodologies, our PwC limited assurance reports and relevant environment key facts, see our ESG Data Pack at www.hsbc.com/esg. 64 HSBC Holdings plc Annual Report and Accounts 2023 ESG review | Environmental ESG review Banking Our banking business is well positioned to support our customers managing their own climate risk through financing. For our wholesale customers, we use our transition engagement questionnaire to understand clients’ climate strategies and risks. We have set out a suite of policies to guide our management of climate risk. We continue to develop our climate risk appetite and metrics to help manage climate exposures in our wholesale and retail portfolios. We also develop and use climate scenario analysis to gain insights on the long-term effects of transition and physical risks across our wholesale and retail banking portfolios (for further details, see page 225). Asset management HSBC Asset Management recognises that climate risk may manifest as transition and physical risks over the short, medium and long term. The impact of climate-related risk will vary depending on characteristics such as asset class, sector, business model and geography. Where applicable and relevant, HSBC Asset Management incorporates climate-related indicators, such as carbon intensity and management of carbon emissions, into investment decisions as well as insights from its climate-related engagement. Work continues on the integration of ESG and climate analysis into HSBC Asset Management’s actively managed product offerings to help ensure the climate risks faced by companies are considered when making investment decisions and to assess ESG risks and opportunities that could impact investment performance. HSBC Asset Management engages with investee companies on a priority list as defined in its Global Stewardship Plan, and votes at company general meetings, including on the topic of climate change. It also works with collaborative engagement initiatives such as Climate Action 100+ and Nature Action 100. For further details of the HSBC Global Asset Management (UK) Limited’s annual TCFD Report, see https://www.assetmanagement. hsbc.co.uk/-/media/files/attachments/uk/ common/tcfd-report-2022.pdf. Employee pensions The Trustee of the HSBC Bank (UK) Pension Scheme, our largest plan with $36bn assets under management, aims to achieve net zero greenhouse gas emissions across its defined benefit and defined contribution assets by 2050. To help achieve this, it is targeting an interim emissions reduction of 50% by 2030, from 2019 levels, for its equity and corporate bond mandates. This commitment was made in the context of wider efforts to manage the impact of climate change on the Scheme’s investments and the consequent impact on the financial interests of members. The Scheme, which has reported emission reductions for its listed equity and corporate bond mandate portfolios between 2019 and 2022 through its annual TCFD Report, will continue to report against the 2030 targets and aims to widen the coverage of its assessment and reporting over time. In 2023, its asset managers were formally notified of the Trustee’s ESG risk mitigation priorities and encouraged to develop commensurate risk mitigation strategies. The manager monitoring and selection processes now explicitly include assessment of these strategies where financially material. For further details of the HSBC Bank (UK) Pension Scheme’s annual TCFD statements and climate action plan, see http://futurefocus.staff. hsbc.co.uk/active-dc/information-centre/ other-information. Insurance  In 2023, our Insurance business updated its sustainability procedures to align with the Group’s updated energy and thermal coal- phase out policies. We also delivered ESG product marketing guidelines with insurance examples and training. In response to various ESG regulatory initiatives and developments, HSBC’s insurance manufacturing entities in the EU, which are in Malta and France, have continued to implement key disclosure-related regulatory requirements, including pre-contractual reporting, client periodic reporting and sustainable investment impact statements. Related requirements for the UK are expected to be introduced in 2024.   Managing climate risk TCFD Banking  We manage the climate risk in our banking portfolios through our risk appetite and policies for financial and non-financial risks. This helps enable us to identify opportunities to support our customers, while continuing to meet stakeholder expectations. Employee pensions Our pension plans manage climate risk in line with their fiduciary duties towards members and local regulatory requirements. We monitor climate risk exposure internally for our largest plans based on asset sector allocation and carbon emissions data where available. Asset management Climate risk management is a key feature of our investment decision making and portfolio management approach. We also engage with companies on topics related to climate change. Insurance We consider climate risk in our portfolio of assets. We have established an evolving ESG programme to meet changing external expectations and customer demands. Climate risk HSBC Holdings plc Annual Report and Accounts 2023 65 Environmental Climate risk relates to the financial and non- financial impacts that may arise as a result of climate change and the move to a net zero economy. We manage climate risk across all our businesses and are incorporating climate considerations within our traditional risk types in line with our Group-wide risk management framework. Our material exposure to climate risk relates to wholesale and retail client financing activity within our banking portfolio. We are also exposed to climate risk in relation to asset ownership by our insurance business and employee pension plans. Our clients are exposed to climate-related investment risk in our asset management business. In the table below, we set out our duties to our stakeholders in our four most material roles. For further details of our approach to climate risk, see ‘ESG risk’ on page 141 and ‘Climate risk’ on page 221. Our sustainability risk policies help to set out our appetite for financing and advisory activities in certain sectors. Our policies are important mechanisms for delivering our net zero ambitions, as well as for managing sustainability risks. Our policies Our sustainability risk policies comprise our core net zero-aligned policies – thermal coal phase-out and energy – and our broader sustainability risk policies covering: agricultural commodities, chemicals, forestry, mining and metals, and World Heritage Sites and Ramsar-designated wetlands. We also apply the Equator Principles when financing relevant projects. Our sustainability risk policies focus on mitigating the negative impacts of specific sectors on people and the environment. Our net zero policies, including energy and thermal coal phase-out, also support our ambition to transition to net zero. Engaging with customers on their transition plans is a key aspect of our net zero policy approach. These policies aim to provide clear signals to our customers on how our appetite and expectations for different activities are changing, as well as how we will consider their plans for the future. We continue to review policy implementation as we apply our policies in practice, and our operationalisation of such policies continues to be enhanced. We take a risk-based approach when identifying transactions and clients to which our energy and thermal coal phase-out policies apply, and when reporting on relevant exposures, adopting approaches proportionate to risk and materiality. This helps to focus our efforts on areas where we believe we can help drive meaningful change, while taking into account experience from policy implementation over time. We regularly review our policies, incorporating feedback and building on experience from policy implementation over time. Where we identify activities that could cause material negative impacts, we expect customers to demonstrate that they are identifying and mitigating risks responsibly, and we will look to take required actions as outlined in our policies, which may include applying financing restrictions or enhanced due diligence. For further details of how we manage sustainability risk, as well as our full policies, see www.hsbc.com/our-approach/risk-and- responsibility/sustainability-risk. Governance and implementation Our Group Risk and Compliance function has specialists who review and support implementation of our sustainability risk policies. Our relationship managers are the primary point of contact for many of our business customers and are responsible for managing customers’ adherence to the sustainability risk policies. They are supported by sustainability risk managers across the Group who have local or regional responsibility for advising on, and overseeing, the management of risks as outlined in the policies. Where considered appropriate, policy matters are escalated to relevant internal governance committees. Oversight of the development and implementation of policies is the responsibility of relevant governance committees comprising senior members of the Group Risk and Compliance function and global businesses. Biodiversity and natural capital-related policies Our sustainability risk policies impose restrictions on certain financing activities that may have material negative impacts on nature. While a number of our sustainability risk policies have such restrictions, our forestry and agricultural commodities policies focus specifically on a key nature-related impact: deforestation. These policies require customers involved with major deforestation- risk commodities to operate in accordance with sustainable business principles. We also require palm oil customers to obtain certification under the Roundtable on Sustainable Palm Oil, and commit to ‘No Deforestation, No Peat and No Exploitation’ (see ‘Our respect for human rights’ on page 89). Our energy policy Our energy policy covers the broader energy system, including upstream oil and gas, fossil fuel power generation, hydrogen, renewables and hydropower, nuclear, biomass and waste- to-energy sectors. The policy seeks to balance three objectives: driving down global greenhouse gas emissions; enabling an orderly transition that builds resilience in the long term; and supporting a just and affordable transition, recognising the local realities in all the communities we serve. The energy policy was first published in December 2022 and updated in January 2024. We review the policy annually to help ensure that it remains aligned with our net zero by 2050 ambition and strategic objectives. For further details of our oil and gas, and power and utilities financed emissions targets, see the ‘Targets and progress’ section in ‘Financed emissions on page 57. For further details of our energy policy, see www.hsbc.com/our-approach/risk-and- responsibility/sustainability-risk. Sustainability risk policies TCFD 66 HSBC Holdings plc Annual Report and Accounts 2023 ESG review | Environmental ESG review Asset Management policy HSBC Asset Management published its own policy on thermal coal in September 2022, and its own energy policy in November 2023. As an asset manager, it is subject to separate regulatory and legal obligations to deliver customers’ investment interests and deliver fair outcomes. Under its thermal coal policy, HSBC Asset Management will not hold listed securities of issuers with more than de minimis revenue exposure to thermal coal in its actively managed funds beyond 2030 for EU and OECD markets, and globally by 2040. The policy also includes enhanced due diligence on the transition plans of investee companies with thermal coal exposure. Companies held in investment portfolios that do not develop credible plans to transition away from thermal coal could face voting sanctions and ultimately a divestment of holdings. Under its energy policy, HSBC Asset Management will engage with – and assess the transition plans of – oil and gas, and power and utilities companies held in its portfolios. For its active fundamental sustainable named funds, it will exclude listed issuers whose overall operations are substantially in unconventional oil and gas, subject to data availability, and with the level and scope of exclusions to be set out in fund prospectuses. In its alternatives business, it will not undertake new direct investments in projects associated with the energy- related activities identified as excluded from new finance or advisory services under the Group energy policy. HSBC Asset Management’s policy work will continue to support the Group’s sustainability objectives and the commitment made under the Net Zero Asset Managers initiative to support investing aligned with net zero by 2050. We continue on the journey of policy implementation, including engaging with the companies in which we invest, and improving the data we rely on to monitor the policies. For further details of the energy policy, see www.assetmanagement.hsbc.lu/-/media/files/ attachments/common/energy-policy-en.pdf. For further details of the thermal coal policy, see www.assetmanagement.hsbc.co.uk/-/ media/files/attachments/common/coal-policy- en.pdf. Sustainability risk policies continued Our thermal coal phase-out policy As set out in the thermal coal phase-out policy, we are committed to phasing out the financing of thermal coal-fired power and thermal coal mining in EU and OECD markets by 2030, and globally by 2040. Our policy aims to support thermal coal phase-out aligned to science-based timeframes, recognising the different pace between advanced and emerging economies. In turn our policy supports progress towards our financed emissions targets for the power and utilities and thermal coal mining sectors. The policy was first published in December 2021 and is reviewed annually, with the most recent update in January 2024, to help ensure that it remains aligned with our commitments and takes into consideration relevant changes in external factors. For our thermal coal phase-out policy, see www. hsbc.com/-/files/hsbc/our-approach/risk-and- responsibility/pdfs/240125-hsbc-thermal-coal- phase-out-policy.pdf. For further details of our thermal coal phase-out policy January 2024 update, see page 71 of our Net Zero Transition Plan 2024, which is available at www.hsbc.com/who-we-are/our-climate- strategy/our-net-zero-transition-plan. Thermal coal financing exposures We intend to reduce thermal coal financing drawn balance exposure from a 2020 baseline by at least 25% by 2025 and aim to reduce it by 50% by 2030. In our Annual Report and Accounts 2022 we acknowledged that our processes, systems, controls and governance were not yet designed to fully identify and disclose thermal coal exposures and that we planned to reassess the reliability of our data and review our basis of preparation to help ensure that we are reporting all relevant thermal coal exposures aligned to our thermal coal phase-out policy. We have now revised the basis of preparation for our thermal coal exposures. Aligned with our thermal coal phase-out policy, we applied a risk-based approach to identify clients and report on relevant exposures. This includes the use of globally recognised third-party data sources to screen clients and applies materiality considerations to product type, customer type and exposure type, which informs inclusion and exclusion requirements. Specifically, for product types, short-term lending exposures are excluded from our thermal coal financing exposures reporting in line with our financed emissions methodology. For customer types, exclusions are applied for certain customer types such as sovereigns and individuals. For exposure types, a threshold of $15m for drawn balances is applied for thermal coal financing exposures reporting. For the avoidance of doubt, the $15m threshold applies only to exposure reporting analysis and does not apply to the application of the thermal coal phase-out policy. For further details of our Financed Emissions and Thermal Coal Exposures Methodology, see www.hsbc.com/who-we-are/esg-and- responsible-business/esg-reporting-centre. Considering materiality criteria helps us to focus our efforts on areas where we believe we can help drive meaningful change, while taking into account experience from policy implementation over time. Applying our revised basis of preparation, our thermal coal financing drawn balance exposure was approximately $1bn† as at 31 December 2020. We continue to work on our 2021 and 2022 numbers based on our revised basis of preparation and expect to report on these in future disclosures. For further details of our approach to financed emissions, see ‘Our Approach to financed emissions’ on page 53. † Data is subject to independent limited assurance by PwC in accordance with ISAE 3000/ISAE 3410. For further details, see our Financed Emissions and Thermal Coal Exposures Methodology and PwC’s limited assurance report, which are available at www.hsbc.com/who-we-are/ esg-and-responsible-business/esg-reporting-centre. HSBC Holdings plc Annual Report and Accounts 2023 67 Environmental We recognise that collective action is critical to achieve net zero. We seek to collaborate with a range of partners to develop a supportive environment for achieving net zero and mobilising finance for climate action and nature-based solutions. Our partnerships vary in scope and form depending on the sector and geography, as well as our presence in local markets. We act independently and voluntarily in our decision making, based on our own business interests, priorities and objectives, and in accordance with the laws and regulations of the markets in which we operate. Working with the public sector We engage with governments and public bodies to support the implementation of policies and regulations, including promoting good practice to develop globally consistent approaches to nature and climate-related financial regulation. In 2023, this included: – working with the UK Net Zero Council, a cross-government business partnership, to help address market barriers to delivering net zero, including high start-up costs for renewable energy projects, regulatory challenges and uncertainty around policy frameworks; and – continuing to engage with Just Energy Transition Partnerships contributing to Indonesia’s comprehensive investment and policy plan and Vietnam’s resource mobilisation plan, which provide roadmaps for minimising the negative impact on local communities of phasing out fossil fuels and how banks can support the transition. Working with industry We participate in cross-industry alliances and initiatives to stimulate industry engagement in nature and climate-related issues, and improve consistency in global financial standards, guidance and frameworks to accelerate implementation. In 2023, these included: – We are supporting the widespread adoption of the GFANZ net zero transition plan framework, as a member of its Principals Group. We also jointly led a working group to develop guidance for financial institutions on financing the managed phase-out of coal-fired power plants in Asia-Pacific. – As Chair of the Sustainable Markets Initiative’s (‘SMI’) Financial Services Taskforce, we have been actively involved in the publication of industry guidance to help encourage investment in critical ecosystems and sustainable agricultural practices. These include sponsorship of a report by Pollination on financing coastal nature- based solutions, as well as contributing to the Mangrove Breakthrough initiative’s financial roadmap and the SMI Agribusiness Task Force’s blended finance framework for regenerative farming. – As a member of the Taskforce on Nature- related Financial Disclosures (‘TNFD’), we have piloted the TNFD beta framework to better understand our exposure to nature-related risks, including on subsets of customers. We are currently focused on assessing and preparing for mandatory nature-related disclosure requirements, and we continue to engage with TNFD and explore ways it can help us and our clients to strengthen nature-related reporting. In 2023, we also supported financial product development to help mobilise the allocation of capital towards halting and reversing nature loss: – We worked with the ICMA to help develop global guidance for issuers launching blue bonds – debt instruments that raise capital to finance sustainable marine and ocean-based projects – including eligibility criteria, standards for evaluating the impact of projects, and the steps needed to build the integrity of the blue economy and mobilise investment. – We partnered with Earth Security to explore the barriers, opportunities and design options for creating a ‘mangrove bond’ in Queensland, Australia to help generate funding to enhance mangrove ecosystems. This led to the publication of a practical blueprint for investors, banks, corporates and governments to develop new sustainable fixed income and investment product opportunities. Working with civil society and non-governmental organisations As part of our global philanthropy, we have partnered with a range of organisations to support the acceleration of climate action and investments in nature. Our five-year Climate Solutions Partnership initiative with the World Resources Institute, WWF and over 50 local partners, continues to support the scaling up of nature-based solutions and the transition of the energy sector in Asia. This includes engaging with local enterprises across Asia to make climate commitments and take corporate action. Under the Asia Sustainable Palm Oil Links programme, we are working closely with smallholders and traders to transition to more sustainable practices and reduce nature-related losses. We have also established several new partnerships focused on transitioning industry, decarbonising global trade and catalysing the new economy. These include: – a three-year partnership with the Apparel Impact Institute to mobilise blended finance for projects to reduce supply chain emissions in the global fashion industry; – a founding membership of the Capacity- building Alliance for Sustainable Investment, a global platform providing local capacity building services and technical assistance to support growth of transition financing in emerging markets and developing economies; and – a two-year partnership with Repower, a global non-profit initiative analysing the technical and commercial feasibility of various options for repowering and repurposing coal-fired power plants to accelerate the transition to clean energy. Partnering for systemic change Supporting systemic change to deliver net zero Unlocking the potential of Chinese ecosystems We have been working with the SEE Foundation in China on a multi-stakeholder pilot project to enhance the climate resilience and biodiversity of forests, inland wetlands, and mangroves in several selected local provinces. The project aims to restore and promote sustainable management of key ecosystems and improve ecosystem services such as carbon sinks, as a model for other areas in China and around the world. Its efforts to reduce emissions, and generate jobs through the support of sustainable local enterprises, has also unlocked government and public funding for expansion and gained recognition from the World Bank and the Chinese government. 68 HSBC Holdings plc Annual Report and Accounts 2023 ESG review | Environmental ESG review Our approach to climate reporting TCFD Task Force on Climate-related Financial Disclosures (‘TCFD’) The table below sets out the 11 TCFD recommendations and summarises where additional information can be found. We have considered our ‘comply or explain’ obligation under both the UK’s Financial Conduct Authority’s Listing Rules and Sections 414CA and 414CB of the UK Companies Act 2006, and confirm that we have made disclosures consistent with the TCFD Recommendations and Recommended Disclosures, including its annexes and supplemental guidance, save for certain items, which we summarise below and in the additional information section on page 440. Recommendation Response Disclosure location Governance a) Describe the Board’s oversight of climate-related risks and opportunities (Companies Act 2006 – Sections 414CA and 414CB 2A (a)) Process, frequency and training – The Board takes overall responsibility for ESG strategy, overseeing executive management in developing the approach, execution and associated reporting. It considered ESG at eight meetings during the year. – Board members receive ESG-related training as part of their induction and ongoing development, and seek out further opportunities to build their skills and experience in this area. Pages 88 and 256 Page 88 Sub-committee accountability, processes and frequency – The Group Audit Committee (‘GAC’) considered ESG and climate reporting matters at eight meetings during 2023. Furthermore, as an area of expanded assurance, the GAC, supported by the executive-level ESG Committee, provided close oversight of the disclosure risks in relation to ESG and climate reporting, amid rising stakeholder expectations. – The Group Risk Committee (‘GRC’) received reports on climate risk management, energy and thermal coal phase-out policies, while maintaining oversight of delivery plans to ensure that the Group develops robust climate risk management capabilities. It considered ESG risk at five meetings in 2023. – The diagram on page 88 provides an illustration of our ESG governance process, including how the Board’s strategy on climate is cascaded and implemented throughout the organisation. It identifies examples of forums that manage both climate-related opportunities and risks, along with their responsibilities and the responsible chair. Page 267 Pages 275 and 278 Page 88 Examples of the Board and relevant Board committees taking climate into account – The Board considered whether to establish a Board committee dedicated to ESG issues, but instead decided that the best way to support the oversight and delivery of the Group’s climate ambition and ESG strategy was to retain governance at Board level. – In 2023, the Board oversaw the implementation of ESG strategy through regular dashboard reports and detailed updates including: review and approval of the net zero transition plan, deep dives on the sustainability execution programme, reviews of net zero-aligned policies and climate-aligned financing initiatives. Page 254 Page 254 b) Describe management’s role in assessing and managing climate-related risks and opportunities (Companies Act 2006 – Sections 414CA and 414CB 2A (a)) Who manages climate-related risks and opportunities – The ESG Committee supports the development and delivery of our ESG strategy, key policies and material commitments by providing oversight, coordination and management of ESG commitments and initiatives. It is co-chaired by the Group Chief Sustainability Officer and the Group Chief Financial Officer. – In 2023, we enhanced our ESG governance with the establishment of a new Sustainability Execution Committee, which focuses on defining and measuring the success of our climate ambition, and developing commercial opportunities that support it through the sustainability execution programme. – The Group Chief Risk and Compliance Officer is the senior manager responsible for the management of climate risk under the UK Senior Managers Regime, which involves holding overall accountability for the Group’s climate risk programme. Page 222 Page 88 Page 222 How management reports to the Board – The Board delegates day-to-day management of the business and implementation of strategy to the Group Chief Executive. The Group Chief Executive is supported in his management of the Group by recommendations and advice from the Group Executive Committee, an executive forum comprising members of senior management that include chief executive officers of the global businesses, regional chief executive officers and functional heads. – The Group Executive Committee further enhanced its governance model of ESG matters with the introduction of a new Sustainability Execution Committee and supporting forums. These support senior management in the operationalisation of the Group’s sustainability strategy, through the oversight of the sustainability execution programme. Page 250 Page 254 Processes used to inform management – The Group Risk Management Meeting oversees the enterprise-wide management of all risks, including updates relating to the Group’s climate risk profile and risk appetite, top and emerging climate risks, and key climate initiatives. – The Environmental Risk Oversight Forum oversees global risk activities relating to environmental risk management, including the transition and physical risks from climate change. Equivalent forums have been established at regional level, where appropriate. Page 88 Page 88 HSBC Holdings plc Annual Report and Accounts 2023 69 Environmental Recommendation Response Disclosure location Strategy a) Describe the climate-related risks and opportunities the organisation has identified over the short, medium and long term (Companies Act 2006 – Sections 414CA and 414CB 2A (d)) Processes used to determine material risks and opportunities – To support the requirements for assessing the impacts of climate change, we continue to develop a set of capabilities to execute climate stress testing and scenario analysis. These are used to improve our understanding of our risk exposures for risk management and business decision making. – We also develop and use climate scenario analysis to gain insights on the long-term effects of transition and physical risks across our wholesale and retail banking portfolios. – Our sustainable finance and investment ambition aims to help promote green, sustainable and socially- focused business and sustainable investment products and solutions. Page 37 Page 65 Page 50 Relevant short-, medium-, and long-term time horizons – We have continued to take steps to implement our climate ambition to become net zero in our operations and our supply chain by 2030, and align our financed emissions to net zero by 2050. – In 2023, we continued to provide sustainable financing and investment to our customers in line with our ambition to provide and facilitate $750bn to $1tn by 2030. – Our assessment of climate risks covers three distinct time periods, comprising: short term, which is up to 2025; medium term, which is between 2026 and 2035; and long term, which is between 2036 and 2050. These time periods are aligned to the Climate Action 100+ framework v1.2. Page 42 Page 44 Page 141 Transition or physical climate-related issues identified – We aim to help our customers transition to net zero and a sustainable future by providing and facilitating between $750bn and $1tn of sustainable finance and investment by 2030. Our sustainable finance data dictionary includes a detailed definition of contributing activities. – For transition risk, we have metrics in place to monitor the exposure of our wholesale corporate lending portfolio to six high transition risk sectors. As at 31 December 2023, the overall exposure to six high transition risk sectors was $112bn. Our relationship managers engage with our key wholesale customers through a transition engagement questionnaire (formerly the transition and physical risk questionnaire) to gather information and assess the alignment of our wholesale customers’ business models to net zero and their exposure to physical and transition risks. We use the responses to the questionnaire to create a climate risk score for our key wholesale customers. – We measure the impacts of climate and weather events to our buildings on an ongoing basis using historical, current and scenario modelled forecast data. In 2023, there were 27 major storms that had a minor impact on five premises with no impact on the availability of our buildings. Page 50 Page 223 Page 229 Risks and opportunities by sector and/or geography – For transition risk, we have metrics in place to monitor the exposure of our wholesale corporate lending portfolio to six high transition risk sectors. These are automotive, chemicals, construction and building materials, metals and mining, oil and gas, and power and utilities. – Within our mortgage portfolios, properties or areas with potentially heightened physical risk are identified and assessed locally, and potential exposure is monitored through quarterly metrics. We have also set risk appetite metrics for physical risk in our largest mortgage markets, the UK and Hong Kong, as well as those with local regulatory requirements, including Singapore. – We aim to help our customers transition to net zero and a sustainable future by providing and facilitating between $750bn and $1tn of sustainable finance and investment by 2030. For a detailed breakdown of our sustainable finance progress, see the ESG Data Pack. Page 223 Page 224 Page 50 Concentrations of credit exposure to carbon-related assets (supplemental guidance for banks) – We report our exposure to the six high transition risk sectors in the wholesale portfolio. For details, see the ESG Data Pack. – The UK is our largest mortgage market, which at September 2023 made up 40.0% of our global mortgage portfolio. We estimate that 0.2% of our UK retail mortgage portfolio is at very high risk of flooding and 3.5% is at high risk. This is based on approximately 94.2% climate risk data coverage by value of our UK portfolio as at September 2023. Page 223 Page 224 Climate-related risks (transition and physical) in lending and other financial intermediary business activities (supplemental guidance for banks) – Our material exposure to climate risk relates to wholesale and retail client financing activity within our banking portfolio. – We are also exposed to climate risk in relation to asset ownership by our insurance business and employee pension plans. – HSBC Asset Management recognises that climate risk may manifest as transition and physical risks over the short, medium and long term. The impact of climate-related risk will vary depending on characteristics such as asset class, sector, business model and geography. Where applicable and relevant, HSBC Asset Management incorporates climate-related indicators, such as carbon intensity and management of carbon emissions, into investment decisions as well as insights from its climate-related engagement. – In climate scenario analysis on page 227, we show the relative size of exposures at default in 2023 and the increase in cumulative ECL under each scenario compared with a counterfactual scenario by 2035 (expressed as a multiple). Page 65 Page 65 Page 65 Page 227 Task Force on Climate-related Financial Disclosures (‘TCFD’) continued 70 HSBC Holdings plc Annual Report and Accounts 2023 ESG review | Environmental ESG review Task Force on Climate-related Financial Disclosures (‘TCFD’) continued Recommendation Response Disclosure location b) Describe the impact of climate-related risks and opportunities on the organisation’s businesses, strategy and financial planning (Companies Act 2006 – Sections 414CA and 414CB 2A (e)) Impact on strategy, business, and financial planning – Our net zero ambition represents one of our four strategic pillars. We aim to achieve net zero in our financed emissions by 2050, and in our own operations and supply chain by 2030. – Scenario analysis supports our strategy by assessing our potential exposures to risks and vulnerabilities under a range of climate scenarios. It helps to build our awareness of climate change, plan for the future and meet our growing regulatory requirements. Developments in climate science, data, methodology and scenario analysis techniques will help us shape our approach further. We therefore expect this view to change over time. – We continue to enhance our climate scenario analysis exercises so that we can have a more comprehensive understanding of climate headwinds, risks and opportunities to support our strategic planning and actions. – We have used climate scenarios to inform our organisation’s business, strategy and financial planning. In 2023, we continued to incorporate certain aspects of sustainable finance and financed emissions within our financial planning process. – We do not fully disclose impacts from climate-related opportunities on financial planning and performance including on revenue, costs and the balance sheet, quantitative scenario analysis, detailed climate risk exposures for all sectors and geographies or physical risk metrics. This is due to transitional challenges in relation to data limitations, although nascent work is ongoing in these areas. We expect these data limitations to be addressed in the medium term as more reliable data becomes available and technology solutions are implemented. Page 44 Page 225 Page 225 Page 222 Page 440 Impact on products and services – We aim to help our customers transition to net zero and a sustainable future by providing and facilitating between $750bn and $1tn of sustainable finance and investment by 2030. Page 50 Impact on supply chain and/or value chain – We will continue to engage with our supply chain through CDP, and through direct discussions with our suppliers on how they can further support our transition to net zero. – We recognise that collective action is critical to achieve net zero. We seek to collaborate with a range of partners to develop a supportive environment for achieving net zero and mobilising finance for climate action and nature-based solutions. Our partnerships vary in scope and form depending on the sector and geography, as well as our presence in local markets. – HSBC Asset Management engages with investee companies on a priority list as defined in its Global Stewardship Plan, and votes at company general meetings, including on the topic of climate change. Page 63 Page 68 Page 65 Impact on adaptation and mitigation activities – In October 2020, we announced our ambition to reduce our energy consumption by 50% by 2030, against a 2019 baseline. As part of our ambition to achieve 100% renewable electricity across our operations by 2030, we continue to look for opportunities to procure green electricity in each of our markets. In 2023, our fourth UK renewable PPA went live in Sorbie, Scotland. A key challenge remains the limited opportunity to pursue PPAs or green tariffs in key markets due to regulations. – We regularly review and enhance our building selection process and global engineering standards and will continue to assess historical claims data to help ensure our building selection and design standards address the potential impacts of climate change. Page 63 Page 229 Impact on operations – We have three elements to our strategy: reduce, replace and remove. We plan to first focus on reducing carbon emissions from consumption, and then replacing remaining emissions with low-carbon alternatives in line with the Paris Agreement. We plan to remove the remaining emissions that cannot be reduced or replaced by procuring, in accordance with prevailing regulatory requirements, high-quality offsets at a later stage. – We use stress testing to evaluate the potential for impact on our owned or leased premises. Our scenario stress test, conducted in 2023, analysed how eight climate change-related hazards could impact 1,000 of our critical and important buildings. These hazards were coastal inundation, extreme heat, extreme winds, wildfires, riverine flooding, pluvial flooding, soil movement due to drought, and surface water flooding. Page 63 Page 229 Impact on investment in research and development – Throughout 2023, we published regular ESG and sustainability-related market insights and updates such as #WhyESGMatters and Learning about ESG to help clients better understand the implications for their investments. – We recognise the need to find new solutions and increase the pace of change for the world to achieve the Paris Agreement goal of being net zero by 2050. We are working with a range of partners to accelerate investment in sustainable infrastructure, natural resources and climate technology to help reduce emissions and address climate change. Page 51 Page 52 Impact on acquisitions or divestments – We have updated our merger and acquisition process to consider potential climate and sustainability-related targets, net zero transition plans and climate strategy, and how this relates to HSBC. Page 222 Impact on access to capital – We have considered the impact of climate-related issues on our businesses, strategy and financial planning. Our access to capital may be impacted by reputational concerns as a result of climate action or inaction. In addition, if we are perceived to mislead stakeholders on our business activities or if we fail to achieve our stated net zero ambitions, we could face reputational damage, impacting our revenue-generating ability and potentially our access to capital markets. We expect to further enhance the disclosure in the medium term as more data becomes available. To manage these risks we have integrated climate risk into our existing risk taxonomy, and incorporated it within the risk management framework through the policies and controls for the existing risks where appropriate. Page 440 Transition plan to a low-carbon economy – We published our Group-wide net zero transition plan in January 2024. In this plan, we provided an overview of our approach to net zero and the actions we are taking to help meet our ambitions. We want to be clear about our approach, the change underway today and what we plan to do in the future. We also want to be transparent about where there are still unresolved issues and uncertainties. We are still developing our disclosures, including considerations of possible additional data in relation to our financial plans, budgets, and related financial approach for the implementation of the transition plan in the medium term (e.g. amount of capital and other expenditures supporting our decarbonisation strategy). The UK Transition Plan Taskforce published its final transition plan disclosure framework in October 2023. We will continue to evolve our transition plan disclosures to take into account new and evolving regulatory developments. Page 440 HSBC Holdings plc Annual Report and Accounts 2023 71 Environmental Task Force on Climate-related Financial Disclosures (‘TCFD’) continued Recommendation Response Disclosure location c) Describe the resilience of the organisation’s strategy, taking into consideration different climate-related scenarios, including a 2°C or lower scenario (Companies Act 2006 – Sections 414CA and 414CB 2A (f)) Embedding climate into scenario analysis – Scenario analysis supports our strategy by assessing our potential exposures to risks and vulnerabilities under a range of climate scenarios. It helps to build our awareness of climate change, plan for the future and meet our growing regulatory requirements. – In our 2023 climate scenario analysis exercises, we explored five scenarios that were created to examine the potential impacts from climate change for the Group and its entities. Page 225 Page 225 Key drivers of performance and how these have been taken into account – Climate scenario analysis allows us to model how different potential climate pathways may affect and impact the resilience of our customers and our portfolios, particularly in respect of credit losses. Under the Current Commitments scenario, we expect lower levels of losses relating to transition risks, although we would expect an increase in the effects of climate-related physical risks over the longer term. – Scenario analysis results have been used to support the Group’s ICAAP. This is an internal assessment of the capital the Group needs to hold to meet the risks identified on a current and projected basis, including climate risk. – In addition, scenario analysis informs our risk appetite statement metrics. As an example, it supports the calibration of physical risk metrics for our retail mortgage portfolios and it is used to consider climate impact in our IFRS 9 assessment. Page 227 Page 229 Page 229 Scenarios used and how they factored in government policies – Our scenarios are: the Net Zero scenario, the Current Commitments scenario, the Delayed Transition Risk scenario, the Downside Physical Risk scenario and the Near Term scenario. – Our scenarios reflect different levels of physical and transition risks over a variety of time periods. The scenario assumptions include varying levels of governmental climate policy changes, macroeconomic factors and technological developments. However, these scenarios rely on the development of technologies that are still unproven, such as global hydrogen production to decarbonise aviation and shipping. Page 225 Page 225 How our strategies may change and adapt – The nature of the scenarios, our developing capabilities, and limitations of the analysis lead to outcomes that are indicative of climate change headwinds, although they are not a direct forecast. – Developments in climate science, data, methodology and scenario analysis techniques will help us shape our approach further. We therefore expect this view to change over time. – Climate scenario analysis plays a crucial role helping us to identify and understand the impact of climate- related risks and potential opportunities as we navigate the transition to net zero. – Our target-setting approach to date, for on-balance sheet financed emissions and facilitated emissions, has been to utilise a single net zero reference scenario (IEA NZE 2021) to underpin both energy supply-related sectors (oil and gas, power and utilities, and thermal coal mining) and our published targets for demand-side sectors in transport and heavy industry. – We recognise that the so-called ‘hard-to-abate’ sectors, such as cement, iron, steel and aluminium, and aviation have a large dependence on nascent technologies and the presence (or not) of enabling policies and regulations. We may consider tracking progress relative to 1.5°C-aligned ambition ranges for these sectors in the future, which could include industry-specific scenarios alongside the IEA NZE scenario. – We do not currently fully disclose the impacts of transition and physical risk quantitatively, due to transitional challenges including data limitations and evolving science and methodologies. In 2023, we have disclosed the impairment impacts for our wholesale, retail and commercial real estate portfolios in different climate scenarios. In addition, we have disclosed losses on our retail mortgage book under three scenarios and flood depths for specific markets. For our wholesale book, we have disclosed potential implications on our expected credit losses for 11 sectors under two scenarios. We have also disclosed a heat map showing how we expect the risks to evolve over time. Page 225 Page 225 Page 229 Page 53 Page 48 Page 440 Risk management a) Describe the organisation’s processes for identifying and assessing climate-related risks (Companies Act 2006 – Sections 414CA and 414CB 2A (b)) Process – We continue to integrate climate risk into policies, processes and controls across many areas of our organisation, and we will continue to update these as our climate risk management capabilities mature over time. – We updated our climate risk management approach to incorporate net zero alignment risk and developed guidance on how climate risk should be managed for non-financial risk types. While we have made progress in enhancing our climate risk framework, further work remains. This includes the need to develop additional metrics and tools to measure our exposure to climate-related risks, and to incorporate these tools within decision making. – In 2023, we enhanced our internal climate scenario analysis exercise by focusing our efforts on generating more granular insights for key sectors and regions to support core decision-making processes, and to respond to our regulatory requirements. In climate scenario analysis, we consider, jointly, both physical risks and transition risks. – We continue to review policy implementation as we apply our policies in practice, and our operationalisation of such policies continues to be enhanced. We take a risk-based approach when identifying transactions and clients to which our energy and thermal coal phase-out policies apply, and when reporting on relevant exposures, adopting approaches proportionate to risk and materiality. Page 222 Page 222 Page 225 Page 66 Integration into policies and procedures – We continue to integrate climate risk into policies, processes and controls across many areas of our organisation, and we will continue to update these as our climate risk management capabilities mature over time. Page 222 Consider climate-related risks in traditional banking industry risk categories (supplementary guidance for banks) – We provide further details of how we have embedded the management of climate risk across key risk types, including wholesale credit risk, retail credit risk, treasury risk, traded risk, reputational risk, regulatory compliance risk, resilience risk, model risk, and financial reporting risk. Page 223 72 HSBC Holdings plc Annual Report and Accounts 2023 ESG review | Environmental ESG review Recommendation Response Disclosure location b) Describe the organisation’s processes for managing climate-related risks (Companies Act 2006 – Sections 414CA and 414CB 2A (b)) Process and how we make decisions – The Group Risk Management Meeting and the Group Risk Committee receive regular updates on our climate risk profile and progress of our climate risk programme. – The Environmental Risk Oversight Forum (formerly the Climate Risk Oversight Forum) oversees risk activities relating to climate and sustainability risk management, including the transition and physical risks from climate change. Equivalent forums have been established at a regional level. Page 222 Page 222 c) Describe how processes for identifying, assessing and managing climate-related risks are integrated into the organisation’s overall risk management framework (Companies Act 2006 – Sections 414CA and 414CB 2A (c)) How we have aligned and integrated our approach – Our climate risk approach is aligned to our Group-wide risk management framework and three lines of defence model, which sets out how we identify, assess and manage our risks. – We are developing our climate risk capabilities across our businesses, by prioritising sectors, portfolios and counterparties with the highest impacts. – In 2023, we updated our climate risk materiality assessment, to understand how climate risk may impact across HSBC’s risk taxonomy. – In addition to this assessment, we also consider climate risk in our emerging risk reporting and scenario analysis. Page 221 Page 221 Page 221 Page 221 How we take into account interconnections between entities and functions – Our climate risk approach is aligned to our Group-wide risk management framework and three lines of defence model, which sets out how we identify, assess and manage our risks. – Through our climate risk programme, we continued to embed climate considerations throughout the organisation, including through risk policy updates and the completion of our annual climate risk materiality assessment. We also developed risk metrics to monitor and manage exposures, and further enhanced our internal climate scenario analysis. – We continue to make progress in enhancing our climate risk capabilities, and recognise it is a long-term iterative process. This includes updating our approach to reflect how the risks associated with climate change continue to evolve in the real world, and maturing how we embed climate risk factors into strategic planning, transactions and decision making across our businesses. Page 221 Page 139 Page 221 Metrics and targets a) Disclose the metrics used by the organisation to assess climate-related risk and opportunities in line with its strategy and risk management process (Companies Act 2006 – Sections 414CA and 414CB 2A (h)) Metrics used to assess the impact of climate-related risks on our loan portfolio – We have metrics in place to monitor the exposure of our wholesale corporate lending portfolio to six high transition risk sectors. As at 31 December 2023, the overall exposure to six high transition risk sectors was $112bn. – The UK is our largest mortgage market, which at September 2023 made up 40.0% of our global mortgage portfolio. We estimate that 0.2% of our UK retail mortgage portfolio is at very high risk of flooding, and 3.5% is at high risk. This is based on approximately 94.2% climate risk data coverage by value of our UK portfolio as at September 2023. – In 2023, we further developed our risk metrics to monitor our performance against our net zero targets for both financed emissions and own operations. Page 223 Page 224 Page 222 Metrics used to assess progress against opportunities – We continue to track our progress against our ambition to provide and facilitate $750bn to $1tn of sustainable finance and investment by 2030, aligned to our published data dictionary. For a detailed breakdown of our sustainable finance progress, see the ESG Data Pack. – We do not currently fully disclose the proportion of revenue or proportion of assets, capital deployment or other business activities aligned with climate-related opportunities, including revenue from products and services designed for a low-carbon economy, forward-looking metrics consistent with our business or strategic planning time horizons. In relation to sustainable finance revenue and assets we are disclosing certain elements. We expect the data and system limitations related to financial planning and performance, and climate-related opportunities metrics to be addressed in the medium term as more reliable data becomes available and technology solutions are implemented. We expect to further enhance this disclosure in the medium term. Page 18 Page 440 Board or senior management incentives – To help us achieve our ESG ambitions, a number of measures are included in the annual incentive and long- term incentive scorecards of the Group Chief Executive, Group Chief Financial Officer and Group Executives. Page 16 Internal carbon price – We do not currently disclose internal carbon prices due to transitional challenges such as data challenges. But we considered carbon prices as an input for our climate scenario analysis exercise. We expect to further enhance this disclosure in the medium term. Page 440 Metrics used to assess the impact of climate risk on lending and financial intermediary business (supplemental guidance for banks) – As part of our 2023 internal climate scenario analysis, we completed a detailed climate risk assessment for the UK, Hong Kong, mainland China and Australia, which together represent 75% of the balances in our global retail mortgage portfolio. Our analysis shows that over the longer term, we expect minimal losses to materialise when considering the Current Commitments scenario. – In insights from climate scenario analysis on page 227, we showed the relative size of exposures at default in 2023 and the increase in cumulative ECL under each scenario compared with a counterfactual scenario by 2035 (expressed as a multiple). – We do not fully disclose metrics used to assess the impact of climate-related physical (chronic) and transitions (policy and legal, technology and market) risks on retail lending, parts of wholesale lending and other financial intermediary business activities (specifically credit exposure, equity and debt holdings, or trading positions, each broken down by industry, geography, credit quality and average tenor). We are aiming to develop the appropriate systems, data and processes to provide these disclosures in future years. We disclose the exposure to six high transition risk wholesale sectors and the flood risk exposure and Energy Performance Certificate breakdown for the UK portfolio. Page 228 Page 227 Page 440 Task Force on Climate-related Financial Disclosures (‘TCFD’) continued HSBC Holdings plc Annual Report and Accounts 2023 73 Environmental Recommendation Response Disclosure location b) Disclose scope 1, scope 2 and, if appropriate, scope 3 greenhouse gas emissions and the related risks (Companies Act 2006 – Sections 414CA and 414CB 2A (h)) Our own operations – We report greenhouse gas emissions resulting from the energy used in our buildings and employees’ business travel. In 2023, we also continue to disclose our scope 3 (category 1 and category 2) supply chain emissions. Our initial supply chain emission figures may require updating as data availability changes over time and methodologies and climate science evolve. Page 64 Greenhouse gas emissions for lending and financial intermediary business (supplemental guidance for banks) – Our analysis of financed emissions comprises ‘on-balance sheet financed emissions’ and ‘facilitated emissions’. Our on-balance sheet financed emissions include emissions related to on-balance sheet lending, such as project finance and direct lending. Our facilitated emissions include emissions related to financing we help clients to raise through capital markets activities. – Work continues on the integration of ESG and climate analysis into HSBC Asset Management’s actively managed product offerings to help ensure the climate risks faced by companies are considered when making investment decisions and to assess ESG risks and opportunities that could impact investment performance. – We currently disclose four out of 15 categories of scope 3 greenhouse gas emissions including business travel, supply chain and financed emissions. In relation to financed emissions, we publish on-balance sheet financed emissions for a number of sectors as detailed on page 18. We also publish facilitated emissions for the oil and gas, and power and utilities sectors. Future disclosures on financed emissions and related risks are reliant on our customers publicly disclosing their greenhouse gas emissions, targets and plans, and related risks. We recognise the need to provide early transparency on climate disclosures but balance this with the recognition that existing data and reporting processes require significant enhancements. Page 53 Page 65 Page 440 c) Describe the targets used by the organisation to manage climate-related risks and opportunities and performance against targets (Companies Act 2006 – Sections 414CA and 414CB 2A (g)) Details of targets set and whether they are absolute or intensity based – We continue to track our progress against our ambition to provide and facilitate $750bn to $1tn of sustainable finance and investment by 2030, aligned to our published data dictionary. – We have continued to take steps to implement our climate ambition to become net zero in our operations and our supply chain by 2030, and align our financed emissions to net zero by 2050. – For financed emissions we do not plan to set 2025 targets. We set targets in line with the Net-Zero Banking Alliance (‘NZBA‘) guidelines by setting 2030 targets. While the NZBA defines 2030 as intermediate, we use different time horizons for climate risk management. For climate, we define short term as time periods up to 2025; medium term is between 2026 and 2035; and long term is between 2036 and 2050. These time periods align to the Climate Action 100+ disclosure framework. In 2023, we disclosed interim 2030 targets for financed emissions for a number of sectors as we outline on page 18. – We do not currently disclose a target for capital deployment. In relation to capital deployment, since 2015, we have issued more than $2bn of our own green bonds and structured green bonds with the capital invested into a variety of green projects, including: green buildings, renewable energy and clean transportation projects. In 2023, we further progressed our internal review and enhancement of the green bond framework, with further refinement including internal and external review to be undertaken in 2024. This will be subject to continuous review and monitoring to ensure that they remain up to date and reflect updated standards, taxonomies and best practices. Any such developments in standards, taxonomies and best practices over time could result in revisions in our reporting going forward and lead to differences year-on-year as compared to prior years. See the HSBC Green Bond Report for further information. – We do not currently disclose internal carbon pricing target due to transitional challenges such as developing the appropriate systems and processes, but we considered carbon prices as an input for our climate scenario analysis exercise. We expect to further enhance the disclosure in the medium term as more data becomes available. – We do not currently disclose targets used to measure and manage physical risk. This is due to transitional challenges including data limitations of physical risk metrics. For retail, we do not use targets to measure and manage physical risk. In 2023 we introduced internally a global ‘soft trigger’ monitoring and review process for physical risk exposure where a market reaches or exceeds a set threshold, as this ensures markets are actively considering their balance sheet risk exposure to peril events. We also consider physical and transition risk as an input for our climate scenario analysis exercise. We expect to further enhance our disclosures as our data, quantitative scenario analysis, risk metrics and physical risk targets evolve, and technology solutions are implemented in the medium term. – We have described the targets used by the organisation to manage climate-related risks and opportunities and performance against targets. However, taking into account the nature of our business, we do not consider water usage to be a material target for our business and, therefore, we have not included a target in this year’s disclosure. Page 18 Page 42 Page 17 Page 440 Page 440 Page 440 Page 440 Other key performance indicators used – In October 2020, we announced our ambition to reduce our energy consumption by 50% by 2030, against a 2019 baseline, and in 2023 we achieved 26.3%. – As part of our ambition to achieve 100% renewable electricity across our operations by 2030, we continue to look for opportunities to procure green electricity in each of our markets. In 2023, our fourth UK renewable PPA went live in Sorbie, Scotland. Page 63 Page 63 Task Force on Climate-related Financial Disclosures (‘TCFD’) continued 74 HSBC Holdings plc Annual Report and Accounts 2023 ESG review | Environmental ESG review Social Building inclusion and resilience We play an active role in opening up a world of opportunity for our customers, colleagues and communities by connecting across our international networks to help build a more inclusive and resilient society. At a glance Inclusion is key to opening up a world of opportunity. It involves a commitment to identifying and addressing barriers that may stop people from accessing opportunities because of who they are or where they are from. Inclusion goes hand in hand with resilience. We aim to help people build the capabilities they need to achieve their goals and to deal with the challenges they face, so we are focused on delivering products, services and education that support our colleagues, customers and communities. Colleagues We believe that an inclusive, healthy and rewarding workplace helps the whole Group succeed. We are focused on recruiting and retaining diverse talent by offering fair pay and career progression so we can ensure our colleagues – and particularly our leadership – are representative of the communities we serve. We do this by setting meaningful goals and tracking and monitoring our progress. In 2023, we continued to make progress against all of our goals, although the progress we are In this section Promoting diversity and fostering inclusion Our approach to diversity and inclusion We value diversity of thought and we are building an inclusive environment that reflects our customers and communities. Page 76 Creating a diverse environment Page 77 Fostering an inclusive culture Page 78 Building a healthy workplace Listening to our colleagues We run a Snapshot survey and report insights to our Group Executive Committee and the Board. Page 79 Being a great place to work We aim to create a great workplace that will help in attracting, retaining and motivating our colleagues so they can deliver for our customers across countries and territories. Page 81 Developing skills, careers and opportunities Learning and skills development We aim to build a dynamic, inclusive culture where colleagues can develop skills and experiences that help them fulfil their potential. Page 83 Energising our colleagues for growth We are committed to offering colleagues the chance to develop their skills while building pipelines of talented colleagues to support the achievement of our strategic priorities. Page 84 Building customer inclusion and resilience Our approach to customer inclusion and resilience We aim to support financial well-being and remove barriers people can face in accessing financial services. Page 85 Engaging with our communities Building a more inclusive and resilient world We focus on a number of priorities where we can make a difference to the community and support sustainable growth. Page 86 making with women in senior leadership roles has not been as fast paced as we would like. Employee well-being is essential. We offer all colleagues a wide range of resources that help support their mental, physical and financial well-being so they can thrive in and out of work. We are working to ensure that our offices, branches and digital spaces are accessible and safe for all. We also help our colleagues build resilience by ensuring that they are equipped with the skills and knowledge they need to progress their careers during a period of significant economic transformation. Customers We are committed to helping our customers access the financial services they need. They should not find it more difficult to access finance because of their gender, their ethnicity, their sexual orientation, their neurodiversity or their disability. Our ambition is to create a welcoming, inclusive and accessible banking experience for all our customers. We build resilience by creating products and services that simplify the banking experience, so customers can manage and grow their wealth more easily. We also help protect what people value most – their health, families, homes and belongings. We also build resilience by providing education so customers can understand how to manage their finances more effectively. Communities We are developing an updated global philanthropy strategy that allows us to work alongside the communities we operate within, and which aligns with our ESG areas of focus – ‘transition to net zero’ and ‘building inclusion and resilience’. We believe that fostering inclusion and building resilience helps us to create long-term value and growth. By removing unnecessary barriers and striving to be a fair and equitable organisation, we can attract and retain the best talent, support a wider customer base to achieve their goals and stimulate growth in our communities. This is how we open up a world of opportunity for our colleagues, our customers and our communities. HSBC Holdings plc Annual Report and Accounts 2023 75 Social Promoting diversity and fostering inclusion How we hold ourselves to account We set meaningful goals Our executive Directors and Group Executives are accountable for progressing our agenda through a series of diversity and inclusion aspirational goals that align to three public commitments that we have made. In 2023, we continued to make progress against our three goals by: – achieving a 34.1% representation of women in senior leadership roles, with a goal of achieving 35% by 2025; – attaining a 3.0% representation of Black heritage colleagues in senior leadership in the UK and US combined, against a goal to achieve 3.4% by 2025; and – increasing our Inclusion index as measured in our Snapshot survey, to 78% against a 2023 target of 75%. We report and track progress Measuring our performance ensures we consistently and accurately monitor the progress made against our aspirational goals. Our data- backed approach tracks this through: – an inclusion dashboard, which monitors progress against goals with trend data on hiring, promotion and exit ratios, is reported to the Group Executive Committee on a quarterly basis; and – semi-annual review meetings where our Head of Inclusion meets each Group Executive to review data, their progress against their aspirational goals, and to support further progress. We benchmark our performance External disclosures and benchmarks allow us to measure the progress that we are making and identify opportunities for future prioritisation. In 2023, we: – scored 87.2% in the Bloomberg Gender-Equality Index measuring our gender-related data, transparency and performance; – maintained our Stonewall Gold standard and rank as a top global LGBTQ+ inclusion employer; and – ranked as a Top 75 employer in the UK Social Mobility Index in our first year of entering a submission. A data-driven approach to inclusion We are evolving our data-driven approach by enabling more of our colleagues to self-identify across a range of data points. This data has enabled us to set locally relevant priorities and identify areas of our organisation where we need to focus our attention. We invite colleagues to self-identify on a broad range of data points where we can, although given the international nature of our business, there are some jurisdictions where we are unable to invite colleagues to share their diversity data with us. We have enabled 91% of our colleagues to disclose their ethnic background, with 62% of colleagues choosing to do so, where this is legally permissible. Our approach goes beyond ethnic heritage and considers broader representation within the workplace. We have enabled 90% of the workforce to share whether they have a disability, 71% of our workforce to share their sexual orientation, and all UK-based colleagues to share their socio-economic background. Our approach to Asian heritage representation Our roots as an organisation trace back over 150 years to Hong Kong, where HSBC opened its doors to serve clients with international needs. Asia remains a strategic focus for us today. To better reflect the communities we serve, we have a focus on increasing representation across our global workforce, including Asian heritage representation. Defining Asian heritage can be complex due to the vast range of ethnicities and identities across the region. In 2023, 37.8% of our senior leaders were able to self-identify as being from an Asian heritage background. To deliver our international strategy it is vital that we are both representative of our local communities, and able to mobilise leaders with global perspective and diverse heritage backgrounds across our international network. Our approach to diversity and inclusion Our purpose, ‘Opening up a world of opportunity’, explains why we exist as an organisation, and is the foundation of our diversity and inclusion strategy. Inclusion is an enabler for our ‘energise’ strategic pillar, and is embedded in the values of our organisation. By valuing difference and seeking different perspectives, we can more accurately reflect the societies we serve, creating better outcomes for customers and colleagues. Our data-driven strategy enables us to set aspirational goals to track and monitor our progress. We remain focused on specific Group-wide priorities for which we hold senior executives accountable. Some executives also have local priorities, which ensures our diversity and inclusion agenda remains locally relevant. 76 HSBC Holdings plc Annual Report and Accounts 2023 ESG review | Social ESG review 47% 53% 21% 79% 34% 66% 34% 66% Holdings Board Combined Group Executives and direct reports1 Senior leadership3 35% 65% Subsidiary directors2 Group Executives 38% 62% Middle management3 49% 51% Junior management3 52% 48% All employees Male Female Gender diversity data Women in senior leadership Since achieving our ambition of having 30% of senior leadership positions held by women in 2020, we set a new goal to reach 35% by 2025. We remain on track, with 34.1% of senior leadership roles held by women at the end of 2023, excluding our Canada business, which is planned for sale in 2024. Progress in the past year has not been as fast paced as we would like. A total of 37.7% of all external appointments into senior positions were female, compared with 35.7% in 2022, and women represented 39.6% of all promotions into senior leadership roles in 2023. Development programmes, including our Accelerating Female Leaders initiative, have helped to increase the visibility, sponsorship and network of our high performing, senior women. Since the start of the programme in 2017, 24% of participants have been promoted and 2% have taken a lateral move to develop their careers. We have also retained over 79% of colleagues who completed the programme. In our 2023 Accelerating into Leadership programme, which prepares high potential, mid-level colleagues for leadership roles, 43% of participants were women. More than 5,200 women also participated in our Coaching Circles programme, which matches senior leaders with a small group of colleagues to provide advice and support on the development of leadership skills and network building. Our succession planning for key leadership roles includes an assessment of the diversity of our succession plans. We are improving the gender diversity of those roles critical to our organisation and the successors to those roles. In 2023, 40% of the succession pool for these roles were women, compared with 36% in 2022. Black colleagues in senior leadership We remain on track to double the number of Black colleagues in senior leadership roles globally by 2025, having increased the number of Black senior leaders by 62% since 2020. In 2022, we set a new Group-wide ethnicity strategy, which is overseen by a senior working group and led by our Group Chief Risk and Compliance Officer. The aim of the strategy is to ensure we accurately reflect the communities we serve and the societies in which we operate. We continue to identify challenges colleagues from diverse backgrounds face in achieving their aspirations at HSBC. We have continued to focus on the development of Black heritage colleagues through the delivery of dedicated development programmes. Using data analytics, we have identified that in the UK, Black heritage female colleagues are less likely to hold positions as people managers. To address this, we introduced the Solaris programme to provide coaching and development for our UK-based Black heritage female colleagues. Forty women have successfully completed the programme and 29% have been promoted. We also partnered with Vivida, a virtual reality firm, to launch an immersive learning programme designed to bring to life the experiences of Black heritage and ethnic minority colleagues, highlighting the pressures, barriers and biases faced by these communities. The programme has been completed by 11,900 colleagues, and was nominated for awards at the 2023 European Diversity Awards and as finalists at The 2024 Learning Awards. In 2023 EmpowHER was launched, a programme created by Black heritage women for Black heritage women at mid- management levels across the UK business. Creating a diverse environment The programme encourages participants to support each other with the tools and shared experiences to structure their careers, expand their network and seek job opportunities. It also helps to create improved visibility of talent to senior leadership. Representation and pay gaps We publish this data annually to ensure both transparency and a maintained focus on addressing representation gaps within the organisation. Our gender and ethnicity pay gap reporting shows the difference in average pay between two groups of people (regardless of roles or seniority). We have reported our UK gender representation and pay gap data since 2017 in line with reporting regulations, and have voluntarily extended this to include the US, mainland China, Hong Kong, India, Mexico, Singapore and the UAE, alongside ethnicity data for the UK and US. In 2023, we also included gender pay gap data for Argentina and Malaysia, covering approximately 80% of our workforce (excluding our Canada business held for sale. In 2023, our mean aggregate UK-wide gender pay gap was 43.2%, compared with 45.2% in 2022, and the ethnicity pay gap was 4.5%, compared with 0.4% in 2022. Our UK gender pay gap is driven by several factors including the shape of our workforce, where there are more men than women in senior higher-paid roles, and more women than men in junior roles. While we are confident in our approach to pay equity, until women and ethnic minority colleagues are proportionately represented across all areas and levels of the organisation we will continue to see gaps in average pay. We are committed to paying colleagues fairly regardless of their gender or ethnicity and have processes to ensure that remuneration is free from bias. We review our pay practices and undertake a pay equity review annually, including a regular independent third-party review of equal pay in major markets. If pay differences are identified that are not due to objective, tangible reasons such as performance, skills or experience, we make adjustments. For further details on our representation data, pay gap data, and actions, see www.hsbc.com/ diversitycommitments and the ESG Data Pack at www.hsbc.com/esg. 1 Combined Group Executives and direct reports includes HSBC Group Executives and their direct reports (excluding administrative staff) as of 31 December 2023. 2 Directors (or equivalent) of subsidiary companies that are included in the Group’s consolidated financial statements, excluding corporate directors. 3 In our leadership structure, we classify senior leadership as those at career band 3 and above; middle management as those at global career band 4; and junior management as those at global career bands 5 and 6. HSBC Holdings plc Annual Report and Accounts 2023 77 Social Fostering an inclusive culture Our inclusion strategy seeks to make HSBC an organisation in which every colleague can feel like they belong, and are empowered to contribute their perspectives and ideas. Our strategy sits above a range of diversity and inclusion strands from gender, ethnicity and faith to disability and socio-economic background – we want to ensure that all colleagues are able to realise their full potential. We use the Inclusion index in our annual Snapshot survey to measure the extent to which our colleagues feel a sense of belonging and psychological safety within the organisation, alongside their perception of fairness and trust. In 2023, we achieved a score of 78%, which is three percentage points ahead of our annual aspirational goal, and two percentage points ahead of the financial services industry benchmark. Analysis of our Inclusion index allows us to measure engagement levels of specific colleague groups in greater detail, in particular different diversity strands, to better understand the experiences of our colleagues globally. We found that scores from colleagues who identify as male and female were broadly in line with the overall Group- wide result, at 79% and 77% respectively. From an ethnicity perspective, our Black heritage colleagues were four percentage points below the Group-wide average, while our Asian heritage colleagues’ results were on a par with the overall score, at 78%. Our employee resource groups Our employee resource groups (‘ERGs’) foster an inclusive culture and contribute significantly to the experience of tens of thousands of colleagues. They operate globally and are led by colleagues with a range of shared values, identities, interests and goals, including disability, LGBTQ+, ethnicity, faith and gender. Each of our non-executive Directors and most Group Executives are aligned with one of our global ERGs, ensuring there is a direct link between senior leadership and our colleagues. The non-executive Director dedicated to workforce engagement is closely aligned to our diversity and inclusion strategy and has attended events such as our 2023 Global ERG Summit. In 2023, our ERGs led numerous initiatives and events, including the Ability network hosting a global summit aimed at driving cultural change to build confidence for colleagues with a disability. Our Nurture ERG, which supports working parents and carers, launched the #LeaveLoudly Campaign globally. Its aim is to drive engagement by counteracting ‘presenteeism’, acknowledging that everyone has multifaceted lives, and to show that leaders across HSBC support a healthy work-life balance. Looking to the future on disability Enhancing the experience of our employees, particularly those with disabilities, is a vital part of our commitment to build an inclusive organisation. A key initiative has been a targeted career development programme to empower colleagues with confidence to drive their careers forward. Recognising the pivotal role of line managers, we have introduced a learning plan through our Degreed platform to help managers support team members with physical, sensory, long-term, and mental health conditions, as well as those who identify as neurodiverse. Our Ability ERG has hosted support sessions globally, where colleagues shared their experiences and raised awareness for disability inclusion, and the support provided by HSBC. In collaboration with PurpleSpace, the disability network and professional development hub, we sponsored and published a Leadership Model resource for employee groups. In 2023, we also sponsored the UK Business Disability Forum’s roundtable and conference. We have enhanced the support we provide to colleagues through our workplace adjustment programme partnering with Microlink, extending the availability of this service to almost 37,790 colleagues in our global service centres and technology centres in India. UK socio-economic diversity We believe that no-one should be limited by their socio-economic background and are committed to driving socio-economic inclusion within our workforce. In 2022, we began exploring the impact socio- economic background has on our colleagues, working with them, and internal and external stakeholders to develop our understanding on socio-economic diversity. In 2023, we entered the Social Mobility Index for the first time and gained recognition as a top 75 employer. Our Strive ERG, sponsored by the Group Chief Human Resources Officer, now has over 1,000 members. We have continued to be an active member of Progress Together, focused on helping members progress and retain a socio-economically diverse workforce, including taking part in the largest financial services study of socio- economic diversity. We launched a career development programme through the Strive ERG, enabling colleagues from different backgrounds to lead with impact and build career confidence. We continue to improve the socio-economic diversity data we collect by running campaigns encouraging our colleagues and job applicants to share their socio-economic background. In 2023, we extended our socio-economic focus to Asia, with an initial data collection pilot in Singapore through our employee engagement survey. We also launched a new learning plan, available for all employees to better understand what socio- economic diversity is and why it matters. Supporting colleagues experiencing menopause Many of our female colleagues will experience menopause symptoms during their career. We do not want menopause to be a silent struggle and we have put in place the right support so it does not need to be. In 2023, we launched a new global framework centred around three principles of: creating awareness; removing barriers; and being adaptable. These form the basis of our menopause toolkit, which is available to all colleagues, and includes guidance on how to access menopause support and guidance for line managers on how to best support those in need. We recognise that there is much more we can do to support those who are experiencing menopause and those who are supporting others experiencing it. Senior sponsorship is helping to raise awareness and our first step is to provide access to dedicated resources on menopause. 78 HSBC Holdings plc Annual Report and Accounts 2023 ESG review | Social ESG review Building a healthy workplace Listening to our colleagues is an essential part of building a healthy workplace at HSBC. We capture employee feedback in a variety of ways to understand how our colleagues feel about HSBC and to help us improve the employee experience. How we listen Our annual Snapshot survey runs every September and gives all HSBC employees the opportunity to share their experiences of working at the organisation. Our 2023 survey achieved a record response rate of 85%, up from 78% in 2022, with nearly 180,000 colleagues choosing to share their views. The results of Snapshot are discussed at all levels. Our record participation has enabled us to put more data directly in the hands of our people managers, with more than 11,000 teams able to access their results, while maintaining the confidentiality of individual employees’ responses. Managers are supported by a guided action planning tool to help them understand and interpret insights relevant to their team, while directing them towards support resources for them and their teams to explore. Results are also shared with executive leadership teams across the Group, with detailed reporting provided to our Group People Committee and the Board. We complement the Snapshot survey with our annual Performance and Reward survey, which runs every March. Open to all employees, it captures feedback on our annual performance and pay review cycle, providing valuable insight into how well we are meeting our colleagues’ needs and expectations on compensation, development and professional growth. We also run targeted listening activities for employees at key moments in their careers, capturing detailed feedback from new joiners, internal movers and voluntary leavers. Employee conduct and harassment We expect all our employees to treat each other with respect and dignity, and we do not tolerate or condone harassment or bullying in any form. We continually strive to improve awareness and education around such behaviours, and strengthen our understanding and response to these issues across all levels of the organisation. In 2023, our overall Snapshot Speak up index improved slightly to 76%, up one percentage point from 2022. We encourage our colleagues to speak up about poor behaviour or things that do not seem right, and we have included bullying, harassment, discrimination and retaliation in our 2023 Global Mandatory Training curriculum. Our Snapshot survey revealed an increase in colleagues able to state their opinion without fear of negative consequences, with 72% of colleagues feeling able to do so, up from 70% in 2022. In 2023, we launched our global code of conduct which is supported by our global anti- bullying and harassment code. This continues to help us to maintain high standards of conduct across the Group. We have mandatory procedures, both globally and locally, for handling and investigating employee concerns, which include those for bullying and harassment. Cases are continually monitored from our speak-up channels, and data is reported to management committees to ensure there is visibility at leadership level. In 2023, we had a total of 834 concerns raised relating to bullying, harassment, discrimination and retaliation. Where the concerns were substantiated following an investigation, appropriate action was taken, which included termination of services, where appropriate. In 2023, 38% of concerns raised were either partly or fully substantiated and 24 colleagues were dismissed in relation to bullying, harassment, discrimination or retaliation. We are committed to addressing this type of behaviour and will continue to take action where we find that an employee has breached our values and high standards of conduct. Employee engagement: 77% Employee engagement score (2022: 74%) 81% Of colleagues who feel confident about this company’s future (2022: 77%) 85% Of colleagues who completed our annual Snapshot survey (2022: 78%) Listening to our colleagues Promoting mental health awareness A poll posted by a senior leader on our intranet revealed that 94% of colleagues said they trust leadership more when they open up about their own mental health. To build on this sentiment, we celebrated World Mental Health Day by running a global awareness campaign ‘The Big Mental Health Conversation’ in October 2023. We encouraged leaders to post questions on our intranet to gather feedback from colleagues on their experiences and how we can improve mental health support. We surveyed our colleagues during the campaign and half said they were very satisfied with the mental health support HSBC offers. Supporting the mental health of our colleagues continues to be a priority, including ensuring that we continue to signpost how colleagues can access available support. Throughout 2023, we also held over 200 virtual events, featuring internal and external experts providing advice on mental health and topics related to well-being. HSBC Holdings plc Annual Report and Accounts 2023 79 Social What employees told us Seven of our eight Snapshot indices improved in 2023, while our change leadership index remained static. Our headline measure of employee engagement captures how employees feel about HSBC: whether they are proud to say they work here, whether they would recommend working at HSBC, and how motivated they feel to do their best work. Employee engagement increased by three percentage points compared with 2022, and seven percentage points above the external financial services benchmark. Our employee focus index, which measures how employees feel about their day-to-day work, increased by four percentage points to put HSBC four points ahead of the industry benchmark. Analysis of the key drivers of our engagement scores showed that engaged colleagues are more likely to feel positive about their career, our strategy and our leadership. Our free text responses also showed that training and progression opportunities was the most cited reason for recommending HSBC, followed by our approach to flexible and hybrid working and the strength of our management. Negative comments continued to focus around pay and benefits but were mentioned less than in 2022. For further details of our approach to being a great place to work, including pay transparency, see page 81. Our Snapshot survey showed that 67% of employees plan to stay at HSBC for five or more years, a two percentage point increase since 2022. This aligned with a drop in voluntary turnover in 2023 to 9.3%, compared with 14.1% in 2022, and reflects trends in the wider employment market. Results from our listening channels continued to show that career opportunities and competitive reward packages remain the two key drivers behind our ability to attract and retain talented colleagues. We are committed to building on our high levels of engagement and feedback throughout 2024. Listening to our colleagues continued Employee engagement We use eight Snapshot indices to measure key areas of focus and compare against peer institutions. The table below sets out how we performed. Index Score1 vs 20222 HSBC vs benchmark3 Questions that make up the index Employee engagement 77% +3 +7 I am proud to say I work for this company. Right now, I feel motivated by this organisation to do the best job I can.4 I would recommend this company as a great place to work. Employee focus 76% +4 +4 I generally look forward to my work day. My work gives me a feeling of personal accomplishment. My work is challenging and interesting. Strategy 78% +3 +5 I have a clear understanding of this company’s strategic objectives. I am seeing the positive impact of our strategy. I feel confident about this company’s future. Change leadership 76% 0 +4 Leaders in my area set a positive example. My line manager does a good job of communicating reasons behind important changes that are made. Senior leaders in my area communicate openly and honestly about changes to the business. Speak up 76% +1 0 I believe my views are genuinely listened to when I share my opinion.5 I feel able to speak up when I see behaviour which I consider to be wrong. I can state my opinion without the fear of negative consequences.6 Trust 78% +1 0 I trust my direct manager. I trust senior leadership in my area. Where I work, people are treated fairly. Career 71% +3 +6 I feel able to achieve my career objectives at this company. I believe that we have fair processes for moving/promoting people into new roles. My line manager actively supports my career development. Inclusion 78% +2 +2 I feel a genuine sense of belonging to my team. I feel able to achieve my career objectives at this company. I feel able to be myself at work. I trust my direct manager. Where I work, people are treated fairly. I can state my opinion without the fear of negative consequences.6 1 Each index comprises constituent questions, with the average of these questions forming the index score. 2 We revised the questions that comprise some of our indices to ensure the reliability of external benchmark data. New questions were trialled in 2022 so comparisons are all reported on a like-for-like basis; as such, historical comparison figures differ slightly from those reported last year. 3 We benchmark Snapshot results against a peer group of global financial services institutions, provided by our research partner, Ipsos Karian and Box. Scores for each question are calculated as the percentage of employees who agree to each statement. For further details of the constituent questions and past results, see the ESG Data Pack at www.hsbc.com/esg. 4 Previously: I feel valued at this company. 5 Previously: My company is genuine in its commitment to encourage colleagues to speak up. 6 Previously: Where I work, people can state their opinion without fear of negative consequences. For further details of well-being, see page 82, and for further details of inclusion, see page 76. 80 HSBC Holdings plc Annual Report and Accounts 2023 ESG review | Social ESG review Being a great place to work To deliver our purpose, ambition and strategy we need the best people, performing at their best. Creating a great workplace helps us attract, retain and motivate our colleagues so they can deliver for our customers. Underpinning this is our reward strategy, which we updated in 2022 to create an environment where the best people want to work. Our workforce proposition is rooted in our purpose and values, and the principles of rewarding colleagues responsibly, recognising colleagues’ success and supporting our colleagues to grow. Rewarding colleagues responsibly We believe in rewarding our colleagues responsibly, which means ensuring that our pay and benefits provide financial security for all. Our annual Performance and Reward survey measures several factors, including how colleagues feel about our reward proposition. In 2023, seven key performance indicators related to our year-end review improved by four or more percentage points, including a nine percentage point increase in colleagues who feel they are paid fairly for the work they do. As part of our commitment to rewarding colleagues responsibly, we went beyond compliance in assessing statutory minimum wages, to ensure that all colleagues are paid at least a living wage. A living wage should be sufficient to cover an adequate standard of living considering the cost of goods and services in each country and territory in which we operate. In 2023, we worked with the Fair Wage Network, which provided an independent source of wage levels. As a result, HSBC achieved accreditation as a global living wage employer in 2024. We will continue to review our pay levels to ensure that no colleague falls below a living wage level. For further details of our approach to colleague remuneration, see page 290. Recognising colleagues’ success We are committed to recognising the achievements of our colleagues’ success. Variable pay, which forms part of total compensation alongside fixed pay, allows us to recognise the performance and behaviours of our colleagues. At the beginning of each year, we ask colleagues to set goals with support from their line managers to ensure they are aligned with the overall Group strategy and business priorities. As a result, 87% of colleagues said they have a clear understanding of what is expected of them throughout the year. We expect our people managers to hold regular performance and development conversations to review progress, incorporate feedback and discuss well-being. In 2023, our Snapshot survey revealed that 81% of colleagues said they had regular performance conversations with their manager, while 63% had them at least once a month, up from 57% in 2022. These conversations also provide an opportunity for colleagues to regularly revisit any goals set to maintain the right level of challenge in their day-to-day work. At year-end, employees are rated on both performance and behaviour. In our Pay and Benefits survey, 72% of colleagues said their year-end performance assessment fairly reflected their performance and 83% agreed that rating decisions were determined in an unbiased way, regardless of any protected characteristics or work patterns. In our Snapshot survey, 81% of employees said they receive feedback that helps them improve their performance, compared with 74% in 2022, and 81% feel motivated to do the best job they can, up from 78% last year. We have continued to enhance our ‘At Our Best’ platform that allows colleagues to recognise each other’s contributions, by providing mobile access to encourage real- time acts of appreciation. In 2023, colleagues made more than 1.4 million At Our Best recognitions, an increase of 13% from 2022. Managers are encouraged to recognise colleagues’ service anniversaries every five years up to 40 years of service. This also includes the presentation of a special commemorative HSBC medallion. The At Our Best platform supports the global service recognition programme, which in 2023 helped to celebrate more than 30,000 service anniversaries. Share plans are another way to empower colleagues to participate in the Group’s success and to have a share in the rewards. In 2023, we expanded our global share plan to include the Philippines, making it available to 91% of colleagues globally. Our 2020 three- year Sharesave plan, in which 42% of UK employees took part, matured in November 2023. The share price at maturity represented more than double the option price, providing employees with significant share price growth. We ran information webinars, attended by more than 11,000 colleagues, and offered support resources to help our colleagues understand tax considerations and the choices available to them at maturity. Supporting our colleagues to grow To help our colleagues to grow personally and professionally, we are committed to providing flexibility and choice around how, when and where they work, supporting their well-being, and helping them develop skills. The sections on the next page detail the ways in which we support our colleagues. For further details of our approach to skills and career development, see page 83. Increasing social connection in the office Since the Covid-19 pandemic and the return of colleagues to the office, we identified the need for changes to improve team cohesion and a sense of belonging among our colleagues in Hong Kong. To help address, this we created a new type of work and social space at the HSBC Centre office in Kowloon, Hong Kong. ‘The Hub’ is a flexible informal space that can be adapted to accommodate a range of different group activities and number of people, from large social events to smaller team training sessions. It is also designed to be a multi-level and interconnected space, with a central social meeting point to enhance the sense of community, improve levels of engagement and encourage greater social connection between colleagues. HSBC Holdings plc Annual Report and Accounts 2023 81 Social Being a great place to work continued Prioritising benefits that matter most to colleagues For a second year our Pay and Benefits survey showed that 59% of colleagues feel their benefits meet their needs and those of their family ‘well’. To improve sentiment, we have focused on enhancing benefits in areas that colleagues tell us are most important including health, saving for the future and time off. Cancer checks were made available to all UK colleagues, as early detection can result in higher survival rates. In the US, we have enhanced our fertility, adoption and surrogacy benefits to support colleagues starting a family. We also expanded our gender dysphoria benefits for LGBTQ+ colleagues in the UK. Carer leave of five paid working days has also been introduced in the UAE, Egypt, Algeria, Bahrain, Kuwait, Qatar, Türkiye, Saudi Arabia and Mexico. To help employees plan for their retirement, we became the first international bank to launch a defined contribution pension plan in Vietnam. We also implemented a new defined contribution plan in Guernsey and enhanced our retirement savings plan in Egypt, to support employees to plan for retirement with the benefit of employer contributions. Social well-being and flexible working In 2023, we focused on embedding hybrid working across the Group and helping colleagues strike the right balance of office and remote working. Our colleagues continue to embrace hybrid working, with 78% now splitting their time between home and the workplace, compared with 58% in 2022. To support managers and colleagues to continue to find the right balance between individual flexibility and social connection, we have refreshed our training to equip managers with skills to lead flexible teams. In 2023, hybrid workers spent approximately 47% of their time in the workplace, compared with 36% in 2022. We know that getting the balance right has a positive effect on our colleagues. Colleagues who spend around 40% of their time in the workplace reported the highest positive sentiment across key employee indices, including engagement, trust and inclusion. We track and measure responses from our Snapshot survey to ensure our broader approach to flexibility works for our customers and teams. A total of 81% of colleagues said they feel a genuine sense of belonging to their team, a two percentage point increase from 2022. A new question in the survey also found that 87% of new joiners feel they receive the right level of face-to-face support in order to succeed. In the same survey, 76% of colleagues said they are able to integrate their work and personal life positively, a slight increase compared with 75% in 2022. To help the work- life balance of our colleagues, in Australia, we have introduced 20-weeks paid, gender- neutral parental leave for when a child joins their family. Longer periods of paid parental leave have also been introduced in Mexico, Singapore, South Korea, Taiwan and Thailand. Mental well-being Supporting the mental health of our colleagues remains a top priority. Cost-of- living pressures and global crises continue to increase mental health challenges in many countries and territories. Our Snapshot survey revealed a slight decrease in mental well-being, with 83% of colleagues rating their mental health as positive, compared with 84% in 2022. However, it also found that 74% of colleagues feel comfortable talking to their manager about their mental health, and 77% said they know how to access mental health support at work. Both increased one percentage point compared with 2022. We have continued to make the meditation app Headspace and counselling services available to all colleagues globally. More than 200,000 colleagues took part in mental health awareness training as part of global mandatory training. Our voluntary mental health education modules have been completed by 31,000 employees, with people managers making up 74% of the completions. Our network of mindfulness champions, who are specially trained colleagues who volunteer to run mindfulness sessions, community events and courses for the benefit of fellow colleagues, has almost 200 members with representation in 22 countries and territories. In 2023, we held 1,400 mindfulness sessions, a 26% increase compared with 2022, and these were attended by 25,000 colleagues. Physical well-being The Snapshot survey also revealed an increase in physical well-being, with 74% of colleagues rating their physical health as positive, compared with 71% in 2022. In February 2023, our Pay and Benefits survey showed that 69% of colleagues highly valued the health benefits we offer, and 34% of colleagues wanted more support with physical activity and exercise. In response, we launched a platform called Virgin Pulse, which incentivises colleagues to set and track health goals, and to take part in active challenges. Since launching globally in November 2023, more than 5,700 colleagues have downloaded the app and more than 30 activity challenges have been run. We have continued to provide access to private medical insurance as well as telemedicine healthcare services in the majority of our countries and territories, covering 98% of permanent employees. In certain countries and territories, we also provide on-site medical centres that the majority of colleagues can access. Financial well-being We recognise that financial challenges remain a concern for colleagues, caused by increases in the cost of living globally. Our Snapshot survey revealed a slight increase in financial well-being, with 61% of colleagues reporting positively, compared with 60% in 2022. Just over half (56%) of colleagues said they have at least three months of essential outgoings saved, the same as in 2022. In 2023, we ran campaigns in all regions to raise awareness of financial education and tools, and more than 1,000 colleagues attended our seminars on psychology and spending habits. We continue to offer retirement or longer-term savings plans to 95% of permanent employees, and our life insurance cover is available to 99.9% of colleagues to help provide financial security for their families. Awards CCLA Global 100 Mental Health Benchmark – Ranked number 1 global employer for the second consecutive year 82 HSBC Holdings plc Annual Report and Accounts 2023 ESG review | Social ESG review Learning and skills development We aim to build a dynamic environment where our colleagues can develop skills and undertake experiences that help them fulfil their potential. Our approach helps us meet our key strategic priorities and support our colleagues to achieve their career goals. Our learning and skills platforms We continue to evolve the opportunities to learn and develop at HSBC. We use a range of skill development platforms, learning courses and resources to help colleagues take ownership of their development and career, including: – HSBC University, our home for learning and skills accessed online and through a network of training centres, where learning is organised through technical academies on topics of strategic importance; – Degreed, our learning experience platform that provides access to internal and external learning content and courses, where colleagues can share, collaborate and learn with individuals and in groups via learning pathways; – Talent Marketplace, our online platform that uses artificial intelligence (‘AI’) to match colleagues interested in developing specific skills or career goals with opportunities that exist throughout our global network; and – Careers at HSBC, which enables all employees to set alerts and search for internal career opportunities. Our learning fundamentals We expect all colleagues, regardless of their contract type, to complete global mandatory training each year. This training plays a critical role in shaping our culture, ensuring a focus on the issues that are fundamental to our work, such as sustainability, financial crime risk and our intolerance of bullying and harassment. New joiners attend our Global Discovery programme, which is designed to build their knowledge of the organisation and engage with our purpose, values and strategy. As the risks and opportunities our business faces change, our global academies adapt to offer general and targeted development. Our Risk Academy provides learning for every employee in traditional areas of risk management such as financial crime risk, and also offers more specific development for those in senior leadership, high-risk roles and learning for colleagues on emerging issues such as ESG risk, terrorist financing, proliferation financing and sanctions. We have continued to deliver targeted skills programmes, including our Vision 27 programme that aims to ensure we are attracting, developing and retaining critical technology talent. We have also expanded our Accelerating Wealth Programme, which prioritises hiring for transferable skills rather than experience. For further details of how we are achieving our wealth goals in Asia, see page 84. Building skills with Talent Marketplace Our people capability teams partner with businesses and functions to identify the key skills we need now and in the future. We also continue to support colleagues to develop new skills that achieve their career aspirations. We have helped colleagues identify opportunities to enhance their skills through our Talent Marketplace. More than 38,000 colleagues have created a profile on the platform to help identify their existing skills and those they would like to develop. In 2023, it matched colleagues to a number of projects and networking opportunities unlocking over 123,000 hours of skills development. Projects centred around Cloud computing, data analytics, software development and project management have created opportunities for colleagues to work on in- demand skills. Training at HSBC In 2023, we continued to enable colleagues to learn via a range of channels including digital and on-the-job learning. This is reflected in a reduction in overall learning hours as colleagues access different learning channels. 5.3 million Training hours by our colleagues in 2023. (2022: 6.3 million) 23.9 hours Training hours per FTE in 2023. (2022: 28.8 hours) Developing skills, careers and opportunities Identifying and retaining future talent The need for talent is greater than ever. In 2023, a further 9,000 managers completed our compulsory inclusive hiring training, promoting cognitive awareness of bias. Our targeted talent programmes and enterprise-wide solutions are designed to support employees transitioning to more complex roles, and provide wider career opportunities and career growth. Our recruitment programmes are a key enabler of achieving our broader diversity goals (see page 76). In 2023, we welcomed more than 720 graduates and 651 interns to the organisation. The graduate intake represented 48 nationalities, over 25 ethnic backgrounds, and 51% were women. In 2023, we continued to broaden our emerging talent programmes beyond traditional graduate and internship programmes, developing early access schemes for those in school and first year of university, as well as expanding our apprenticeship scheme (see page 84). We continually refresh all our talent programmes to ensure they remain aligned to HSBC’s strategic priorities. Our key programmes include: – Accelerating Female Leaders, which has been re-designed in partnership with Cranfield School of Management. This programme supports female colleagues with learning materials, coaching and senior sponsorship to help them prepare for leadership roles; and – Accelerating into Leadership, which aims to improve role mobility and retention, and supports colleagues identified as having the capacity, interest and drive to succeed in more complex roles. HSBC Holdings plc Annual Report and Accounts 2023 83 Social Energising our colleagues for growth We aspire to offer colleagues the opportunity to develop their skills while ensuring we build a pipeline of talent to support our strategic priorities. It is vital that we demonstrate the right leadership and create the right environment to energise our colleagues for growth. Skilling the transition to net zero The Sustainability Academy was launched in 2022 to support our net zero ambitions. As the academy has evolved we have shifted the focus from knowledge building to capability building across key colleague groups who are supporting customers on their transition to net zero. In 2023, we applied four main activities to support this effort: – supplying on-demand learning modules based on role, region and client-base for colleagues who support customers with core transition activities; – creating advanced workshops across our global businesses and functions to build colleagues’ knowledge and develop practical skills to achieve business outcomes; – encouraging external certifications and qualifications, where required, to deepen colleagues’ expertise; and – designing a 16-week sustainability leadership programme, in partnership with Imperial College London, which combines education on core sustainability concepts with change management, purpose and leadership principles. In 2023, the programme was completed by more than 170 senior leaders. Additional net zero learning opportunities were also provided to the Board and 100 of our most senior leaders. We need to build strong leadership and develop our colleagues’ capabilities to navigate the transition to net zero and achieve our climate goals. In 2023, we worked with our internal experts from the Sustainability Centre of Excellence to provide more advanced skills training in key transition areas such as energy transition, climate technology and financed emissions, alongside other core sustainability topics such as biodiversity. Supporting our Asia wealth strategy Our ambition is to become the preferred international financial partner for clients, and the expansion of our wealth management services particularly in Asia, sits at the heart of this ambition. To help achieve this, we have continued to expand our Accelerating Wealth Programme, which offers a skills-based development plan for colleagues who are looking to pursue a career as a relationship manager in wealth management. The programme enables HSBC to develop talent from within and hire talented people with different career backgrounds from outside the business. In 2023, we extended the programme to external applicants in Hong Kong and to internal applicants in mainland China, India and Singapore. We will continue to add new countries and territories in 2024 to provide a sustainable hiring channel for front- line roles. Technology transformation We are committed to delivering better customer outcomes through digital transformation. Our technology transformation skills programme aims to ensure we attract, develop and retain the skilled talent we need to execute our strategy. In 2023, our technology colleagues completed more than 800,000 hours of learning and gained over 950 certifications in software development, cyber, AI, data processes, Cloud computing and app development, among others. Our new Principle Engineer and Principle Architecture accelerator programmes have equipped colleagues with advanced technical knowledge and skills, enhancing their ability to innovate in their roles. Leadership development We continue to strengthen the training and development opportunities we offer our leaders at all levels of the Group, to ensure they are equipped with the clarity, alignment and capability with our goals to drive the performance of our organisation. In 2023, we significantly increased investment in the development of our leadership population. For senior leaders, our Executive and Managing Director Leadership Programmes helped bring our purpose and strategy to life through innovative flagship courses, masterclasses and strategy briefing sessions. We recognise the importance of people managers in shaping the experience of our colleagues. In 2023, we re-designed our People Management Excellence programme to better support managers at all levels. The face-to-face and virtual training includes a focus on the role and expectations of managers, how to design and organise work, and how to nurture a productive team environment. In 2023, over 3,800 colleagues attended this programme. Supporting UK emerging talent We continue to extend our emerging talent programmes beyond traditional graduate and internship schemes to support our socio-economic diversity ambitions (see page 78). In 2023, we awarded more than 100 apprenticeships to external and internal applicants. Our degree apprenticeship programmes provided an alternative to the traditional university route for 47 individuals, and we launched a disability apprenticeship programme for our Marketing function. We have also offered over 460 structured work placements to secondary school students and continued to support the #merkybook financial literacy programme for young people. HSBC has funded 30 University of Cambridge scholarships for Black and socially disadvantaged students through our Stormzy partnership, and will invest a further £2m to achieve 60 scholarships by 2026 to support underrepresented groups. In 2023, Black heritage representation in our graduate and summer internship programmes was 10% of job applicants and 11% of new hires. 84 HSBC Holdings plc Annual Report and Accounts 2023 ESG review | Social ESG review Making banking accessible Number of no-cost accounts held for customers who do not qualify for a standard account or who might need additional support due to social or financial vulnerability. 692,655 716,957 718,306 2023 2022 2021 We believe that financial services, when accessible and fair, can reduce inequality and help more people access opportunities. We are playing an active role in opening up a world of opportunity for individuals by supporting their financial well-being, and removing the different barriers that people can face in accessing financial services. Access to products and services We provide innovative solutions to help improve customer access to products and services. HSBC UK and HSBC Hong Kong provide no-cost accounts for customers who do not qualify for a standard account or who might need additional support due to social or financial vulnerability. In 2023, HSBC Egypt ran a campaign that allowed new customers to open bank accounts with no minimum balance required and no account opening fees. In the UK, we continue to make our branches more accessible by providing ‘safe spaces’ for domestic abuse victims, where they can seek specialist support and advice. In 2023, we also launched a specialist training programme to raise awareness among our colleagues of modern slavery and human trafficking. This has been completed by more than 5,300 UK colleagues. In addition, our strategic partnership with housing and homelessness charity Shelter UK aims to support those in crisis and build financial resilience solutions to help prevent homelessness in the future. Supporting financial knowledge and education We continue to invest in financial education content and features across different channels to help customers, colleagues and communities be confident users of financial services. Since 2020, we received over 6.6 million unique visitors to our global digital financial education content. We continue to help customers expand their financial capabilities through our personal financial management tools. In 2023, HSBC UK launched new capabilities on our app enabling customers to manage their budgets, see their spending insights and view financial fitness content. This new tab on the app has attracted over 4.5 million unique visitors. We also added investment pots and goals to help motivate customers to save for the future. In 2022, we launched our ‘Well+’ reward programme on the HSBC HK Mobile Banking app to help customers improve the health of their body, money and mind. Reward points are earned by completing a series of simple activities, such as building their financial knowledge. In 2023, we added new capabilities, such as bonus badges, and more than 212,000 customers have engaged with Well+ in Hong Kong since launch. To help customers understand complex products and make informed decisions, HSBC Life UK launched a series of quick video guides to explain the key benefits, exclusions and underwriting process of critical illness cover. To support Hong Kong customers with special educational needs, we launched simple step-by-step guides, which were shared with our partners, to explain how to access basic banking services. We also support programmes that help expand the financial knowledge of children and young people to ensure future resilience. HSBC Egypt partnered with Injaz Al-Arab, a member of JA Worldwide, to deliver its ‘building a financially capable generation’ programme to students in seven schools in Cairo. In Mexico, we created a podcast, targeted at developing the financial capabilities of young people with each episode covering a specific theme, to enhance their basic financial knowledge. We continued to build on our financial literacy programmes for young people in the UK, with the launch of the first financial capability skills module for the Duke of Edinburgh’s Award. Creating an inclusive banking experience We aim to ensure that our banking products and services are designed to be accessible for customers experiencing either temporary or permanent challenging circumstances, such as disability, impairment or a major life event. A simplified version of the HSBC HK Mobile Banking app aims to continue to enhance digital inclusion for all, including seniors. The app is the first of its kind among Hong Kong banks and has attracted more than 477,000 unique users since launch. We are committed to improving accessibility experiences across our digital channels and continuously review our browser-based websites in 23 markets, and our mobile banking services in 18 markets, against the WCAG 2.0 AA standards. We also share our digital accessibility expertise with partners, companies and colleagues. More than 10,000 people and 66 companies have taken advantage of our specialised training programmes. To further share our best practice externally, HSBC sponsored and hosted AbilityNet’s Techshare Pro event in our Group head office in London. Our work on digital accessibility was recognised with 11 awards in 2023. Support for customers extends beyond our digital channels and we recognise that not all disabilities are visible or immediately obvious to others. We have expanded our commitment to the Hidden Disabilities Sunflower Lanyard Scheme, rolling it out across the UK, Hong Kong, the Channel Islands and Australia. The lanyard indicates that an individual may need a little more help, support or time. HSBC UK is also making use of virtual reality tools, such as EBOX (Empathy Box), to give colleagues the opportunity to experience vulnerability from the perspective of the customer. In 2023, HSBC UK was awarded the UK Construction Industry Council’s Inclusive Environments Recognition at the Organisational Level certification. This recognises the strong organisation and design processes HSBC has put in place to support accessible and inclusive design. Supporting women HSBC UAE and HSBC Singapore have collaborated with digital financial education provider Sophia, to create a programme designed specifically to help female customers build their financial knowledge. It covers a range of topics, including budgeting, ways to invest and investment strategies. In Mexico, our Mujeres Al Mundo programme continues to support women as customers through products, services, education and networking. In 2023, we also supported female-owned businesses through our $1bn Female Entrepreneur Fund, alongside hosting bespoke Pitch Day events for a number of female entrepreneurs seeking investment. Our approach to customer inclusion and resilience Building customer inclusion and resilience HSBC Holdings plc Annual Report and Accounts 2023 85 Social Charitable giving in 2023 (%) Social, including Future Skills: 26% Environment, including the Climate Solutions Partnership: 37% Local priorities: 24% Disaster relief and other giving: 13% We have a long-standing commitment to support the communities in which we operate. We aim to empower people and communities to develop the skills and knowledge needed to thrive in the future. Through the global reach of our charitable partnerships we bring together diverse people, ideas and perspectives that help us open up opportunities and build a more inclusive world. Building community and future skills We work with charity partners to initiate programmes that help people and communities respond to opportunities and challenges as global economies transition towards a low-carbon future. In 2023, these included: – launching a three-year partnership with the British Council in Brazil, Mexico, India, Indonesia and Vietnam, and extending The Prince’s Trust programmes in Australia, Canada, India and Malaysia, to help young, marginalised people develop the skills they need to thrive in the green economy; – partnering with the Guangdong Lvya Rural Women Development Foundation in China to help equip women in remote mountain areas with sustainable farming skills; and – partnering with the Ghabbour Foundation in Egypt to help provide technicians with specialist skills training to work in the electric vehicle market. We also work with our charity partners around the world to strengthen the resilience of disadvantaged communities: – In Hong Kong, we announced a three-year partnership with Food Angel to increase its capacity to provide meals to underprivileged elderly groups. – In the US, we expanded our workforce development programme with Feeding America to support communities to find meaningful employment, especially mothers and Black, Indigenous People of Colour women. – In the UK, we announced a three-year partnership with Shelter to help develop the homeless charity’s training, guidance, tools and support within local communities to help build financial resilience. – In France, we continued our work with Article 1 to help young people from deprived communities succeed in higher education through mentoring programmes. – We supported disaster relief agency response to humanitarian needs, including those in Israel, Libya, Morocco, the Palestinian territories, Türkiye, and the Hawaiian island of Maui. Community engagement and volunteering We offer paid volunteering days, and encourage our people to offer their time, skills and knowledge to causes within their communities. In 2023, our colleagues gave over 181,800 hours to community activities during work hours. Awards – National CSR Fund 2023 UAE – Platinum Impact Seal – Charitable giving by HSBC in China received recognition from the China Philanthropy Times Total cash giving towards charitable programmes $107.3m Hours volunteered during work time >181,800 People projected to be reached through our Future Skills programme 1.25m Building a more inclusive and resilient world Advancing financing and digital literacy Over the past five years, HSBC worked with three microfinance networks to advance financial and digital literacy of women from unbanked and underbanked communities in India. The programme has engaged with more than 550,000 women to build awareness and understanding of digital payment platforms, and enhance their ability to access banking services, such as savings, credit and insurance, as well as government welfare schemes. By the end of 2023, 56,000 women had undertaken loan repayments worth $521,000 via digital channels. Insights from the initiative will be shared with financial institutions and the National Payment Corporation of India, set up by the banking regulator to oversee retail payments and settlement systems in India, to increase unbanked households’ access to financial services and products. Engaging with our communities 86 HSBC Holdings plc Annual Report and Accounts 2023 ESG review | Social ESG review Governance Acting responsibly We remain committed to high standards of governance. We work alongside our regulators and recognise our contribution to building healthy and sustainable societies. At a glance Our relationship We act on our responsibility to run our business in a way that upholds high standards of corporate governance. Customer experience is at the heart of how we operate. It is imperative that we treat our customers well, that we listen, and that we act to resolve complaints quickly and fairly. We measure customer satisfaction through net promoter scores across each of our global businesses, listen carefully to customer feedback so we know where we need to improve, and take steps to do this. Our customer satisfaction performance improved in many markets in which we operate, although we still have work to do to improve our rank position against competitors. We are committed to working with our regulators to manage the safety of the financial system, adhering to the spirit and the letter of the rules and regulations governing our industry. We strive to meet our responsibilities to society, including through being transparent in our approach to paying taxes. We also seek to ensure we respect global standards on human rights in our workplace and our supply chains, and continually work to improve our compliance management capabilities. For further details of our corporate governance, see our corporate governance report on page 238. In this section Setting high standards of governance How ESG is governed We expect that our approach to ESG governance is likely to continue to develop, in line with our evolving approach to ESG matters and stakeholder expectations. Page 88 Human rights Our respect for human rights We have continued to raise awareness and develop our understanding of our salient human rights issues. Page 89 Customer experience Customer satisfaction While we are ranked in the top three banks against our competitors in 58% of our key markets across WPB and CMB, we still have work to do to improve our rank position against competitors Page 91 How we listen We aim to be open and transparent in how we track, record and manage complaints. Page 92 Integrity, conduct and fairness Safeguarding the financial system We have continued our efforts to combat financial crime and reduce its impact on our organisation, customers and communities that we serve. Page 94 Whistleblowing Our global whistleblowing channel, HSBC Confidential, allows our colleagues and other stakeholders to raise concerns confidentially. Page 94 A responsible approach to tax We seek to pay our fair share of tax in all jurisdictions in which we operate. Page 95 Conduct: Our product responsibilities Our conduct approach guides us to do the right thing and to focus on the impact we have on our customers and the geographies in which we operate. Page 96 Our approach with our suppliers We require suppliers to meet our third-party risk compliance standards and we assess them to identify any financial stability concerns. Page 96 Safeguarding data Data privacy We are committed to protecting and respecting the data we hold and process, in accordance with the laws and regulations of the markets in which we operate. Page 97 Cybersecurity We invest in our business and technical controls to help prevent, detect and mitigate cyber threats. Page 98 HSBC Holdings plc Annual Report and Accounts 2023 87 Governance How HSBC’s climate strategy is cascaded Group Executive Committee ESG Committee Sustainability Execution Committee Environmental Risk Oversight Forum Group Risk Management Meeting Group Risk Committee Examples of ESG-related management governance The following governance bodies support management in its delivery of ESG activities. Board level governance Management level governance Has oversight of ESG strategy, policy, material commitments and external disclosure. Oversees and monitors progress against ESG strategy, policies, plans, targets, commitments and execution processes. Reports to the Board of progress on the commitments, deliverables and targets under the sustainability execution programme. Co-Chairs: Group Chief Financial Officer, and Group Chief Sustainability Officer Oversees the enterprise-wide management of all risks, including updates relating to the Group’s climate risk profile and risk appetite, top and emerging climate risks, and key climate initiatives. Chair: Group Chief Risk and Compliance Officer Has oversight of environmental strategy, including commercial execution and operationalisation through the sustainability execution programme. This included financed and facilitated emissions targets and commitments, implementation and execution of transition plans, and delivery of $750bn to $1tn sustainable finance and investment by 2030. Chair: Group Head of Commercial Banking, and Group Chief Sustainability Officer Digital Business Services Executive Committee Oversees the global delivery of ESG activities within our own operations, services and technology elements of our strategy. Chair: Group Chief Operating Officer Human Rights Steering Committee Oversees the Group’s evolving approach to human rights and provides enhanced governance. Chair: Group Chief Risk and Compliance Officer Group Reputational Risk Committee Provides recommendations and advice on significant reputational risk matters with impact across the Group. Chair: Group Chief Risk and Compliance Officer Oversees risk activities relating to climate and sustainability risk management, including the transition and physical risks from climate change. Equivalent forums have been established at a regional level, where appropriate. Chair: Senior adviser, ESG Risk Regional, global business and global functions Supporting governance Opportunities Risks Group Audit Committee How ESG is governed The Board takes overall responsibility for ESG strategy, overseeing executive management in developing the approach, execution and associated reporting. Progress against our ESG ambitions is reviewed through Board discussion and review of key topics such as updates on customer experience and employee sentiment. The Board is regularly provided with specific updates on ESG matters, including the financed emissions sector targets, human rights and employee well-being. Board members receive ESG- related training as part of their induction and ongoing development, and seek out further opportunities to build their skills and experience in this area. For further details of Board members’ ESG skills and experience, see page 239. For further details of their induction and training in 2023, see page 253. Given the wide-ranging remit of ESG matters, the governance activities are managed through a combination of specialist governance infrastructure and regular meetings and committees, where appropriate. These include the Group Disclosure and Controls Committee and Group Audit Committee, which provide oversight for the scope and content of ESG disclosures, and the Group People Committee, which provides oversight support for the Group’s approach to performance management. For some areas, such as climate where our approach is more advanced, dedicated governance activities exist to support the wide range of activities, including climate risk management in the Environmental Risk Oversight Forum. The Group Chief Risk and Compliance Officer and the chief risk officers of our PRA- regulated businesses are the senior managers responsible for climate financial risks under the UK Senior Managers Regime. Climate risks are considered in the Group Risk Management Meeting and the Group Risk Committee, with scheduled updates provided, as well as detailed reviews of material matters, such as climate-related stress testing exercises. The diagram on the right provides an illustration of our ESG governance process, including how the Board’s strategy on climate is cascaded and implemented throughout the organisation. It identifies examples of forums that manage both climate-related opportunities and risks, along with their responsibilities and the responsible chair. The structure of the process is similar for the escalation of problems, with issues either resolved in a given forum or raised to the appropriate level of governance with appropriate scope and authority. In 2023, we enhanced our ESG governance with the establishment of a new Sustainability Execution Committee, which focuses on Setting high standards of governance TCFD defining and measuring the success of our climate ambition, and developing commercial opportunities that support it through the sustainability execution programme. We expect that our approach to ESG governance is likely to continue to develop, in line with our evolving approach to ESG matters and stakeholder expectations. 88 HSBC Holdings plc Annual Report and Accounts 2023 ESG review | Governance ESG review As set out in our Human Rights Statement, we recognise the role of business in respecting human rights. Our approach is guided by the UN Guiding Principles on Business and Human Rights (‘UNGPs’) and the OECD Guidelines for Multinational Enterprises on Responsible Business Conduct. Our salient human rights issues We continue to raise awareness and develop our understanding of our salient human rights issues. These are the human rights at risk of the most severe negative impact through our business activities and relationships. An extensive review of our salient human rights issues conducted in 2022 identified five human rights risks inherent to HSBC’s business globally, and five types of activity through which such risks might arise. These are represented in the adjacent table. In 2023, building on this assessment, we provided practical guidance and training, where relevant, to our colleagues across the Group on how to identify and manage human rights risk. We are now focusing on translating this into risk management enhancements in two key areas of activity. These are the services we provide to business customers and the goods and services we buy from third parties. Managing risks to human rights In 2023, we continued the process of adapting our risk management procedures to reflect what we learned from our work on salient human rights issues and related guidance. We continued to embed and build on the Sustainable Procurement Mandatory Procedure, which sets out the minimum sustainability requirements for procurement activity. This included enhanced procedures for human rights risk identification through the introduction of a human rights residual risk questionnaire for suppliers as part of our global onboarding assessment process, and human rights supplier audit pilots in our Asia- Pacific and Latin America regions to assess the potential need for further supplier audits in the future. New approaches to identifying and managing human rights risk in respect of our business customers have also been piloted. These included screening for indicators of potential negative impacts on people, including media monitoring and other relevant third-party data. Our salient human rights issues Illustration of HSBC Group’s inherent human rights risks mapped to business activities. HSBC activities Employer Buyer Provider of products and services Investor1 Inherent human rights risks Personal customers Business customers Right to decent work Freedom from forced labour ◆ ◆ ◆ Just and favourable conditions of work ◆ ◆ ◆ ◆ Right to health and safety at work ◆ ◆ ◆ ◆ ◆ Right to equality and freedom from discrimination ◆ ◆ ◆ ◆ ◆ Right to privacy ◆ ◆ ◆ Cultural and land rights ◆ ◆ ◆ Right to dignity and justice ◆ ◆ ◆ ◆ ◆ 1 Investor includes our activities in HSBC Asset Management. We continued to develop our in-house capability on human rights with the launch of further online resources for all staff and bespoke human rights training for colleagues in key roles, including those managing relationships with suppliers, and those with responsibility for overseeing risk management processes. The actions we are taking to address these salient human rights issues are consistent with our values and will help us to meet our commitments on diversity and inclusion, and those we have made under the UN Global Compact and WEF metrics on risk for incidents of child, forced or compulsory labour. For further details of the actions taken to respect the right to decent work, see our 2023 Annual Statement under the UK Modern Slavery Act at www.hsbc.com/modernslaveryact. For further details of the actions taken to respect the right to equality and freedom from discrimination, see ’Our approach to diversity and inclusion’ on page 76. Sustainability risk policies Some of our business customers operate in sectors where the risk of adverse human rights impact is high. Our sustainability risk policies for agricultural commodities, energy, forestry, mining and metals consider human rights issues such as forced labour, harmful or exploitative child labour and land rights. They also consider the rights of indigenous peoples such as ‘free prior and informed consent’, workers’ rights, and the health and safety of communities. Through our membership of international certification schemes such as the Forestry Stewardship Council, the Roundtable on Sustainable Palm Oil and the Equator Principles, we support standards aimed at respecting human rights. Our sustainability risk policies are reviewed periodically to ensure they reflect our priorities. For further details, see our sustainability risk policies at www.hsbc.com/who-we-are/esg-and- responsible-business/managing-risk/ sustainability-risk. Financial crime controls The risk of us causing, contributing or being linked to adverse human rights impacts is also mitigated by our financial crime risk framework, which includes our global policies and associated controls. For further details of how we fight financial crime, see www.hsbc.com/who-we-are/ esg-and-responsible-business/ fighting-financial-crime. Human rights Our respect for human rights HSBC Holdings plc Annual Report and Accounts 2023 89 Governance Our respect for human rights continued Driving change We continued to participate in industry forums, including the Thun Group of Banks, which is an informal group that seeks to promote understanding of the UNGPs within the sector, and the UN Global Compact Human Rights Working Group. HSBC has been a member of the Mekong Club since 2016. We are a participant of its monthly financial services working group, and we use its informative typological toolkits, infographics, and other multimedia resources covering current and emerging issues. Our Compliance teams regularly collaborate and engage with the Mekong Club in designing Group-wide knowledge sharing and training sessions. Investments Since 2022, HSBC Asset Management has published an annual Global Stewardship Plan outlining its approach to engagement, prioritisation of investee companies, objective- setting and escalation procedures. The plan also highlights its thematic priorities including human rights. HSBC Asset Management recognises collaborative engagement as a tool to promote change. It participates in investor-led joint engagement initiatives where it believes these can have a positive influence. It is a signatory to the Principles for Responsible Investment Advance initiative to promote active stewardship on human rights and social issues. It has also actively contributed to other sector-specific initiatives, including engaging with technology firms on digital rights and responsible AI, and working with ESG data providers to promote higher quality human rights data set. Working for a just transition Just Energy Transition Partnerships are becoming increasingly popular bringing key stakeholders together to enable a clean, fair energy transition in emerging economies that rely heavily on coal. Essentially, they are multilateral financial agreements aimed at accelerating the phase-out of fossil fuels, in a way that addresses the social consequences of doing so. For further details on HSBC’s role in Just Energy Transition Partnerships with Indonesia and Vietnam, see www.hsbc.com/news-and-views/views/hsbc-views/jetps-powering-a-faster-energy-transition. Read more on Just Energy Transition Partnerships on page 68 of this ESG Review. HSBC Asset Management has also incorporated human rights and modern slavery considerations into its Global Voting Guidelines. This helps to identify non-compliance with UN Global Compact principles, as well as a company’s competency in human rights management and disclosures. Where a company falls below expectations, HSBC Asset Management may vote against the re-election of the board chair or relevant board director. As a signatory to the Net Zero Asset Management Initiative, HSBC Asset Management is taking steps to reduce the carbon exposure of its portfolios and engage with issuers on their climate strategies. It also recognises the impact that the climate transition can have on workers, communities, consumers and other stakeholders, and has published its perspectives on a just transition. For the Global Stewardship Plan, see www.assetmanagement.hsbc.co.uk/-/media/files/ attachments/uk/policies/stewardship-plan-uk.pdf. For further details of the Net Zero Asset Management Initiative, see www. assetmanagement.hsbc.co.uk/en/institutional- investor/about-us/road-to-net-zero/a-transition- for-everyone. Monitoring effectiveness Metric 2023 2022 Contracted suppliers who either confirmed adherence to the code of conduct or provided their own alternative that was accepted by our Global Procurement function 95% 93% Employees who have received training on human rights 8,176 520 Votes by HSBC Asset Management against management for reasons including human rights1 213 87 1 The figure represents the number of resolutions at investee company shareholder meetings (including AGMs) where votes were cast against management for reasons related to human rights. Supporting those impacted and those potentially at risk We continued to expand our Survivor Bank programme, which has now supported over 3,000 survivors of modern slavery and human trafficking in the UK, and is a model for making financial services more accessible to vulnerable communities worldwide. We built on this experience in developing access to banking services for customers with no fixed abode in the UK and in Hong Kong, providing over 5,700 accounts under these programmes. For further details of our work to support vulnerable communities, see page 86. Effectiveness The table below includes some indicative metrics we use to measure year-on-year continual improvement to our human rights processes. For further diversity and inclusion metrics, see page 76 in this ESG review, as well as Section 4 of the 2023 Annual Statement under the UK Modern Slavery Act, which is available at www. hsbc.com/who-we-are/esg-and-responsible- business/modern-slavery-act. 90 HSBC Holdings plc Annual Report and Accounts 2023 ESG review | Governance ESG review We remain committed to improving customers’ experiences. In 2023, we gathered feedback from over one million customers across our three global businesses to help us understand our strengths and the areas we need to focus on. We were ranked among the top three banks against our competitors in 58% of our six key markets across WPB and CMB1. This was lower than in 2022 when we were ranked among the top three banks against our competitors in 66% of our key markets. Customer satisfaction Listening to drive improvement We have continued to embed our feedback system so we can better listen, learn and act on our customers’ feedback. We use the net promoter score (‘NPS’) to provide a consistent measure of our performance. NPS is measured by subtracting the percentage of ‘detractors’ from the percentage of ‘promoters’. ‘Detractors’ are customers who provide a score of 0 to 6, and ‘promoters’ are customers who provide a score of 9 to 10 to the question: ‘On a scale on 0 to 10, how likely is it that you would recommend HSBC to a friend or colleague’. We run studies that allow us to benchmark ourselves against other banks. We try to make it as easy as possible for customers to give us feedback, accelerating our use of digital real- time surveys to capture insight. By sharing this and other feedback with our front-line teams, and allowing them to respond directly to customers, we are improving how we address issues and realise opportunities. In 2023, we launched the CMB Customer Impact Forum, a dedicated global forum set up to provide oversight of our business and corporate customers’ experiences and promote continuous improvement. This, alongside our WPB ‘Customer in the room’ programme launched in 2022, helps ensure we use feedback in all aspects of how we run our business and prioritise initiatives that matter most to our customers. How we fared In WPB, our NPS increased in four of our six key markets, which were Hong Kong, Mexico, India and Singapore. Our NPS in the UK declined slightly, largely among our mass affluent customers. In Hong Kong, we remained first overall against our competitors, driven by our mass affluent customers. In India we ranked in first place, driven by increased digitalisation. We introduced digital self-service solutions for updating customer details and downloading key documents, and digitised our onboarding process. We were also a top three bank in mainland China, based on 2022 data (see footnote 3 in the adjacent table). In our private bank, our global NPS increased to 42 points, compared with 25 points in 2022. This was largely due to increased customer satisfaction in Asia, with improved scores in Hong Kong, Singapore, Taiwan and mainland China. This was driven by relationship manager engagement and enhancements to our digital services. In CMB, we were ranked among the top three banks against our competitors in four of our six key markets. We ranked first in Hong Kong and as a top three bank in mainland China, Singapore and Mexico. In India and the UK, we were ranked outside the top three. Our NPS rank improved in the UK, driven by our business banking customers and our top three ranking among UK corporate customers. Our NPS declined slightly among our mid-market enterprise customers. In GBM, we had one of the highest NPS scores in the market against our competitors, including the quality of our digital trade finance platforms and for satisfaction with our digital capabilities. Number of markets in top three or improving rank1,2 2023 WPB3 3 out of 6 CMB 5 out of 6 1 The six markets comprise: the UK, Hong Kong, Mexico, mainland China, India and Singapore. Rank positions are provided using data gathered through third-party research agencies. 2 We benchmark our NPS against our key competitors to create a rank position in each market. This table is based is on the number of markets where we are in the top three or have improved rank from the previous year. 3 Our WPB NPS ranking in mainland China is based on 2022 results. Due to data integrity challenges, we are unable to produce a 2023 ranking. The next mainland China results will be in 2024. Acting on feedback We have continued to focus on developing our products and services, and enhancing our digital capabilities to improve customer experience. In WPB, we redesigned our international products and services to make it quicker and easier to bank internationally. This involved the launch of six products and services across 10 international markets. International customers can open an international account digitally pre-departure, gain access to a credit card in their new market, and make use of cross-border payment solutions with 24/7 global support to manage their international needs. In CMB, we introduced a new credit application system, the Digital Credit Portal, in 15 markets. It uses internal and external data combined with automation to streamline credit journeys. In Hong Kong, the portal also integrates with a credit decision engine to automate credit decisions for qualifying customers, reducing the assessment time on loan approvals from days to as little as a few minutes. Our digital onboarding tool, SmartServe, has been implemented in 21 markets to support international and domestic account opening. We have onboarded 89% of eligible customers through the digital platform, with 72% of customers rating this experience as ‘easy’. In GBM, we continued to execute our strategy and refine the client coverage model. In 2023, we accelerated our ‘originate-to-distribute’ model, providing clients with an effective capital efficiency strategy. We have refinanced our in-country and cross-border coverage model in mainland China and refreshed our growth plans in India based on client feedback. We also launched growth initiatives against our Asia-MENAT corridor to better service our clients. Customer experience HSBC Holdings plc Annual Report and Accounts 2023 91 Governance How we listen To improve how we serve our customers, we must be open to feedback and acknowledge when things go wrong. We continue to adapt at pace to provide support for customers facing new challenges, new ways of working and those that require enhanced care needs. We aim to be open and consistent in how we track, record and manage complaints, although as we serve a wide range of customers – from personal banking and wealth customers to large corporates, institutions and governments – we tailor our approach in each of our global businesses. As the table on the right demonstrates, we have a consistent set of principles that enable us to remain customer-focused throughout the complaints process. For further details of complaints volumes by geography, see our ESG Data Pack at www.hsbc.com/esg. 1 A complaint is any expression of dissatisfaction about WPB’s activities, products or services where a response or resolution is explicitly or implicitly expected. 2 Markets included: Hong Kong, mainland China, France, the UK, UAE, Mexico, Canada and the US. 3 The UK, Mexico and Hong Kong make up 86% of total complaints. How we handle complaints Our principles Our actions Making it easy for customers to complain Customers can complain through the channel that best suits them. We provide a point of contact along with clear information on next steps and timescales. Acknowledging complaints All colleagues welcome complaints as opportunities and exercise empathy to acknowledge our customers’ issues. Complaints are escalated if they cannot be resolved at first point of contact. Keeping the customer up to date We set clear expectations and keep customers informed throughout the complaint resolution process through their preferred channel. Ensuring fair resolution We thoroughly investigate all complaints to address concerns and ensure the right outcome for our customers. Providing available rights We provide customers with information on their rights and the appeal process if they are not satisfied with the outcome of the complaint. Undertaking root cause analysis Complaint causes are analysed on a regular basis to identify and address any systemic issues and to inform process improvements. Acting on feedback In 2023, we continued to develop and embed tools and capabilities across our business to deliver improved experiences for our customers around the world. Through our measurement of customer experience, we identify opportunities for improvement, develop agile customer experience plans and track and measure our progress. As a result of standardising our approach to customer experience globally, we have strengthened our capability to listen, understand and act on what our customers are telling us on a regular basis. WPB complaint volumes1 (per 1,000 customers per month) 2023 2022 Total2 2.3 2.3 UK3 1.1 1.4 Hong Kong3 0.9 1.0 Mexico3 5.2 5.1 In 2023, we received approximately 1.2 million complaints from customers. The ratio of complaints per 1,000 customers per month in our large markets remained stable at around 2.3. In the UK, complaints fell 19%. In 2023, we applied the new UK Consumer Duty rules to our complaint handling processes and invested in root cause analysis to ensure good outcomes and avoid instances of foreseeable harm. We will continue to focus on enhancing our processes and on training complaint handlers to improve the customer experience and reduce our complaint volumes further. The decrease in complaints in Hong Kong was primarily driven by improvements in our digital capabilities to make it easier for customers to connect with us. Regular reviews, analysis of customer feedback and greater collaboration across business lines to address emerging customer pain points also contributed to the fall in complaints. In response to an increase in credit and debit card fraud attacks in Mexico during the first quarter of 2023, we focused on strengthening our monitoring and fraud detection capabilities to help protect our customers. In October, we also released the new Visa Account Attack Intelligence tool to mitigate foreign e-commerce attacks on customer debit cards. As a result of these efforts, average monthly complaints in Mexico for the last nine months of the year decreased by 20.5% compared with the first quarter. In our private bank, we received 507 complaints, an increase of 176 compared with 2022. This was largely due to growth in our customer base since establishing new private banking operations in the UAE and Mexico, along with an increase in complaints in the US. This led to an increase in administration and service issues, a high proportion of which were attributable to delays and errors in processing client instructions. Overall, the private bank resolved 465 complaints. Complaint data for the new private banking operation in India was reported within the WPB figures, pending system development to separately report the complaint figures. Wealth and Personal Banking (‘WPB’) 92 HSBC Holdings plc Annual Report and Accounts 2023 ESG review | Governance ESG review In 2023, we received 45,899 customer and client complaints, a decrease of 27% from 2022. Of the overall volumes, 33,777 came from HSBC UK and 7,354 from Asia-Pacific. The most common complaint related to servicing and transactions, with the largest volume of complaints globally coming from business banking customers, which represented 87% of our total complaints. We attribute the overall decrease in our complaint volumes to enhanced training of our front-line colleagues to ensure they can identify the differences between a complaint, query and feedback. We also focused on addressing the root causes of the complaint trends, as well on improvements to our systems, processes and advice to our clients. We resolved 47,812 complaints globally in 2023. The average resolution time for complaints was 24 days, which was just above our global target of 20 days. How we listen continued Global Banking and Markets (‘GBM’) In 2023, we received 1,552 customer complaints in Global Banking, a decrease of 27% from 2022. Of the overall complaint volumes, 49% came from Europe and 23% came from the Middle East, North Africa and Türkiye. The most common complaint, at 38% of total complaints, related to servicing, which was in line with previous years. In Markets and Securities Services (‘MSS’) complaints increased by 21% to 354. We attribute some of the increase to improvements in our data reporting processes globally. The majority of complaints were operational in nature and resolved in a timely manner. Of the overall MSS complaints, 47% came from Europe and 34% from Asia, our two largest markets. 1 Globally, a complaint is any expression of dissatisfaction, whether justified or not, relating to the provision of, or failure to provide, a specific product or service or service activity. Within the UK, a complaint is any expression of dissatisfaction – whether justified or not – about our products, services or activities which suggests we have caused (or might cause) financial loss, or material distress or material inconvenience. 2 Global Banking also includes Global Payments Solutions (previously known as Global Liquidity and Cash Management) and complaints relating to payment operations, which is part of Digital Business Services. 3 Contains Global Research complaint volumes. GBM complaint volumes1 2023 2022 Total 1,906 2,419 Global Banking2 1,552 2,127 Global Markets and Securities Services3 354 292 CMB complaint volumes1 (000s) 2023 2022 Total 46 63 UK 33.8 49.2 Hong Kong 6.5 8.1 Acting on feedback In 2023, we focused on improvements to our governance of complaints, creating regular forums in key markets to ensure that analysis of the root cause of issues and trends are prioritised to enhance our understanding of pain points for our customers. Since the Covid-19 pandemic, there has been increased efforts Group-wide to identify customers who are more exposed to harm or declare as vulnerable. In 2023, we focused on identifying these complaint types to ensure that we can offer adjustments and support within our processes. This new process helps to improve our understanding and support of clients at risk of financial or non-financial harm to ensure our banking services are accessible to all. Acting on feedback We have continued to invest in our client feedback tool to create a more consistent and streamlined experience for colleagues across GBM and our wholesale businesses globally. In 2023, we introduced additional automation to improve the process of logging complaints, and simplified our procedures to make it easier for front-line colleagues to record feedback. We have also introduced mandatory training around conduct and complaints to ensure our people are acting on the feedback they receive and are consistent in how they evaluate queries and complaints. Commercial Banking (‘CMB’) HSBC Holdings plc Annual Report and Accounts 2023 93 Governance Safeguarding the financial system We have continued our efforts to combat financial crime and reduce its impact on our organisation, customers and the communities that we serve. Financial crime includes fraud, bribery and corruption, tax evasion, sanctions and export control violations, money laundering, terrorist financing and proliferation financing. We manage financial crime risk because it is the right thing to do to protect our customers, shareholders, staff, the communities in which we operate, as well as the integrity of the financial system on which we all rely. We have a financial crime risk management framework that is applicable across all global businesses and functions, and in all countries and territories in which we operate. The financial crime risk framework, which is overseen by the Board, is supported by our financial crime policy that is designed to enable adherence to applicable laws and regulations globally. Annual global mandatory training is provided to all colleagues, with additional targeted training tailored to certain individuals. We carry out regular risk assessments to identify where we need to respond to evolving financial crime threats, as well as to monitor and test our financial crime risk management programme. We continue to invest in new technology, including through the deployment of a capability to monitor correspondent banking activity. We are also enhancing our fraud monitoring capability and our trade screening controls, and investing in the application of machine learning to improve the accuracy and timeliness of our detection capabilities. These new technologies should enhance our ability to respond effectively to unusual activity and be more granular in our risk assessments. This helps us to protect our customers, the organisation and the integrity of the global financial system against financial crime. Our anti-bribery and corruption policy Our global financial crime policy requires that all activity must be: conducted without intent to bribe or corrupt; reasonable and transparent; considered to not be lavish nor disproportionate to the professional relationship; appropriately documented with business rationale; and authorised at an appropriate level of seniority. There were no concluded legal cases regarding bribery or corruption brought against HSBC or its employees in 2023. Our global financial crime policy requires that we identify and mitigate the risk of our customers and third parties committing bribery or corruption. Among other controls, we use customer due diligence and transaction monitoring to identify and help mitigate the risk that our customers are involved in bribery or corruption. We perform anti-bribery and corruption risk assessments on third parties that expose us to this risk. The scale of our work Each month, on average, we monitor over 1.35 billion transactions for signs of financial crime. In 2023, we filed over 96,000 suspicious activity reports to law enforcement and regulatory authorities where we identified potential financial crime. We perform daily screening of 125 million customer records for sanctions exposure. In 2022, we reported screened customer records as a monthly average, although screening was, and continues to be, performed on a daily basis. Whistleblowing We want colleagues and stakeholders to have confidence in speaking up when they observe unlawful or unethical behaviour. We offer a range of speak-up channels to listen to the concerns of individuals and have a zero tolerance policy for acts of retaliation. Listening through whistleblowing channels Our global whistleblowing channel, HSBC Confidential, is one of our speak-up channels, which allows colleagues and other stakeholders to raise concerns confidentially and, if preferred, anonymously (subject to local laws). In most of our markets, HSBC Confidential concerns are raised through an independent third party, offering 24/7 hotlines and a web portal in multiple languages. We also provide and monitor an external email address for concerns about accounting, internal financial controls or auditing matters (accountingdisclosures@hsbc.com). Concerns are investigated proportionately and independently, with action taken where appropriate. This can include disciplinary action, such as dismissal and adjustments to variable pay and performance ratings, or operational actions including changes to policies and procedures. We actively promote our full range of speak- up channels to colleagues to help ensure their concerns are handled through the most effective route. In 2023, 4% fewer concerns were raised through HSBC Confidential compared with 2022. Of the concerns investigated through the HSBC Confidential channel in 2023, 81% related to individual behaviour and personal conduct, 14% to security and fraud risks, 4% to compliance risks and less than 1% to other categories. The Group Audit Committee has oversight of the Group’s whistleblowing arrangements, and the Chair of the Group Audit Committee acts as HSBC’s Whistleblowers’ Champion with responsibility for ensuring and overseeing the integrity, independence and effectiveness of the Group’s policies and procedures. Regulatory Compliance sets the whistleblowing policy and procedures, and provides the Group Audit Committee with periodic updates on their effectiveness. Specialist teams and investigation functions own whistleblowing controls, with monitoring in place to determine control effectiveness. For further details of the role of the Group Audit Committee in relation to whistleblowing, see page 270. HSBC Confidential concerns raised in 2023: 1,746 (2022: 1,817) Substantiation rate of concerns investigated through HSBC Confidential in 2023: 41% (2022: 41%) 98% Total percentage of permanent and non- permanent employees who received financial crime training, including on anti-bribery and corruption. Integrity, conduct and fairness 94 HSBC Holdings plc Annual Report and Accounts 2023 ESG review | Governance ESG review Taxes paid – by type of tax Tax on profits $3,685m (2022: $2,429m) Withholding taxes $432m (2022: $361m) Employer taxes $1,052m (2022: $1,041m) Bank levy $57m (2022: $314m) Irrecoverable VAT $1,298m (2022: $1,152m) Other duties and levies $249m1 (2022: $232m) Taxes paid – by region Taxes collected – by region Europe $4,714m (2022: $4,197m) Asia-Pacific $3,226m (2022: $3,274m) Middle East, North Africa and Türkiye $77m (2022: $67m) North America $1,119m (2022: $1,129m) Latin America $1,680m (2022: $1,493m) Europe $2,945m (2022: $2,745m) Asia-Pacific $2,488m (2022: $1,894m) Middle East, North Africa and Türkiye $296m (2022: $259m) North America $389m (2022: $207m) Latin America $655m (2022: $424m) A responsible approach to tax We seek to pay our fair share of tax in all jurisdictions in which we operate, and to minimise the likelihood of customers using our products and services to evade or inappropriately avoid tax. We also abide by international protocols that affect our organisation. Our approach to tax and governance processes is designed to achieve these goals. Through adoption of the Group’s risk management framework, we seek to ensure that we do not adopt inappropriately tax- motivated transactions or products, and that tax planning is scrutinised and supported by genuine commercial activity. HSBC has no appetite for using aggressive tax structures. With respect to our own taxes, we are guided by the following principles: – We are committed to applying both the letter and spirit of the law. This includes adherence to a variety of measures arising from the OECD Base Erosion and Profit Shifting initiative including the ‘Pillar Two’ global minimum tax rules which will apply to the Group from 2024. These rules seek to ensure that the Group pays tax at a minimum rate of 15% in each jurisdiction in which it operates. We have identified 12 jurisdictions that may have an effective tax rate below 15% in 2024. We continually monitor the number of active subsidiaries within each jurisdiction as part of our ongoing entity rationalisation programme. – We seek to ensure that our entities active in nil or low tax jurisdictions have clear business rationale for why they are based in these locations and appropriate transparency over their activities. – We seek to have open and transparent relationships with all tax authorities. Given the size and complexity of our organisation, which operates across over 60 jurisdictions, a number of areas of differing interpretation or disputes with tax authorities exist at any point in time. We cooperate with the relevant local tax authorities to mutually agree and resolve these in a timely manner. With respect to our customers’ taxes, we are guided by the following principles: – We have made considerable investments to support external tax transparency initiatives and reduce the risk of banking services being used to facilitate customer tax evasion. Initiatives include the US Foreign Account Tax Compliance Act, the OECD Standard for Automatic Exchange of Financial Account Information (‘Common Reporting Standard’), and the UK legislation on the corporate criminal offence of failing to prevent the facilitation of tax evasion. – We implement processes that aim to ensure that inappropriately tax-motivated products and services are not provided to our customers. Our tax contributions The effective tax rate for the year of 19.1% was higher than in the previous year (2022: 4.7%). The effective tax rate for the year was increased by 2.3% from the non-taxable impairment of the Group’s interest in BoCom, and reduced by 1.6% by the release of provisions for uncertain tax positions and by 1.5% by the non-taxable provisional gain on the acquisition of SVB UK. Further details are provided on page 369. The UK bank levy charge for 2023 of $339m was higher than the charge of $13m in 2022, mainly due to adjustments arising upon filing prior year returns, which represented a credit in 2022 and a charge in 2023. As highlighted below, in addition to paying $6.8bn of our own tax liabilities during 2023, we collected taxes of $10.8bn on behalf of governments around the world. A more detailed geographical breakdown of the taxes paid in 2023 is provided in the ESG Data Pack. 1 Other duties and levies includes property taxes of $91m (2022: $94m) HSBC Holdings plc Annual Report and Accounts 2023 95 Governance Conduct: Our product responsibilities Our conduct approach guides us to do the right thing and to focus on the impact we have for our customers and the financial markets in which we operate. It is embedded into the way we design, approve, market and manage products and services, with a focus on five clear outcomes: – We understand our customers’ needs. – We provide products and services that offer a fair exchange of value. – We service customers’ ongoing needs and put it right if we make a mistake. – We act with integrity in the financial markets we operate in. – We operate resiliently and securely to avoid harm to customers and markets. We train all our colleagues on our approach to customer and market conduct, helping to ensure our conduct outcomes are part of everything we do. Designing products and services Our approach to product development is set out in our policies and provides a clear basis on which informed decisions can be made. Our policies require that products must be fit-for-purpose throughout their existence, meeting regulatory requirements and associated conduct outcomes. Our approach includes: – designing products to meet identified customer needs; – managing products through governance processes, helping to ensure they meet customers’ needs and deliver a fair exchange of value; – periodically reviewing products to help ensure they remain relevant and perform in line with expectations we have set; and – improving, or withdrawing from sale, products which do not meet our customers’ needs or no longer meet our high standards. Meeting our customers’ needs Our policies and procedures set standards to ensure that we consider and meet customer needs. These include: – enabling customers to understand the key features of products and services; – enabling customers to make informed decisions before purchasing a product or service; and – ensuring processes are in place for the provision of advice to customers. They help us provide the right outcomes for customers, including those with enhanced care needs. This helps us to support customers who are more vulnerable to external impacts, including the current cost of living crisis (see ‘Supporting our customers in challenging economic times’ on page 15). Financial promotion Our policies help to ensure that in the sale of products and services, we use marketing and product materials that support customer understanding and fair customer outcomes. This includes providing information on products and services that is clear, fair and not misleading. We also have controls in place to ensure our cross-border marketing complies with relevant regulatory requirements. Our approach with our suppliers We maintain global standards and procedures for the onboarding and use of third-party suppliers. We require suppliers to meet our third-party risk compliance standards and we assess them to identify any financial stability concerns. Sustainable procurement Supporting and engaging with our supply chain is vital to the development of our sustainable procurement processes. In 2023: – We published net zero guides to help buyers and suppliers understand our net zero ambitions. The guides explain our carbon reduction requirements and provide practical advice for meeting these ambitions, as laid out in our supplier code of conduct. – We began developing decarbonisation plans for high-emitting procurement categories, including real estate services, telecommunications, data centres and servers, and computer hardware. Engagement with suppliers has given us a better understanding of their decarbonisation efforts and the challenges and opportunities of achieving net zero in these categories. As a result, strategies for these procurement categories will include decarbonisation plans from 2024 onwards. – We completed analysis to understand the impacts and dependencies of our supply chain on biodiversity. The analysis will inform the development of a biodiversity strategy for global procurement in 2024, to reduce supply chain biodiversity impacts. – We launched the supplier diversity portal in the UK and US. The portal enables small and medium-sized enterprises or businesses, which are majority-owned, operated and controlled by historically underrepresented groups, to register interest in becoming an HSBC supplier. For further details, see www.hsbc.com/our-approach/risk-and- responsibility/working-with-suppliers. Supplier code of conduct Our supplier code of conduct sets out our ambitions, targets and commitments on the environment, diversity and human rights, and outlines the minimum standards we expect of our suppliers on these issues. We seek to formalise adherence to the code with clauses in our supplier contracts, which support the right to audit and act if a breach is discovered. At the end of 2023, 95% of approximately 10,400 contracted suppliers had either confirmed adherence to the supplier code of conduct or provided their own alternative that was accepted by our Global Procurement function. For further details of the number of suppliers in each geographical region, see the ESG Data Pack at www.hsbc.com/esg. Product governance Our product management policy covers the entire lifecycle of the product. This helps ensure that our products meet our requirements before we sell them and allows continued risk-based oversight of product performance against the intended customer outcomes. When we decide to withdraw a product from sale, we aim to consider the implications for our existing customers and agree actions to help them achieve a fair outcome where appropriate. 96 HSBC Holdings plc Annual Report and Accounts 2023 ESG review | Governance ESG review Safeguarding data Data privacy We are committed to protecting and respecting the data we hold and process, in accordance with the laws and regulations of the markets in which we operate. Our approach rests on having the right talent, technology, systems, controls, policies and processes to ensure appropriate management of privacy risk. Our Group-wide privacy policy and principles provide a consistent global approach to managing data privacy risk, and must be applied by all our global businesses and functions. Our privacy principles are available at www.hsbc.com/who-we-are/ esg-and-responsible-business/managing-risk/ operational-risk. We conduct regular employee training and awareness sessions on data privacy and security issues throughout the year. This includes mandatory training for all our colleagues globally, with additional training sessions, where needed, to keep up to date with new developments in this space. We provide transparency to our customers and stakeholders on how we collect, use and manage their personal data, and their associated rights. Where relevant, we work with third parties to help ensure adequate protections are provided, in line with our data privacy policy and as required under data privacy law. We offer a broad range of channels in the markets where we operate, through which customers and stakeholders can raise concerns about the privacy of their data. Our dedicated privacy teams report to the highest level of management on data privacy risks and issues, and oversee our global data privacy programmes. We review data privacy regularly at multiple governance forums, including at Board level, to help ensure appropriate challenge and visibility for senior executives. Data privacy laws and regulations continue to evolve globally. We continually monitor the regulatory environment to ensure we respond appropriately to any changes. As part of our three lines of defence model, our Global Internal Audit function provides independent assurance as to whether our data privacy risk management approaches and processes are designed and operating effectively. In addition, we have established data privacy governance structures, and continue to embed accountability across all businesses and functions. We continue to implement industry practices for data privacy and security. Our privacy teams work closely with our data protection officers, industry bodies and research institutions to drive the design, implementation and monitoring of privacy solutions. We conduct regular reviews and privacy risk assessments, and continue to develop solutions to strengthen our data privacy controls. We continue to enhance our internal data privacy tools to improve accountability for data privacy. We have procedures to articulate the actions needed to deal with data privacy considerations. These include notifying regulators, customers or other data subjects, as required under applicable privacy laws and regulations, in the event of a reportable incident occurring. Intellectual property rights practices We have a group intellectual property risk policy, supported by controls and guidance, to manage risk relating to intellectual property. This is to help ensure that commercially and strategically valuable intellectual property is identified and protected appropriately, including by applying to register trademarks and patents and enforcing our intellectual property rights against unauthorised use by third parties. Our intellectual property framework also helps us avoid infringement of third-party intellectual property rights, supporting our consistent and effective management of intellectual property risk in line with our risk appetite. Data Privacy Day In January 2023, we held a hybrid roundtable event for our colleagues to mark International Data Privacy Day. The event was hosted by our Global Head of Data Legal, and guest speakers included the former UK Information Commissioner and industry specialists from an external law firm, with HSBC’s own data privacy experts in attendance. The event covered privacy-related developments likely to have the greatest impact across the Group. Key themes included upcoming data privacy reforms in the UK and the implications for global organisations, and trends in enforcement of data privacy laws and regulations. We also reviewed the impact, successes and challenges of General Data Protection Regulation (‘GDPR’) implementation globally. The ethical use of data and AI Artificial intelligence and other emerging technologies provide the opportunity to process and analyse data at a depth and breadth not previously possible. While these technologies offer significant potential benefits for our customers, they also pose potential ethical risks for the financial services industry and society as a whole. We have a set of principles to help ensure we consider and address the ethical issues that could arise. HSBC’s Principles for the Ethical Use of Data and Artificial Intelligence are available at www.hsbc.com/who-we-are/esg-and- responsible-business/our-conduct. We continue to develop and enhance our approach to, and oversight of, AI, taking into consideration the fast-evolving regulatory landscape, market developments and best practice. HSBC Holdings plc Annual Report and Accounts 2023 97 Governance Cybersecurity The threat of cyber-attacks remains a concern for our organisation, as it does across the financial sector and other industries. As cyber-attacks continue to evolve, failure to protect our operations may result in the loss of sensitive data, disruption for our customers and our business, or financial loss. This could have a negative impact on our customers and our reputation, among other risks. We continue to monitor ongoing geopolitical events and changes to the cyber threat landscape and take proactive measures with the aim to reduce any impact to our customers. Prevent, detect and mitigate We invest in business and technical controls to help prevent, detect and mitigate cyber threats. Our cybersecurity controls follow a ’defence in depth’ approach, making use of multiple security layers, recognising the complexity of our environment. Our ability to detect and respond to attacks through round-the-clock security operations centre capabilities is intended to help reduce the impact of attacks. We have a cyber intelligence and threat analysis team, which proactively collects and analyses internal and external cyber information to continuously evaluate threat levels for the most prevalent attack types and their potential outcomes. We actively participate in the broader cyber intelligence community, including by sharing technical expertise in investigations, alongside others in the financial services industry and government agencies around the world. In 2023, we further strengthened our cyber defences and enhanced our cybersecurity capabilities with the objective to help reduce the likelihood and impact of unauthorised access, security vulnerabilities being exploited, data leakage, third-party security exposure, and advanced malware. These defences build upon a proactive data analytical approach to help identify advanced targeted threats and malicious behaviour. We work with our third parties, including suppliers, financial infrastructure bodies and other non-traditional third parties, in an effort to help reduce the threat of cyber-attacks impacting our business services. We have a third-party security risk management process in place to assess, identify and manage the risks associated with cybersecurity threats with supplier and other third-party relationships. The process includes risk-based cybersecurity due diligence reviews that assess third parties’ cybersecurity programmes against our standards and requirements. Policy and governance We have a robust suite of cybersecurity policies, procedures and key controls designed to help ensure that the organisation is well managed, with effective oversight and control. This includes but is not limited to defined information security responsibilities for employees, contractors and third parties, as well as standard procedures for cyber incident identification, investigation, mitigation and reporting. We operate a three lines of defence model, aligned to the enterprise risk management framework, to help ensure oversight and challenge of our cybersecurity capabilities and priorities. In the first line of defence, we have risk owners within global businesses and functions who are accountable for identifying and managing cyber risk. They work with cybersecurity control owners to apply the appropriate risk treatment in line with our risk appetite. Our controls are designed to be executed in line with our policies and are reviewed and challenged by our risk stewards representing the second line of defence. They are independently assured by the Global Internal Audit function, the third line of defence. The assessment and management of our cybersecurity risk is led and coordinated by a Global Chief Information Security Officer, who has extensive experience in financial services, security and resilience, as well as in strategy, governance, risk management and regulatory compliance. The Global Chief Information Security Officer is supported by regional and business level chief information security officers. In the event of incidents, the Global Chief Information Security Officer and relevant supporting officers are informed by our security operations team and are engaged in alignment with our cybersecurity incident response protocols. Key performance indicators, control effectiveness and other matters related to cybersecurity, including significant cyber incidents, are presented on a regular basis to various management risk and control committees including to the Board, the Group Risk Management Meeting and across global businesses, functions and regions. This is done to ensure ongoing awareness and management of our cybersecurity position. Our cybersecurity capabilities are regularly assessed against the National Institute of Standards and Technology framework by independent third parties, and we proactively collaborate with regulators to participate in regular testing activities. HSBC also engages external independent third parties to support our penetration and threat-led penetration testing, which help to identify vulnerabilities to cyber threats and test security resilience. Cyber training and awareness We understand the important role our people play in protecting against cybersecurity threats. Our aim is to equip every colleague with the appropriate tools and behaviours they need to keep our organisation and customers’ data safe. We provide cybersecurity training and awareness to our people, ranging from our top executives to IT developers to front-line relationship managers around the world. Over 94% of our IT developers hold at least one of our enhanced security certifications to help ensure we build secure systems and products. We host an annual Cyber Awareness Month for all colleagues, covering topics such as online safety at home, social media safety, safe hybrid working, and cyber incidents and response. Our dedicated cybersecurity training and awareness team provides a wide range of education and guidance to both customers and our colleagues about how to identify and prevent online fraud. Over 99% Employees completed mandatory cybersecurity training on time. Over 94% IT developers hold at least one of our internal secure developer certifications. Over 90 Cybersecurity education events were held globally. Over 96% Of survey respondents to cybersecurity education events said they have a better understanding of cybersecurity following these events. 98 HSBC Holdings plc Annual Report and Accounts 2023 ESG review | Governance Moving to a dynamic new London HQ Our global headquarters is to relocate to the heart of the City of London, after we signed contracts to move to the new Panorama St Paul’s development. When selecting our future location, we wanted a head office that provides flexible, dynamic and inclusive workspaces for colleagues and clients. We also wanted the choice of building to contribute to our net zero commitments through sustainable design, with the building constructed to high sustainability standards, using predominantly repurposed materials. With our lease at our existing Canary Wharf office expiring in early 2027, we expect colleagues to start moving to Panorama St Paul’s from late 2026. The financial review gives detailed reporting of our financial performance at Group level as well as across our different global businesses and legal entities. 100 Financial summary 111 Global businesses and legal entities 130 Reconciliation of alternative performance measures Financial review 99 HSBC Holdings plc Annual Report and Accounts 2023 Financial summary Contents 100 Changes to presentation from 1 January 2023 100 Use of alternative performance measures 101 Critical estimates and judgements 101 Impact of hyperinflationary accounting 102 Consolidated income statement 103 Income statement commentary 106 Supplementary table for planned disposals 107 Consolidated balance sheet Changes to presentation from 1 January 2023 Changes to our reporting framework On 1 January 2023, we updated our financial reporting framework. We no longer report ‘adjusted’ results, which excluded the impact of both foreign currency translation differences and significant items. Instead, we compute constant currency performance by adjusting comparative reported results only for the effects of foreign currency translation differences between the relevant periods. This will enable users to understand the impact of foreign currency translation differences on the Group’s performance. We separately disclose ‘notable items‘, which are components of our income statement that management would consider as outside the normal course of business and generally non-recurring in nature. While our primary segmental reporting by global business remains unchanged, effective from 1 January 2023, the Group changed the supplementary presentation of results from geographical regions to main legal entities to better reflect the Group’s structure. IFRS 17 ‘Insurance Contracts’ On 1 January 2023, HSBC adopted IFRS 17 ‘Insurance Contracts’. As required by the standard, the Group applied the requirements retrospectively with comparative data previously published under IFRS 4 ‘Insurance Contracts’ restated from the 1 January 2022 transition date. As required by IAS 1 ‘Presentation of Financial Statements’ a third statement of financial position as at the transition date of 1 January 2022 has been disclosed (for further details, see page 331). Under IFRS 17 there is no present value of in-force business (‘PVIF’) asset recognised up front. Instead the measurement of the insurance contract liability takes into account fulfilment cash flows and a contractual service margin (‘CSM’) representing the unearned profit. In contrast to the Group’s previous IFRS 4 accounting where profits are recognised up front, under IFRS 17 they are deferred and systematically recognised in revenue as services are provided over the expected coverage period. The CSM also includes directly attributable costs, which had previously been expensed as incurred and which are now incorporated within the insurance liability measurement and recognised over the expected coverage period. In conjunction with the implementation of IFRS 17, the Group has made use of the option to re-designate to fair value through profit or loss assets that were previously held at amortised cost totalling $55.1bn, and eligible assets previously held at fair value through other comprehensive income totalling $1.1bn. The re-designation of amortised cost assets generated a net increase to assets of $4.9bn because the fair value measurement on transition was higher than the previous amortised cost carrying amount. The impact of the transition was a reduction of $1.1bn on the Group’s full-year 2022 reported revenue and a reduction of $0.5bn on full-year 2022 reported profit before tax. The Group’s total equity at 1 January 2022 reduced by $10.5bn to $196.3bn on the transition, and tangible equity reduced by $2.4bn to $146.9bn. For further details of our adoption of IFRS 17, see Note 38 ‘Effects of adoption of IFRS 17’ on page 422. Cost target At our full-year 2022 results, we set a target for our ‘adjusted‘ operating expenses of growth for 2023 compared with 2022. Under our new reporting framework we no longer present ‘adjusted‘ results. The exception to this is for operating expenses, where our ‘target basis’ will adjust reported results for notable items and the period-on- period effects of foreign currency translation differences. We also exclude the impact of retranslating comparative period financial information at the latest rates of foreign exchange in hyperinflationary economies, which is not within our control. We consider that this measure provides useful information to investors by quantifying and excluding the items that management considered when setting and assessing cost-related targets. In our target basis, we also exclude the costs related to the acquisition of SVB UK and related investments internationally, which are expected to add approximately 1% to our cost growth compared with 2022. Our 2022 baseline for operating expenses on this basis is $29.8bn, which has been retranslated at the average rates of foreign exchange for 2023. Resegmentation In the first quarter of 2023, following an internal review to assess which global businesses were best suited to serve our customers’ respective needs, a portfolio of our Global Banking customers within our entities in Latin America was transferred from GBM to CMB for reporting purposes. Comparative data have been re-presented accordingly. Similar smaller transfers from GBM to CMB were also undertaken within our entities in Australia and Indonesia, where comparative data have not been re-presented. Banking NII At our interim 2023 results, we introduced banking net interest income. This alternative performance measure is reconciled on page 104, and deducts from Group reported net interest income: the impact of the cost of funding reported in net interest income used to fund trading and fair value net assets; the impact of foreign exchange swaps in Markets Treasury, where an offsetting income or loss is recorded in trading and fair value income, and third-party net interest income from our insurance business. This resulting measure is intended to approximate the Group’s banking revenue that is directly impacted by changes in interest rates. Use of alternative performance measures Our reported results are prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (‘IFRS Accounting Standards’), as detailed in the financial statements starting on page 329. To measure our performance, we supplement our IFRS Accounting Standards figures with non-IFRS Accounting Standards measures, which constitute alternative performance measures under European Securities and Markets Authority guidance and non-GAAP financial measures defined in and presented in accordance with US Securities and Exchange Commission rules and regulations. These measures include those derived from our reported results that eliminate factors that distort year-on-year comparisons. The ‘constant currency performance’ measure used throughout this report is described below. Definitions and calculations of other alternative performance measures are included in our ‘Reconciliation of alternative performance measures’ on page 130. In addition, insurance-specific non-GAAP measures including ‘Insurance manufacturing value of new business‘, ‘Insurance manufacturing proxy embedded value‘, and ‘Insurance equity plus CSM net of tax‘ are provided on pages 116 to 117, together with their definitions and reconciliation to GAAP measures. All alternative performance measures are reconciled to the closest reported performance measure. Financial summary 100 HSBC Holdings plc Annual Report and Accounts 2023 The global business segmental results are presented on a constant currency basis in accordance with IFRS 8 ‘Operating Segments’ as detailed in Note 10 ‘Segmental analysis’ on page 372. Constant currency performance Constant currency performance is computed by adjusting reported results for the effects of foreign currency translation differences, which distort year-on-year comparisons. We consider constant currency performance to provide useful information for investors by aligning internal and external reporting, and reflecting how management assesses year-on-year performance. Notable items We separately disclose ‘notable items’, which are components of our income statement that management would consider as outside the normal course of business and generally non-recurring in nature. The tables on pages 112 to 113 and pages 123 to 128 detail the effects of notable items on each of our global business segments, legal entities and selected countries/territories in 2023, 2022 and 2021. Foreign currency translation differences Foreign currency translation differences reflect the movements of the US dollar against most major currencies during 2023. We exclude them to derive constant currency data, allowing us to assess balance sheet and income statement performance on a like- for-like basis and to better understand the underlying trends in the business. Foreign currency translation differences for 2023 are computed by retranslating into US dollars for non-US dollar branches, subsidiaries, joint ventures and associates: – the income statements for 2022 and 2021 at the average rates of exchange for 2023; and – the balance sheets at 31 December 2022 and 31 December 2021 at the prevailing rates of exchange on 31 December 2023. No adjustment has been made to the exchange rates used to translate foreign currency-denominated assets and liabilities into the functional currencies of any HSBC branches, subsidiaries, joint ventures or associates. The constant currency data of HSBC’s Argentina subsidiaries have not been adjusted further for the impacts of hyperinflation. Since 1 June 2022, Türkiye has been deemed a hyperinflationary economy for accounting purposes. HSBC has an operating entity in Türkiye and the constant currency data have not been adjusted further for the impacts of hyperinflation. When reference is made to foreign currency translation differences in tables or commentaries, comparative data reported in the functional currencies of HSBC’s operations have been translated at the appropriate exchange rates applied in the current period on the basis described above. Critical estimates and judgements The results of HSBC reflect the choice of accounting policies, assumptions and estimates that underlie the preparation of HSBC’s consolidated financial statements. The material accounting policies, including the policies which include critical estimates and judgements, are described in Note 1.2 on the financial statements. The accounting policies listed below are highlighted as they involve a high degree of uncertainty and have a material impact on the financial statements: – Impairment of amortised cost financial assets and financial assets measured at fair value through other comprehensive income (‘FVOCI’): The most significant judgements relate to defining what is considered to be a significant increase in credit risk, determining the lifetime and point of initial recognition of revolving facilities, selecting and calibrating the probability of default (‘PD’), the loss given default (‘LGD’) and the exposure at default (‘EAD’) models, as well as selecting model inputs and economic forecasts, making assumptions and estimates to incorporate relevant information about late-breaking and past events, current conditions and forecasts of economic conditions, and selecting applicable recovery strategies for certain wholesale credit-impaired loans. A high degree of uncertainty is involved in making estimations using assumptions that are highly subjective and very sensitive to the risk factors. See Note 1.2(i) on page 348. – Deferred tax assets: The most significant judgements relate to those made in respect of recoverability, which are based on expected future profitability. See Note 1.2(l) on page 353. – Valuation of financial instruments: In determining the fair value of financial instruments a variety of valuation techniques are used, some of which feature significant unobservable inputs and are subject to substantial uncertainty. See Note 1.2(c) on page 345. – Impairment of investment in subsidiaries: Impairment testing, including testing for reversal of impairment, involves significant judgement in determining the value in use, and in particular estimating the present values of cash flows expected to arise from continuing to hold the investment, based on a number of management assumptions. See Note 1.2(a) on page 343. – Impairment of interests in associates: Impairment testing, including testing for reversal of impairment, involves significant judgement in determining the value in use, and in particular estimating the present values of cash flows expected to arise from continuing to hold the investment, based on a number of management assumptions. The most significant judgements relate to the impairment testing of our investment in Bank of Communications Co., Limited (‘BoCom’). See Note 1.2(a) on page 343. – Impairment of goodwill and non-financial assets: A high degree of uncertainty is involved in estimating the future cash flows of the cash-generating units (‘CGUs’) and the rates used to discount these cash flows. See Note 1.2(a) on page 343 and Note 1.2(n) on page 353. – Provisions: Significant judgement may be required due to the high degree of uncertainty associated with determining whether a present obligation exists, and estimating the probability and amount of any outflows that may arise. See Note 1.2(m) on page 353. – Post-employment benefit plans: The calculation of the defined benefit pension obligation involves the determination of key assumptions including discount rate, inflation rate, pension payments and deferred pensions, pay and mortality. See Note 1.2(k) on page 352. – Non-current assets and disposal groups held for sale: Management judgement is required in determining the likelihood of the sale to occur, and the anticipated timing in assessing whether the held for sale criteria have been met. See Note 1.2(o) on page 354. Given the inherent uncertainties and the high level of subjectivity involved in the recognition or measurement of the items above, it is possible that the outcomes in the next financial year could differ from the expectations on which management’s estimates are based, resulting in the recognition and measurement of materially different amounts from those estimated by management in these financial statements. Impact of hyperinflationary accounting We continue to treat Argentina and Türkiye as hyperinflationary economies for accounting purposes. The impact of applying IAS 29 ‘Financial Reporting in Hyperinflationary Economies’ and the hyperinflation provisions of IAS 21 ’The Effects of Changes in Foreign Exchange Rates’ in the current period for our operations in both Argentina and Türkiye was a decrease in the Group’s profit before tax of $1,297m (2022: $548m), comprising a decrease in revenue, including loss on net monetary position, of $1,586m (2022: $541m) and a decrease in ECL and operating expenses of $289m (2022: increase of $7m). The CPI at 31 December for Argentina was 3,576, with an increase in the year of 2,429.13 (2022: 563.92 increase). The CPI for Türkiye was 1,859 with an increase in the year of 730.89 (2022: 359.94 increase). HSBC Holdings plc Annual Report and Accounts 2023 101 Financial review Consolidated income statement Summary consolidated income statement 2023 20221 2021 2020 2019 $m $m $m $m $m Net interest income 35,796 30,377 26,489 27,578 30,462 Net fee income 11,845 11,770 13,097 11,874 12,023 Net income from financial instruments held for trading or managed on a fair value basis 16,661 10,278 7,744 9,582 10,231 Net income/(expense) from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit or loss 7,887 (13,831) 4,053 2,081 3,478 Net insurance premium income — — 10,870 10,093 10,636 Insurance finance (expense)/income (7,809) 13,799 — — — Insurance service result 1,078 809 — — — Gain on acquisition2 1,591 — — — — (Impairment)/reversal of impairment relating to the sale of our retail banking operations in France3 150 (2,316) — — — Other operating (expense)/income4 (1,141) (266) 1,687 1,866 4,194 Total operating income 66,058 50,620 63,940 63,074 71,024 Net insurance claims and benefits paid and movement in liabilities to policyholders — — (14,388) (12,645) (14,926) Net operating income before change in expected credit losses and other credit impairment charges5 66,058 50,620 49,552 50,429 56,098 Change in expected credit losses and other credit impairment charges (3,447) (3,584) 928 (8,817) (2,756) Net operating income 62,611 47,036 50,480 41,612 53,342 Total operating expenses excluding impairment of goodwill and other intangible assets (32,355) (32,554) (33,887) (33,044) (34,955) Impairment of goodwill and other intangible assets 285 (147) (733) (1,388) (7,394) Operating profit 30,541 14,335 15,860 7,180 10,993 Share of profit in associates and joint ventures 2,807 2,723 3,046 1,597 2,354 Impairment of interest in associate (3,000) — — — — Profit before tax 30,348 17,058 18,906 8,777 13,347 Tax expense (5,789) (809) (4,213) (2,678) (4,639) Profit for the year 24,559 16,249 14,693 6,099 8,708 Attributable to: – ordinary shareholders of the parent company 22,432 14,346 12,607 3,898 5,969 – preference shareholders of the parent company — — 7 90 90 – other equity holders 1,101 1,213 1,303 1,241 1,324 – non-controlling interests 1,026 690 776 870 1,325 Profit for the year 24,559 16,249 14,693 6,099 8,708 Five-year financial information 2023 20221 2021 2020 2019 $ $ $ $ $ Basic earnings per share 1.15 0.72 0.62 0.19 0.3 Diluted earnings per share 1.14 0.72 0.62 0.19 0.3 Dividends per ordinary share (paid in the period)6 0.53 0.27 0.22 — 0.51 % % % % % Dividend payout ratio7 50 44 40 79 100 Post-tax return on average total assets 0.8 0.5 0.5 0.2 0.3 Return on average ordinary shareholders’ equity 13.6 9.0 7.1 2.3 3.6 Return on average tangible equity 14.6 10.0 8.3 3.1 8.4 Effective tax rate 19.1 4.7 22.3 30.5 34.8 1 From 1 January 2023, we adopted IFRS 17 ‘Insurance Contracts’, which replaced IFRS 4 ‘Insurance Contracts’. Comparative data for the financial year ended 31 December 2022 have been restated accordingly. Comparative data for the years ended 31 December 2021, 2020 and 2019 are prepared on an IFRS 4 basis. 2 Provisional gain recognised in respect of the acquisition of SVB UK. 3 In the fourth quarter of 2023, an impairment loss of $2.0bn was recognised relating to the sale of our retail banking operations in France. This largely offset the $2.1bn recognised in the first quarter of 2023 on the reversal of the held for sale classification at that time. In 2023, a total net $0.1bn of credit was recognised in other operating income, reflecting the net asset value disposed under the final terms of sale. The $0.4bn impairment of goodwill recognised in the third quarter in 2022 has not been reversed. 4 Other operating (expense)/income includes a loss on net monetary positions of $1,667m (2022: $678m; 2021: $576m) as a result of applying IAS 29 ‘Financial Reporting in Hyperinflationary Economies’ and disposal losses on capitalised markets treasury repositioning of $977m in 2023. 5 Net operating income before change in expected credit losses and other credit impairment charges also referred to as revenue. 6 Includes dividend paid during the period, which consisted of a second interim dividend of $0.23 per ordinary share in respect of the financial year ended 31 December 2022 paid in April 2023 and the first, second and third interim dividends of $0.30 per ordinary share in respect of the financial year ending 31 December 2023. 7 In 2023, our dividend payout ratio was adjusted for material notable items and related impacts. In 2022, our dividend payout ratio was adjusted for the loss on classification to held for sale of our retail banking business in France, items relating to the planned sale of our banking business in Canada, and the recognition of certain deferred tax assets. No items were adjusted for in 2021, 2020 or 2019. Unless stated otherwise, all tables in the Annual Report and Accounts 2023 are presented on a reported basis. For a summary of our financial performance in 2023, see page 27. For further financial performance data for each global business and legal entity, see pages 111 to 114 and 120 to 130 respectively. The global business segmental results are presented on a constant currency basis in accordance with IFRS 8 ‘Operating Segments’ as set out in Note 10: Segmental analysis on page 372. Financial summary 102 HSBC Holdings plc Annual Report and Accounts 2023 Income statement commentary The following commentary compares Group financial performance for the year ended 2023 with 2022, unless otherwise stated. Net interest income Year ended Quarter ended 31 Dec 31 Dec 31 Dec 31 Dec 30 Sep 31 Dec 2023 20221 2021 2023 2023 20221 $m $m $m $m $m $m Interest income 100,868 52,826 36,188 26,714 27,198 18,957 Interest expense (65,072) (22,449) (9,699) (18,430) (17,950) (9,971) Net interest income 35,796 30,377 26,489 8,284 9,248 8,986 Average interest-earning assets 2,161,746 2,143,758 2,209,513 2,164,324 2,157,370 2,116,018 % % % % % % Gross interest yield2 4.67 2.46 1.64 4.90 5.00 3.55 Less: gross interest payable2 (3.47) (1.24) (0.53) (3.83) (3.80) (2.21) Net interest spread3 1.20 1.22 1.11 1.07 1.20 1.34 Net interest margin4 1.66 1.42 1.20 1.52 1.70 1.68 1 From 1 January 2023, we adopted IFRS 17 ‘Insurance Contracts’, which replaced IFRS 4 ‘Insurance Contracts’. Comparative data for the financial year ended 31 December 2022 have been restated accordingly. Comparative data for the year ended 31 December 2021 are prepared on an IFRS 4 basis. 2 Gross interest yield is the average annualised interest rate earned on average interest-earning assets (‘AIEA’). Gross interest payable is the average annualised interest cost as a percentage of average interest-bearing liabilities. 3 Net interest spread is the difference between the average annualised interest rate earned on AIEA, net of amortised premiums and loan fees, and the average annualised interest rate payable on average interest-bearing funds. 4 Net interest margin is net interest income expressed as an annualised percentage of AIEA. Summary of interest income by type of asset 2023 20221 2021 Average balance Interest income Yield Average balance Interest income Yield Average balance Interest income Yield $m $m % $m $m % $m $m % Short-term funds and loans and advances to banks 403,674 14,770 3.66 445,659 5,577 1.25 450,678 1,105 0.25 Loans and advances to customers 957,717 47,673 4.98 1,022,320 32,543 3.18 1,060,658 26,071 2.46 Reverse repurchase agreements – non-trading2 240,263 14,391 5.99 231,058 4,886 2.11 206,246 1,019 0.49 Financial investments 407,363 16,858 4.14 372,702 7,704 2.07 438,840 6,729 1.53 Other interest-earning assets 152,729 7,176 4.70 72,019 2,116 2.94 53,091 1,264 2.38 Total interest-earning assets 2,161,746 100,868 4.67 2,143,758 52,826 2.46 2,209,513 36,188 1.64 Summary of interest expense by type of liability 2023 20221 2021 Average balance Interest expense Cost Average balance Interest expense Cost Average balance Interest expense Cost $m $m % $m $m % $m $m % Deposits by banks3 60,392 2,401 3.98 75,739 770 1.02 75,671 198 0.26 Customer accounts4 1,334,803 34,162 2.56 1,342,342 10,903 0.81 1,362,580 4,099 0.30 Repurchase agreements – non-trading2 146,605 10,858 7.41 118,308 3,085 2.61 114,201 363 0.32 Debt securities in issue – non-trading 184,867 11,223 6.07 179,775 5,607 3.12 193,137 3,603 1.87 Other interest-bearing liabilities 146,216 6,428 4.40 87,965 2,084 2.37 70,929 1,436 2.02 Total interest-bearing liabilities 1,872,883 65,072 3.47 1,804,129 22,449 1.24 1,816,518 9,699 0.53 1 From 1 January 2023, we adopted IFRS 17 ‘Insurance Contracts’, which replaced IFRS 4 ‘Insurance Contracts’. Comparative data for the financial year ended 31 December 2022 have been restated accordingly. Comparative data for the year ended 31 December 2021 are prepared on an IFRS 4 basis. 2 The average balances for repurchase and reverse repurchase agreements include net amounts where the criteria for offsetting are met, resulting in a lower net balance reported for repurchase agreements and thus higher cost. 3 Including interest-bearing bank deposits only. 4 Including interest-bearing customer accounts only. Net interest income (‘NII’) for 2023 was $35.8bn, an increase of $5.4bn or 18% compared with 2022. This reflected higher average interest rates across major currencies compared with 2022. Excluding the unfavourable impact of foreign currency translation differences, net interest income increased by $6.0bn or 20%. NII for the fourth quarter of 2023 was $8.3bn, down 10% compared with the previous quarter, and down 8% compared with the fourth quarter of 2022. The decrease was predominantly driven by the impact of higher funding costs across our liabilities, which included the impact of deposit migration in our main legal entities in Asia and Europe. In addition, the fourth quarter of 2023 included an adverse impact of $0.2bn, relating to the first nine months of 2023, due to reclassifications to NII from ‘net income from financial instruments held for trading or managed on a fair value basis’ related to hedges in Canada that will not recur given the expected sale of the business. The impact of hyperinflation in Argentina on NII in 2023 was an adverse movement of $0.5bn, with an associated impact on NIM of 2bps. The impact in the fourth quarter of 2023 was an adverse movement of $0.5bn, with an associated impact on NIM of 9bps. This compared with minimal movements in the equivalent periods in 2022. The increase in hyperinflationary accounting impacts in 2023 was notably due to the impact of the devaluation of the Argentinian peso. Net interest margin (‘NIM’) for 2023 of 1.66% was 24bps higher compared with 2022, as the rise in the yield on average interest- earning assets (‘AIEA’) of 220bps was partly offset by the rise in the funding costs of average interest-bearing liabilities of 196bps. HSBC Holdings plc Annual Report and Accounts 2023 103 Financial review The increase in NIM in 2023 included the unfavourable impact of foreign currency translation differences. Excluding this, NIM increased by 27bps. NIM for the fourth quarter of 2023 was 1.52%, down 18bps compared with the previous quarter, and down 16bps compared with the fourth quarter of 2022. The decreases were predominantly driven by a rise in funding costs of average interest-bearing liabilities, which included the impact of customer deposit migration in our main legal entities in Asia and Europe, as well as the Argentina hyperinflation impact as noted above, partly offset by an increase in the yield on AIEA. Interest income for 2023 of $100.9bn increased by $48.0bn compared with 2022. Interest income of $26.7bn in the fourth quarter of 2023 was down $0.5bn compared with the previous quarter, and up $7.8bn compared with the fourth quarter of 2022. The respective increases of $48.0bn and $7.8bn were predominantly driven by the impact of higher market interest rates. The decrease of $0.5bn compared with the previous quarter was predominantly due to hyperinflation in Argentina. The change in interest income in 2023 compared with 2022 included an adverse impact of foreign currency translation differences of $1.2bn. After excluding foreign currency translation differences, interest income increased by $49.2bn. Interest expense for 2023 of $65.1bn increased by $42.6bn compared with 2022. This reflected an increase in funding costs of 223bps, mainly due to the impact of higher interest rates on our liabilities including customer deposit migration, notably in Asia and Europe. Within interest expense was the effect of higher funding costs associated with supporting our trading and fair value activities, as explained below in banking net interest income. The rise in interest expense included the favourable effects of foreign currency translation differences of $0.6bn. Excluding this, interest expense increased by $43.2bn. Interest expense of $18.4bn in the fourth quarter of 2023 was up $0.5bn compared with the third quarter of 2023, and up $8.5bn compared with the fourth quarter of 2022. The increase was predominantly driven by the impact of higher market interest rates, and the impact of deposit migration. Banking net interest income Year ended Quarter ended 31 Dec 31 Dec 31 Dec 30 Sep 31 Dec 2023 2022 2023 2023 2022 $bn $bn $bn $bn $bn Net interest income 35.8 30.4 8.3 9.2 9.0 Banking book funding costs used to generate ‘net income from financial instruments held for trading or managed on a fair value basis’ 8.7 2.5 2.5 2.4 1.3 Third-party net interest income from insurance (0.4) (0.4) (0.1) (0.1) (0.1) Banking net interest income 44.1 32.5 10.7 11.5 10.2 Banking net interest income is an alternative performance measure, and is defined as Group reported net interest income after deducting: – the internal cost to fund trading and fair value net assets for which associated revenue is reported in ‘Net income from financial instruments held for trading or managed on a fair value basis’, also referred to as ‘trading and fair value income’. These funding costs reflect proxy overnight or term interest rates as applied by internal funds transfer pricing; – the funding costs of foreign exchange swaps in Markets Treasury, where an offsetting income or loss is recorded in trading and fair value income. These instruments are used to manage foreign currency deployment and funding in our entities; and – third-party net interest income in our insurance business. In our segmental disclosures, the funding costs of trading and fair value net assets are predominantly recorded in GBM in ‘net income from financial instruments held for trading or managed on a fair value basis’. On consolidation, this funding is eliminated in Corporate Centre, resulting in an increase in the funding costs reported in net interest income with an equivalent offsetting increase in ‘net income from financial instruments held for trading or managed on a fair value basis’ in this segment. In the second quarter of 2023 we implemented a consistent reporting approach across our most material entities that contribute to our trading and fair value net assets, which resulted in an increase to the first half of 2023 associated funding costs reported through the intersegment elimination in Corporate Centre of approximately $0.4bn, recognised in the second quarter of 2023. In the consolidated Group results, the cost to fund these trading and fair value net assets is reported in net interest income. The internally allocated funding cost of $8.7bn, which was incurred in 2023 to generate trading and fair value income, related to trading, fair value and associated net asset balances predominantly in GBM. At 31 December 2023, these stood at approximately $164bn. Net fee income of $11.8bn was $0.1bn higher than in 2022, and included an adverse impact from foreign currency translation differences of $0.1bn. The rise in net fee income in CMB and WPB was partly offset by a reduction in GBM. In CMB, net fee income increased by $0.2bn driven by higher fees from credit facilities, notably in Europe and the UK due to an increase in trade products. Fee income also grew in account services, reflecting greater client activity in transaction banking, mainly in Global Payments Solutions (‘GPS’), and in cards, as spending increased compared with 2022. These increases were partly offset by a reduction in fees from funds under management and broking activities. In WPB, net fee income increased by $0.1bn. The rise was mainly due to higher cards income, mainly in our legal entities in Hong Kong and in Mexico, as customer spending increased. However, income from broking fell, notably in Hong Kong, due to weaker equity markets and muted customer sentiment. The rise in cards activity resulted in higher fee expenses. In GBM, net fee income decreased by $0.2bn. This was driven by higher fee expense, notably in our main entities in Hong Kong, mainly relating to GBM products sold to customers in other global businesses. In Europe, fee expense grew in our private credit business, and we incurred higher interbank and clearing fee expense. There was a decrease in corporate finance fee income, reflecting lower client activity in Europe, and a fall in broking income due to lower equity turnover. Global custody income also fell. This was partly offset by an increase in underwriting income, from an increase in syndicated fees in Europe and a rise in fees in the US following historical lows in 2022. Net income from financial instruments held for trading or managed on a fair value basis of $16.7bn was $6.4bn higher compared with 2022. This reflected a rise in income, primarily relating to trading activities in GBM, for which the associated funding costs are reported in net interest income, notably in our main legal entities in Hong Kong and Europe. The rise also included a favourable movement on non-qualifying hedges of $0.5bn due to the non- recurrence of fair value losses in 2022. These increases were partly offset by an adverse fair value movement on foreign exchange hedges related to the planned sale of our banking business in Canada. Net income from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit or loss of $7.9bn compared with a net expense of $13.8bn in 2022. This increase reflected favourable movements on debt Financial summary 104 HSBC Holdings plc Annual Report and Accounts 2023 securities, due to movements in interest rates, and equities. The increases were notably in our portfolios in Hong Kong and France. This favourable movement resulted in a corresponding movement in insurance finance expense, which has an offsetting impact for the related liabilities to policyholders. Insurance finance expense of $7.8bn compared with an income of $13.8bn in 2022, reflecting the impact of investment returns on underlying assets on the value of liabilities to policyholders, which moves inversely with ‘net income from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit or loss’. Insurance service result of $1.1bn increased by $0.3bn compared with 2022, primarily due to an increase in the release of the contractual service margin (‘CSM’). This primarily reflected a higher CSM balance from higher new business written and favourable assumption updates, primarily from updates to lapse rate assumptions. The increase also reflected a reduction in losses from onerous contracts. Under IFRS 17, the measurement of the insurance contract liability takes into account fulfilment cash flows and a CSM representing the unearned profit. In contrast to the Group’s previous IFRS 4 accounting where profits are recognised up front, under IFRS 17 they are deferred and systematically recognised in revenue as services are provided over the life of the contract. The CSM also includes attributable cost, which had previously been expensed as incurred and which is now incorporated within the insurance liability measurement and recognised over the life of the contract. Gain on acquisition of $1.6bn related to the provisional gain recognised in respect of the acquisition of Silicon Valley Bank UK Limited. Impairment loss relating to the sale of the retail banking operations in France was a net impairment reversal of $0.2bn in 2023, compared with an impairment of $2.3bn in 2022. In accordance with IFRS 5 ‘Non-current Assets Held for Sale and Discontinued Operations’, the disposal group was classified as held for sale on 30 September 2022, at which point the Group recognised the estimated impairment of $2.3bn, which included impairment of goodwill of $0.4bn and related transaction costs. In the first quarter of 2023, $2.1bn of this impairment loss was reversed as the sale became less certain. It was reinstated in the fourth quarter of 2023 as we reclassified these operations as held for sale and remeasured the disposal group at the lower of carrying value and fair value less costs to sell, resulting in a $2.0bn impairment loss, reflecting the final terms of the sale. The sale completed on 1 January 2024. Other operating expense of $1.1bn was $0.9bn higher than in 2022. The increase primarily related to losses in 2023 in Markets Treasury on asset disposals of $1.0bn relating to repositioning and risk management activities in our hold-to-collect-and-sell portfolio in certain key legal entities. These actions are accretive to net interest income and reduce the consumption of the Group‘s financial resources. The increased expense also included a loss of $0.3bn in 2023 relating to corrections to historical valuation estimates in our life insurance business, and losses related to the disposal of our New Zealand retail mortgage loan portfolio and the merger of HSBC Bank Oman in 2023 with Sohar International. These were partly offset by losses in 2022 relating to the disposal of our branch operations in Greece and the planned disposal of our business in Russia. Change in expected credit losses and other credit impairment charges (‘ECL’) were a charge of $3.4bn, a decrease of $0.1bn or 4% compared with 2022. The charge in 2023 primarily comprised stage 3 net charges, notably related to mainland China commercial real estate sector exposures. ECL charges in this sector were $1.0bn in 2023. The charge in 2023 also reflected the impact of continued economic uncertainty, rising interest rates and inflationary pressures. The charge in 2022 of $3.6bn included charges related to mainland China commercial real estate exposures of $1.3bn. For further details on the calculation of ECL, including the measurement uncertainties and significant judgements applied to such calculations, the impact of the economic scenarios and management judgemental adjustments, see pages 156 to 168. Operating expenses Year ended 2023 2022¹ 2021 $m $m $m Gross employee compensation and benefits 19,623 19,288 19,612 Capitalised wages and salaries (1,403) (1,285) (870) Goodwill impairment — — 587 Property and equipment 4,285 4,949 5,145 Amortisation and impairment of intangibles 1,827 1,701 1,438 UK bank levy 339 13 116 Legal proceedings and regulatory matters 188 246 106 Other operating expenses2 7,211 7,789 8,486 Reported operating expenses 32,070 32,701 34,620 Currency translation — (399) (2,376) Constant currency operating expenses 32,070 32,302 32,244 1 From 1 January 2023, we adopted IFRS 17 ‘Insurance Contracts’, which replaced IFRS 4 ‘Insurance Contracts’. Comparative data for the financial year ended 31 December 2022 have been restated accordingly. Comparative data for the year ended 31 December 2021 are prepared on an IFRS 4 basis. 2 Other operating expenses includes professional fees, contractor costs, transaction taxes, marketing and travel. The decrease was driven by favourable currency translation differences and lower restructuring and other related costs following the completion of our cost-saving programme at the end of 2022. Staff numbers (full-time equivalents)1 2023 2022 2021 Global businesses Wealth and Personal Banking 128,399 128,764 130,185 Commercial Banking 45,884 43,640 42,969 Global Banking and Markets 46,241 46,435 46,166 Corporate Centre 337 360 377 At 31 Dec 220,861 219,199 219,697 1 Represents the number of full-time equivalent people with contracts of service with the Group who are being paid at the reporting date. HSBC Holdings plc Annual Report and Accounts 2023 105 Financial review Operating expenses of $32.1bn were $0.6bn or 2% lower than in 2022, including a favourable impact of $0.4bn from foreign currency translation differences. This was driven by lower restructuring and other related costs following the completion of our cost to achieve programme, which concluded at the end of 2022, as well as a $0.2bn reduction due to a reversal of historical asset impairments, and the effects of our continued cost discipline. There was also a favourable impact of $0.2bn due to the impact of hyperinflationary accounting in Argentina in 2023. These reductions were partly offset by an increase in technology costs, the impacts of inflation, a higher performance-related pay accrual and severance payments. In addition, the UK bank levy increased by $0.3bn, which included adjustments related to prior years, and we incurred a $0.2bn charge in the US relating to the FDIC special assessment. The number of employees expressed in full-time equivalent staff (‘FTE’) at 31 December 2023 was 220,861, an increase of 1,662 compared with 31 December 2022. The number of contractors at 31 December 2023 was 4,676, a decrease of 1,371. Share of profit in associates and joint ventures of $2.8bn was $0.1bn or 3% higher than in 2022, reflecting an increase in the share of profit from Saudi Awwal Bank (‘SAB’). Impairment of interest in associate of $3.0bn related to our investment in BoCom. We maintain a 19.03% interest in BoCom. Since our investment in 2004, BoCom has grown its business significantly to the extent that it has recently been designated as a global systemically important bank (‘GSIB’). For accounting purposes, the balance sheet carrying value attributed to BoCom represents our share of its net assets. We perform quarterly impairment tests incorporating a value-in-use calculation, recognising the gap between this carrying value and the fair value (based on the list share price). We have previously disclosed that the excess of the value-in-use calculation over its carrying value has been marginal in recent years, and that reasonably possible changes in assumptions could generate an impairment. Recent macroeconomic, policy and industry factors resulted in a wider range of reasonably possible value-in-use outcomes for our BoCom valuation. At 31 December 2023, the Group performed an impairment test on the carrying value which resulted in an impairment of $3.0bn, as the recoverable amount as determined by a value-in-use calculation was lower than the carrying value. Our value-in-use calculation uses both historical experience and market participant views to estimate future cash flows, relevant discount rates and associated capital assumptions. This impairment will have no material impact on HSBC’s capital, capital ratios or distribution capacity, and therefore no impact on dividends or share buy-backs. The insignificant impact on HSBC’s capital and CET1 ratio is due to the compensating release of regulatory capital deductions to offset the impairment charge. We remain strategically committed to mainland China as demonstrated by our recent announcements to acquire Citi’s retail wealth management portfolio and the investments made into mainland China in recent years. BoCom remains a strong partner in China, and we remain focused on maximising the mutual value of our partnership. Our positive views on the medium- and long-term structural growth opportunities in mainland China are unchanged. For further details, see Note 18: Interests in associates and joint ventures on page 391. Tax expense Year ended 2023 2022 $m $m Tax (charge)/credit Reported (5,789) (809) Currency translation — 160 Constant currency tax (charge)/credit (5,789) (649) Notable items Year ended 2023 2022 $m $m Tax Tax (charge)/credit on notable items 207 1,026 Recognition of losses — 2,333 Uncertain tax positions 427 (142) Tax expense The effective tax rate for 2023 of 19.1% was higher than the 4.7% in 2022. The effective tax rate for 2023 was increased by 2.3 percentage points by the non-deductible impairment of investments in associates, and reduced by 1.6 percentage points by the release of provisions for uncertain tax positions and reduced by 1.5 percentage points by the non-taxable accounting gain on the acquisition of SVB UK. The effective tax rate for 2022 was reduced by 12.8 percentage points by the recognition of a deferred tax asset on historical tax losses of HSBC Holdings as a result of improved profit forecasts for the UK tax group. Excluding these items, the effective tax rates were 19.9% for 2023 and 17.5% for 2022. Return on average tangible equity In 2023, RoTE was 14.6%, compared with 10.0% in 2022. Excluding the impact of strategic transactions and the impairment of BoCom, RoTE was 15.6%. Supplementary table for planned disposals The income statements and selected balance sheet metrics for the year ended 31 December 2023 of our banking business in Canada and our retail banking operations in France are shown below. The asset and liability balances relating to these planned disposals are reported on the Group balance sheet within ‘Assets held for sale’ and ‘Liabilities of disposal groups held for sale’, respectively, as at 31 December 2023. Income statement and selected balance sheet metrics of disposal groups held for sale Year ended 2023 Canada1 France retail2 $bn $bn Revenue 2.0 0.3 ECL — — Operating expenses (1.0) (0.6) of which: costs expected to be exited (0.7) (0.4) Profit before tax 0.9 (0.2) Loans and advances to customers 56.1 16.9 Customer accounts 63.0 22.3 RWA3 31.9 4.1 1 Under the terms of the sale agreement, the pre-tax profit on sale will be recognised through a combination of the consolidation of HSBC Canada’s results into the Group’s financial statements from 30 June 2022 until completion, and the remaining gain on sale recognised at completion. 2 France retail includes the transferring of the retail banking business, HSBC SFH and associated supporting services. For further details, see Note 23: Assets held for sale and liabilities of disposal groups held for sale on page 401. 3 Includes $3.5bn in Canada in respect of operational risk RWAs, and $0.6bn associated with our retail banking business in France. Financial summary 106 HSBC Holdings plc Annual Report and Accounts 2023 Consolidated balance sheet Five-year summary consolidated balance sheet 2023 20221 2021 2020 2019 $m $m $m $m $m Assets Cash and balances at central banks 285,868 327,002 403,018 304,481 154,099 Trading assets 289,159 218,093 248,842 231,990 254,271 Financial assets designated and otherwise mandatorily measured at fair value through profit or loss 110,643 100,101 49,804 45,553 43,627 Derivatives 229,714 284,159 196,882 307,726 242,995 Loans and advances to banks 112,902 104,475 83,136 81,616 69,203 Loans and advances to customers 938,535 923,561 1,045,814 1,037,987 1,036,743 Reverse repurchase agreements – non-trading 252,217 253,754 241,648 230,628 240,862 Financial investments 442,763 364,726 446,274 490,693 443,312 Assets held for sale 114,134 115,919 3,411 299 123 Other assets 262,742 257,496 239,110 253,191 229,917 Total assets at 31 Dec 3,038,677 2,949,286 2,957,939 2,984,164 2,715,152 Liabilities Deposits by banks 73,163 66,722 101,152 82,080 59,022 Customer accounts 1,611,647 1,570,303 1,710,574 1,642,780 1,439,115 Repurchase agreements – non-trading 172,100 127,747 126,670 111,901 140,344 Trading liabilities 73,150 72,353 84,904 75,266 83,170 Financial liabilities designated at fair value 141,426 127,321 145,502 157,439 164,466 Derivatives 234,772 285,762 191,064 303,001 239,497 Debt securities in issue 93,917 78,149 78,557 95,492 104,555 Insurance contract liabilities 120,851 108,816 112,745 107,191 97,439 Liabilities of disposal groups held for sale 108,406 114,597 9,005 — — Other liabilities 216,635 212,319 190,989 204,019 194,876 Total liabilities at 31 Dec 2,846,067 2,764,089 2,751,162 2,779,169 2,522,484 Equity Total shareholders’ equity 185,329 177,833 198,250 196,443 183,955 Non-controlling interests 7,281 7,364 8,527 8,552 8,713 Total equity at 31 Dec 192,610 185,197 206,777 204,995 192,668 Total liabilities and equity at 31 Dec 3,038,677 2,949,286 2,957,939 2,984,164 2,715,152 1 From 1 January 2023, we adopted IFRS 17 ‘Insurance Contracts’, which replaced IFRS 4 ‘Insurance Contracts’. We have restated 2022 comparative data. A more detailed consolidated balance sheet is contained in the financial statements on page 331. HSBC Holdings plc Annual Report and Accounts 2023 107 Financial review Five-year selected financial information 2023 20221 2021 2020 2019 $m $m $m $m $m Called up share capital 9,631 10,147 10,316 10,347 10,319 Capital resources2 171,204 162,423 177,786 184,423 172,150 Undated subordinated loan capital 18 1,967 1,968 1,970 1,968 Preferred securities and dated subordinated loan capital3 36,413 29,921 28,568 30,721 33,063 Risk-weighted assets 854,114 839,720 838,263 857,520 843,395 Total shareholders’ equity 185,329 177,833 198,250 196,443 183,955 Less: preference shares and other equity instruments (17,719) (19,746) (22,414) (22,414) (22,276) Total ordinary shareholders’ equity 167,610 158,087 175,836 174,029 161,679 Less: goodwill and intangible assets (net of tax) (11,900) (11,160) (17,643) (17,606) (17,535) Tangible ordinary shareholders’ equity 155,710 146,927 158,193 156,423 144,144 Financial statistics Loans and advances to customers as a percentage of customer accounts 58.2% 58.8% 61.1% 63.2% 72.0% Average total shareholders’ equity to average total assets 6.01% 5.97% 6.62% 6.46% 6.97% Net asset value per ordinary share at year-end ($)4 8.82 8.01 8.76 8.62 8.00 Tangible net asset value per ordinary share at year-end ($)5 8.19 7.44 7.88 7.75 7.13 Tangible net asset value per fully diluted share at year-end ($) 8.14 7.39 7.84 7.72 7.11 Number of $0.50 ordinary shares in issue (millions) 19,263 20,294 20,632 20,694 20,639 Basic number of $0.50 ordinary shares outstanding (millions) 19,006 19,739 20,073 20,184 20,206 Basic number of $0.50 ordinary shares outstanding and dilutive potential ordinary shares (millions) 19,135 19,876 20,189 20,272 20,280 Closing foreign exchange translation rates to $: $1: £ 0.784 0.830 0.739 0.732 0.756 $1: € 0.903 0.937 0.880 0.816 0.890 1 From 1 January 2023, we adopted IFRS 17 ‘Insurance Contracts’, which replaced IFRS 4 ‘Insurance Contracts’. We have restated 2022 comparative data. 2 Capital resources are regulatory total capital, the calculation of which is set out on page 206. 3 Including perpetual preferred securities, details of which can be found in Note 29: Subordinated liabilities on page 406. 4 The definition of net asset value per ordinary share is total shareholders’ equity, less non-cumulative preference shares and capital securities, divided by the number of ordinary shares in issue, excluding own shares held by the company, including those purchased and held in treasury. 5 The definition of tangible net asset value per ordinary share is total ordinary shareholders’ equity excluding goodwill, PVIF (for 2021, 2020 and 2019) and other intangible assets (net of deferred tax), divided by the number of basic ordinary shares in issue, excluding own shares held by the company, including those purchased and held in treasury. Combined view of customer lending and customer deposits 2023 2022 $m $m Loans and advances to customers 938,535 923,561 – of which: HSBC Innovation Bank Limited (formerly SVB UK) 7,955 — Loans and advances to customers of disposal groups reported in ‘Assets held for sale’ 73,285 80,576 – banking business in Canada 56,129 55,197 – retail banking operations in France 16,902 25,029 – other 254 350 Non-current assets held for sale 92 112 Combined customer lending 1,011,912 1,004,249 Currency translation — 20,454 Combined customer lending at constant currency 1,011,912 1,024,703 Customer accounts 1,611,647 1,570,303 – of which: HSBC Innovation Bank Limited (formerly SVB UK) 6,019 — Customer accounts reported in ‘Liabilities of disposal groups held for sale’ 85,950 85,274 – banking business in Canada 63,001 60,606 – retail banking operations in France 22,307 22,348 – other 642 2,320 Combined customer deposits 1,697,597 1,655,577 Currency translation — 30,773 Combined customer deposits at constant currency 1,697,597 1,686,350 Balance sheet commentary compared with 31 December 2022 At 31 December 2023, total assets of $3.0tn were $89bn or 3% higher on a reported basis and increased by $31bn or 1% on a constant currency basis. Reported loans and advances to customers as a percentage of customer accounts was 58.2% compared with 58.8% at 31 December 2022. The movement in this ratio reflected a higher growth in customer accounts than in lending. Assets Cash and balances at central banks decreased by $41bn or 13%, which included a $13bn favourable impact of foreign currency translation differences. The decrease was mainly in HSBC UK, reflecting a reduction in customer accounts and repurchase agreements, as well as an increase in the deployment of our cash surplus into financial investments. Cash fell in HSBC Bank plc as our European branches managed liquidity requirements and due to the completion of the sale of our retail banking operations in France. Cash also decreased in the UK as we deployed our commercial surplus into reverse repurchase agreements and financial investments. Trading assets increased by $71bn or 33%, mainly as we captured increased client activity in equity and debt securities, particularly in Hong Kong and HSBC Bank plc. The increase in trading assets also reflected the use of surplus liquidity to fund trading activities given the subdued demand for customer lending. Derivative assets decreased by $54bn or 19%, mainly in Europe, reflecting adverse revaluation movements on interest rate contracts due to a stabilisation and downward shift in long-term yield curve rates in most major markets. Foreign exchange contracts also fell, primarily in HSBC Bank plc, as a result of reduced volatility in foreign exchange rate movements in 2023. The decrease in derivative assets was consistent with the decrease in derivative liabilities, as the underlying risk is broadly matched. Financial summary 108 HSBC Holdings plc Annual Report and Accounts 2023 Loans and advances to customers of $939bn increased by $15bn or 2% on a reported basis. This included a favourable impact of foreign currency translation differences of $18bn. On a constant currency basis, loans and advances to customers fell by $3bn, reflecting the following movements. In WPB, customer lending increased by $21bn, reflecting growth in mortgage balances, notably in our main legal entities in Hong Kong (up $6bn), the UK (up $5bn), Mexico (up $1bn) and Australia (up $1bn). There was an increase of $7.8bn in secured lending in our main entity in Europe following the reclassification of a portfolio of home loans previously classified as assets held for sale, relating to the sale of our retail banking operations in France. The increase also included growth of $3bn in credit card balances, mainly in our entities in Hong Kong, the UK and Mexico. These increases were partly offset by reductions due to business divestments in Oman and New Zealand. In GBM, lending fell by $16bn due to a reduction in term lending, primarily in our main legal entities in Hong Kong, including a reduction in the commercial real estate sector, and in Europe, reflecting muted client demand. Lending also fell by $1bn due to the merger of our operations in Oman with Sohar International. In addition there was a transfer of GBM customers to CMB in Australia and Indonesia, resulting in a $3bn reduction. In CMB, customer lending was $7bn lower, mainly in our main legal entities in Hong Kong, including in the commercial real estate sector, and in the US, as well as in HSBC Bank plc, reflecting weaker client demand in a higher interest rate environment. Lending also fell by $1bn due to the sale of our business in Oman. In HSBC UK, lending grew by $4bn, as an increase from the acquisition of SVB UK of $8bn partly mitigated reductions from clients repaying their facilities. The transfer of customers to CMB from GBM in Australia and Indonesia, referred to above, led to an increase of $3bn. Financial investments increased by $78bn or 21%, mainly in Asia and Europe from the purchase of debt securities, treasury and other eligible bills, as we redeployed our commercial surplus to benefit from higher yield curves and enhance our hedging activities on net interest income. The increase was across both debt instruments held at fair value through other comprehensive income and instruments held at amortised cost. Assets held for sale of $114bn primarily comprised the assets relating to the sale of our retail banking operations in France and the planned sale of our banking business in Canada. This balance was broadly stable compared with 2022, as a decrease of $8bn relating to the transfer to loans and advances to customers of a portfolio of secured home loans in France was largely offset by a transfer of cash into assets held for sale, related to the completion of the sale of our retail banking operations there. Liabilities Customer accounts of $1.6tn increased by $41bn or 3% on a reported basis. This included a favourable impact of foreign currency translation differences of $28bn. On a constant currency basis, customer accounts increased by $13bn, reflecting the following movements. In WPB, customer accounts grew by $12bn, reflecting higher interest- bearing term and money market deposit balances, as interest rates rose, primarily in our main legal entity in Asia, notably Hong Kong (up $10bn, or 3%), Singapore (up $5bn, or 15%), Australia (up $3bn, or 19%), mainland China (up $3bn, or 19%) and Taiwan up ($2bn, or 34%). However, customer accounts fell by $14bn in HSBC UK, reflecting cost of living and competitive pressures. There was also a reduction due to the sale of our business in Oman. In CMB, customer accounts increased by $3bn. The growth included an increase of $6bn related to our acquisition of SVB UK, as well as increases in our entities in Asia, excluding Hong Kong, and in continental Europe, mainly in term and money market deposits. In addition, a transfer of customers from GBM to CMB in Australia and Indonesia resulted in a rise of $4bn. These increases mitigated reductions in our main entities in Hong Kong and the UK and a reduction of $2bn due to the sale of our business in Oman. In GBM, customer accounts were marginally lower, falling $2bn. Balances fell in Hong Kong and the UK, although there was growth in continental Europe and Singapore. Balances fell by $1bn following the sale of our business in Oman, and by $4bn due to the transfer of customers from GBM to CMB in Australia and Indonesia. Repurchase agreements – non-trading increased by $44bn or 35%, notably in HSBC Bank plc, reflecting higher client demand, and in our main entity in Asia due to a higher requirement for short-term funding. Derivative liabilities decreased by $51bn or 18%, which is consistent with the reduction in derivative assets, since the underlying risk is broadly matched. Debt securities in issue increased by $16bn or 20%, due to a net increase in debt issuances. Liabilities of disposal groups held for sale of $108bn primarily comprised the liabilities relating to the sale of our retail banking operations in France and the planned sale of our banking business in Canada. Equity Total shareholders’ equity, including non-controlling interests, increased by $7bn or 4% compared with 31 December 2022. Shareholders’ equity was increased by profits generated of $25bn and net gains through other comprehensive income (‘OCI’) of $5bn. These increases were partly offset by the impact of dividends paid of $12bn, the redemption of perpetual subordinated contingent convertible capital securities of $4bn and the impact of our $7bn share buy-back activities in 2023. The net gains through OCI of $5bn included favourable movements of $3bn on financial instruments designated as hold-to-collect-and-sell, which are held as hedges to our exposure to interest rate movements. The favourable movement was a result of the fall in long- term market yield curves in 2023. The net gain also included a favourable movement on cash flow hedges of $3bn and from the effects of hyperinflation of $2bn. These gains were partly offset by fair value losses on liabilities related to changes in own credit risk of $1bn, as well as other smaller losses. Financial investments As part of our interest rate hedging strategy, we hold a portfolio of debt instruments, reported within financial investments, which are classified as hold-to-collect-and-sell. As a result, the change in value of these instruments is recognised through ‘debt instruments at fair value through other comprehensive income’ in equity. At 31 December 2023, we recognised a pre-tax cumulative unrealised loss reserve through other comprehensive income of $3.9bn related to these hold-to-collect-and-sell positions. This reflected a $2.6bn pre- tax gain in 2023, inclusive of movements on related fair value hedges. The gain in 2023 included a reduction in unrealised losses due to the disposal of securities as part of repositioning actions taken in this portfolio of $1.0bn. Overall, the Group is positively exposed to rising interest rates through net interest income, although there is an adverse impact on our capital base in the early stages of a rising interest rate environment due to the fair value of hold-to collect-and- sell instruments. Over time, these adverse movements will unwind as the instruments reach maturity, although not all will necessarily be held to maturity. We also hold a portfolio of financial investments measured at amortised cost, which are classified as hold-to-collect. At 31 December 2023, there was a cumulative unrealised loss of $1.7bn, although the unrealised loss is not reflected on our balance sheet. This included $1.0bn that related to debt instruments held to manage our interest rate exposure, representing a $0.8bn improvement during 2023. HSBC Holdings plc Annual Report and Accounts 2023 109 Financial review Risk-weighted assets Risk-weighted assets (‘RWAs’) totalled $854.1bn at 31 December 2023, a $14.4bn increase since 2022, including foreign currency translation differences of $2.0bn. This was mainly due to: – a $26.2bn increase in asset size, which was mostly attributed to WPB lending growth and a rise in operational risk RWAs, offset by reduced lending in CMB and GBM; – a $6.2bn increase from acquisitions, mainly from SVB UK, partly offset by a disposal of our Oman business; and – a $19.9bn decrease in RWAs due to changes in methodology and policy. Customer accounts by country/territory 2023 20221 $m $m Hong Kong 543,504 542,543 UK 508,181 493,028 US 99,607 100,404 Singapore 73,547 61,475 Mainland China 56,006 56,948 France1 42,666 33,726 Australia 32,071 28,506 Germany 30,641 28,949 Mexico 29,423 25,531 UAE 24,882 23,331 India 24,377 22,636 Taiwan 16,949 15,316 Malaysia 15,983 16,008 Switzerland 8,047 5,167 Egypt 5,858 6,045 Indonesia 5,599 5,840 Türkiye 3,510 3,497 Other2 90,796 101,353 At 31 Dec 1,611,647 1,570,303 1 From 1 January 2023, we adopted IFRS 17 ‘Insurance Contracts’, which replaced IFRS 4 ‘Insurance Contracts’. We have restated 2022 comparative data. 2 At 31 December 2023, customer accounts of $86bn (2022: $85bn) met the criteria to be classified as held for sale and are reported within ‘Liabilities of disposal groups held for sale’ on the balance sheet, of which $63bn (2022: $61bn) and $22bn (2022: $22bn) belongs to the planned sale of the banking business in Canada and sale of our retail banking operations in France, respectively. Refer to Note 23 on page 401 for further details. Loans and advances, deposits by currency At 31 Dec 2023 $m USD GBP HKD EUR CNY Others1 Total Loans and advances to banks 33,231 15,632 7,106 4,688 8,772 43,473 112,902 Loans and advances to customers 170,274 284,261 213,079 68,655 49,594 152,672 938,535 Total loans and advances 203,505 299,893 220,185 73,343 58,366 196,145 1,051,437 Deposits by banks 28,744 18,231 2,597 6,997 4,517 12,077 73,163 Customer accounts 441,967 423,725 305,520 128,444 63,535 248,456 1,611,647 Total deposits 470,711 441,956 308,117 135,441 68,052 260,533 1,684,810 31 Dec 20222 Loans and advances to banks 34,495 12,292 5,188 6,328 7,833 38,339 104,475 Loans and advances to customers 182,719 265,988 221,150 57,077 49,036 147,591 923,561 Total loans and advances 217,214 278,280 226,338 63,405 56,869 185,930 1,028,036 Deposits by banks 23,133 16,963 4,002 8,830 4,707 9,087 66,722 Customer accounts 430,866 422,087 312,052 112,399 63,032 229,867 1,570,303 Total deposits 453,999 439,050 316,054 121,229 67,739 238,954 1,637,025 1 ‘Others’ includes items with no currency information available of $1,592m for loans to banks (2022: $1,112m), $1,904m for loans to customers (2022: $2,112m), $11m for deposits by banks (2022: $13m) and $8m for customer accounts (2022: $6m). 2 From 1 January 2023, we adopted IFRS 17 ‘Insurance Contracts’, which replaced IFRS 4 ‘Insurance Contracts’. Comparative data have been restated accordingly. RWAs by currency At 31 Dec 2023 $m USD GBP HKD EUR CNY Others Total RWAs1 202,697 155,231 135,701 69,996 57,907 232,582 854,114 31 Dec 2022 RWAs1 223,657 143,474 152,804 60,843 49,867 209,075 839,720 1 RWAs includes credit risk, market risk and operational risk RWAs. Financial summary 110 HSBC Holdings plc Annual Report and Accounts 2023 Global businesses and legal entities Contents 111 Summary 111 Supplementary analysis of constant currency results and notable items by global business 114 Reconciliation of reported and constant currency risk-weighted assets 114 Supplementary tables for WPB and GBM 120 Analysis of reported results by legal entities 123 Summary information – legal entities and selected countries/ territories 128 Analysis by country/territory Summary The Group Chief Executive, supported by the rest of the Group Executive Committee (‘GEC‘), reviews operating activity on a number of bases, including by global business and legal entities. Our global businesses – Wealth and Personal Banking, Commercial Banking, and Global Banking and Markets – along with Corporate Centre are our reportable segments under IFRS 8 ‘Operating Segments’ and are presented below and in Note 10: Segmental analysis on page 372. On 1 January 2023, we updated our financial reporting framework and changed the supplementary presentation of results from geographical regions to main legal entities to better reflect the Group’s structure. The results of main legal entities are presented on a reported and constant currency basis, including HSBC UK Bank plc, HSBC Bank plc, The Hongkong and Shanghai Banking Corporation Limited, HSBC Bank Middle East Limited, HSBC North America Holdings Inc., HSBC Bank Canada and Grupo Financiero HSBC, S.A. de C.V. The results of legal entities are presented on a reported basis on page 120 and a constant currency basis on page 123. Basis of preparation The Group Chief Executive, supported by the rest of the GEC, is considered the Chief Operating Decision Maker (‘CODM’) for the purposes of identifying the Group’s reportable segments. Global business results are assessed by the CODM on the basis of constant currency performance. We separately disclose ‘notable items’, which are components of our income statement that management would consider as outside the normal course of business and generally non-recurring in nature. Constant currency performance information for 2022 and 2021 are presented as described on page 101. As required by IFRS 8, reconciliations of the total constant currency global business results to the Group’s reported results are presented on page 373. Supplementary reconciliations from reported to constant currency results by global business are presented on pages 111 to 113 for information purposes. Global business performance is also assessed using return on tangible equity (‘RoTE’). A reconciliation of global business RoTE to the Group’s RoTE is provided on page 132. Our operations are closely integrated and, accordingly, the presentation of data includes internal allocations of certain items of income and expense. These allocations include the costs of certain support services and global functions to the extent that they can be meaningfully attributed to global businesses and legal entities. While such allocations have been made on a systematic and consistent basis, they necessarily involve a degree of subjectivity. Costs that are not allocated to global businesses are included in Corporate Centre. Where relevant, income and expense amounts presented include the results of inter-segment funding along with inter-company and inter- business line transactions. All such transactions are undertaken on arm’s length terms. The intra-Group elimination items for the global businesses are presented in Corporate Centre. HSBC Holdings incurs the liability of the UK bank levy, with the cost being recharged to its UK operating subsidiaries. The current year expense will be reflected in the fourth quarter as it is assessed on our balance sheet position as at 31 December. In the first quarter of 2023, following an internal review to assess which global businesses were best suited to serve our customers’ respective needs, a portfolio of our customers within our entities in Latin America was transferred from Global Banking and Markets to Commercial Banking for reporting purposes. Comparative data have been re- presented accordingly. Similar smaller transfers from Global Banking and Markets to Commercial Banking were also undertaken within our entities in Australia and Indonesia, where comparative data have not been re- presented. Supplementary analysis of constant currency results and notable items by global business Revenue3 27,275 22,867 16,115 (199) 66,058 ECL (1,058) (2,062) (326) (1) (3,447) Operating expenses (14,738) (7,524) (9,865) 57 (32,070) Share of profit in associates and joint ventures 65 (1) — (257) (193) Profit/(loss) before tax 11,544 13,280 5,924 (400) 30,348 Loans and advances to customers (net) 454,878 309,422 173,966 269 938,535 Customer accounts 804,863 475,666 330,522 596 1,611,647 Constant currency results1 2023 Wealth and Personal Banking Commercial Banking2 Global Banking and Markets2 Corporate Centre Total $m $m $m $m $m 1 In the current period constant currency results are equal to reported as there is no currency translation. 2 In the first quarter of 2023, following an internal review to assess which global businesses were best suited to serve our customers’ respective needs, a portfolio of our customers within our markets in Latin America was transferred from GBM to CMB for reporting purposes. Comparative data have been re-presented accordingly. 3 Net operating income before change in expected credit losses and other credit impairment charges, also referred to as revenue. HSBC Holdings plc Annual Report and Accounts 2023 111 Financial review Notable items 2023 Wealth and Personal Banking Commercial Banking Global Banking and Markets Corporate Centre Total $m $m $m $m $m Notable items Revenue Disposals, acquisitions and related costs1,2,3 4 1,591 — (297) 1,298 Fair value movements on financial instruments4 — — — 14 14 Disposal losses on Markets Treasury repositioning (391) (316) (270) — (977) Operating expenses Disposals, acquisitions and related costs (53) (55) 3 (216) (321) Restructuring and other related costs5 20 32 21 63 136 Impairment of interest in associate6 — — — (3,000) (3,000) 1 Includes the impact of the sale of our retail banking operations in France. 2 Includes the provisional gain of $1.6bn recognised in respect of the acquisition of SVB UK. 3 Includes fair value movements on the foreign exchange hedging of the expected proceeds from the planned sale of our banking operations in Canada. 4 Fair value movements on non-qualifying hedges in HSBC Holdings. 5 Amounts relate to reversals of restructuring provisions recognised during 2022. 6 Relates to an impairment loss of $3.0bn recognised in respect of the Group’s investment in BoCom. See Note 18 on page 391. Reconciliation of reported results to constant currency results – global businesses (continued) 20221 Wealth and Personal Banking Commercial Banking1 Global Banking and Markets2 Corporate Centre Total $m $m $m $m $m Revenue3 Reported 21,103 16,494 14,899 (1,876) 50,620 Currency translation (219) (211) (297) (22) (749) Constant currency 20,884 16,283 14,602 (1,898) 49,871 ECL Reported (1,130) (1,849) (595) (10) (3,584) Currency translation (56) (13) 22 1 (46) Constant currency (1,186) (1,862) (573) (9) (3,630) Operating expenses Reported (14,415) (7,052) (9,383) (1,851) (32,701) Currency translation 167 158 45 29 399 Constant currency (14,248) (6,894) (9,338) (1,822) (32,302) Share of profit/(loss) in associates and joint ventures Reported 30 — (2) 2,695 2,723 Currency translation — — — (121) (121) Constant currency 30 — (2) 2,574 2,602 Profit/(loss) before tax Reported 5,588 7,593 4,919 (1,042) 17,058 Currency translation (108) (66) (230) (113) (517) Constant currency 5,480 7,527 4,689 (1,155) 16,541 Loans and advances to customers (net) Reported 422,309 311,957 188,940 355 923,561 Currency translation 11,813 4,906 1,262 6 17,987 Constant currency 434,122 316,863 190,202 361 941,548 Customer accounts Reported 779,310 463,928 326,630 435 1,570,303 Currency translation 14,000 8,496 5,673 23 28,192 Constant currency 793,310 472,424 332,303 458 1,598,495 1 From 1 January 2023, we adopted IFRS 17 ‘Insurance Contracts’, which replaced IFRS 4 ‘Insurance Contracts’. Comparative data for the financial year ended 31 December 2022 have been restated accordingly. 2 In the first quarter of 2023, following an internal review to assess which global businesses were best suited to serve our customers’ respective needs, a portfolio of our customers within our entities in Latin America was transferred from GBM to CMB for reporting purposes. Comparative data have been re-presented accordingly. 3 Net operating income before change in expected credit losses and other credit impairment charges, also referred to as revenue. Global businesses 112 HSBC Holdings plc Annual Report and Accounts 2023 Notable items (continued) 20221 Wealth and Personal Banking Commercial Banking Global Banking and Markets Corporate Centre Total $m $m $m $m $m Notable items Revenue Disposals, acquisitions and related costs2 (2,212) — — (525) (2,737) Fair value movements on financial instruments3 — — — (618) (618) Restructuring and other related costs4 98 (16) (184) (145) (247) Operating expenses Disposals, acquisitions and related costs (7) — — (11) (18) Restructuring and other related costs (357) (266) (252) (2,007) (2,882) 1 From 1 January 2023, we adopted IFRS 17 ‘Insurance Contracts’, which replaced IFRS 4 ‘Insurance Contracts’. Comparative data for the financial year ended 31 December 2022 have been restated accordingly. 2 Includes losses from classifying businesses as held for sale as part of a broader restructuring of our European business, of which $2.3bn (inclusive of $0.4bn in goodwill impairments) related to the planned sale of the retail banking operations in France. 3 Fair value movements on non-qualifying hedges in HSBC Holdings. 4 Comprises gains and losses relating to the business update in February 2020, including losses associated with the RWA reduction programme. Reconciliation of reported results to constant currency results – global businesses (continued) 20211 Wealth and Personal Banking Commercial Banking Global Banking and Markets Corporate Centre Total $m $m $m $m $m Revenue2 Reported 22,117 13,743 14,276 (584) 49,552 Currency translation (1,145) (1,044) (1,190) (94) (3,473) Constant currency 20,972 12,699 13,086 (678) 46,079 ECL Reported 288 397 240 3 928 Currency translation (93) (58) (19) — (170) Constant currency 195 339 221 3 758 Operating expenses Reported (16,306) (7,213) (10,045) (1,056) (34,620) Currency translation 968 522 790 96 2,376 Constant currency (15,338) (6,691) (9,255) (960) (32,244) Share of profit/(loss) in associates and joint ventures Reported 34 1 — 3,011 3,046 Currency translation 2 — — (241) (239) Constant currency 36 1 — 2,770 2,807 Profit/(loss) before tax Reported 6,133 6,928 4,471 1,374 18,906 Currency translation (268) (580) (419) (239) (1,506) Constant currency 5,865 6,348 4,052 1,135 17,400 Loans and advances to customers (net) Reported 488,786 353,182 203,106 740 1,045,814 Currency translation (15,482) (12,579) (6,913) (28) (35,002) Constant currency 473,304 340,603 196,193 712 1,010,812 Customer accounts Reported 859,029 511,195 339,698 652 1,710,574 Currency translation (24,262) (15,703) (17,392) (30) (57,387) Constant currency 834,767 495,492 322,306 622 1,653,187 1 Comparative data for the year ended 31 December 2021 are prepared on an IFRS 4 basis. 2 Net operating income/(expense) before change in expected credit losses and other credit impairment charges, also referred to as revenue. Notable items (continued) 20211 Wealth and Personal Banking Commercial Banking Global Banking and Markets Corporate Centre Total $m $m $m $m $m Notable items Revenue Fair value movements on financial instruments2 — — — (221) (221) Restructuring and other related costs3 14 (3) (395) 77 (307) Operating expenses Impairment of non-financial items (587) — — — (587) Restructuring and other related costs (296) (83) (195) (1,262) (1,836) 1 Comparative data for the year ended 31 December 2021 are prepared on an IFRS 4 basis. 2 Fair value movements on non-qualifying hedges in HSBC Holdings. 3 Comprises gains and losses relating to the business update in February 2020, including losses associated with the RWA reduction programme. HSBC Holdings plc Annual Report and Accounts 2023 113 Financial review Reconciliation of reported and constant currency risk-weighted assets At 31 Dec 2023 Wealth and Personal Banking Commercial Banking1 Global Banking and Markets1 Corporate Centre Total $bn $bn $bn $bn $bn Risk-weighted assets Reported 192.9 354.5 218.5 88.2 854.1 Constant currency 192.9 354.5 218.5 88.2 854.1 At 31 Dec 2022 Risk-weighted assets Reported 182.9 342.4 225.9 88.5 839.7 Currency translation 1.7 1.8 (0.1) — 3.4 Constant currency 184.6 344.2 225.8 88.5 843.1 At 31 Dec 2021 Risk-weighted assets Reported 178.3 340.0 229.1 90.9 838.3 Currency translation (6.1) (15.9) (8.4) (1.4) (31.8) Constant currency 172.2 324.1 220.7 89.5 806.5 1 In the first quarter of 2023, following an internal review to assess which global businesses were best suited to serve our customers’ respective needs, a portfolio of our customers within our entities in Latin America was transferred from GBM to CMB for reporting purposes. Comparative data have been re-presented accordingly. Supplementary tables for WPB and GBM WPB constant currency performance by business unit A breakdown of WPB by business unit is presented below to reflect the basis of how the revenue performance of the business units is assessed and managed. WPB – summary (constant currency basis) Consists of1 Total WPB Banking operations Life insurance Global Private Banking Asset management $m $m $m $m $m 2023 Net operating income before change in expected credit losses and other credit impairment charges2 27,275 22,279 1,462 2,252 1,282 – net interest income 20,491 19,055 282 1,155 (1) – net fee income/(expense) 5,355 3,213 151 794 1,197 – other income 1,429 11 1,029 303 86 ECL (1,058) (1,056) 4 (6) — Net operating income 26,217 21,223 1,466 2,246 1,282 Total operating expenses (14,738) (11,474) (682) (1,627) (955) Operating profit 11,479 9,749 784 619 327 Share of profit in associates and joint ventures 65 15 50 — — Profit before tax 11,544 9,764 834 619 327 2022 Net operating income before change in expected credit losses and other credit impairment charges2 20,884 16,383 1,354 2,016 1,131 – net interest income 15,971 14,673 339 965 (6) – net fee income/(expense) 5,307 3,260 154 788 1,105 – other income (394) (1,550) 861 263 32 ECL (1,186) (1,173) (8) (4) (1) Net operating income 19,698 15,210 1,346 2,012 1,130 Total operating expenses (14,248) (11,132) (785) (1,477) (854) Operating profit 5,450 4,078 561 535 276 Share of profit in associates and joint ventures 30 13 17 — — Profit before tax 5,480 4,091 578 535 276 Global businesses 114 HSBC Holdings plc Annual Report and Accounts 2023 WPB – summary (constant currency basis) (continued) Total WPB Consists of1 Banking operations Life insurance manufacturing3 Global Private Banking Asset management $m $m $m $m $m 2021 Net operating income before change in expected credit losses and other credit impairment charges2 20,972 15,527 2,512 1,777 1,156 – net interest income 13,447 10,563 2,256 630 (2) – net fee income/(expense) 5,677 4,249 (603) 916 1,115 – other income 1,848 715 859 231 43 ECL 195 204 (21) 13 (1) Net operating income 21,167 15,731 2,491 1,790 1,155 Total operating expenses (15,338) (12,379) (629) (1,538) (792) Operating profit 5,829 3,352 1,862 252 363 Share of profit in associates and joint ventures 36 19 17 — — Profit before tax 5,865 3,371 1,879 252 363 1 Net operating income before change in expected credit losses and other credit impairment charges, also referred to as revenue. 2 From 1 January 2023, we adopted IFRS 17 ‘Insurance Contracts’, which replaced IFRS 4 ‘Insurance Contracts’. Comparative data for the year ended 31 December 2022 have been restated accordingly. Comparative data for the year ended 31 December 2021 is prepared on an IFRS 4 basis. 3 We adopted IFRS 17 from 1 January 2023 and have restated 2022 financial data. Data for 2021 has not restated, and ‘Life insurance manufacturing’ is disclosed on the basis of preparation prevailing in 2021, which includes results from our manufacturing business only, with insurance distribution presented in ‘banking operations’. Life insurance business performance The following table provides an analysis of the performance of our life insurance business for the period. It comprises income earned by our insurance manufacturing operations within our WPB business, as well as income earned and costs incurred within our Wealth insurance distribution channels, consolidation and inter-company elimination entries. Results of WPB’s life insurance business unit (constant currency basis) Year ended 31 Dec 2023 Insurance manufac- turing operations Wealth insurance and other1 Life insurance $m $m $m Net interest income 283 (1) 282 Net fee income/(expense) (27) 178 151 Other income 990 39 1,029 – insurance service results 1,127 (34) 1,093 – net investment returns (excluding net interest income) (119) 30 (89) – other operating income (18) 43 25 Net operating income before change in expected credit losses and other credit impairment charges2 1,246 216 1,462 ECL 4 — 4 Net operating income 1,250 216 1,466 Total operating expenses (571) (111) (682) Operating profit 679 105 784 Share of profit/(loss) in associates and joint ventures 50 — 50 Profit before tax 729 105 834 Year ended 31 Dec 20223 Net interest income 345 (6) 339 Net fee income/(expense) (31) 185 154 Other income 847 14 861 – insurance service results 861 (18) 843 – net investment returns (excluding net interest income) (176) (28) (204) – other operating income 162 60 222 Net operating income before change in expected credit losses and other credit impairment charges2 1,161 193 1,354 ECL (8) — (8) Net operating income 1,153 193 1,346 Total operating expenses (594) (191) (785) Operating profit 559 2 561 Share of profit/(loss) in associates and joint ventures 17 — 17 Profit before tax 576 2 578 1 ‘Wealth insurance and other’ includes fee income earned and operating expenses incurred within our Wealth distribution channels. It also includes the IFRS 17 consolidation entries arising from transactions between our insurance manufacturing operations and Wealth distribution channels and with the wider Group, as well as allocations of central costs benefiting life insurance. 2 Net operating income before change in expected credit losses and other credit impairment charges, also referred to as revenue. 3 From 1 January 2023, we adopted IFRS 17 ‘Insurance Contracts’, which replaced IFRS 4 ‘Insurance Contracts’. Comparative data have been restated accordingly. This table presents an IFRS 17-specific analysis of results and therefore does not include 2021 comparatives. HSBC Holdings plc Annual Report and Accounts 2023 115 Financial review WPB insurance manufacturing (constant currency basis) The following table shows the results of our insurance manufacturing operations for our WPB business and for all global business segments in aggregate. Results of insurance manufacturing operations1,2,3 2023 2022 2021 WPB All global businesses WPB All global businesses WPB All global businesses $m $m $m $m $m $m Net interest income  283 320 345 370 2,255 2,430 Net fee expense (27) (14) (31) (16) (599) (629) Other income 990 981 847 847 14,257 14,745 Insurance service result 1,127 1,125 861 866 — — – release of contractual service margin 1,094 1,094 902 902 — — – risk adjustment release 44 44 45 45 — — – experience variance and other 30 28 42 47 — — – loss from onerous contracts (41) (41) (128) (128) — — Net investment returns (excluding net interest income)4 (119) (125) (176) (187) 3,948 3,980 – insurance finance income/(expense) (7,809) (7,809) 13,850 13,853 — — – other investment income 7,690 7,684 (14,026) (14,040) 3,948 3,980 Net insurance premium income — — — — 10,145 10,617 Other operating income (18) (19) 162 168 164 148 Total operating income 1,246 1,287 1,161 1,201 15,913 16,546 Net insurance claims and benefits paid and movement in liabilities to policyholders — — — — (13,366) (13,863) Net operating income before change in expected credit losses and other credit impairment charges5 1,246 1,287 1,161 1,201 2,547 2,683 Change in expected credit losses and other credit impairment charges 4 4 (8) (9) (18) (22) Net operating income 1,250 1,291 1,153 1,192 2,529 2,661 Total operating expenses (571) (581) (594) (589) (564) (590) Operating profit 679 710 559 603 1,965 2,071 Share of profit in associates and joint ventures 50 50 17 17 17 17 Profit before tax of insurance business operations6 729 760 576 620 1,982 2,088 Additional information Insurance manufacturing new business contractual service margin (reported basis) 1,686 1,686 1,111 1,111 — — Consolidated Group new business contractual service margin (reported basis) 1,812 1,812 1,229 1,229 — — Annualised new business premiums of insurance manufacturing operations 3,797 3,797 2,354 2,354 2,777 2,830 1 From 1 January 2023, we adopted IFRS 17 ‘Insurance Contracts’, which replaced IFRS 4 ‘Insurance Contracts’. Comparative data for 2022 have been restated accordingly; comparative data for 2021 are reported under IFRS 4 ‘Insurance Contracts’. 2 Constant currency results are derived by adjusting for period-on-period effects of foreign currency translation differences. The impact of foreign currency translation differences on ‘All global businesses’ profit before tax was a $13m increase for 2022 and a $53m decrease in 2021. 3 The results presented for insurance manufacturing operations are shown before elimination of inter-company transactions with HSBC non-insurance operations. The ‘All global businesses‘ result consists primarily of WPB business, as well as a small proportion of CMB business. 4 Net investment return under IFRS 17 for all global businesses for 2023 was $195m (2022: $183m), which consisted of net interest income, net income/(expenses) on assets held at fair value through profit or loss, and insurance finance income/(expense). 5 Net operating income before change in expected credit losses and other credit impairment charges, also referred to as revenue. 6 The effect of applying hyperinflation accounting in Argentina on insurance manufacturing operations in all global business resulted in a decrease of $41m in revenue in 2023 (2022: decrease of $7m, 2021: increase of $1m) and a decrease of $41m in profit before tax in 2023 (2022: decrease of $6m, 2021: increase of $1m). Insurance manufacturing The following commentary, unless otherwise specified, relates to the ‘All global businesses’ results. Profit before tax of $0.8bn increased by $0.1bn compared with 2022. This primarily reflected the following: – Insurance service result of $1.1bn increased by $0.3bn compared with 2022. This was driven by an increase in the release of CSM of $0.2bn as a result of a higher closing CSM balance from the effect of new business written and favourable assumption updates primarily from updates to lapse rate assumptions. The improved insurance service result also reflected a reduction to losses from onerous contracts of $0.1bn, mainly in Hong Kong and Singapore, in part due to improved market conditions in 2023. – Net investment return (excluding net interest income) increased by $0.1bn, with positive asset returns in 2023 compared with losses in the prior period. – Other operating income reduced by $0.2bn compared with 2022, and included a $0.3bn loss from corrections to historical valuation estimates, partly offset by gains of $0.2bn from reinsurance contracts in Hong Kong. Profit before tax of $0.6bn in 2022 reduced by $1.5bn compared with 2021, primarily reflecting the change in reporting basis from IFRS 4 ‘Insurance Contracts’ in 2021 to IFRS 17 ‘Insurance Contracts’ in 2022. Further information regarding the impact of transition is provided in Note 38 ‘Effects of adoption of IFRS 17’ on page 422. Annualised new business premiums (‘ANP’) is used to assess new insurance premiums generated by the business. It is calculated as 100% of annualised first year regular premiums and 10% of single premiums, before reinsurance ceded. ANP in 2023 increased by 61% compared with 2022, primarily from strong new business sales in Hong Kong and a shift in product mix from single to multi-premium products. Insurance manufacturing value of new business Insurance manufacturing value of new business is a non-GAAP alternative performance measure that provides information about value generation from new business sold during the period. Since transitioning to IFRS 17, insurance manufacturing value of new business is a metric used internally to measure the long-term profitability of new business sold, and its disclosure supports the consistent communication of this performance measure, albeit on a Global businesses 116 HSBC Holdings plc Annual Report and Accounts 2023 new calculation basis. Insurance manufacturing value of new business is calculated as the sum of the IFRS 17 new business CSM and loss component adjusted for: – a full attribution of expenses incurred within our insurance manufacturing operations. IFRS 17 considers only directly attributable expenses within the new business CSM measurement; and – long-term asset spreads expected to be generated over the contract term. Under IFRS 17, new business CSM is in contrast calculated on a market consistent risk neutral basis. This also necessitates changes to the underlying economic scenario models used in the valuation of policyholder guarantees to reflect this basis. There were no other adjustments made, with demographic and expense assumptions remaining unchanged, except for inclusion of future non-attributable expenses as described above. The IFRS 17 risk adjustment remained unchanged, with no additional allowances made for market risks. Insurance manufacturing value of new business was measured before tax and after inclusion of the impact of reinsurance. Insurance manufacturing value of new business 2023 2022 $m $m Insurance manufacturing operations new business CSM and loss component1 1,678 1,095 Inclusion of incremental expenses not attributable to the contractual service margin (342) (285) Long-term asset spreads 238 362 Insurance manufacturing value of new business 1,574 1,172 1 Insurance manufacturing new business contractual service margin was $1,686m (2022: $1,111m) and the loss component was $8m (2022: $16m). Insurance equity plus CSM net of tax Insurance equity plus CSM net of tax is a non-GAAP alternative performance measure that provides information about our insurance manufacturing operations’ net asset value plus the future earnings from in-force business. At 31 December 2023, insurance equity plus CSM net of tax was $16,583m (31 December 2022: $14,646m). At 31 December 2023, insurance equity plus CSM net of tax was calculated as insurance manufacturing operations equity of $7,731m plus CSM of $10,786m less tax of $1,934m. At 31 December 2022, it was calculated as insurance manufacturing operations equity of $7,236m plus CSM of $9,058m less tax of $1,648m. Insurance manufacturing proxy embedded value Insurance manufacturing proxy embedded value is a non-GAAP alternative performance measure that provides information about the value of the insurance manufacturing operations and is defined as total shareholders’ equity plus the present value of projected future profits. It is not comparable with peer embedded value disclosure as there is no single industry standard basis of calculation. The present value of projected future profits is calculated as the CSM net of tax adjusted for: – a full attribution of expenses incurred within our insurance manufacturing operations, net of tax. IFRS 17 considers only directly attributable expenses within the CSM measurement; and – long-term asset spreads expected to be generated over the contract term, net of tax. Under IFRS 17, CSM is in contrast calculated on a market consistent risk neutral basis. This also necessitates changes to the underlying economic scenario models used in the valuation of policyholder guarantees to reflect this basis. There are no other adjustments made, with demographic and expense assumptions remaining unchanged, except for inclusion of future non-attributable expenses as described above. The IFRS 17 risk adjustment remained unchanged, with no additional allowances made for market risks. Insurance manufacturing proxy embedded value was measured after tax and after inclusion of the impact of reinsurance. Insurance manufacturing proxy embedded value At 31 Dec 2023 At 31 Dec 2022 $m $m Total shareholders’ equity and contractual service margin net of tax 16,583 14,646 Inclusion of incremental expenses not attributable to the contractual service margin, net of tax (582) (559) Long-term asset spreads, net of tax 2,368 2,369 Insurance manufacturing proxy embedded value 18,369 16,456 WPB: Wealth balances The following table shows the wealth balances, which include invested assets and wealth deposits. Invested assets comprise customer assets either managed by our Asset Management business or by external third-party investment managers, as well as self-directed investments by our customers. WPB – reported wealth balances1 2023 2022 $bn $bn Global Private Banking invested assets 363 312 – managed by Global Asset Management 61 57 – external managers, direct securities and other 302 255 Retail invested assets 383 363 – managed by Global Asset Management 178 198 – external managers, direct securities and other 205 165 Asset Management third-party distribution 445 340 Reported invested assets1 1,191 1,015 Wealth deposits (Premier, Jade and Global Private Banking)2 536 503 Total reported wealth balances 1,727 1,518 1 Invested assets are not reported on the Group’s balance sheet, except where it is deemed that we are acting as principal rather than agent in our role as investment manager. At 31 December 2023, $32bn of invested assets were classified as held for sale and are not included in the table above. 2 Premier, Jade and Global Private Banking deposits, which include Prestige deposits in Hang Seng Bank, form part of the total WPB customer accounts balance of $805bn (2022: $779bn) on page 111. At 31 December 2023, $42bn of wealth deposits were classified as held for sale and are not included in the table above. HSBC Holdings plc Annual Report and Accounts 2023 117 Financial review Asset Management: funds under management The following table shows the funds under management of our Asset Management business. Funds under management represents assets managed, either actively or passively, on behalf of our customers. Funds under management are not reported on the Group’s balance sheet, except where it is deemed that we are acting as principal rather than agent in our role as investment manager. Asset Management – reported funds under management1 2023 2022 $bn $bn Opening balance 595 630 Net new invested assets 54 45 Net market movements 23 (36) Foreign exchange and others 12 (44) Closing balance 684 595 Asset Management – reported funds under management by legal entities 2023 2022 $bn $bn HSBC Bank plc 162 134 The Hongkong and Shanghai Banking Corporation Limited 198 184 HSBC North America Holdings Inc. 71 60 Grupo Financiero HSBC, S.A. de C.V. 15 8 Other trading entities2 238 209 Closing balance 684 595 1 Funds under management are not reported on the Group’s balance sheet, except where it is deemed that we are acting as principal rather than agent in our role as investment manager. 2 Funds under management of $177bn in 2023 and $143bn in 2022 relating to our Asset Management entity in the UK are reported under ‘other trading entities’ in the table above. At 31 December 2023, Asset Management funds under management amounted to $684bn, an increase of $89bn or 15%. The increase reflected net new invested assets of $54bn and a positive impact from market performances and foreign exchange translation. Net new invested assets were notably from additions in money market and exchange traded funds, as well as passive and private equity products. Global Private Banking: client balances Global Private Banking client balances comprises invested assets and deposits, which are translated at the rates of exchange applicable for their respective year-ends, with the effects of currency translation reported separately. Global Private Banking – reported client balances1 2023 2022 $bn $bn Opening balance 383 423 Net new invested assets 17 18 Increase/(decrease) in deposits 9 (1) Net market movements 19 (53) Foreign exchange and others 19 (4) Closing balance 447 383 Global Private Banking – reported client balances by legal entities 2023 2022 $bn $bn HSBC UK Bank plc 32 28 HSBC Bank plc 54 58 The Hongkong and Shanghai Banking Corporation Limited 209 174 HSBC North America Holdings Inc. 64 56 Grupo Financiero HSBC, S.A. de C.V. 3 — Other trading entities 85 67 Closing balance 447 383 1 Client balances are not reported on the Group’s balance sheet, except where it is deemed that we are acting as principal rather than agent in our role as investment manager. Customer deposits included in these client balances are on balance sheet. Global businesses 118 HSBC Holdings plc Annual Report and Accounts 2023 Retail invested assets The following table shows the invested assets of our retail customers. These comprise customer assets either managed by our Asset Management business or by external third-party investment managers as well as self-directed investments by our customers. Retail invested assets are not reported on the Group’s balance sheet, except where it is deemed that we are acting as principal rather than agent in our role as investment manager. Retail invested assets 2023 2022 $bn $bn Opening balance 363 434 Net new invested assets1 26 26 Net market movements 7 (47) Foreign exchange and others (13) (50) Closing balance 383 363 Retail invested assets by legal entities 2023 2022 $bn $bn HSBC UK Bank plc 29 27 HSBC Bank plc 31 27 The Hongkong and Shanghai Banking Corporation Limited 292 284 HSBC Bank Middle East Limited 3 2 HSBC North America Holdings Inc. 14 12 Grupo Financiero HSBC, S.A. de C.V. 9 7 Other trading entities 5 4 Closing balance 383 363 1 ‘Retail net new invested assets’ covers nine markets, comprising Hong Kong including Hang Seng Bank (Hong Kong), mainland China, Malaysia, Singapore, HSBC UK, UAE, US, Canada and Mexico. The net new invested assets relating to all other geographies is reported in ‘foreign exchange and others’. WPB invested assets Net new invested assets represents the net customer inflows from retail invested assets, Asset Management third-party distribution and Global Private Banking invested assets. It excludes all customer deposits. The net new invested assets in the table below is non- additive from the tables above, as net new invested assets managed by Asset Management that are generated by retail clients or Global Private Banking will be recorded in both businesses. WPB: Invested assets 2023 2022 $bn $bn Opening balance 1,015 1,119 Net new invested assets 84 80 Net market movements 43 (118) Foreign exchange and others 49 (66) Closing balance 1,191 1,015 WPB: Net new invested assets by legal entities 2023 2022 $bn $bn HSBC UK Bank plc 1 2 HSBC Bank plc 3 6 The Hongkong and Shanghai Banking Corporation Limited 47 59 HSBC Bank Middle East Limited 1 — HSBC North America Holdings Inc. 7 8 HSBC Bank Canada — (1) Grupo Financiero HSBC, S.A. de C.V. 5 1 Other trading entities 20 5 Total 84 80 HSBC Holdings plc Annual Report and Accounts 2023 119 Financial review GBM: Securities Services and Issuer Services Assets held in custody Custody is the safekeeping and servicing of securities and other financial assets on behalf of clients. Assets held in custody are not reported on the Group’s balance sheet, except where it is deemed that we are acting as principal rather than agent in our role as investment manager. At 31 December 2023, we held $9.7tn of assets as custodian, an increase of 6% compared with 31 December 2022. The balance comprised $8.8tn of assets in Securities Services, which were recorded at market value, and $0.9tn of assets in Issuer Services, recorded at book value. The increase was mainly in Securities Services balances. This was driven by net asset inflows in Europe and Asia, favourable market movements in Asia, North America and Latin America, and a positive impact of currency translation differences in Europe. Assets under administration Our assets under administration business includes the provision of bond and loan administration services, transfer agency services and the valuation of portfolios of securities and other financial assets on behalf of clients and complements the custody business. At 31 December 2023, the value of assets held under administration by the Group amounted to $4.9tn, which was 9% higher than at 31 December 2022. The balance comprised $2.9tn of assets in Securities Services, which were recorded at market value, and $2.0tn of assets in Issuer Services, recorded at book value. The increase was mainly driven by Securities Services balances due to net asset inflows in Europe and Asia together with a favourable impact of currency translation differences, market movements and onboarding of new clients in Europe. Issuer Services balances also rose driven by new issuances, notably in the US and the UK, as well as a favourable impact of currency translation differences in the UK. Analysis of reported results by legal entities HSBC reported profit/(loss) before tax and balance sheet data 2023 HSBC UK Bank plc HSBC Bank plc The Hongkong and Shanghai Banking Corporation Limited HSBC Bank Middle East Limited HSBC North America Holdings Inc. HSBC Bank Canada Grupo Financiero HSBC, S.A. de C.V. Other trading entities Holding companies, shared service centres and intra-Group eliminations Total $m $m $m $m $m $m $m $m $m $m Net interest income 9,684 2,674 16,705 1,551 1,712 1,275 2,148 3,765 (3,718) 35,796 Net fee income 1,597 1,527 4,859 475 1,237 559 581 1,225 (215) 11,845 Net income from financial instruments held for trading or managed on a fair value basis 516 4,220 9,507 397 729 110 437 1,054 (309) 16,661 Net income from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit and loss — 1,438 6,258 — — — 39 323 (171) 7,887 Insurance finance income/(expense) — (1,460) (6,237) — — — (44) (166) 98 (7,809) Insurance service result — 154 838 — — — 87 9 (10) 1,078 Other income/(expense)1 1,608 736 (31) 2 185 22 65 (1,481) (506) 600 Net operating income before change in expected credit losses and other credit impairment charges2 13,405 9,289 31,899 2,425 3,863 1,966 3,313 4,729 (4,831) 66,058 Change in expected credit losses and other credit impairment charges (523) (212) (1,641) (90) (94) (46) (696) (279) 134 (3,447) Net operating income 12,882 9,077 30,258 2,335 3,769 1,920 2,617 4,450 (4,697) 62,611 Total operating expenses excluding impairment of goodwill and other intangible assets (4,602) (6,483) (13,379) (1,095) (3,473) (1,049) (1,823) (2,631) 2,180 (32,355) Impairment of goodwill and other intangible assets (10) 97 (16) (1) 222 — (3) (4) — 285 Operating profit/(loss) 8,270 2,691 16,863 1,239 518 871 791 1,815 (2,517) 30,541 Share of profit in associates and joint ventures less impairment3 — (52) (696) — — — 14 544 (3) (193) Profit/(loss) before tax 8,270 2,639 16,167 1,239 518 871 805 2,359 (2,520) 30,348 % % % % % % % % % % Share of HSBC’s profit before tax 27.2 8.7 53.3 4.1 1.7 2.9 2.6 7.8 (8.3) 100.0 Cost efficiency ratio 34.4 68.7 42.0 45.2 84.2 53.4 55.1 55.7 45.1 48.5 Balance sheet data $m $m $m $m $m $m $m $m $m $m Loans and advances to customers (net) 270,208 95,750 455,315 20,072 54,829 — 26,410 15,951 — 938,535 Total assets 423,029 896,682 1,333,911 50,612 252,339 90,731 47,309 59,051 (114,987) 3,038,677 Customer accounts 339,611 274,733 801,430 31,341 99,607 — 29,423 35,326 176 1,611,647 Risk-weighted assets4,5 129,211 131,468 396,677 24,294 72,248 31,890 32,639 59,574 6,704 854,114 Global businesses 120 HSBC Holdings plc Annual Report and Accounts 2023 HSBC reported profit/(loss) before tax and balance sheet data (continued) 20226 HSBC UK Bank plc HSBC Bank plc The Hongkong and Shanghai Banking Corporation Limited HSBC Bank Middle East Limited HSBC North America Holdings Inc. HSBC Bank Canada Grupo Financiero HSBC, S.A. de C.V. Other trading entities Holding companies, shared service centres and intra-Group eliminations Total $m $m $m $m $m $m $m $m $m $m Net interest income 7,615 2,357 14,031 903 1,922 1,251 1,796 2,244 (1,742) 30,377 Net fee income 1,536 1,601 4,924 458 1,223 598 455 1,127 (152) 11,770 Net income from financial instruments held for trading or managed on a fair value basis 472 3,564 5,270 360 485 76 351 639 (939) 10,278 Net income from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit and loss — (1,761) (12,117) — — — (9) 66 (10) (13,831) Insurance finance income/(expense) — 1,431 12,407 — — — 3 (32) (10) 13,799 Insurance service result — 149 636 — — — 50 (20) (6) 809 Other income/(expense)1 148 (1,920) 491 22 533 29 67 (521) (1,431) (2,582) Net operating income before change in expected credit losses and other credit impairment charges2 9,771 5,421 25,642 1,743 4,163 1,954 2,713 3,503 (4,290) 50,620 Change in expected credit losses and other credit impairment charges (563) (292) (2,090) 21 (20) (84) (507) (61) 12 (3,584) Net operating income 9,208 5,129 23,552 1,764 4,143 1,870 2,206 3,442 (4,278) 47,036 Total operating expenses excluding impairment of goodwill and other intangible assets (4,667) (6,497) (13,011) (1,033) (3,429) (1,017) (1,631) (2,359) 1,090 (32,554) Impairment of goodwill and other intangible assets (54) 11 (42) (3) (9) (21) (5) (2) (22) (147) Operating profit/(loss) 4,487 (1,357) 10,499 728 705 832 570 1,081 (3,210) 14,335 Share of profit in associates and joint ventures less impairment — (38) 2,400 — — — 13 351 (3) 2,723 Profit/(loss) before tax 4,487 (1,395) 12,899 728 705 832 583 1,432 (3,213) 17,058 % % % % % % % % % % Share of HSBC’s profit before tax 26.3 (8.2) 75.6 4.3 4.1 4.9 3.4 8.4 (18.8) 100.0 Cost efficiency ratio 48.3 119.6 50.9 59.4 82.6 53.1 60.3 67.4 24.9 64.6 Balance sheet data $m $m $m $m $m $m $m $m $m $m Loans and advances to customers (net) 245,921 86,964 473,985 19,762 54,159 — 20,446 22,325 (1) 923,561 Total assets 412,522 863,308 1,297,806 48,086 239,117 94,604 39,939 67,345 (113,441) 2,949,286 Customer accounts 336,086 253,075 784,236 29,893 100,404 — 25,531 41,078 — 1,570,303 Risk-weighted assets4,5 110,919 127,017 406,985 22,490 72,446 31,876 26,744 60,289 8,144 839,720 HSBC Holdings plc Annual Report and Accounts 2023 121 Financial review HSBC reported profit/(loss) before tax and balance sheet data (continued) 2021 HSBC UK Bank plc HSBC Bank plc The Hongkong and Shanghai Banking Corporation Limited HSBC Bank Middle East Limited HSBC North America Holdings Inc. HSBC Bank Canada Grupo Financiero HSBC, S.A. de C.V. Other trading entities Holding companies, shared service centres and intra-Group eliminations Total $m $m $m $m $m $m $m $m $m $m Net interest income 6,397 2,411 12,623 633 1,809 978 1,542 1,586 (1,490) 26,489 Net fee income 1,484 1,945 5,828 445 1,426 634 406 1,044 (115) 13,097 Net income from financial instruments held for trading or managed on a fair value basis 437 2,382 3,649 275 226 89 272 474 (60) 7,744 Net income/(expense) from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit and loss — 1,670 2,340 — — — 4 44 (5) 4,053 Insurance finance income/(expense) — — — — — — — — — — Insurance service result — — — — — — — — — — Other income/(expense) 278 16 (1,446) 55 595 67 136 (152) (1,380) (1,831) Net operating income before loan impairment (charges)/recoveries and other credit risk provisions2 8,596 8,424 22,994 1,408 4,056 1,768 2,360 2,996 (3,050) 49,552 Change in expected credit losses and other credit impairment (charges)/recoveries 1,362 239 (840) 142 205 37 (224) 2 5 928 Net operating income 9,958 8,663 22,154 1,550 4,261 1,805 2,136 2,998 (3,045) 50,480 Total operating expenses excluding impairment of goodwill and other intangible assets (5,147) (7,448) (12,975) (955) (3,678) (1,036) (1,558) (2,060) 970 (33,887) Impairment of goodwill and other intangible assets (25) (63) (24) (3) (5) (8) (7) (6) (592) (733) Operating profit/(loss) 4,786 1,152 9,155 592 578 761 571 932 (2,667) 15,860 Share of profit in associates and joint ventures less impairment — 263 2,486 — — — 17 280 — 3,046 Profit/(loss) before tax 4,786 1,415 11,641 592 578 761 588 1,212 (2,667) 18,906 % % % % % % % % % % Share of HSBC’s profit before tax 25.3 7.5 61.6 3.1 3.1 4.0 3.1 6.4 (14.1) 100.0 Cost efficiency ratio 60.2 89.2 56.5 68.0 90.8 59.0 66.3 69.0 12.4 69.9 Balance sheet data $m $m $m $m $m $m $m $m $m $m Loans and advances to customers (net) 264,624 122,954 492,523 18,623 52,678 54,226 18,043 22,142 1 1,045,814 Total assets 468,362 807,541 1,259,270 46,773 261,335 94,570 35,525 66,425 (81,862) 2,957,939 Customer accounts 381,482 270,975 792,099 26,802 111,921 58,071 23,583 45,643 (2) 1,710,574 Risk-weighted assets4,5 113,501 136,038 393,742 22,855 77,775 30,198 24,578 56,112 9,072 838,263 1 Other income/(expense) in this context comprises gain on acquisitions, impairment gain/(loss) relating to the sale of our retail banking operations in France, and other operating income/(expense). 2 Net operating income before change in expected credit losses and other credit impairment charges, also referred to as revenue. 3 Includes an impairment loss of $3.0bn recognised in respect of the Group’s investment in BoCom. 4 Risk-weighted assets are non-additive across the principal entities due to market risk diversification effects within the Group. 5 Balances are on a third-party Group consolidated basis. 6 From 1 January 2023, we adopted IFRS 17 ‘Insurance Contracts’, which replaced IFRS 4 ‘Insurance Contracts’. Comparative data for the financial year ended 31 December 2022 have been restated accordingly. Comparative data for the year ended 31 December 2021 are prepared on an IFRS 4 basis. Legal entities 122 HSBC Holdings plc Annual Report and Accounts 2023 Summary information – legal entities and selected countries/territories Legal entity reported and constant currency results¹ 2023 HSBC UK Bank plc HSBC Bank plc The Hongkong and Shanghai Banking Corpo- ration Limited HSBC Bank Middle East Limited HSBC North America Holdings Inc. HSBC Bank Canada Grupo Financiero HSBC, S.A. de C.V. Other trading entities2 Holding companies, shared service centres and intra-Group eliminations Total $m $m $m $m $m $m $m $m $m $m Revenue3 13,405 9,289 31,899 2,425 3,863 1,966 3,313 4,729 (4,831) 66,058 ECL (523) (212) (1,641) (90) (94) (46) (696) (279) 134 (3,447) Operating expenses (4,612) (6,386) (13,395) (1,096) (3,251) (1,049) (1,826) (2,635) 2,180 (32,070) Share of profit in associates and joint ventures — (52) (696) — — — 14 544 (3) (193) Profit/(loss) before tax 8,270 2,639 16,167 1,239 518 871 805 2,359 (2,520) 30,348 Loans and advances to customers (net) 270,208 95,750 455,315 20,072 54,829 — 26,410 15,951 — 938,535 Customer accounts 339,611 274,733 801,430 31,341 99,607 — 29,423 35,326 176 1,611,647 1 In the current period, constant currency results are equal to reported, as there is no currency translation. 2 Other trading entities includes the results of entities located in Oman, Türkiye, Egypt and Saudi Arabia (including our share of the results of Saudi Awwal Bank) which do not consolidate into HSBC Bank Middle East Limited. These entities had an aggregated impact on the Group’s reported profit before tax of $1,286m. Supplementary analysis is provided on page 130 to provide a fuller picture of the MENAT regional performance. 3 Net operating income before change in expected credit losses and other credit impairment charges, also referred to as revenue. Legal entity results: notable items 2023 HSBC UK Bank plc HSBC Bank plc The Hongkong and Shanghai Banking Corpo- ration Limited HSBC Bank Middle East Limited HSBC North America Holdings Inc. HSBC Bank Canada Grupo Financiero HSBC, S.A. de C.V. Other trading entities Holding companies, shared service centres and intra-Group eliminations Total $m $m $m $m $m $m $m $m $m $m Revenue Disposals, acquisitions and related costs1,2,3 1,591 (14) — — — — — — (279) 1,298 Fair value movements on financial instruments4 — — — — — — — — 14 14 Restructuring and other related costs — 361 — — — — — — (361) — Disposal losses on Markets Treasury repositioning (145) (94) (473) (20) (246) — — — 1 (977) Operating expenses Disposals, acquisitions and related costs (45) (111) — — (11) (115) — — (39) (321) Restructuring and other related costs5 20 30 10 2 10 — 6 2 56 136 Impairment of interest in associate6 — — (3,000) — — — — — — (3,000) 1 Includes the impacts of the sale of our retail banking operations in France. 2 Includes the provisional gain of $1.6bn recognised in respect of the acquisition of SVB UK. 3 Includes fair value movements on the foreign exchange hedging of the expected proceeds from the planned sale of our banking operations in Canada. 4 Fair value movements on non-qualifying hedges in HSBC Holdings. 5 Balances relate to reversals of restructuring provisions recognised during 2022. 6 Includes an impairment loss of $3.0bn recognised in respect of the Group’s investment in BoCom. Selected countries/territories results1 2023 UK2 Hong Kong Mainland China US Mexico $m $m $m $m $m Revenue3 19,092 20,611 3,923 3,796 3,313 ECL (594) (1,529) (93) (94) (696) Operating expenses (12,485) (8,244) (2,713) (3,251) (1,826) Share of profit/(loss) in associates and joint ventures (53) 30 (746) — 14 Profit before tax 5,960 10,868 371 451 805 Loans and advances to customers (net) 309,262 279,551 44,275 54,829 26,410 Customer accounts 508,181 543,504 56,006 99,607 29,423 1 In the current period, constant currency results are equal to reported, as there is no currency translation. 2 UK includes HSBC UK Bank plc (ring-fenced bank) and HSBC Bank plc (non-ring-fenced bank). 3 Net operating income before change in expected credit losses and other credit impairment charges, also referred to as revenue. HSBC Holdings plc Annual Report and Accounts 2023 123 Financial review Selected countries/territories results: notable items 2023 UK1 Hong Kong Mainland China US Mexico $m $m $m $m $m Revenue Disposals, acquisitions and related costs1,2,3,4 1,272 — — — — Fair value movements on financial instruments5 14 — — — — Disposal losses on Markets Treasury repositioning (239) (473) — (246) — Operating expenses Disposals, acquisitions and related costs (71) (1) (5) (11) — Restructuring and other related costs6 75 9 4 10 6 Impairment of interest in associate7 — — (3,000) — — 1 UK includes HSBC UK Bank plc (ring-fenced bank) and HSBC Bank plc (non-ring-fenced bank). 2 Includes the provisional gain of $1.6bn recognised in respect of the acquisition of SVB UK. 3 Includes the impairment gain relating to the sale of our retail banking operations in France. 4 Includes fair value movements on the foreign exchange hedging of the expected proceeds from the planned sale of our banking operations in Canada. 5 Fair value movements on non-qualifying hedges in HSBC Holdings. 6 Balances relates to reversals of restructuring provisions recognised during 2022. 7 Includes an impairment loss of $3.0bn recognised in respect of the Group’s investment in BoCom. Legal entity reported and constant currency results (continued) 20221 HSBC UK Bank plc HSBC Bank plc The Hongkong and Shanghai Banking Corpo- ration Limited HSBC Bank Middle East Limited HSBC North America Holdings Inc. HSBC Bank Canada Grupo Financiero HSBC, S.A. de C.V. Other trading entities2 Holding companies, shared service centres and intra-Group eliminations Total $m $m $m $m $m $m $m $m $m $m Revenue3 Reported 9,771 5,421 25,642 1,743 4,163 1,954 2,713 3,503 (4,290) 50,620 Currency translation 125 (11) (278) 3 — (67) 370 (789) (102) (749) Constant currency 9,896 5,410 25,364 1,746 4,163 1,887 3,083 2,714 (4,392) 49,871 ECL Reported (563) (292) (2,090) 21 (20) (84) (507) (61) 12 (3,584) Currency translation (43) 14 6 — — 2 (67) 41 1 (46) Constant currency (606) (278) (2,084) 21 (20) (82) (574) (20) 13 (3,630) Operating expenses Reported (4,721) (6,486) (13,053) (1,036) (3,438) (1,038) (1,636) (2,361) 1,068 (32,701) Currency translation (45) (81) 134 (1) — 37 (221) 500 76 399 Constant currency (4,766) (6,567) (12,919) (1,037) (3,438) (1,001) (1,857) (1,861) 1,144 (32,302) Share of profit/(loss) in associates and joint ventures Reported — (38) 2,400 — — — 13 351 (3) 2,723 Currency translation — 1 (123) — — — 1 — — (121) Constant currency — (37) 2,277 — — — 14 351 (3) 2,602 Profit/(loss) before tax Reported 4,487 (1,395) 12,899 728 705 832 583 1,432 (3,213) 17,058 Currency translation 37 (77) (261) 2 — (28) 83 (248) (25) (517) Constant currency 4,524 (1,472) 12,638 730 705 804 666 1,184 (3,238) 16,541 Loans and advances to customers (net) Reported 245,921 86,964 473,985 19,762 54,159 — 20,446 22,325 (1) 923,561 Currency translation 14,412 4,009 (2,105) 22 — — 3,044 (1,396) 1 17,987 Constant currency 260,333 90,973 471,880 19,784 54,159 — 23,490 20,929 — 941,548 Customer accounts Reported 336,086 253,075 784,236 29,893 100,404 — 25,531 41,078 — 1,570,303 Currency translation 19,697 12,400 (2,671) 35 — — 3,802 (5,072) 1 28,192 Constant currency 355,783 265,475 781,565 29,928 100,404 — 29,333 36,006 1 1,598,495 1 From 1 January 2023, we adopted IFRS 17 ‘Insurance Contracts’, which replaced IFRS 4 ‘Insurance Contracts’. Comparative data for the financial year ended 31 December 2022 have been restated accordingly. 2 Other trading entities includes the results of entities located in Oman, Türkiye, Egypt and Saudi Arabia (including our share of the results of Saudi Awwal Bank) which do not consolidate into HSBC Bank Middle East Limited. These entities had an aggregated impact on the Group’s reported profit before tax of $997m and constant currency profit before tax of $840m. Supplementary analysis is provided on page 130 to provide a fuller picture of the MENAT regional performance. 3 Net operating income before change in expected credit losses and other credit impairment charges, also referred to as revenue. Legal entities 124 HSBC Holdings plc Annual Report and Accounts 2023 Legal entity results: notable items (continued) 20221 HSBC UK Bank plc HSBC Bank plc The Hongkong and Shanghai Banking Corporation Limited HSBC Bank Middle East Limited HSBC North America Holdings Inc. HSBC Bank Canada Grupo Financiero HSBC, S.A. de C.V. Other trading entities Holding companies, shared service centres and intra-Group eliminations Total $m $m $m $m $m $m $m $m $m $m Revenue Disposals, acquisitions and related costs2 — (2,242) — — — — — — (495) (2,737) Fair value movements on financial instruments3 — — — — — — — — (618) (618) Restructuring and other related costs4 1 (278) 46 (13) 98 1 (17) — (85) (247) Operating expenses Disposals, acquisitions and related costs — (18) — — — — — — — (18) Restructuring and other related costs (521) (656) (741) (64) (421) (87) (115) (150) (127) (2,882) 1 From 1 January 2023, we adopted IFRS 17 ‘Insurance Contracts’, which replaced IFRS 4 ‘Insurance Contracts’. Comparative data for the financial year ended 31 December 2022 have been restated accordingly. 2 Includes losses from classifying businesses as held for sale as part of a broader restructuring of our European business, of which $2.3bn (inclusive of $0.4bn in goodwill impairments) relates to the planned sale of the retail banking operations in France. 3 Fair value movements on non-qualifying hedges in HSBC Holdings. 4 Comprises gains and losses relating to the business update in February 2020, including losses associated with the RWA reduction programme. Selected countries/territories results (continued) 20221 UK2 Hong Kong Mainland China US Mexico $m $m $m $m $m Revenue3 Reported 17,268 15,712 4,104 4,107 2,713 Currency translation 223 8 (212) — 370 Constant currency 17,491 15,720 3,892 4,107 3,083 ECL Reported (712) (1,683) (326) (20) (507) Currency translation (36) (2) 16 — (67) Constant currency (748) (1,685) (310) (20) (574) Operating expenses Reported (13,232) (7,935) (2,757) (3,438) (1,636) Currency translation (140) (1) 139 — (221) Constant currency (13,372) (7,936) (2,618) (3,438) (1,857) Share of profit/(loss) in associates and joint ventures Reported (41) 5 2,386 — 12 Currency translation 1 — (122) — 2 Constant currency (40) 5 2,264 — 14 Profit before tax Reported 3,283 6,099 3,407 649 582 Currency translation 48 5 (179) — 84 Constant currency 3,331 6,104 3,228 649 666 Loans and advances to customers (net) Reported 286,032 294,580 50,481 54,159 20,446 Currency translation 16,763 (626) (1,476) — 3,044 Constant currency 302,795 293,954 49,005 54,159 23,490 Customer accounts Reported 493,028 542,543 56,948 100,404 25,531 Currency translation 28,895 (1,153) (1,664) — 3,802 Constant currency 521,923 541,390 55,284 100,404 29,333 1 From 1 January 2023, we adopted IFRS 17 ‘Insurance Contracts’, which replaced IFRS 4 ‘Insurance Contracts’. Comparative data for the financial year ended 31 December 2022 have been restated accordingly. 2 UK includes HSBC UK Bank plc (ring-fenced bank) and HSBC Bank plc (non-ring-fenced bank). 3 Net operating income before change in expected credit losses and other credit impairment charges, also referred to as revenue. HSBC Holdings plc Annual Report and Accounts 2023 125 Financial review Selected countries/territories results: notable items (continued) 20221 UK2 Hong Kong Mainland China US Mexico $m $m $m $m $m Revenue Disposals, acquisitions and related costs (60) — — — — Fair value movements on financial instruments3 (617) — — — — Restructuring and other related costs4 407 (124) 71 99 (17) Operating expenses Restructuring and other related costs (1,741) (393) (70) (424) (115) 1 From 1 January 2023, we adopted IFRS 17 ‘Insurance Contracts’, which replaced IFRS 4 ‘Insurance Contracts’. Comparative data for the financial year ended 31 December 2022 have been restated accordingly. 2 UK includes HSBC UK Bank plc (ring-fenced bank) and HSBC Bank plc (non-ring-fenced bank). 3 Fair value movements on non-qualifying hedges in HSBC Holdings. 4 Comprises gains and losses relating to the business update in February 2020, including losses associated with RWA reduction commitments. Legal entity reported and constant currency results (continued) 20211 HSBC UK Bank plc HSBC Bank plc The Hongkong and Shanghai Banking Corpo- ration Limited HSBC Bank Middle East Limited HSBC North America Holdings Inc. HSBC Bank Canada Grupo Financiero HSBC, S.A. de C.V. Other trading entities1 Holding companies, shared service centres and intra-Group eliminations Total $m $m $m $m $m $m $m $m $m $m Revenue2 Reported 8,596 8,424 22,994 1,408 4,056 1,768 2,360 2,996 (3,050) 49,552 Currency translation (824) (737) (841) 1 — (127) 344 (871) (418) (3,473) Constant currency 7,772 7,687 22,153 1,409 4,056 1,641 2,704 2,125 (3,468) 46,079 ECL Reported 1,362 239 (840) 142 205 37 (224) 2 5 928 Currency translation (128) (25) 24 — — (3) (36) (3) 1 (170) Constant currency 1,234 214 (816) 142 205 34 (260) (1) 6 758 Operating expenses Reported (5,172) (7,511) (12,999) (958) (3,683) (1,044) (1,565) (2,066) 378 (34,620) Currency translation 499 677 471 (1) 1 75 (250) 582 322 2,376 Constant currency (4,673) (6,834) (12,528) (959) (3,682) (969) (1,815) (1,484) 700 (32,244) Share of profit/(loss) in associates and joint ventures Reported — 263 2,486 — — — 17 280 — 3,046 Currency translation — (27) (214) — — — 3 — (1) (239) Constant currency — 236 2,272 — — — 20 280 (1) 2,807 Profit/(loss) before tax Reported 4,786 1,415 11,641 592 578 761 588 1,212 (2,667) 18,906 Currency translation (453) (112) (560) — 1 (55) 61 (292) (96) (1,506) Constant currency 4,333 1,303 11,081 592 579 706 649 920 (2,763) 17,400 Loans and advances to customers (net) Reported 264,624 122,954 492,523 18,623 52,678 54,226 18,043 22,142 1 1,045,814 Currency translation (15,280) (4,501) (13,319) 22 — (2,183) 3,749 (3,491) 1 (35,002) Constant currency 249,344 118,453 479,204 18,645 52,678 52,043 21,792 18,651 2 1,010,812 Customer accounts Reported 381,482 270,975 792,099 26,802 111,921 58,071 23,583 45,643 (2) 1,710,574 Currency translation (22,028) (12,400) (16,539) 19 — (2,338) 4,900 (9,003) 2 (57,387) Constant currency 359,454 258,575 775,560 26,821 111,921 55,733 28,483 36,640 — 1,653,187 1 Comparative data for the year ended 31 December 2021 are prepared on an IFRS 4 basis. 2 Net operating income before change in expected credit losses and other credit impairment charges, also referred to as revenue. Legal entities 126 HSBC Holdings plc Annual Report and Accounts 2023 Legal entity results: notable items (continued) 20211 HSBC UK Bank plc HSBC Bank plc The Hongkong and Shanghai Banking Corporation Limited HSBC Bank Middle East Limited HSBC North America Holdings Inc. HSBC Bank Canada Grupo Financiero HSBC, S.A. de C.V. Other trading entities Holding companies, shared service centres and intra-Group eliminations Total $m $m $m $m $m $m $m $m $m $m Revenue Fair value movements on financial instruments2 — — — — — — — — (221) (221) Restructuring and other related costs3 4 (280) 1 1 (6) 2 (15) 2 (16) (307) Operating expenses Impairment of non-financial items — — — — — — — (1) (586) (587) Restructuring and other related costs (356) (473) (406) (31) (355) (68) (59) (78) (10) (1,836) 1 Comparative data for the year ended 31 December 2021 are prepared on an IFRS 4 basis. 2 Fair value movements on non-qualifying hedges in HSBC Holdings. 3 Comprises gains and losses relating to the business update in February 2020, including losses associated with the RWA reduction programme. Selected countries/territories results (continued) 20211 UK2 Hong Kong Mainland China US Mexico $m $m $m $m $m Revenue3 Reported 16,415 14,463 3,734 4,006 2,341 Currency translation (1,571) (101) (340) (1) 343 Constant currency 14,844 14,362 3,394 4,005 2,684 ECL Reported 1,645 (608) (89) 205 (224) Currency translation (154) 3 11 — (36) Constant currency 1,491 (605) (78) 205 (260) Operating expenses Reported (14,808) (7,955) (2,773) (3,683) (1,565) Currency translation 1,212 51 255 1 (250) Constant currency (13,596) (7,904) (2,518) (3,682) (1,815) Share of profit/(loss) in associates and joint ventures Reported 267 16 2,461 — 17 Currency translation (27) — (213) — 3 Constant currency 240 16 2,248 — 20 Profit before tax Reported 3,519 5,916 3,333 528 569 Currency translation (540) (47) (287) — 60 Constant currency 2,979 5,869 3,046 528 629 Loans and advances to customers (net) Reported 306,464 311,947 54,239 52,678 18,043 Currency translation (17,696) (553) (5,689) — 3,749 Constant currency 288,768 311,394 48,550 52,678 21,792 Customer accounts Reported 535,797 549,429 59,266 111,921 23,583 Currency translation (30,939) (974) (6,217) — 4,900 Constant currency 504,858 548,455 53,049 111,921 28,483 1 Comparative data for the year ended 31 December 2021 are prepared on an IFRS 4 basis. 2 UK includes HSBC UK Bank plc (ring-fenced bank) and HSBC Bank plc (non-ring-fenced bank). 3 Net operating income before change in expected credit losses and other credit impairment charges, also referred to as revenue. HSBC Holdings plc Annual Report and Accounts 2023 127 Financial review Selected countries/territories results: notable items (continued) 20211 UK2 Hong Kong Mainland China US Mexico $m $m $m $m $m Revenue Fair value movements on financial instruments3 (221) — — — — Restructuring and other related costs4 227 (54) 41 (9) (15) Operating expenses Restructuring and other related costs (1,121) (225) (32) (355) (59) 1 Comparative data for the year ended 31 December 2021 are prepared on an IFRS 4 basis. 2 UK includes HSBC UK Bank plc (ring-fenced bank) and HSBC Bank plc (non-ring-fenced bank). 3 Fair value movements on non-qualifying hedges in HSBC Holdings. 4 Comprises gains and losses relating to the business update in February 2020, including losses associated with RWA reduction commitments. Analysis by country/territory Profit/(loss) before tax by country/territory within global businesses 2023 Wealth and Personal Banking Commercial Banking Global Banking and Markets Corporate Centre Total $m $m $m $m $m UK1 2,415 4,437 (692) (200) 5,960 – of which: HSBC UK Bank plc (ring-fenced bank) 2,754 5,282 144 90 8,270 – of which: HSBC Bank plc (non-ring-fenced bank) 396 295 121 177 989 – of which: Holdings and other (735) (1,140) (957) (467) (3,299) France (35) 235 128 10 338 Germany 44 144 128 4 320 Switzerland 25 29 — 5 59 Hong Kong 6,808 2,970 1,394 (304) 10,868 Australia 177 319 85 (15) 566 India 56 398 774 289 1,517 Indonesia 23 124 68 (7) 208 Mainland China (90) 339 662 (540) 371 Malaysia 111 158 219 (21) 467 Singapore 233 436 444 (31) 1,082 Taiwan 99 72 198 (7) 362 Egypt 141 98 303 (11) 531 UAE 387 212 377 (83) 893 Saudi Arabia2 — — 118 539 657 US 225 513 111 (398) 451 Canada 293 561 120 (96) 878 Mexico 317 504 15 (31) 805 Other3 315 1,731 1,472 497 4,015 Year ended 31 Dec 2023 11,544 13,280 5,924 (400) 30,348 1 UK includes results from the ultimate holding company, HSBC Holdings plc, and the separately incorporated group of service companies (‘ServCo Group’). 2 Includes the results of HSBC Saudi Arabia and our share of the profits of our associate, Saudi Awwal Bank. 3 Corporate Centre includes the profit and loss impact of inter-company debt eliminations of $571m. Legal entities 128 HSBC Holdings plc Annual Report and Accounts 2023 Profit/(loss) before tax by country/territory within global businesses (continued) 20221 Wealth and Personal Banking Commercial Banking Global Banking and Markets Corporate Centre Total $m $m $m $m $m UK2 1,764 2,094 (534) (41) 3,283 – of which: HSBC UK Bank plc (ring-fenced bank) 2,112 2,662 143 (430) 4,487 – of which: HSBC Bank plc (non-ring-fenced bank) 294 315 141 (473) 277 – of which: Holdings and other (642) (883) (818) 862 (1,481) France3 (2,248) 210 81 (231) (2,188) Germany 17 8 133 (147) 11 Switzerland 25 17 13 (30) 25 Hong Kong 4,435 1,278 955 (568) 6,100 Australia 147 180 157 (36) 448 India 45 304 622 306 1,277 Indonesia 4 71 100 (8) 167 Mainland China (100) 303 526 2,678 3,407 Malaysia 110 89 219 (36) 382 Singapore 218 255 351 (77) 747 Taiwan 36 43 137 (17) 199 Egypt 101 76 194 (4) 367 UAE 128 107 320 (86) 469 Saudi Arabia4 30 — 94 345 469 US 209 557 270 (387) 649 Canada 243 548 140 (89) 842 Mexico 241 414 39 (112) 582 Other5 183 1,039 1,102 (2,502) (178) Year ended 31 Dec 2022 5,588 7,593 4,919 (1,042) 17,058 1 From 1 January 2023, we adopted IFRS 17 ‘Insurance Contracts’, which replaced IFRS 4 ‘Insurance Contracts’. Comparative data for financial year ended 31 December 2022 have been restated accordingly. 2 UK includes results from the ultimate holding company, HSBC Holdings plc, and the separately incorporated group of service companies (‘ServCo Group’). 3 Includes the impact of goodwill impairment of $425m as a result of the reclassification of our retail banking operations in France to held for sale. At 31 December 2022, HSBC’s cash-generating units were based on geographical regions, sub-divided by global businesses. 4 Includes the results of HSBC Saudi Arabia and our share of the profits of our associate, Saudi Awwal Bank. 5 Corporate Centre includes the profit and loss impact of inter-company debt eliminations of $1,850m. Profit/(loss) before tax by country/territory within global businesses (continued) 2021 Wealth and Personal Banking Commercial Banking Global Banking and Markets Corporate Centre Total $m $m $m $m $m UK1 1,511 2,475 (487) 20 3,519 – of which: HSBC UK Bank plc (ring-fenced bank) 2,047 2,929 127 (318) 4,785 – of which: HSBC Bank plc (non-ring fenced bank) 176 259 220 (17) 638 – of which: Holdings and other (712) (713) (834) 355 (1,904) France 236 163 (97) (133) 169 Germany 17 82 155 67 321 Switzerland 46 10 — (12) 44 Hong Kong 4,076 1,303 920 (383) 5,916 Australia 146 132 131 (26) 383 India 20 265 593 232 1,110 Indonesia 14 12 111 (8) 129 Mainland China (95) 288 586 2,554 3,333 Malaysia 37 (23) 145 (20) 139 Singapore 145 107 231 (13) 470 Taiwan 14 16 106 (5) 131 Egypt 79 42 163 (2) 282 UAE 91 3 342 (61) 375 Saudi Arabia2 17 — 65 274 356 US (131) 472 524 (337) 528 Canada 141 544 145 (62) 768 Mexico 305 88 222 (46) 569 Other3 (536) 698 867 (665) 364 Year ended 31 Dec 2021 6,133 6,677 4,722 1,374 18,906 1 UK includes results from the ultimate holding company, HSBC Holdings plc, and the separately incorporated group of service companies (‘ServCo Group’). 2 Includes the results of HSBC Saudi Arabia and our share of the profits of our associate, Saudi Awwal Bank. 3 Includes the impact of goodwill impairment of $587m. At 31 December 2021, HSBC’s cash-generating units were based on geographical regions, sub- divided by global businesses. HSBC Holdings plc Annual Report and Accounts 2023 129 Financial review Middle East, North Africa and Türkiye supplementary information The following tables show the results of our Middle East, North Africa and Türkiye business operations on a regional basis (including results of all the legal entities operating in the region and our share of the results of Saudi Awwal Bank). They also show the profit before tax of each of the global businesses. Middle East, North Africa and Türkiye regional performance 2023 2022 $m $m Revenue1 3,688 2,936 Change in expected credit losses and other credit impairment charges (133) 8 Operating expenses (1,592) (1,586) Share of profit in associates and joint ventures 538 342 Profit before tax 2,501 1,700 Loans and advances to customers (net)2 22,766 26,475 Customer accounts2 40,708 43,933 1 Net operating income before change in expected credit losses and other credit impairment charges, also referred to as revenue. 2 In the second quarter of 2023, loans and advances to customers of $2,975m were classified as ‘Assets held for sale’, and customer accounts of $4,878m were classified as ‘Liabilities of disposal groups held for sale’ in respect of the planned merger of our business in Oman. The merger was subsequently completed in August 2023. Profit before tax by global business 2023 2022 $m $m Wealth and Personal Banking 612 313 Commercial Banking 400 290 Global Banking and Markets 1,104 861 Corporate Centre 385 236 Total 2,501 1,700 Reconciliation of alternative performance measures Contents 130 Use of alternative performance measures 131 Alternative performance measure definitions 132 Return on average ordinary shareholders’ equity and return on average tangible equity 133 Net asset value and tangible net asset value per ordinary share 133 Post-tax return and average total shareholders’ equity on average total assets 133 Expected credit losses and other credit impairment charges as % of average gross loans and advances to customers 133 Target basis operating expenses 134 Basic earnings per share excluding material notable items and related impacts 134 Multi-jurisdictional client revenue Use of alternative performance measures Our reported results are prepared in accordance with IFRS Accounting Standards as detailed in our financial statements starting on page 329. As described on page 100, we use a combination of reported and alternative performance measures, including those derived from our reported results that eliminate factors that distort year-on-year comparisons. These are considered alternative performance measures (non-GAAP financial measures). The following information details the adjustments made to the reported results and the calculation of other alternative performance measures. All alternative performance measures are reconciled to the closest reported performance measure. On 1 January 2023, HSBC adopted IFRS 17 ‘Insurance Contracts’. As required by the standard, the Group applied the requirements retrospectively with comparative data previously published under IFRS 4 ‘Insurance Contracts’ restated from the 1 January 2022 transition date. In addition to the alternative performance measures set out in this section, further alternative performance measures in relation to the Group’s insurance manufacturing operations are set out on pages 116 to 117. Legal entities 130 HSBC Holdings plc Annual Report and Accounts 2023 Alternative performance measure definitions Alternative performance measure Definition Return on average ordinary shareholders’ equity (‘RoE’) Profit attributable to the ordinary shareholders Average ordinary shareholders’ equity Return on average tangible equity (‘RoTE‘) Profit attributable to the ordinary shareholders, excluding impairment of goodwill and other intangible assets Average ordinary shareholders’ equity adjusted for goodwill and intangibles Return on average tangible equity (‘RoTE‘) excluding strategic transactions and impairment of BoCom Profit attributable to the ordinary shareholders, excluding impairment of goodwill and other intangible assets, the impact of strategic transactions and impairment of BoCom1 Average ordinary shareholders’ equity adjusted for goodwill and intangibles, the impact of strategic transactions and impairment of BoCom1 Net asset value per ordinary share Total ordinary shareholders’ equity2 Basic number of ordinary shares in issue excluding treasury shares Tangible net asset value per ordinary share Tangible ordinary shareholders’ equity3 Basic number of ordinary shares in issue excluding treasury shares Post-tax return on average total assets Profit after tax Average total assets Average total shareholders’ equity on average total assets Average total shareholders’ equity Average total assets Expected credit losses and other credit impairment charges (‘ECL’) as % of average gross loans and advances to customers Annualised constant currency ECL4 Constant currency average gross loans and advances to customers4 Expected credit losses and other credit impairment charges (‘ECL’) as % of average gross loans and advances to customers, including held for sale Annualised constant currency ECL4 Constant currency average gross loans and advances to customers, including held for sale4 Target basis operating expenses Reported operating expenses excluding notable items, foreign exchange translation and other excluded items5 Basic earnings per share excluding material notable items and related impacts Profit attributable to ordinary shareholders excluding material notable items and related impacts6 Weighted average number of ordinary shares outstanding, excluding own shares held Multi-jurisdictional client revenue Total client revenue we generate from clients that hold a relationship with us that generates revenue in more than one market 1 Excluding the impacts of the sale of our retail banking operations in France, the provisional gain of $1.6bn recognised in respect of the acquisition of SVB UK and the impairment loss of $3.0bn recognised in respect of the Group’s investment in BoCom. 2 Total ordinary shareholders’ equity is total shareholders‘ equity less non-cumulative preference shares and capital securities. 3 Tangible ordinary shareholders’ equity is total ordinary shareholders’ equity excluding goodwill and other intangible assets (net of deferred tax). 4 The constant currency numbers are derived by adjusting reported ECL and average loans and advances to customers for the effects of foreign currency translation differences. 5 Includes impact of re-translating comparative period financial information at the latest rates of foreign exchange in hyperinflationary economies, which we consider to be outside of our control, and the incremental costs associated with our acquisition of SVB UK and related international investments. 6 Excluding the impacts of material M&A transactions, the 2022 deferred tax adjustment in HSBC Holdings and the impairment loss of $3.0bn recognised in 2023 in respect of the Group’s investment in BoCom. HSBC Holdings plc Annual Report and Accounts 2023 131 Financial review Return on average ordinary shareholders’ equity, return on average tangible equity and return on average tangible equity excluding strategic transactions and impairment of BoCom 2023 2022¹ 2021 $m $m $m Profit Profit attributable to the ordinary shareholders of the parent company 22,432 14,346 12,607 Impairment of goodwill and other intangible assets (net of tax) 43 535 608 Decrease/(increase) in PVIF (net of tax)1 — — (58) Profit attributable to the ordinary shareholders, excluding goodwill, other intangible assets impairment and PVIF 22,475 14,881 13,157 Impact of strategic transactions and impairment of BoCom2,3,4 1,275 1,886 N/A Profit attributable to the ordinary shareholders, excluding goodwill, other intangible assets impairment, strategic transactions and impairment of BoCom 23,750 16,767 N/A Equity Average total shareholders’ equity 184,029 180,263 199,295 Effect of average preference shares and other equity instruments (18,794) (21,202) (22,814) Average ordinary shareholders’ equity 165,235 159,061 176,481 Effect of goodwill, other intangibles and PVIF (net of deferred tax) (11,480) (10,786) (17,705) Average tangible equity 153,755 148,275 158,776 Average impact of strategic transactions and impairment of BoCom (1,277) 748 N/A Average tangible equity excluding strategic transactions and impairment of BoCom 152,478 149,023 N/A % % % Ratio Return on average ordinary shareholders’ equity 13.6 9.0 7.1 Return on average tangible equity 14.6 10.0 8.3 Return on average tangible equity excluding strategic transactions and impairment of BoCom 15.6 11.3 N/A 1 From 1 January 2023, we adopted IFRS 17 ‘Insurance Contracts’, which replaced IFRS 4 ‘Insurance Contracts’. Comparative data for the financial year ended 31 December 2022 have been restated accordingly. Comparative data for the year ended 31 December 2021 are prepared on an IFRS 4 basis. 2 Includes the impacts of the sale of our retail banking operations in France. 3 Includes the provisional gain of $1.6bn recognised in respect of the acquisition of SVB UK. 4 Includes the impairment loss of $3.0bn recognised in respect of the Group’s investment in BoCom. See Note 18 on page 394. From 2024, we intend to revise the adjustments made to return on average tangible equity (‘RoTE’) to exclude all notable items, improving alignment with the treatment of notable items in our other income statement disclosures. On this basis, we continue to target a RoTE in the mid-teens for 2024. If this basis had been adopted for 2023, our RoTE excluding notable items would have been 16.2%. The following table details the adjustments made to reported results by global business: Return on average tangible equity by global business Year ended 31 Dec 2023 Wealth and Personal Banking Commercial Banking Global Banking and Markets Corporate Centre Total $m $m $m $m $m Profit before tax 11,544 13,280 5,924 (400) 30,348 Tax expense (2,141) (2,945) (1,165) 462 (5,789) Profit after tax 9,403 10,335 4,759 62 24,559 Less attributable to: preference shareholders, other equity holders, non-controlling interests (828) (485) (588) (226) (2,127) Profit attributable to ordinary shareholders of the parent company 8,575 9,850 4,171 (164) 22,432 Other adjustments (221) 364 168 (268) 43 Profit attributable to ordinary shareholders 8,354 10,214 4,339 (432) 22,475 Average tangible shareholders’ equity 29,352 43,687 38,036 42,680 153,755 Return on average tangible equity (%) 28.5 23.4 11.4 (1.0) 14.6 Year ended 31 Dec 2022 Profit before tax 5,588 7,593 4,919 (1,042) 17,058 Tax expense (1,150) (1,796) (761) 2,898 (809) Profit after tax 4,438 5,797 4,158 1,856 16,249 Less attributable to: preference shareholders, other equity holders, non-controlling interests (688) (344) (510) (362) (1,903) Profit attributable to ordinary shareholders of the parent company 3,750 5,453 3,648 1,494 14,346 Other adjustments 432 328 255 (499) 515 Profit attributable to ordinary shareholders 4,182 5,781 3,903 995 14,861 Average tangible shareholders’ equity 30,290 42,271 39,935 35,780 148,276 Return on average tangible equity (%) 13.8 13.7 9.8 2.8 10.0 132 HSBC Holdings plc Annual Report and Accounts 2023 Reconciliation of alternative performance measures Net asset value and tangible net asset value per ordinary share 2023 2022¹ 2021 $m $m $m Total shareholders’ equity 185,329 177,833 198,250 Preference shares and other equity instruments (17,719) (19,746) (22,414) Total ordinary shareholders’ equity 167,610 158,087 175,836 Goodwill, PVIF and intangible assets (net of deferred tax) (11,900) (11,160) (17,643) Tangible ordinary shareholders’ equity 155,710 146,927 158,193 Basic number of $0.50 ordinary shares outstanding 19,006 19,739 20,073 $ $ $ Value per share Net asset value per ordinary share 8.82 8.01 8.76 Tangible net asset value per ordinary share 8.19 7.44 7.88 1 From 1 January 2023, we adopted IFRS 17 ‘Insurance Contracts’, which replaced IFRS 4 ‘Insurance Contracts’. We have restated 2022 comparative data. Post-tax return and average total shareholders’ equity on average total assets 2023 2022¹ 2021 $m $m $m Profit after tax 24,559 16,249 14,693 Average total shareholders’ equity 184,029 180,263 199,295 Average total assets 3,059,887 3,017,495 3,012,437 Ratio % % % Post-tax return on average total assets 0.8 0.5 0.5 Average total shareholders’ equity to average total assets 6.01 5.97 6.62 1 From 1 January 2023, we adopted IFRS 17 ‘Insurance Contracts’, which replaced IFRS 4 ‘Insurance Contracts’. Comparative data for the financial year ended 31 December 2022 have been restated accordingly. Comparative data for the year ended 31 December 2021 are prepared on an IFRS 4 basis. Expected credit losses and other credit impairment charges as % of average gross loans and advances to customers and expected credit losses and other credit impairment charges as % of average gross loans and advances to customers, including held for sale 2023 2022¹ 2021 $m $m $m Expected credit losses and other credit impairment charges (‘ECL’) (3,447) (3,584) 928 Currency translation — (46) (170) Constant currency (3,447) (3,630) 758 Average gross loans and advances to customers 955,585 1,014,148 1,057,412 Currency translation 11,629 6,701 (43,098) Constant currency 967,214 1,020,849 1,014,314 Average gross loans and advances to customers, including held for sale 1,020,992 1,035,678 1,058,947 Currency translation 12,688 7,837 (43,098) Constant currency 1,033,680 1,043,515 1,015,849 Ratio % % % Expected credit losses and other credit impairment charges as % of average gross loans and advances to customers 0.36 0.36 (0.07) Expected credit losses and other credit impairment charges as % of average gross loans and advances to customers, including held for sale 0.33 0.35 (0.07) 1 From 1 January 2023, we adopted IFRS 17 ‘Insurance Contracts’, which replaced IFRS 4 ‘Insurance Contracts’. Comparative data for the financial year ended 31 December 2022 have been restated accordingly. Comparative data for the year ended 31 December 2021 are prepared on an IFRS 4 basis. Target basis operating expenses Target basis operating expenses is computed by excluding the impact of notable items and foreign exchange translation impacts from reported results. We also exclude the impact of retranslating comparative period financial information at the latest rates of foreign exchange in hyperinflationary economies, which we consider to be outside of our control. Our target basis also excludes the impact of the acquisition of SVB UK and related investments internationally, which added approximately 1% to our cost growth in 2023 compared with 2022. We consider this measure to provide useful information to investors by quantifying and excluding the notable items that management considered when setting and assessing cost-related targets. Target basis operating expenses 2023 2022 $m $m Reported operating expenses 32,070 32,701 Notable items (185) (2,900) Disposals, acquisitions and related costs (321) (18) Impairment of non-financial items — — Restructuring and other related costs1 136 (2,882) Excluding the impact of SVB UK and related international investments (271) — Currency translation2 (430) Excluding the impact of retranslating prior year costs of hyperinflationary economies at a constant currency foreign exchange rate 440 Target basis operating expenses 31,614 29,811 1 Amounts in 2023 relate to reversals of restructuring provisions recognised during 2022. 2 Currency translation on reported operating expenses, excluding currency translation on notable items. HSBC Holdings plc Annual Report and Accounts 2023 133 Financial review Basic earnings per share excluding material notable items and related impacts Material notable items are a subset of notable items. Material notable items are components of our income statement that management would consider as outside the normal course of business and generally non-recurring in nature, which are excluded from our dividend payout ratio calculation and our earnings per share measure, along with related impacts. Categorisation as a material notable item is dependent on the nature of each item in conjunction with the financial impact on the Group’s income statement. Related impacts include those items that do not qualify for designation as notable items but whose adjustment is considered by management to be appropriate for the purposes of determining the basis for our dividend payout ratio calculation. In 2023, material notable items comprised the impacts of the sale of our retail banking operations in France, the planned sale of our banking business in Canada, the acquisition of SVB UK and the impairment of BoCom. The impairment of BoCom is included within material notables given that the impairment relates to the accounting assessment of the future value-in-use. The impairment has no material impact on our distribution capacity, dividends or share buy- backs. Related items comprised HSBC Bank Canada‘s financial results from the 30 June 2022 net asset reference date onwards, as a component of the gain on sale will be recognised through the consolidation of HSBC Bank Canada‘s results in the Group‘s results, with the remainder recognised at completion. Commencing in 2024, we will establish a dividend payout ratio on a ‘target basis’. We will disclose at each quarter the adjustments that we will designate as material notable items and related impacts. Basic earnings per share excluding material notable items and related impacts 20231 $m Profit attributable to shareholders of company 23,533 Coupon payable on capital securities classified as equity (1.1) Profit attributable to ordinary shareholders of company 22.4 Impairment of interest in associate2 3.0 Provisional gain on acquisition of SVB UK (1.5) Impairment loss relating to the sale of our retail banking operations in France (net of tax) 0.1 Impact of the planned sale of our banking business in Canada3 (0.3) Profit attributable to ordinary shareholders of company excluding material notable items and related impacts 23.7 Number of shares Weighted average basic number of ordinary shares (millions) 19,478 Basic earnings per share excluding material notable items and related impacts 1.22 Basic earnings per share 1.15 Dividend per ordinary share (in respect of the period) ($) 0.61 Dividend payout ratio (%) (dividend per ordinary share divided by basic earnings per share excluding material notable items and related impacts) 50% 1 In 2023, earnings per share (‘EPS’) was adjusted for material notable items and related impacts. 2022 comparatives have not been provided due to the change our reporting framework and restatement due to the adoption of the IFRS 17. See our Annual Report and Accounts 2022 for details of the impacts of adjustments to our EPS in 2022. 2 Represents an impairment loss of $3bn recognised in respect of the Group’s investment in BoCom. See Note 18 on page 392. 3 Represents the earnings recognised by the banking business in Canada, net of gains and losses on foreign exchange hedges held at Group level, that will reduce the gain on sale recognised by the Group on completion. Multi-jurisdictional revenue Multi-jurisdictional revenue is a financial metric we use to assess our ability to drive value from our international network. In our wholesale businesses, we identify a client as multi-jurisdictional if they hold a relationship with us that generates revenue in any market outside of where the primary relationship is managed. A client is defined as a mastergroup (HSBC’s own client groupings) that includes both the parent and, where relevant, any subsidiaries. Multi-jurisdictional client revenue is a component of wholesale client revenue and represents the total client revenue we generate from multi-jurisdictional clients. Wholesale client revenue is derived by excluding from CMB and GBM reported revenue the revenue we generate from client facilitation in fixed income and equities, the 2023 provisional gain on the acquisition of SVB UK, as well as other non- client revenue. In WPB, we identify a customer as multi-jurisdictional if they bank with us in more than one of our 11 key markets. It is derived by excluding from WPB reported revenue the revenue from Canada and our retail business in France, as well as other non-customer income. Wholesale multi-jurisdictional client revenue 2023 $bn CMB and GBM revenue 39.0 Allocated revenue and other1 0.9 Client facilitation in Fixed Income and Equities (4.8) Provisional gain on acquisition of SVB UK (1.6) Wholesale client revenue 33.5 – clients banked in multiple jurisdictions (‘multi-jurisdictional’) 20.4 – domestic only clients 13.1 WPB multi-jurisdictional customer revenue 2023 $bn WPB revenue 27.3 Allocated revenue and other1 (0.5) France retail and Canada (1.4) WPB customer revenue 25.4 – international customer revenue 10.2 of which: customers banked in multiple jurisdictions (‘multi- jurisdictional’) 5.3 of which: non-resident and resident foreigner 4.9 – domestic only clients 15.2 1 including allocations of Market Treasury revenue, HSBC Holdings interest expense and hyperinflationary accounting adjustments, and interest earned on capital held in the global businesses. Reconciliation of alternative performance measures 134 HSBC Holdings plc Annual Report and Accounts 2023 Our partnership with Google to fight financial crime Google Cloud in 2023 officially launched an anti-money laundering artificial intelligence capability, which HSBC co-developed, that has the potential to transform how financial crime is tackled across the industry. We first implemented the solution, known at HSBC as the Dynamic Risk Assessment, in the UK in 2021 and have since deployed it in six markets, covering 80% of our customers. As a result of the tool, we can now identify more financial crime risk, twice as fast and with greater accuracy. We are also continuing to work with Google Cloud on other use cases for artificial intelligence. Our risk review outlines our approach to risk management, how we identify and monitor top and emerging risks, and the actions we take to mitigate them. In addition, it explains our material banking risks, including how we manage capital. 136 Our approach to risk 136 Our risk appetite 136 Risk management 139 Key developments in 2023 140 Top and emerging risks 140 Externally driven 143 Internally driven 145 Our material banking risks 147 Credit risk 203 Treasury risk 218 Market risk 221 Climate risk 230 Resilience risk 231 Regulatory compliance risk 231 Financial crime risk 232 Model risk 233 Insurance manufacturing operations risk Risk review HSBC Holdings plc Annual Report and Accounts 2023 135 Our approach to risk Our risk appetite We recognise the importance of a strong culture, which refers to our shared attitudes, beliefs, values and standards that shape behaviours including those related to risk awareness, risk taking and risk management. All our people are responsible for the management of risk, with ultimate supervisory oversight residing with the Board. Our risk appetite defines the level and types of risk that we are willing to take, while informing the financial planning process and guiding strategic decision making. The following principles guide the Group’s overarching appetite for risk and determine how our businesses and risks are managed. Financial position – We aim to maintain a strong capital position, defined by regulatory and internal capital ratios. – We carry out liquidity and funding management for each operating entity on a stand-alone basis. Operating model – We seek to generate returns in line with our risk appetite and strong risk management capability. – We aim to deliver sustainable and diversified earnings and consistent returns for shareholders. Business practice – We have no appetite for deliberately or knowingly causing detriment to consumers, or incurring a breach of the letter or spirit of regulatory requirements. – We have no appetite for inappropriate market conduct by any member of staff or by any Group business. – We are committed to managing the climate risks that have an impact on our financial position and delivering on our net zero ambition. – We consider and, where appropriate, mitigate reputational risk that may arise from our business activities and decisions. – We monitor non-financial risk exposure against risk appetite, including exposure related to inadequate or failed internal processes, people and systems, or events that impact our customers or can lead to sub-optimal returns to shareholders, censure, or reputational damage. Enterprise-wide application Our risk appetite encapsulates the consideration of financial and non- financial risks. We define financial risk as the risk of a financial loss as a result of business activities. We actively take these types of risks to maximise shareholder value and profits. Non-financial risk is the risk to achieving our strategy or objectives as the result of failed internal processes, people and systems, or from external events. Our risk appetite is expressed in both quantitative and qualitative terms and applied at the global business and regional levels, and to material operating entities. Every three years, the Group Risk and Compliance function commissions an external independent firm to review the Group’s approach to risk appetite and to help ensure that it remains in line with market best practice and regulatory expectations. This review was last carried out in 2021 and confirmed the Group’s risk appetite statement (‘RAS’) remains aligned to best practices, regulatory expectations and strategic goals. Our risk appetite continues to evolve and expand its scope as part of our regular review process. The Board reviews and approves the Group’s risk appetite regularly to make sure it remains fit for purpose. The Group’s risk appetite is considered, developed and enhanced through: – an alignment with our strategy, purpose, values and customer needs; – trends highlighted in other Group risk reports; – communication with risk stewards on the developing risk landscape; – strength of our capital, liquidity and balance sheet; – compliance with applicable laws and regulations; – effectiveness of the applicable control environment to mitigate risk, informed by risk ratings from risk control assessments; – functionality, capacity and resilience of available systems to manage risk; and – the level of available staff with the required competencies to manage risks. We formally articulate our risk appetite through our RAS. Setting out our risk appetite helps ensure that we agree a suitable level of risk for our strategy. In this way, risk appetite informs our financial planning process and helps senior management to allocate capital to business activities, services and products. The RAS is applied to the development of business line strategies, strategic and business planning, and remuneration. At a Group level, performance against the RAS is reported to the Group Risk Management Meeting alongside key risk indicators to support targeted insight and discussion on breaches of risk appetite and any associated mitigating actions. This reporting allows risks to be promptly identified and mitigated, and informs risk-adjusted remuneration to drive a strong risk culture. Each global business, region and material operating entity is required to have its own RAS, which is monitored to help ensure it remains aligned with the Group’s RAS. Each RAS and business activity is guided and underpinned by qualitative principles and/or quantitative metrics. Risk management We recognise that the primary role of risk management is to help protect our customers, business, colleagues, shareholders and the communities that we serve, while ensuring we are able to support our strategy and provide sustainable growth. This is supported through our three lines of defence model described on page 138. The implementation of our business strategy remains a key focus. As we implement change initiatives, we actively manage the execution risks. We also perform periodic risk assessments, including against strategies, to help ensure retention of key personnel for our continued safe operation. We aim to use a comprehensive risk management approach across the organisation and across all risk types, underpinned by our culture and values. This is outlined in our risk management framework, including the key principles and practices that we employ in managing material risks, both financial and non-financial. The framework fosters continuous monitoring, promotes risk awareness and encourages a sound operational and strategic decision-making and escalation process. It also supports a consistent approach to identifying, assessing, managing and reporting the risks we accept and incur in our activities, with clear accountabilities. We actively review and enhance our risk management framework and our approach to managing risk, through our activities with regard to: people and capabilities; governance; reporting and management information; credit risk management models; and data. Group Risk and Compliance is independent from the global businesses, including our sales and trading functions. It provides challenge, oversight and appropriate balance in risk/return decisions. Risk review 136 HSBC Holdings plc Annual Report and Accounts 2023 Our risk management framework The following diagram and descriptions summarise key aspects of the risk management framework, including governance, structure, risk management tools and our culture, which together help align employee behaviour with risk appetite. Key components of our risk management framework HSBC values and risk culture Risk governance Non-executive risk governance The Board approves the Group’s risk appetite, plans and performance targets. It sets the ‘tone from the top’ and is advised by the Group Risk Committee (see page 254). Executive risk governance Our executive risk governance structure is responsible for the enterprise-wide management of all risks, including key policies and frameworks for the management of risk within the Group (see pages 138 and 145). Roles and responsibilities Three lines of defence model Our ‘three lines of defence’ model defines roles and responsibilities for risk management. An independent Group Risk and Compliance function helps ensure the necessary balance in risk/return decisions (see page 138). Processes and tools Risk appetite The Group has processes in place to identify, assess, monitor, manage and report risks to help ensure we remain within our risk appetite. Enterprise-wide risk management tools Active risk management: identification/assessment, monitoring, management and reporting Internal controls Policies and procedures Policies and procedures define the minimum requirements for the controls required to manage our risks. Control activities Operational and resilience risk management defines minimum standards and processes for managing operational risks and internal controls. Systems and infrastructure The Group has systems and processes that support the identification, capture and exchange of information to support risk management activities. Risk governance The Board has ultimate supervisory responsibility for the effective management of risk and approves our risk appetite. The Group Chief Risk and Compliance Officer, supported by members of the Group Risk Management Meeting, holds executive accountability for the ongoing monitoring, assessment and management of the risk environment and the effectiveness of the risk management framework. The Group Chief Risk and Compliance Officer is also responsible for the oversight of reputational risk, with the support of the Group Reputational Risk Committee. The Group Reputational Risk Committee considers matters arising from customers, transactions and third parties that either present a serious potential reputational risk to the Group or merit a Group-led decision to ensure a consistent risk management approach across the regions, global businesses and global functions. Further details can be found under the ‘Reputational risk’ section of www.hsbc.com/who-we-are/esg-and-responsible- business/managing-risk. Day-to-day responsibility for risk management is delegated to senior managers with individual accountability for decision making. All our people have a role to play in risk management. These roles are defined using the three lines of defence model, which takes into account our business and functional structures, including regulatory compliance and financial crime, as described in the following commentary, ‘Our responsibilities’. We use a defined executive risk governance structure to help ensure there is appropriate oversight and accountability of risk, which facilitates reporting and escalation to the Group Risk Management Meeting. This structure is summarised in the following table. Group Risk Management Meeting Group Chief Risk and Compliance Officer Group Chief Legal Officer Group Chief Executive Group Chief Financial Officer Group Head of Financial Crime and Group Money Laundering Reporting Officer All other Group Executive Committee members – Supporting the Group Chief Risk and Compliance Officer in exercising Board- delegated risk management authority – Overseeing the implementation of risk appetite and the risk management framework – Forward-looking assessment of the risk environment, analysing possible risk impacts and taking appropriate action – Monitoring all categories of risk and determining appropriate mitigating action – Promoting a supportive Group culture in relation to risk management and conduct Governance structure for the management of risk and compliance Authority Membership Responsibilities include: HSBC Holdings plc Annual Report and Accounts 2023 137 Risk review Group Risk and Compliance Executive Committee Group Chief Risk and Compliance Officer Chief risk and compliance officers of HSBC’s global businesses Regional chief risk and compliance officers and chief risk officers Heads of Global Risk and Compliance sub-functions – Supporting the Group Chief Risk and Compliance Officer in providing strategic direction for the Group Risk and Compliance function, setting priorities and providing oversight – Overseeing a consistent approach to accountability for, and mitigation of, risk and compliance across the Group Global business/regional risk management meetings Global business/regional chief risk and compliance officers and chief risk officers Global business/regional chief executive officers Global business/regional chief financial officers Global business/regional heads of global functions – Supporting the Group Chief Risk and Compliance Officer in exercising Board- delegated risk management authority – Forward-looking assessment of the risk environment – Implementation of risk appetite and the risk management framework – Monitoring all categories of risk and overseeing appropriate mitigating actions – Embedding a supportive culture in relation to risk management and controls Governance structure for the management of risk and compliance (continued) Authority Membership Responsibilities include: The Board committees with responsibility for oversight of risk-related matters are set out on page 252. Treasury risks are the responsibility of the Group Executive Committee and the Group Risk Committee. Global Treasury actively manages these risks, supported by the Holdings Asset and Liability Management Committee (‘ALCO’) and local ALCOs, overseen by Treasury Risk Management and the Group Risk Management Meeting. Further details on treasury risk management are set out on page 203. Our responsibilities All our people are responsible for identifying and managing risk within the scope of their roles. Roles are defined using the three lines of defence model, which takes into account our business and functional structures as described below. Three lines of defence To create a robust control environment to manage risks, we use an activity-based three lines of defence model. This model delineates management accountabilities and responsibilities for risk management and the control environment. The model underpins our approach to risk management by clarifying responsibility and encouraging collaboration, as well as enabling effective coordination of risk and control activities. The three lines of defence are summarised below: – The first line of defence owns the risks and is responsible for identifying, recording, reporting and managing them in line with risk appetite, and ensuring that the right controls and assessments are in place to mitigate them. – The second line of defence challenges the first line of defence on effective risk management, and provides advice, guidance and assurance of the first line of defence to ensure it is managing risk effectively. – The third line of defence is our Global Internal Audit function, which provides independent assurance as to whether our risk management approach and processes are designed and operating effectively. Group Risk and Compliance function Our Group Risk and Compliance function is responsible for the Group’s risk management framework. This responsibility includes establishing global policy, monitoring risk profiles, and identifying and managing forward-looking risk. Group Risk and Compliance is made up of sub-functions covering all risks to our business. Forming part of the second line of defence, the Group Risk and Compliance function is independent from the global businesses, including sales and trading functions. It provides challenge, appropriate oversight and balance in risk/return decisions. Responsibility for minimising both financial and non-financial risk, including regulatory compliance and financial crime, lies with our people. They are required to manage the risks of the business and operational activities for which they are responsible. We maintain adequate oversight of our risks through our various specialist risk stewards and the collective accountability held by our chief risk and compliance officers. We have continued to strengthen the control environment and our approach to the management of risk, as set out in our risk management framework. Our ongoing focus is on helping to ensure more effective oversight and better end-to-end identification and management of financial and non-financial risks. This is overseen by the Enterprise Risk Management function, headed by the Global Head of Enterprise Risk Management. Stress testing and recovery planning Our stress testing programme assesses our capital and liquidity strength through a rigorous examination of our resilience to external shocks, and forms part of our risk management and capital and liquidity planning. As well as undertaking regulatory-driven stress tests, we conduct our own internal stress tests in order to understand the nature and level of material risks, quantify the impact of such risks and develop plausible mitigating actions. The outcome of a stress test provides management with key insights into the impact of severely adverse events on the Group and provides an indication of resilience to regulators on the Group’s financial stability. Internal stress tests Our internal capital assessment uses a range of stress scenarios that explore risks identified by management. They include potential adverse macroeconomic, geopolitical, climate and operational risk events, as well as other potential events that are specific to HSBC. The selection of stress scenarios is based upon the output of our identified top and emerging risks and our risk appetite. Stress testing analysis helps management understand the nature and extent of vulnerabilities to which the Group is exposed. Using this information, management decides whether risks can or should be mitigated through management actions or, if they were to crystallise, be absorbed through capital and liquidity. This in turn informs decisions about preferred capital and liquidity levels and allocations. During 2023, we completed a Group-wide internal stress test alongside testing of the Group’s strategy, otherwise known as the corporate plan, to test and inform our strategy and assumptions. The stress scenario explored the potential impact of interest rate shocks and a deep recession. Under this scenario, inflation re-intensifies as accentuated geopolitical tensions lead to severe global supply chain disruptions and a rise in energy prices. In addition to the Group-wide stress testing scenarios, each major subsidiary conducts regular macroeconomic and event-driven scenario analysis specific to its region. They also participate, as required, in the regulatory stress testing programmes of the jurisdictions in which they operate, such as stress tests required by the Bank of England Risk review 138 HSBC Holdings plc Annual Report and Accounts 2023 (‘BoE’) in the UK, the Federal Reserve Board (‘FRB’) in the US, and the Hong Kong Monetary Authority (‘HKMA’) in Hong Kong. Global functions and businesses also perform bespoke stress testing to inform their assessment of risks to potential scenarios. We also conduct reverse stress tests each year at Group level and, where required, at subsidiary entity level to understand potential extreme conditions that would make our business model non-viable. Reverse stress testing identifies potential stresses and vulnerabilities we might face, and helps inform early warning triggers, management actions and contingency plans designed to mitigate risks. Recovery and resolution plans Recovery and resolution plans form part of the integral framework safeguarding the Group’s financial stability. The Group recovery plan, together with stress testing, help us understand the likely outcomes of adverse business or economic conditions and in the identification of appropriate risk mitigating actions. The Group is committed to further developing its recovery and resolution capabilities, including in relation to the Resolvability Assessment Framework. Ibor transition Interbank offered rates (‘Ibors’) were previously used extensively to set interest rates on different types of financial transactions and for valuation purposes, risk measurement and performance benchmarking. The publication of sterling, Swiss franc, euro, Japanese yen and US dollar Libor interest rate benchmarks, as well as the Euro Overnight Index Average (‘Eonia’) and other local interbank interest rates globally, has ceased following regulatory announcements and industry initiatives. To support any remaining contracts referencing sterling and US dollar Libor benchmarks, the UK’s Financial Conduct Authority (‘FCA’) has compelled the ICE Benchmark Administration Limited to publish the three-month sterling Libor setting using an alternative ‘synthetic’ methodology until 31 March 2024, and the one-month, three-month and six-month US dollar Libor settings until 30 September 2024. We continue to support our customers in the transition of the limited number of outstanding contracts relying on ‘synthetic’ Libor benchmarks in line with these dates. There are approximately 90 of these contracts remaining, which are predominantly syndicated lending contracts, where Commercial Banking and Global Banking customers have required additional time to enable refinancing or restructuring, with transition expected to be completed prior to 30 September 2024. Additionally, there are a small number of Group-issued MREL and capital securities and client retail mortgages that are contingent on demised Ibors after the end of their fixed interest rate periods. HSBC remains committed to seeking to remediate and/or mitigate relevant risks relating to Ibor-demise, as appropriate, for these contracts. HSBC expects to be able to remediate and/or mitigate these risks by the relevant interest rate calculation dates, which may occur post-cessation of the relevant Ibor. All other contracts referencing benchmarks that are no longer published have been transitioned in line with client and investor discussions. Although we continue to track the transition of remaining contracts to alternative interest rate benchmarks, overall, our regulatory compliance, conduct and legal risks have materially diminished. We will continue to monitor until all contracts are fully transitioned. Key developments in 2023 In 2023, we actively managed the risks related to macroeconomic and geopolitical uncertainties, as well as other key risks described in this section. In addition, we sought to enhance our risk management in the following areas: – We enhanced our model risk frameworks and controls as we seek to manage the increasing numbers of climate risk, artificial intelligence (‘AI’) and machine learning models being embedded in business processes. Focus is also on generative AI due to the pace of technological changes and regulatory and wider interest in adoption and usage. – We implemented two revised risk appetite frameworks to better manage and strengthen our controls with respect to concentration risks. These relate to concentration risks arising from exposures to countries and territories, and to single customer groups. – We enhanced our processes, framework and capabilities to seek to improve the control and oversight of our material third parties, and to help maintain our operational resilience and meet new and evolving regulatory requirements. – We continued to make progress with our comprehensive regulatory reporting programme in seeking to strengthen our global processes, improve consistency and enhance controls across regulatory reports. – Through our climate risk programme, we continued to embed climate considerations throughout the organisation, including through risk policy updates and the completion of our annual climate risk materiality assessment. We also developed risk metrics to monitor and manage exposures, and further enhanced our internal climate scenario analysis. – We deployed industry-leading technology and advanced analytics capabilities into new markets to improve our ability to identify suspicious activities and prevent financial crime. – We continued to develop and enhance our electronic communication policies and standards to help ensure that we act on the most substantive issues. A Group-wide approach to providing corporate device access is being implemented to meet regulatory expectations. – We are embedding our suite of regulatory management systems following the Group-wide roll-out of regulatory horizon scanning capabilities, and enhanced regulation mapping tooling. – We continued to stabilise our net interest income, despite the fluctuations in interest rate expectations, driven by central bank rate increases and a reassessment of the trajectory of inflation in major economies. HSBC Holdings plc Annual Report and Accounts 2023 139 Risk review Top and emerging risks We use a top and emerging risks process to provide a forward-looking view of issues with the potential to threaten the execution of our strategy or operations over the medium to long term. We proactively assess the internal and external risk environment, as well as review the themes identified across our regions and global businesses, for any risks that may require global escalation. We update our top and emerging risks as necessary. Our current top and emerging risks are as follows. Externally driven Geopolitical and macroeconomic risks HSBC faces elevated geopolitical risks, with the Russia-Ukraine war continuing to have global economic and political implications, and the Israel-Hamas war increasing tensions in the Middle East, leading to recent attacks on shipping in the Red Sea and countermeasures, which have begun to disrupt supply chains. HSBC is monitoring and assessing the impacts of these wars. The Russia-Ukraine war has continued to elevate geopolitical instability, which could have continued ramifications for the Group and its customers. HSBC continues to monitor and respond to financial sanctions and trade restrictions that have been adopted in response. These sanctions and trade restrictions are complex, novel and evolving. In particular, the US, the UK and the EU, as well as other countries, have imposed significant sanctions and trade restrictions against Russia. Such sanctions and restrictions target certain Russian government officials, politically exposed persons, business people, Russian oil imports, energy products, financial institutions and other major Russian companies and sanctions evasion networks. These countries have also enacted more generally applicable investment, export, and import bans and restrictions. In December 2023, the US established a new secondary sanctions regime, providing itself broad discretion to impose severe sanctions on non-US banks that are knowingly or even unknowingly engaged in certain transactions or services involving Russia’s military-industrial base. This creates challenges associated with the detection or prevention of third-party activities beyond HSBC’s control. The imposition of such sanctions against any non-US HSBC entity could result in significant adverse commercial, operational, and reputational consequences for HSBC, including the restriction or termination of the non-US HSBC entity’s ability to access the US financial system and the freezing of the entity’s assets that are subject to US jurisdiction. In response to such sanctions and trade restrictions, as well as asset flight, Russia has implemented certain countermeasures, including the expropriation of foreign assets. Our business in Russia principally serves multinational corporate clients headquartered in other countries, is not accepting new business or customers and is consequently on a declining trend. Following a strategic review, HSBC Europe BV (a wholly-owned subsidiary of HSBC Bank plc) has entered into an agreement to sell its wholly-owned subsidiary HSBC Bank (RR) (Limited Liability Company), subject to regulatory and governmental approvals. The planned sale of our business in Russia became less certain and remains subject to regulatory approval. The US-China relationship remains complex. To date, the US, the UK, the EU and other countries have imposed various sanctions and trade restrictions on Chinese persons and companies, and the countries’ respective approaches to strategic competition with China continue to develop. Although sanctions and trade restrictions are difficult to predict, increases in diplomatic tensions between China and the US and other countries could result in further sanctions and trade restrictions that could negatively impact the Group, its customers and the markets in which the Group operates. For example, there is a continued risk of additional sanctions and trade restrictions being imposed by the US and other governments in relation to human rights, technology, and other issues, and this could create a more complex operating environment for the Group and its customers. China, in turn, imposed a number of its own sanctions and trade restrictions that target, or provide authority to target, foreign individuals and companies as well as certain goods such as rare earth minerals and metals, and technology and services. These, as well as certain law enforcement measures, have been imposed against certain countries, Western consulting and data intelligence firms, defence companies and public officials associated with the implementation of foreign sanctions against China. Further sanctions, counter-sanctions and trade restrictions may adversely affect the Group, its customers and the markets in which the Group operates, by creating regulatory, reputational and market risks. Economic and financial risks also remain significant, and we continue to monitor our risk profile closely in the context of uncertainty over global macroeconomic policies. A fall in global energy and food prices from the highs of 2022 facilitated a process of disinflation across key economies during 2023. To date, the Israel-Hamas war has not materially disrupted energy supply, and non-OPEC producers, including the US, increased output in the fourth quarter of 2023. Similarly, geopolitical developments in the Middle East have not to date led to a sustained increase in energy prices, but disruption and further price volatility continue to be a risk. The escalation or a broadening of either the Russia-Ukraine war or the Israel-Hamas war could aggravate supply chain disruptions and drive inflation higher and may pose challenges for our customers and our business. Following the reduction in global inflation rates, central banks in most developed markets are expected to have concluded monetary policy tightening in the second half of 2023. A further fall in inflation is expected to enable reductions in interest rates throughout 2024, although forecasts still assume that they remain materially higher than in recent years. Higher financing costs will raise interest payment burdens for many counterparties. Fiscal deficits are also expected to remain large in both developed and emerging markets, as public spending on items including social welfare, defence and climate transition initiatives is expected to remain high. In many countries, the fiscal response to the Covid-19 pandemic has also left a very high public debt burden. Against a backdrop of slower economic growth and high interest rates, a rise in borrowing costs could increase the financial strains on highly indebted sovereigns. Political changes may also have implications for policy. Many countries are expected to hold elections in 2024. This may result in continuity in some markets, but significant political and policy change in others. Political change could bring uncertainty to the political and legal frameworks in markets where the Group operates. Sector-specific risks are also closely monitored. Mainland China commercial real estate conditions remain distressed as offshore financing conditions and buyer demand remain subdued. Signs of a material or sustained recovery are yet to emerge, with market data still reflecting reduced investment and weak sentiment. The Chinese government is expected to expand fiscal and monetary support to the economy to boost growth and lending in 2024, including specific measures to support developers and stimulate housing demand. However, the risk of a slow and protracted recovery remains significant. The business and financial performance of corporates operating in this market has been weak, and refinancing risks are likely to continue in 2024. State-owned enterprises continue to outperform privately-owned enterprises in general, with above market average sales performance, market share gains and greater access to funding. The challenges in this sector could create further pressure on our customers. We continue to closely monitor and take actions to proactively risk manage our portfolio. Macroeconomic, financial and geopolitical risks have all impacted our macroeconomic risk scenarios. Our Central scenario, which has the highest probability weighting in our IFRS 9 ‘Financial Instruments’ calculations of ECL, assumes that GDP growth rates in our main markets will slow down in 2024, followed by a moderate recovery in Risk review 140 HSBC Holdings plc Annual Report and Accounts 2023 2025. It is anticipated that inflation will converge towards central banks’ target rates by early 2025. Similarly, interest rates are expected to decline but remain materially higher than in recent years. We also consider scenarios where commodity prices are materially higher, inflation and interest rates rise and a global recession follows, although we assign these scenarios a lower probability of occurring. Forecasts remain uncertain, and changing economic conditions and the materialisation of key risks could reduce the accuracy of the Central scenario forecast. In particular, forecasts in recent years have been sensitive to commodity price changes, changing supply chain conditions, monetary policy adjustments and inflation expectations. Uncertainty remains with respect to the relationship between the economic factors and historical loss experience, which has required adjustments to modelled ECL in cases where we determined that the model was unable to capture the material underlying risks. Despite these risks, forecast stability and reduced forecast dispersion in our main markets ensured that the Central scenario for impairment was assigned the same likelihood of occurrence across our key markets. For further details of our Central and other scenarios, see ‘Measurement uncertainty and sensitivity analysis of ECL estimates’ on page 156. Global tensions over trade, technology and ideology are manifesting themselves in divergent regulatory standards and compliance regimes, presenting long-term strategic challenges for multinational businesses. As the geopolitical landscape evolves, compliance by multinational corporations with their legal or regulatory obligations in one jurisdiction may be seen as supporting the law or policy objectives of that jurisdiction over another, creating additional compliance, reputational and political risks for the Group. We maintain dialogue with our regulators in various jurisdictions on the impact of legal and regulatory obligations on our business and customers. The financial impact on the Group of geopolitical risks in Asia is heightened due to the region’s relatively high contribution to the Group’s profitability, particularly in Hong Kong. While it is the Group’s policy to comply with all applicable laws and regulations of all jurisdictions in which it operates, geopolitical tensions, and potential ambiguities in the Group’s compliance obligations, will continue to present challenges and risks for the Group and could have a material adverse impact on the Group‘s business, financial condition, results of operations, prospects, strategy and reputation, as well as on the Group’s customers. Mitigating actions – We closely monitor geopolitical and economic developments in key markets and sectors, and undertake scenario analysis where appropriate. This helps us to take actions to manage our portfolios where necessary, including through enhanced monitoring, amending our risk appetite and/or reducing limits and exposures. – We stress test portfolios of particular concern to identify sensitivity to loss under a range of scenarios, with management actions being taken to rebalance exposures and manage risk appetite where necessary. – We regularly review key portfolios – including our commercial real estate portfolio – to help ensure that individual customer or portfolio risks are understood and that our ability to manage the level of facilities offered through any downturn is appropriate. – We continue to seek to manage sanctions and trade restrictions through the use of reasonably designed policies, procedures and controls, which are subject to ongoing testing, auditing and enhancements. – We have taken steps, where necessary, to enhance physical security in geographical areas deemed to be at high risk from terrorism and military conflicts. Technology and cybersecurity risk Like other organisations, we operate in an extensive and complex technology landscape. We need to remain resilient in order to support customers, our colleagues and financial markets globally. Risks arise where, for example, technology is not understood, maintained or developed appropriately. We also continue to operate in an increasingly complex cyber threat environment globally. These threats include potential unauthorised access to customer accounts and attacks on systems, whether ours or our third-party suppliers’. These threats require ongoing investment in business and technical controls to defend against them. Mitigating actions – We continue to upgrade many of our IT systems and are transforming how software solutions are developed, delivered, maintained and tested as part of our investment in the Group’s operational resilience capabilities to seek to meet the expectations of our customers and regulators and to help prevent disruptions to our services. – Our cyber intelligence and threat analysis team continually evaluate threat levels for the most prevalent cyber-attack types and their potential outcomes (see page 98), and we continue to seek to strengthen our controls to help reduce the likelihood and impact of advanced malware, data leakage, exposure through third parties and security vulnerabilities. – We continue to seek to enhance our cybersecurity capabilities, including Cloud security, identity and access management, metrics and data analytics, and third-party security reviews and to invest in mitigating the potential threats of emerging technologies. – We regularly report and review cyber risk and control effectiveness at executive level across global businesses, functions and regions, as well as at non-executive Board level to help ensure there is appropriate visibility and governance of the risk and its mitigating actions. – We participate globally in industry bodies and working groups to collaborate on tactics employed by cyber-crime groups and to work together to seek to prevent, detect and defend against cyber-attacks on financial organisations globally. – We respond to attempts to compromise our cybersecurity in accordance with our cybersecurity framework, which adheres to applicable laws, rules and regulations. To date, none of these attacks have had a material impact on our business or operations. Environmental, social and governance (’ESG’) risk We are subject to financial and non-financial risks associated with ESG-related matters. Our current areas of focus include climate risk, nature-related risks and human rights risks. These can impact us both directly and indirectly through our business activities and relationships. For details of how we govern ESG, see page 88. Our assessment of climate risks covers three distinct time periods, comprising: short term, which is up to 2025; medium term, which is between 2026 and 2035; and long term, which is between 2036 and 2050. These time periods are aligned to the Climate Action 100+ framework v1.2. We may face credit losses if our customers’ business models fail to align to a net zero economy or if our customers face disruption to their operations or deterioration to their assets as a result of extreme weather. We may face trading losses if climate change results in changes to macroeconomic and financial variables that negatively impact our trading book exposures. We may face impacts from physical risk on our own operations and premises, owing to the increase in frequency and severity of weather events and chronic shifts in weather patterns, which could affect our ability to conduct our day-to-day operations. HSBC Holdings plc Annual Report and Accounts 2023 141 Risk review We may face increased reputational, legal, and regulatory compliance risks if we fail to make sufficient progress towards our net zero ambition, and ESG-related targets, commitments and ambitions, if we fail to meet evolving regulatory expectations and requirements on the management of climate risk and broader ESG risks, or if we knowingly or unknowingly make inaccurate, unclear, misleading, or unsubstantiated claims regarding sustainability to our stakeholders. Requirements, policy objectives, expectations or views may vary by jurisdiction and stakeholder in relation to ESG-related matters. We may be subject to potentially conflicting approaches to ESG matters in certain jurisdictions, which may impact our ability to conduct certain business within those jurisdictions or result in additional regulatory compliance, reputational, political or litigation risks. These risks may also arise from divergence in the implementation of ESG, climate policy and financial regulation in the many regions in which we operate, including initiatives to apply and enforce policy and regulation with extraterritorial effect. We may face financial reporting risk in relation to our climate-related and broader ESG disclosures, as any data, methodologies, scenarios and reporting standards we have used may evolve over time in line with market practice, regulation or developments in science. We may also face the risk of making reporting errors due to issues relating to the availability, accuracy and verifiability of data, and system, process and control challenges. Any changes and reporting errors could result in revisions to our internal frameworks and reported data and could mean that reported figures are not reconcilable or comparable year on year. We may also have to re-evaluate our progress towards our climate-related targets in the future. We may face model risk, as the uncertain and evolving impacts of climate change and data and methodology limitations present challenges to creating reliable and accurate model outputs. We may face climate and broader ESG-related litigation and regulatory enforcement risks, either directly if stakeholders think that we are not adequately managing climate and broader ESG-related risks, or indirectly if our clients and customers are themselves the subject of litigation, potentially resulting in the revaluation of client assets. We may also be exposed to nature-related risks beyond climate change. These risks arise when the provision of ecosystem services, such as water availability, air quality and soil quality, is compromised by human activity. Nature risk can manifest through macroeconomic, market, credit, reputational, legal and regulatory risks, for both HSBC and our customers. Regulation and disclosure requirements in relation to human rights, and to modern slavery in particular, are increasing. Businesses are expected to be transparent about their efforts to identify and respond to the risk of negative human rights impacts arising from their business activities and relationships. Mitigating actions – A dedicated Environmental Risk Oversight Forum is responsible for shaping and overseeing our approach and providing support in managing climate and sustainability risk. For further details of the Group’s ESG governance structure, see page 88. – Our climate risk programme continues to support the development of our climate risk management capabilities across four key pillars: governance and risk appetite, risk management, stress testing and scenario analysis, and disclosures. We continue to enhance our approach and mitigation of the risk of greenwashing. – In January 2024, we updated our energy policy covering the broader energy system including upstream oil and gas, oil and gas power generation, coal, hydrogen, renewables and hydropower, nuclear, biomass and energy from waste. We also updated our thermal coal phase-out policy, which aims to drive thermal coal phase-out aligned to science-based timeframes. We take a risk- based approach in the way that we identify transactions and clients to which our energy and thermal coal phase-out policies apply, and report on relevant exposures, adopting approaches proportionate to risk and materiality. For further details of our sustainability risk policies, see page 67. – In 2023, we conducted pilot exercises to assess nature risk exposures, focusing on our continental Europe portfolios in line with regulatory expectations. – In 2023, we provided practical guidance and training, where relevant, to our colleagues across the Group on how to identify and manage human rights risk. For further details, see page 89. – We have expanded the scope of financial reporting risk to explicitly include oversight over accuracy and completeness of climate- related and broader ESG disclosures. In 2023, we updated the risk appetite statement to reference our ESG and climate-related disclosures. We also updated our internal controls to incorporate requirements for addressing the risk of misstatement in climate- related and broader ESG disclosures. To support this, we have developed a framework to guide control implementation over climate-related and broader ESG disclosures, which includes areas such as process and data governance, and risk assessment. – We continue to engage with our customers, investors and regulators proactively on the management of climate-related and broader ESG risks. We also engage with initiatives, including the Climate Financial Risk Forum, Equator Principles, Task Force on Climate-related Financial Disclosures and CDP (formerly the Carbon Disclosure Project) to help drive best practice for climate risk management. For further details of our approach to climate risk management, see ‘Climate risk’ on page 221. For further details of ESG risk management, see ‘Financial crime risk‘ on page 231 and ‘Regulatory compliance risk’ on page 231. Our ESG review can be found on page 42. Financial crime risk Financial institutions remain under considerable regulatory scrutiny regarding their ability to detect and prevent financial crime. In 2023, these risks were exacerbated by rising geopolitical tensions and ongoing macroeconomic factors. These challenging developments require managing conflicting laws and approaches to legal and regulatory regimes, and implementing increasingly complex and less predictable sanctions and trade restrictions. Amid high levels of inflation and increasing cost of living pressures, we face increasing regulatory expectations with respect to managing internal and external fraud and protecting vulnerable customers. In addition, the accessibility and increasing sophistication of generative AI brings financial crime risks. While there is potential for the technology to support financial crime detection, there is also a risk that criminals use generative AI to perpetrate fraud, particularly scams. The digitisation of financial services continues to have an impact on the payments ecosystem, with an increasing number of new market entrants and payment mechanisms, not all of which are subject to the same level of regulatory scrutiny or regulations as banks. Developments around digital assets and currencies have continued at pace, with an increasing regulatory and enforcement focus on the financial crimes linked to these types of assets. Expectations continue to increase with respect to the intersection of ESG issues and financial crime, as our organisation, customers and suppliers transition to net zero. These are particularly focused on potential ‘greenwashing’, human rights issues and environmental crimes. In addition, climate change itself could heighten risks linked to vulnerable migrant populations in countries where financial crime is already more prevalent. We also continue to face increasing challenges presented by national data privacy requirements, which may affect our ability to manage financial crime risks across markets. Mitigating actions – We continue to seek to manage sanctions and trade restrictions through the use of reasonably designed policies, procedures and controls, which are subject to ongoing testing, auditing and enhancements. – We continue to develop our fraud controls and invest in capabilities to fight financial crime through the application of Risk review 142 HSBC Holdings plc Annual Report and Accounts 2023 advanced analytics and AI, while monitoring technological developments and engaging with third parties. – We are looking at the impact of a rapidly changing payments ecosystem, as well as risks associated with direct and indirect exposure to digital assets and currencies, in an effort to maintain appropriate financial crime controls. – We regularly review our existing policies and control framework so that developments relating to ESG are considered and the financial crime risks are mitigated to the extent possible. – We engage with regulators, policymakers and relevant international bodies, seeking to address data privacy challenges through international standards, guidance and legislation. Digitalisation and technological advances risk Developments in technology and changes to regulations are enabling new entrants to the industry, particularly with respect to payments. This challenges us to continue innovating to address evolving customer requirements, drive efficiency and adapt our products to attract and retain customers. As a result, we may need to increase our investment in our business to adapt or develop products and services to respond to our customers’ evolving needs. We also need to ensure that new digital capabilities do not weaken our resilience or wider risk management capabilities. New technologies such as generative AI, large language models blockchain and quantum computing offer both business opportunities and potential risks for HSBC. As with the use of all technologies, we aim to maximise their potential while seeking to ensure a robust control environment is in place to help manage the inherent risks, such as the impact on encryption algorithms. Mitigating actions: – We continue to monitor this emerging risk and advances in technology, as well as changes in customer behaviours, to understand how these may impact our business. – We assess new technologies to help develop appropriate controls and maintain resilience. – We closely monitor and assess financial crime risk and the impact on payment transparency and architecture. Evolving regulatory environment risk We aim to keep abreast of the emerging regulatory compliance and conduct risk agenda. Current focus areas include but are not limited to: ESG agenda developments, including in particular managing the risk of ‘greenwashing’; ensuring good customer outcomes, including addressing customer vulnerabilities due to cost of living pressures; enhancements to regulatory reporting controls; and employee compliance, including the use of e-communication channels. The competitive landscape in which the Group operates may be impacted by future regulatory changes and government intervention. Mitigating actions – We monitor regulatory developments to understand the evolving regulatory landscape, and seek to respond with changes in a timely manner. – We engage with governments and regulators, and respond to consultations with a view to help shape regulations that can be implemented effectively. – We hold regular meetings with relevant authorities to discuss strategic contingency plans, including those arising from geopolitical issues. – Our purpose-led conduct approach aligns to our purpose and values, in particular the value ‘we take responsibility’. Internally driven Data risk We use multiple systems and growing quantities of data to support our customers. Risk arises if data is incorrect, unavailable, misused, or unprotected. Along with other banks and financial institutions, we need to meet external regulatory obligations and laws that cover data, such as the Basel Committee on Banking Supervision’s 239 guidelines and the General Data Protection Regulation. Mitigating actions – Through our global data management framework, we monitor the quality, availability and security of data that supports our customers and internal processes. We work towards resolving any identified data issues in a timely manner. – We continue to make improvements to our data policies and to our control framework – which includes trusted sources, data flows and data quality – in order to enhance the end-to-end management of data risk. – We have established a global data management utility and continue to simplify and unify data management activities across the Group. – We seek to protect customer data through our data privacy framework, which establishes practices, design principles and guidelines that enable us to demonstrate compliance with data privacy laws and regulations. – We continue to modernise our data and analytics infrastructure through investments in Cloud technology, data visualisation, machine learning and AI. – We continue to educate our employees on data risk and data management. We have delivered regular mandatory training globally on how to protect and manage data appropriately. Risks arising from the receipt of services from third parties We use third parties to provide a range of goods and services. It is critical that we ensure we have appropriate risk management policies, processes and practices over the selection, governance and oversight of third parties and their supply chain, particularly for key activities that could affect our operational resilience. Any deficiency in the management of risks associated with our third parties could affect our ability to support our customers and meet regulatory expectations. Mitigating actions – We continue to monitor the effectiveness of the controls operated by our third-party providers and request third-party control reports, where required. – We continue to enhance the effective management of our intra- Group arrangements using the same control standards as we have for external third-party arrangements. – We have strengthened the way third-party risk is overseen and managed across all non-financial risks, and have enhanced our processes, framework and reporting capabilities to help improve the visibility of risk and enable more robust management of our material third parties by our global businesses, functions and regions. – We are implementing the changes required by new regulations as set by our regulators. Model risk Model risk arises whenever business decision making includes reliance on models. We use models in both financial and non-financial contexts, as well as in a range of business applications such as customer selection, product pricing, financial crime transaction monitoring, creditworthiness evaluation and financial reporting. Assessing model performance is a continuous undertaking. Models can need redevelopment as market conditions change. Significant increases in global inflation and interest rates have impacted the reliability and accuracy of both credit and market risk models. HSBC Holdings plc Annual Report and Accounts 2023 143 Risk review We continued to prioritise the redevelopment of internal ratings-based (‘IRB’) and internal model methods (‘IMM’) models, in relation to counterparty credit, as part of the IRB repair and Basel III programmes, with a key focus on enhancing the quality of data used as model inputs. Some models have been approved and a number are pending approval decisions from the UK’s Prudential Regulation Authority (‘PRA’) and other key regulators. Some IMM and internal model approach (‘IMA’) models have been approved for use, and feedback has been received for some IRB models. Climate risk modelling is a key focus for the Group as HSBC’s commitment to ESG has become a key part of the Group’s strategy. Focus is also on AI and machine learning where the pace of technological advances is driving significant changes in modelling techniques. Model risk remains a key area of focus given the regulatory scrutiny in this area, with local regulatory exams taking place in many jurisdictions and the PRA’s publication of supervisory statement 1/23 (SS1/23) which provided revised principles on how model risk should be managed, as well as further developments in policy expected from other regulators. Mitigating actions – We have continued to embed the enhanced monitoring, review and challenge of expected credit loss model performance through our Model Risk Management function as part of a broader quarterly process to determine loss levels. The Model Risk Management team aims to provide effective review and challenge of any future redevelopment of these models. – A programme of work is in progress to address the requirements of the new PRA guidance for managing model risk. – Model Risk Governance committees at the Group, business and functional levels continue to provide oversight of model risk. – A full review of the Group’s model landscape is being undertaken across the organisation to ensure models are being deployed in line with global business strategy. – Model Risk Management works closely with businesses to ensure that IRB/IMM/IMA models in development meet risk management, pricing and capital management needs. Global Internal Audit provides assurance over the risk management framework for models. – Additional assurance work is performed by the model risk governance teams, which act as second lines of defence. The teams test whether controls implemented by model users comply with model risk policy and if model risk standards are adequate. – Models using AI or generative AI techniques are validated and monitored to help ensure that risks that are determined by the algorithms have adequate oversight and review. A framework to manage the range of risks that are generated by these advanced techniques, and to recognise the multidisciplinary nature of these risks, is being developed. Change execution risk The needs of our customers are evolving faster than ever, particularly with regard to technological advancements and the global transition to a low-carbon economy. The resulting scale, complexity and pace of strategic and regulatory change have elevated the level of risk for executing such changes safely and efficiently. Mitigating actions – Change execution risk is part of our risk taxonomy and control library so that it is defined, assessed, managed, reported and overseen in the same way as our other material risks. – Our change framework provides colleagues across all levels of the Group who deliver on strategic and organisational initiatives with a common and consistent understanding of their role in achieving value and outcomes. – The Change Prioritisation and Oversight Committee oversees the prioritisation, strategic alignment and management of execution risk for all strategic change portfolios and initiatives. Risks associated with workforce capability, capacity and environmental factors with potential impact on growth Our global businesses and functions in all of our markets are exposed to risks associated with workforce capacity challenges, including challenges to retain, develop and attract high-performing employees in key labour markets, and compliance with employment laws and regulations. Failure to manage these risks may have an impact on the delivery of our strategic objectives. It could also result in poor customer outcomes or a breach of employment laws and regulations, which may lead to regulatory sanctions or legal claims. Mitigating actions – We seek to promote a diverse and inclusive workforce and provide health and well-being support. We continue to build our speak-up culture through active campaigns. – We monitor hiring activities and levels of employee attrition, with each business and function putting in place plans to help ensure they have effective workforce forecasting to meet business demands. – We monitor people risks that could arise due to organisational restructuring, helping to ensure we manage redundancies sensitively and support impacted employees. We encourage our people leaders to focus on talent retention at all levels, with an empathetic mindset and approach, while ensuring the whole proposition of working at HSBC is well understood. – Our Future Skills curriculum helps provides skills that will help to enable employees and HSBC to be successful in the future. – We develop succession plans for key management roles, with oversight from the Group Executive Committee. Risk review 144 HSBC Holdings plc Annual Report and Accounts 2023 Our material banking risks The material risk types associated with our banking and insurance manufacturing operations are described in the following tables: Credit risk (see page 147) Credit risk is the risk of financial loss if a customer or counterparty fails to meet an obligation under a contract. Credit risk arises principally from direct lending, trade finance and leasing business, but also from other products such as guarantees and derivatives. Credit risk is: – measured as the amount that could be lost if a customer or counterparty fails to make repayments; – monitored using various internal risk management measures and within limits approved by individuals within a framework of delegated authorities; and – managed through a robust risk control framework, which outlines clear and consistent policies, principles and guidance for risk managers; and by setting limits and appetite across geographical markets, portfolios or sectors. Treasury risk (see page 203) Treasury risk is the risk of having insufficient capital, liquidity or funding resources to meet financial obligations and satisfy regulatory requirements, including the risk of adverse impact on earnings or capital due to structural and transactional foreign exchange exposures and changes in market interest rates, together with pension and insurance risk. Treasury risk arises from changes to the respective resources and risk profiles driven by customer behaviour, management decisions or the external environment. Treasury risk is: – measured through risk appetite and more granular limits, set to provide an early warning of increasing risk, minimum ratios of relevant regulatory metrics, and metrics to monitor the key risk drivers impacting treasury resources; – monitored and projected against appetites and by using operating plans based on strategic objectives together with stress and scenario testing; and – managed through control of resources in conjunction with risk profiles, strategic objectives and cash flows. Market risk (see page 218) Market risk is the risk of an adverse financial impact on trading activities arising from changes in market parameters such as interest rates, foreign exchange rates, asset prices, volatilities, correlations and credit spreads. Market risk arises from both trading portfolios and non-trading portfolios. Market risk for non-trading portfolios is discussed in the Treasury risk section on page 215. Market risk exposures arising from our insurance operations are discussed on page 235. Market risk is: – measured using sensitivities, value at risk and stress testing, giving a detailed picture of potential gains and losses for a range of market movements and scenarios, as well as tail risks over specified time horizons; – monitored using value at risk, stress testing and other measures; and – managed using risk limits approved by the Group Risk Management Meeting and the risk management meetings in various global businesses. Climate risk (see page 221) Climate risk relates to the financial and non-financial impacts that may arise as a result of climate change and the move to a net zero economy. Climate risk can materialise through: – physical risk, which arises from the increased frequency and severity of weather events; – transition risk, which arises from the process of moving to a low-carbon economy; – net zero alignment risk, which arises from failing to meet our net zero commitments or to meet external expectations related to net zero because of inadequate ambition and/ or plans, poor execution, or inability to adapt to changes in the external environment; and – the risk of greenwashing, which arises from the act of knowingly or unknowingly making inaccurate, unclear, misleading or unsubstantiated claims regarding sustainability to stakeholders. Climate risk is: – measured using risk metrics and stress testing; – monitored against risk appetite statements; and – managed through adherence to risk appetite thresholds, through specific policies, and through enhancements to processes and development of tools including the development of product market controls to manage the risk of greenwashing and the development of portfolio steering capabilities to manage our net zero targets. Resilience risk (see page 230) Resilience risk is the risk of sustained and significant business disruption from execution, delivery, physical security or safety events, causing the inability to provide critical services to our customers, affiliates, and counterparties. Resilience risk arises from failures or inadequacies in processes, people, systems or external events. Resilience risk is: – measured using a range of metrics with defined maximum acceptable impact tolerances, and against our agreed risk appetite; – monitored through oversight of enterprise processes, risks, controls and strategic change programmes; and – managed by continual monitoring and thematic reviews. Description of risks – banking operations Risks Arising from Measurement, monitoring and management of risk HSBC Holdings plc Annual Report and Accounts 2023 145 Risk review Regulatory compliance risk (see page 231) Regulatory compliance risk is the risk associated with breaching our duty to clients and other counterparties, inappropriate market conduct (including unauthorised trading) and breaching related financial services regulatory standards. Regulatory compliance risk arises from the failure to observe relevant laws, codes, rules and regulations and can manifest itself in poor market or customer outcomes and lead to fines, penalties and reputational damage to our business. Regulatory compliance risk is: – measured by reference to risk appetite, identified metrics, incident assessments, regulatory feedback and the judgement and assessment of our regulatory compliance teams; – monitored against the first line of defence risk and control assessments, the results of the monitoring and control assurance activities of the second line of defence functions, and the results of internal and external audits and regulatory inspections; and – managed by establishing and communicating appropriate policies and procedures, training employees in them and monitoring activity to help ensure their observance. Proactive risk control and/or remediation work is undertaken where required. Financial crime risk (see page 231) Financial crime risk is the risk that HSBC’s products and services will be exploited for criminal activity. This includes fraud, bribery and corruption, tax evasion, sanctions and export control violations, money laundering, terrorist financing and proliferation financing. Financial crime risk arises from day-to- day banking operations involving customers, third parties and employees. Financial crime risk is: – measured by reference to risk appetite, identified metrics, incident assessments, regulatory feedback and the judgement of, and assessment by, our compliance teams; – monitored against the first line of defence risk and control assessments, the results of the monitoring and control assurance activities of the second line of defence functions, and the results of internal and external audits and regulatory inspections; and – managed by establishing and communicating appropriate policies and procedures, training employees in them and monitoring activity to help ensure their observance. Proactive risk control and/or remediation work is undertaken where required. Model risk (see page 232) Model risk is the risk of the potential for adverse consequences from model errors or the inappropriate use of modelled outputs to inform business decisions. Model risk arises in both financial and non-financial contexts whenever business decision making includes reliance on models. Model risk is: – measured by reference to model performance tracking and the output of detailed technical reviews, with key metrics including model review statuses and findings; – monitored against model risk appetite statements, insight from the independent validations completed by the model risk management team, feedback from internal and external audits, and regulatory reviews; and – managed by creating and communicating appropriate policies, procedures and guidance, training colleagues in their application, and supervising their adoption to ensure operational effectiveness. Description of risks – banking operations (continued) Risks Arising from Measurement, monitoring and management of risk Our insurance manufacturing subsidiaries are regulated separately from our banking operations. Risks in our insurance entities are managed using methodologies and processes that are subject to Group oversight. Our insurance operations are also subject to many of the same risks as our banking operations, and these are covered by the Group’s risk management processes. However, there are specific risks inherent to the insurance operations as noted below. Financial risk (see page 235) For insurance entities, financial risk includes the risk of not being able to effectively match liabilities arising under insurance contracts with appropriate investments and that the expected sharing of financial performance with policyholders under certain contracts is not possible. Exposure to financial risk arises from: – market risk affecting the fair values of financial assets or their future cash flows; – credit risk; and – liquidity risk of entities being unable to make payments to policyholders as they fall due. Financial risk is: – measured for credit risk, in terms of economic capital and the amount that could be lost if a counterparty fails to make repayments; for market risk, in terms of economic capital, internal metrics and fluctuations in key financial variables; and for liquidity risk, in terms of internal metrics including stressed operational cash flow projections; – monitored through a framework of approved limits and delegated authorities; and – managed through a robust risk control framework, which outlines clear and consistent policies, principles and guidance. This includes using product design, asset liability matching and bonus rates. Insurance risk (see page 237) Insurance risk is the risk that, over time, the cost of insurance policies written, including claims and benefits, may exceed the total amount of premiums and investment income received. The cost of claims and benefits can be influenced by many factors, including mortality and morbidity experience, as well as lapse and surrender rates. Insurance risk is: – measured in terms of life insurance liabilities and economic capital allocated to insurance underwriting risk; – monitored through a framework of approved limits and delegated authorities; and – managed through a robust risk control framework, which outlines clear and consistent policies, principles and guidance. This includes using product design, underwriting, reinsurance and claims-handling procedures. Description of risks – insurance manufacturing operations Risks Arising from Measurement, monitoring and management of risk Risk review 146 HSBC Holdings plc Annual Report and Accounts 2023 Credit risk Contents 147 Overview 147 Credit risk management 149 Credit risk in 2023 149 Summary of credit risk 153 Stage 2 decomposition 154 Assets held for sale 155 Credit exposure 156 Measurement uncertainty and sensitivity analysis of ECL estimates 168 Reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to banks and customers including loan commitments and financial guarantees 172 Credit quality 176 Wholesale lending 190 Personal lending 198 Supplementary information 202 HSBC Holdings Overview Credit risk is the risk of financial loss if a customer or counterparty fails to meet an obligation under a contract. Credit risk arises principally from direct lending, trade finance and leasing business, but also from other products such as guarantees and derivatives. Credit risk management Key developments in 2023 There were no material changes to the policies and practices for the management of credit risk in 2023. We continued to apply the requirements of IFRS 9 ‘Financial Instruments’ within the Credit Risk sub-function. For our wholesale portfolios, we introduced new policies for the management of country risk, subordinated debt assessments, and a revised risk appetite framework. Implementation of these changes did not have a material impact on our wholesale portfolios. We actively managed the risks related to macroeconomic uncertainties, including interest rates, inflation, fiscal and monetary policy, broader geopolitical uncertainties and conflicts. For further details, see ‘Top and emerging risks’ on page 140. Governance and structure We have established Group-wide credit risk management and related IFRS 9 processes. We continue to assess the impact of economic developments in key markets on specific customers, customer segments or portfolios. As credit conditions change, we take mitigating actions, including the revision of risk appetites or limits and tenors, as appropriate. In addition, we continue to evaluate the terms under which we provide credit facilities within the context of individual customer requirements, the quality of the relationship, local regulatory requirements, market practices and our local market position. Credit Risk sub-function (Audited) Credit approval authorities are delegated by the Board to the Group Chief Executive together with the authority to sub-delegate them. The Credit Risk sub-function in Group Risk and Compliance is responsible for the key policies and processes for managing credit risk, which include formulating Group credit policies and risk rating frameworks, guiding the Group’s appetite for credit risk exposures, undertaking independent reviews and objective assessment of credit risk, and monitoring performance and management of portfolios. The principal objectives of our credit risk management are: – to maintain across HSBC a strong culture of responsible lending, and robust risk policies and control frameworks; – to both partner and challenge our businesses in defining, implementing and continually re-evaluating our risk appetite under actual and scenario conditions; and – to ensure there is independent, expert scrutiny of credit risks, their costs and their mitigation. Key risk management processes IFRS 9 ‘Financial Instruments’ process The IFRS 9 process comprises three main areas: modelling and data; implementation; and governance. Modelling, data and forward economic guidance We have established IFRS 9 modelling and data processes in various geographies, which are subject to internal model risk governance including independent review of significant model developments. We have a centralised process for generating unbiased and independent global economic scenarios. Scenarios are subject to a process of review and challenge by a dedicated central team and individually for each region. Each quarter, the scenarios and probability weights are reviewed and checked for consistency with the economic conjuncture and current economic and financial risks. These are subject to final review and approval by senior management in a Forward Economic Guidance Global Business Impairment Committee. Implementation A centralised impairment engine performs the expected credit losses calculation using data, which is subject to a number of validation checks and enhancements, from a variety of client, finance and risk systems. Where possible, these checks and processes are performed in a globally consistent and centralised manner. Governance Regional management review forums are established in key sites and regions in order to review and approve the impairment results. Regional management review forums have representatives from Credit Risk and Finance. The key site and regional approvals are reported up to the relevant global business impairment committee for final approval of the Group’s ECL for the period. Required members of the committee are the Wholesale Global Chief Corporate Credit Officer and Chief Risk and Compliance Officer for Wealth and Personal Banking Risk, as well as the relevant global business’s Chief Financial Officer and the Global Financial Controller. Concentration of exposure (Audited) Concentrations of credit risk arise when a number of counterparties or exposures have comparable economic characteristics, or such counterparties are engaged in similar activities or operate in the same geographical areas or industry sectors so that their collective ability to meet contractual obligations is uniformly affected by changes in economic, political or other conditions. We use a number of controls and measures to minimise undue concentration of exposure in our portfolios across industries, countries and global businesses. These include portfolio and counterparty limits, approval and review controls, and stress testing. Credit quality of financial instruments (Audited) Our risk rating system facilitates the internal ratings-based approach under the Basel framework adopted by the Group to support the calculation of our minimum credit regulatory capital requirement. The five credit quality classifications encompass a range of granular internal credit rating grades assigned to wholesale and retail customers, and the external ratings attributed by external agencies to debt securities. HSBC Holdings plc Annual Report and Accounts 2023 147 Risk review For debt securities and certain other financial instruments, external ratings have been aligned to the five quality classifications based upon the mapping of related customer risk rating (‘CRR’) to external credit rating. Wholesale lending The CRR 10-grade scale summarises a more granular underlying 23-grade scale of obligor probability of default (‘PD’). All corporate customers are rated using the 10- or 23-grade scale, depending on the degree of sophistication of the Basel approach adopted for the exposure. Each CRR band is associated with an external rating grade by reference to long-run default rates for that grade, represented by the average of issuer-weighted historical default rates. This mapping between internal and external ratings is indicative and may vary over time. Retail lending Retail lending credit quality is based on a 12-month point-in-time probability-weighted PD. Credit quality classification Sovereign debt securities and bills Other debt securities and bills Wholesale lending and derivatives Retail lending External credit rating External credit rating Internal credit rating 12-month Basel probability of default % Internal credit rating 12 month probability- weighted PD % Quality classification1,2 Strong BBB and above A- and above CRR 1 to CRR 2 0–0.169 Band 1 and 2 0.000–0.500 Good BBB- to BB BBB+ to BBB- CRR 3 0.170–0.740 Band 3 0.501–1.500 Satisfactory BB- to B and unrated BB+ to B and unrated CRR 4 to CRR 5 0.741–4.914 Band 4 and 5 1.501–20.000 Sub-standard B- to C B- to C CRR 6 to CRR 8 4.915–99.999 Band 6 20.001–99.999 Credit impaired Default Default CRR 9 to CRR 10 100 Band 7 100 1 Customer risk rating (‘CRR’). 2 12-month point-in-time probability-weighted probability of default (‘PD’). Quality classification definitions – ‘Strong’ exposures demonstrate a strong capacity to meet financial commitments, with negligible or low probability of default and/or low levels of expected loss. – ‘Good’ exposures require closer monitoring and demonstrate a good capacity to meet financial commitments, with low default risk. – ‘Satisfactory’ exposures require closer monitoring and demonstrate an average-to-fair capacity to meet financial commitments, with moderate default risk. – ‘Sub-standard’ exposures require varying degrees of special attention and default risk is of greater concern. – ‘Credit-impaired’ exposures have been assessed as described on Note 1.2(i) on the financial statements. Forborne loans and advances (Audited) Forbearance measures consist of concessions towards an obligor that is experiencing or about to experience difficulties in meeting its financial commitments. We continue to class loans as forborne when we modify the contractual payment terms due to having significant concerns about the borrowers’ ability to meet contractual payments when they were due. Our definition of forborne captures non-payment-related concessions, such as covenant waivers. For details of our policy on forbearance, see Note 1.2(i) in the financial statements. Credit quality of forborne loans For wholesale lending, where payment-related forbearance measures result in a diminished financial obligation, or if there are other indicators of impairment, the loan will be classified as credit impaired if it is not already so classified. All facilities with a customer, including loans that have not been modified, are considered credit impaired following the identification of a payment-related forborne loan. For retail lending, where a material payment-related concession has been granted, the loan will be classified as credit impaired. In isolation, non- payment forbearance measures may not result in the loan being classified as credit impaired unless combined with other indicators of credit impairment. These are classed as performing forborne loans for both wholesale and retail lending. Wholesale and retail lending forborne loans are classified as credit impaired until there is sufficient evidence to demonstrate a significant reduction in the risk of non-payment of future cash flows, observed over a minimum one-year period, and there are no other indicators of impairment. Any forborne loans not considered credit impaired will remain forborne for a minimum of two years from the date that credit impairment no longer applies. For wholesale and retail lending, any forbearance measures granted on a loan already classed as forborne results in the customer being classed as credit impaired. Forborne loans and recognition of expected credit losses (Audited) Forborne loans expected credit loss assessments reflect the higher rates of losses typically experienced with these types of loans such that they are in stage 2 and stage 3. The higher rates are more pronounced in unsecured retail lending requiring further segmentation. For wholesale lending, forborne loans are typically assessed individually. Credit risk ratings are intrinsic to the impairment assessments. The individual impairment assessment takes into account the higher risk of the future non-payment inherent in forborne loans. Impairment assessment (Audited) For details of our impairment policies on loans and advances and financial investments, see Note 1.2(i) on the financial statements. Write-off of loans and advances (Audited) Under IFRS 9, write-off should occur when there is no reasonable expectation of recovering further cash flows from the financial asset. This principle does not prohibit early write-off, which is defined in local policies to ensure effectiveness in the management of customers in the collections process. Unsecured personal facilities, including credit cards, are generally written off at between 150 and 210 days past due. The standard Risk review 148 HSBC Holdings plc Annual Report and Accounts 2023 period runs until the end of the month in which the account becomes 180 days contractually delinquent. However, in exceptional circumstances, to avoid unfair customer outcomes, deliver customer duty or meet regulatory expectations, the period may be extended further. For secured facilities, write-off should occur upon repossession of collateral, receipt of proceeds via settlement, or determination that recovery of the collateral will not be pursued. Where these assets are maintained on the balance sheet beyond 60 months of consecutive delinquency-driven default, the prospect of recovery is reassessed. Recovery activity, on both secured and unsecured assets, may continue after write-off. Any unsecured exposures that are not written off at 180 days past due, and any secured exposures that are in ‘default’ status for 60 months or greater but are not written off, are subject to additional monitoring via the appropriate governance forums. Credit risk in 2023 At 31 December 2023, gross loans and advances to customers and banks of $1,063bn increased by $23.1bn, compared with 31 December 2022. This included favourable foreign exchange movements of $17.7bn. Excluding foreign exchange movements, the underlying increase of $5.4bn was driven by a $21.1bn rise in personal loans and advances to customers and a $8.9bn rise in loans and advances to banks. These were partly offset by a $24.6bn decrease in wholesale loans and advances to customers. The underlying increase in personal loans and advances to customers was mainly driven by an increase in France (up $7.8bn) due to the retention of a portfolio of home loans and other loans previously classified as assets held for sale. It also comprised increases in the UK (up $6.6bn), in Hong Kong (up $5.8bn), in Mexico (up $2.3bn) and in Australia (up $1.4bn) driven by mortgage growth. These were partly offset by a decrease of $1.2bn due to the merger of our business in Oman and a decrease of $1.0bn due to the disposal of our retail mortgage loan portfolio in New Zealand. The underlying increase in loans and advances to banks was driven by central bank balances and money market lending growth in Singapore (up $6.5bn), Hong Kong (up $5.1bn) and the UK (up $2.8bn). These were partly offset by decreases in mainland China (down $2.6bn), Malaysia (down $1.6bn) and Switzerland (down $1.4bn). The underlying decrease in wholesale loans and advances to customers was driven by a $31.5bn reduction in corporate and commercial balances, of which $13.7bn in stage 1 and $16.8bn in stage 2. The decrease was observed mainly in Hong Kong (down $18.6bn), in the UK (down $5.4bn) and in mainland China (down $2.2bn), driven by repayments and deleveraging, as well as de-risking measures on mainland China commercial real estate exposures. It also comprised a decrease in Oman (down $2.1bn) due to the merger of our operations in the country. This was partly offset by an increase in balances with non-bank financial institutions (up $6.8bn) mainly in stage 1 in HSBC UK (up $5.2bn) due to the acquisition of SVB UK. At 31 December 2023, the allowance for ECL of $12.0bn decreased by $0.6bn compared with 31 December 2022, including adverse foreign exchange movements of $0.2bn. The $12.0bn allowance comprised $11.5bn in respect of assets held at amortised cost, $0.4bn in respect of loan commitments and financial guarantees, and $0.1bn in respect of debt instruments measured at fair value through other comprehensive income (‘FVOCI’). Excluding foreign exchange movements, the allowance for ECL in relation to loans and advances to customers decreased by $0.6bn from 31 December 2022. This was attributable to: – a $0.5bn decrease in wholesale loans and advances to customers driven by stages 1 and 2; and – a $0.1bn decrease in personal loans and advances to customers driven by stages 1 and 2. Stage 3 balances and allowances for ECL at 31 December 2023 remained broadly stable compared with 31 December 2022, as write- offs and repayments offset new and additional allowances. In wholesale lending, mainland China’s commercial real estate sector continued to deteriorate in 2023, resulting in new and additional stage 3 charges during the year. The ECL charge for 2023 was $3.4bn, inclusive of recoveries. This was driven by net stage 3 charges, including $1.0bn in the mainland China commercial real estate sector, as well as the impact of continued economic uncertainty in other markets, rising interest rates and inflationary pressures. The ECL charge comprised: $2.3bn in respect of wholesale lending, of which the stage 3 charge was $2.2bn; $1.0bn in respect of personal lending, of which $0.7bn were in stage 3; and $0.1bn in respect of debt instruments measured at FVOCI. Income statement movements are analysed further on page 103. While credit risk arises across most of our balance sheet, ECL have typically been recognised on loans and advances to customers and banks, in addition to securitisation exposures and other structured products. As a result, our disclosures focus primarily on these two areas. For further details of: – maximum exposure to credit risk, see page 155; – measurement uncertainty and sensitivity analysis of ECL estimates, see page 156; – reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to banks and customers including loan commitments and financial guarantees, see page 168; – credit quality, see page 172; – total wholesale lending for loans and advances to banks and customers by stage distribution, see page 177; – wholesale lending collateral, see page 187; – total personal lending for loans and advances to customers at amortised cost by stage distribution, see page 191; and – personal lending collateral, see page 197. Summary of credit risk We have adopted the recommendations of the Taskforce on Disclosures about Expected Credit Losses (’DECL’) to provide disclosures that help investors and other stakeholders better understand the risks we manage. The DECL Taskforce, which was jointly established by the Financial Conduct Authority, Financial Reporting Council and the Prudential Regulation Authority, was created to help guide ECL disclosure practice and to encourage consistency and comparability across financial institutions. The following sections of this report include new and redesigned disclosures addressing the taskforce’s recommendations from its third report, which was published in September 2022. For further details of: – stage 2 decomposition for loans and advances to banks and personal lending products, see page 153; – residual average life for personal and wholesale lending by product, see page 153; – alignment of management judgemental adjustments to the DECL definition with additional qualitative and quantitative granularity, see page 163; – reconciliation of management judgemental adjustments to reported ECL, see page 163; – enhanced wholesale ECL sensitivity to future economic conditions, see page 165; – enhanced retail ECL sensitivity to future economic conditions, see page 166; – reconciliation from reported exposure and ECL to sensitised exposure and weighted ECL, see page 168; – reconciliation of changes in gross carrying amount and allowances for loans and advances to banks and customers, see page 171; – reconciliation of changes in nominal amount and allowances for loan commitments and financial guarantees, see page 171; HSBC Holdings plc Annual Report and Accounts 2023 149 Risk review – wholesale lending – credit risk profile by obligor grade for loan and other credit-related commitments and financial guarantees, see page 182; – first lien residential mortgages – reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to customers including loan commitments and financial guarantees, see page 194; – credit cards – reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to customers including loan commitments and financial guarantees, see page 195; – other personal lending – reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to customers including loan commitments and financial guarantees, see page 195; – enhanced personal lending – credit risk profile by internal PD band for loans and advances to customers at amortised cost, see page 196; and – Personal lending – credit risk profile by internal PD band for loan and other credit-related commitments and financial guarantees, see page 197. Comparative information for the prior period has not been presented in the Annual Report and Accounts 2023 for the majority of the new disclosures as we recognised and prioritised the importance of increasing the comparability of our external disclosures within the timeline recommended by the DECL Taskforce. While prior period information can be valuable in certain contexts, at 31 December 2023 we believed the prospective expansion of the level of disclosures outweighed the benefits of presenting data from prior years. Comparative information is expected to be disclosed from the Annual Report and Accounts 2024. The following disclosure presents the gross carrying/nominal amount of financial instruments to which the impairment requirements in IFRS 9 are applied and the associated allowance for ECL. Summary of financial instruments to which the impairment requirements in IFRS 9 are applied (Audited) 31 Dec 2023 At 31 Dec 2022 Gross carrying/ nominal amount Allowance for ECL1 Gross carrying/ nominal amount Allowance for ECL1 $m $m $m $m Loans and advances to customers at amortised cost 949,609 (11,074) 935,008 (11,447) Loans and advances to banks at amortised cost 112,917 (15) 104,544 (69) Other financial assets measured at amortised cost 960,271 (422) 954,934 (493) – cash and balances at central banks 285,868 — 327,005 (3) – items in the course of collection from other banks 6,342 — 7,297 — – Hong Kong Government certificates of indebtedness 42,024 — 43,787 — – reverse repurchase agreements – non-trading 252,217 — 253,754 — – financial investments 148,346 (20) 109,086 (20) – assets held for sale2 103,186 (324) 102,556 (415) – prepayments, accrued income and other assets3 122,288 (78) 111,449 (55) Total gross carrying amount on-balance sheet 2,022,797 (11,511) 1,994,486 (12,009) Loans and other credit-related commitments 661,015 (367) 618,788 (386) Financial guarantees 17,009 (39) 18,783 (52) Total nominal amount off-balance sheet4 678,024 (406) 637,571 (438) 2,700,821 (11,917) 2,632,057 (12,447) Fair value Memorandum allowance for ECL5 Fair value Memorandum allowance for ECL5 $m $m $m $m Debt instruments measured at fair value through other comprehensive income (‘FVOCI’) 302,348 (97) 265,147 (126) 1 The total ECL is recognised in the loss allowance for the financial asset unless the total ECL exceeds the gross carrying amount of the financial asset, in which case the ECL is recognised as a provision. 2 For further details on gross carrying amounts and allowances for ECL related to assets held for sale, see ‘Assets held for sale’ on page 154. At 31 December 2023, the gross carrying amount comprised $84,074m of loans and advances to customers and banks (2022: $81,221m) and $19,112m of other financial assets at amortised cost (2022: $21,334m). The corresponding allowance for ECL comprised $303m of loans and advances to customers and banks (2022: $392m) and $21m of other financial assets at amortised cost (2022: $23m). 3 Includes only those financial instruments that are subject to the impairment requirements of IFRS 9. ‘Prepayments, accrued income and other assets’ as presented within the consolidated balance sheet on page 331 comprises both financial and non-financial assets, including cash collateral and settlement accounts. 4 Represents the maximum amount at risk should the contracts be fully drawn upon and clients default. 5 Debt instruments measured at FVOCI continue to be measured at fair value with the allowance for ECL as a memorandum item. Change in ECL is recognised in ‘Change in expected credit losses and other credit impairment charges’ in the income statement. The following table provides an overview of the Group’s credit risk by stage and industry, and the associated ECL coverage. The financial assets recorded in each stage have the following characteristics: – Stage 1: These financial assets are unimpaired and without significant increase in credit risk on which a 12-month allowance for ECL is recognised. – Stage 2: A significant increase in credit risk has been experienced on these financial assets since initial recognition for which a lifetime ECL is recognised. – Stage 3: There is objective evidence of impairment and the financial assets are therefore considered to be in default or otherwise credit impaired on which a lifetime ECL is recognised. – POCI: Financial assets that are purchased or originated at a deep discount are seen to reflect the incurred credit losses on which a lifetime ECL is recognised. Risk review 150 HSBC Holdings plc Annual Report and Accounts 2023 Summary of credit risk (excluding debt instruments measured at FVOCI) by stage distribution and ECL coverage by industry sector at 31 December 2023 (Audited) Gross carrying/nominal amount1 Allowance for ECL ECL coverage % Stage 1 Stage 2 Stage 3 POCI2 Total Stage 1 Stage 2 Stage 3 POCI2 Total Stage 1 Stage 2 Stage 3 POCI2 Total $m $m $m $m $m $m $m $m $m $m % % % % % Loans and advances to customers at amortised cost 809,384 120,871 19,273 81 949,609 (1,130) (2,964) (6,950) (30) (11,074) 0.1 2.5 36.1 37.0 1.2 – personal 396,534 47,483 3,505 — 447,522 (579) (1,434) (854) — (2,867) 0.1 3.0 24.4 — 0.6 – corporate and commercial 342,878 69,738 14,958 81 427,655 (499) (1,500) (5,774) (30) (7,803) 0.1 2.2 38.6 37.0 1.8 – non-bank financial institutions 69,972 3,650 810 — 74,432 (52) (30) (322) — (404) 0.1 0.8 39.8 — 0.5 Loans and advances to banks at amortised cost 111,479 1,436 2 — 112,917 (10) (3) (2) — (15) — 0.2 100.0 — — Other financial assets measured at amortised cost 946,873 12,734 664 — 960,271 (109) (132) (181) — (422) — 1.0 27.3 — — Loan and other credit-related commitments 630,949 28,922 1,140 4 661,015 (153) (128) (86) — (367) — 0.4 7.5 — 0.1 – personal 253,183 3,459 355 — 256,997 (23) — (2) — (25) — — 0.6 — — – corporate and commercial 246,210 20,928 736 4 267,878 (120) (119) (83) — (322) — 0.6 11.3 — 0.1 – financial 131,556 4,535 49 — 136,140 (10) (9) (1) — (20) — 0.2 2.0 — — Financial guarantees 14,746 1,879 384 — 17,009 (7) (7) (25) — (39) — 0.4 6.5 — 0.2 – personal 1,106 13 — — 1,119 — — — — — — — — — — – corporate and commercial 10,157 1,290 330 — 11,777 (6) (6) (24) — (36) 0.1 0.5 7.3 — 0.3 – financial 3,483 576 54 — 4,113 (1) (1) (1) — (3) — 0.2 1.9 — 0.1 At 31 Dec 2023 2,513,431 165,842 21,463 85 2,700,821 (1,409) (3,234) (7,244) (30) (11,917) 0.1 2.0 33.8 35.3 0.4 1 Represents the maximum amount at risk should the contracts be fully drawn upon and clients default. 2 Purchased or originated credit-impaired (‘POCI’). Unless identified at an earlier stage, all financial assets are deemed to have suffered a significant increase in credit risk when they are 30 days past due (‘DPD’) and are transferred from stage 1 to stage 2. The following disclosure presents the ageing of stage 2 financial assets by those less than 30 DPD and greater than 30 DPD and therefore presents those financial assets classified as stage 2 due to ageing (30 DPD) and those identified at an earlier stage (less than 30 DPD). Stage 2 days past due analysis at 31 December 2023 (Audited) Gross carrying amount Allowance for ECL ECL coverage % Stage 2 Up-to- date 1 to 29 DPD1 30 and > DPD1 Stage 2 Up-to- date 1 to 29 DPD1 30 and > DPD1 Stage 2 Up-to- date 1 to 29 DPD1 30 and > DPD1 $m $m $m $m $m $m $m $m % % % % Loans and advances to customers at amortised cost 120,871 116,320 2,571 1,980 (2,964) (2,458) (245) (261) 2.5 2.1 9.5 13.2 – personal 47,483 44,634 1,785 1,064 (1,434) (974) (214) (246) 3.0 2.2 12.0 23.1 – corporate and commercial 69,738 68,446 697 595 (1,500) (1,454) (31) (15) 2.2 2.1 4.4 2.5 – non-bank financial institutions 3,650 3,240 89 321 (30) (30) — — 0.8 0.9 — — Loans and advances to banks at amortised cost 1,436 1,424 — 12 (3) (3) — — 0.2 0.2 — — Other financial assets measured at amortised cost 12,734 12,417 171 146 (132) (113) (9) (10) 1.0 0.9 5.3 6.8 1 The days past due amounts presented above are on a contractual basis. HSBC Holdings plc Annual Report and Accounts 2023 151 Risk review Summary of credit risk (excluding debt instruments measured at FVOCI) by stage distribution and ECL coverage by industry sector at 31 December 2022 (Audited) Gross carrying/nominal amount1 Allowance for ECL ECL coverage % Stage 1 Stage 2 Stage 3 POCI2 Total Stage 1 Stage 2 Stage 3 POCI2 Total Stage 1 Stage 2 Stage 3 POCI2 Total $m $m $m $m $m $m $m $m $m $m % % % % % Loans and advances to customers at amortised cost 776,299 139,076 19,504 129 935,008 (1,092) (3,488) (6,829) (38) (11,447) 0.1 2.5 35.0 29.5 1.2 – personal 362,677 48,866 3,339 — 414,882 (561) (1,504) (805) — (2,870) 0.2 3.1 24.1 — 0.7 – corporate and commercial 351,885 85,492 15,696 129 453,202 (488) (1,907) (5,887) (38) (8,320) 0.1 2.2 37.5 29.5 1.8 – non-bank financial institutions 61,737 4,718 469 — 66,924 (43) (77) (137) — (257) 0.1 1.6 29.2 — 0.4 Loans and advances to banks at amortised cost 102,723 1,739 82 — 104,544 (18) (29) (22) — (69) — 1.7 26.8 — 0.1 Other financial assets measured at amortised cost 938,798 15,339 797 — 954,934 (95) (165) (233) — (493) — 1.1 29.2 — 0.1 Loan and other credit-related commitments 583,383 34,033 1,372 — 618,788 (141) (180) (65) — (386) — 0.5 4.7 — 0.1 – personal 239,521 3,686 799 — 244,006 (26) (1) — — (27) — — — — — – corporate and commercial 241,313 27,323 551 — 269,187 (111) (166) (63) — (340) — 0.6 11.4 — 0.1 – financial 102,549 3,024 22 — 105,595 (4) (13) (2) — (19) — 0.4 9.1 — — Financial guarantees 16,071 2,463 249 — 18,783 (6) (13) (33) — (52) — 0.5 13.3 — 0.3 – personal 1,123 11 1 — 1,135 — — — — — — — — — — – corporate and commercial 11,547 1,793 247 — 13,587 (5) (12) (33) — (50) — 0.7 13.4 — 0.4 – financial 3,401 659 1 — 4,061 (1) (1) — — (2) — 0.2 — — — At 31 Dec 2022 2,417,274 192,650 22,004 129 2,632,057 (1,352) (3,875) (7,182) (38) (12,447) 0.1 2.0 32.6 29.5 0.5 1 Represents the maximum amount at risk should the contracts be fully drawn upon and clients default. 2 Purchased or originated credit-impaired (‘POCI’). Stage 2 days past due analysis at 31 December 2022 (Audited) Gross carrying amount Allowance for ECL ECL coverage % Stage 2 Up-to- date 1 to 29 DPD1 30 and > DPD1 Stage 2 Up-to- date 1 to 29 DPD1 30 and > DPD1 Stage 2 Up-to- date 1 to 29 DPD1 30 and > DPD1 $m $m $m $m $m $m $m $m % % % % Loans and advances to customers at amortised cost 139,076 134,680 2,410 1,986 (3,488) (3,017) (234) (237) 2.5 2.2 9.7 11.9 – personal 48,866 46,378 1,682 806 (1,504) (1,080) (214) (210) 3.1 2.3 12.7 26.1 – corporate and commercial 85,492 83,976 712 804 (1,907) (1,860) (20) (27) 2.2 2.2 2.8 3.4 – non-bank financial institutions 4,718 4,326 16 376 (77) (77) — — 1.6 1.8 — — Loans and advances to banks at amortised cost 1,739 1,729 — 10 (29) (29) — — 1.7 1.7 — — Other financial assets measured at amortised cost 15,339 15,103 140 96 (165) (141) (8) (16) 1.1 0.9 5.7 16.7 1 The days past due amounts presented above are on a contractual basis. Risk review 152 HSBC Holdings plc Annual Report and Accounts 2023 Stage 2 decomposition The following table presents the stage 2 decomposition of gross carrying amount and allowances for ECL for loans and advances to customers and banks. It also sets out the reasons why an exposure is classified as stage 2 and therefore presented as a significant increase in credit risk at 31 December 2023. The quantitative classification shows gross carrying amount and allowances for ECL for which the applicable reporting date probability of default (‘PD’) measure exceeds defined quantitative thresholds for retail and wholesale exposures, as set out in Note 1.2 ‘Summary of material accounting policies’, on page 348. The qualitative classification primarily accounts for customer risk rating (‘CRR’) deterioration, watch-and-worry and retail management judgemental adjustments. A summary of our current policies and practices for the significant increase in credit risk is set out in ‘Summary of material accounting policies’ on page 348. Loans and advances to customers and banks1,2 At 31 Dec 2023 Loans and advances to customers Loans and advances to banks at amortised cost Total stage 2 Personal of which: Corporate and commercial Non-bank financial institutions first lien mortgage credit cards3 other personal lending3 $m $m $m $m $m $m $m $m Quantitative 35,742 31,178 1,940 2,624 53,034 2,955 781 92,512 Qualitative 11,678 7,077 2,477 2,124 16,241 653 642 29,214 of which: forbearance 171 69 34 68 982 2 — 1,155 30 DPD backstop4 63 32 2 29 463 42 13 581 Total gross carrying amount 47,483 38,287 4,419 4,777 69,738 3,650 1,436 122,307 Quantitative (1,103) (149) (554) (400) (1,225) (24) (1) (2,353) Qualitative (324) (50) (142) (132) (270) (6) (2) (602) of which: forbearance (4) — (1) (3) (11) — — (15) 30 DPD backstop4 (7) (1) (1) (5) (5) — — (12) Total allowance for ECL (1,434) (200) (697) (537) (1,500) (30) (3) (2,967) ECL coverage % 3.0 0.5 15.8 11.2 2.2 0.8 0.2 2.4 Residual average life5 (in years) 16.0 19.3 <1.0 4.1 2.5 1.2 <1.0 Loans and advances to customers1 At 31 Dec 2022 Gross carrying amount Allowance for ECL ECL coverage Personal Corporate and commercial Non-bank financial institutions Total Personal Corporate and commercial Non-bank financial institutions Total Total $m $m $m $m $m $m $m $m % Quantitative 41,610 66,421 3,679 111,710 (1,302) (1,642) (66) (3,010) 2.7 Qualitative 7,209 18,555 878 26,642 (200) (262) (11) (473) 1.8 30 DPD backstop4 47 516 161 724 (2) (3) — (5) 0.7 Total stage 2 48,866 85,492 4,718 139,076 (1,504) (1,907) (77) (3,488) 2.5 1 Where balances satisfy more than one of the above three criteria for determining a significant increase in credit risk, the corresponding gross exposure and ECL have been assigned in order of categories presented. 2 Stage 2 decomposition for loans and advances to banks and personal lending products have been reported for the first time at 31 December 2023 following the adoption of the recommendations of the DECL Taskforce’s third report. 3 The higher relative contribution of qualitative stage 2 for credit cards and other personal lending is due to management judgemental adjustments, primarily affordability. 4 Days past due (‘DPD’). 5 Calculated as the difference between final contractual maturities and the reporting date, weighted based on the contribution of the instrument to the stage 2 total gross carrying amount of the corresponding product or sector. HSBC Holdings plc Annual Report and Accounts 2023 153 Risk review Assets held for sale (Audited) At 31 December 2023, the most material balances held for sale arose from our banking business in Canada and our retail banking operations in France. Disclosures relating to assets held for sale are provided in the following credit risk tables, primarily where the disclosure is relevant to the measurement of these financial assets: – ‘Maximum exposure to credit risk’ (page 155); and – ‘Distribution of financial instruments by credit quality at 31 December’ (page 172); Although there was a reclassification on the balance sheet, there was no separate income statement reclassification. As a result, charges for changes in expected credit losses and other credit impairment charges shown in the credit risk disclosures include charges relating to financial assets classified as ‘assets held for sale’. ‘Loans and other credit-related commitments’ and ‘financial guarantees’, as reported in credit disclosures, also include exposures and allowances relating to financial assets classified as ‘assets held for sale’. Loans and advances to customers and banks measured at amortised cost (Audited) 2023 2022 Total gross loans and advances Allowance for ECL Total gross loans and advances Allowance for ECL $m $m $m $m As reported 1,062,526 (11,089) 1,039,552 (11,516) Reported in ‘Assets held for sale’ 84,075 (303) 81,221 (392) At 31 December 1,146,601 (11,392) 1,120,773 (11,908) At 31 December 2023, gross loans and advances of our banking business in Canada were $56.5bn, and the related allowance for ECL was $0.2bn. Gross loans of our retail banking operations in France were $27.3bn, and the related allowance for ECL was $0.1bn. Lending balances held for sale continue to be measured at amortised cost less allowances for impairment and, therefore, such carrying amounts may differ from fair value. These lending balances are part of associated disposal groups that are measured in their entirety at the lower of carrying amount and fair value less costs to sell. Any difference between the carrying amount of these assets and their sales price is part of the overall gain or loss on the associated disposal group as a whole. For further details of the carrying amount and the fair value at 31 December 2023 of loans and advances to banks and customers classified as held for sale, see Note 23 on the financial statements. Gross loans and allowance for ECL on loans and advances to customers and banks reported in ‘Assets held for sale’ (Audited) Banking business in Canada Retail banking operations in France Other Total Gross carrying amount Allowance for ECL Gross carrying amount Allowance for ECL Gross carrying amount Allowance for ECL Gross carrying amount Allowance for ECL $m $m $m $m $m $m $m $m Loans and advances to customers at amortised cost 56,349 (220) 16,984 (82) 255 (1) 73,588 (303) – personal 27,071 (95) 13,920 (79) 140 (1) 41,131 (175) – corporate and commercial 27,789 (120) 3,012 (3) — — 30,801 (123) – non-bank financial institutions 1,489 (5) 52 — 115 — 1,656 (5) Loans and advances to banks at amortised cost 154 — 10,333 — — — 10,487 — At 31 December 2023 56,503 (220) 27,317 (82) 255 (1) 84,075 (303) Loans and advances to customers at amortised cost 55,431 (234) 25,121 (92) 412 (62) 80,964 (388) – personal 26,637 (75) 22,691 (88) 305 (47) 49,633 (210) – corporate and commercial 27,128 (154) 2,379 (4) 107 (15) 29,614 (173) – non-bank financial institutions 1,666 (5) 51 — — — 1,717 (5) Loans and advances to banks at amortised cost 100 — — — 157 (4) 257 (4) At 31 December 2022 55,531 (234) 25,121 (92) 569 (66) 81,221 (392) The table below analyses the amount of ECL (charges)/releases arising from assets held for sale. The charges during the period primarily relate to our business in Canada. Changes in expected credit losses and other credit impairment (Audited) 2023 2022 $m $m ECL (charges)/releases arising from: – assets held for sale (49) (5) – assets not held for sale (3,398) (3,579) Year ended 31 December (3,447) (3,584) Risk review 154 HSBC Holdings plc Annual Report and Accounts 2023 Credit exposure Maximum exposure to credit risk (Audited) This section provides information on balance sheet items and their offsets as well as loan and other credit-related commitments. Commentary on consolidated balance sheet movements in 2023 is provided on page 108. The offset of derivatives remains in line with the movements in maximum exposure amounts. ‘Maximum exposure to credit risk’ table The following table presents our maximum exposure before taking account of any collateral held or other credit enhancements (unless such enhancements meet accounting offsetting requirements). The table excludes trading assets, financial assets designated and otherwise mandatorily measured at fair value through profit or loss, and financial investments measured at fair value through other comprehensive income as their carrying amount best represents the net exposure to credit risk. Equity securities are also excluded as they are not subject to credit risk. For the financial assets recognised on the balance sheet, the maximum exposure to credit risk equals their carrying amount and is net of the allowance for ECL. For financial guarantees and other guarantees granted, it is the maximum amount that we would have to pay if the guarantees were called upon. For loan commitments and other credit-related commitments, it is generally the full amount of the committed facilities. The offset in the table relates to amounts where there is a legally enforceable right of offset in the event of counterparty default and where, as a result, there is a net exposure for credit risk purposes. However, as there is no intention to settle these balances on a net basis under normal circumstances, they do not qualify for net presentation for accounting purposes. No offset has been applied to off-balance sheet collateral. In the case of derivatives, the offset column also includes collateral received in cash and other financial assets. Other credit risk mitigants While not disclosed as an offset in the following ‘Maximum exposure to credit risk’ table, other arrangements are in place that reduce our maximum exposure to credit risk. These include a charge over collateral on borrowers’ specific assets, such as residential properties, collateral held in the form of financial instruments that are not held on the balance sheet and short positions in securities. In addition, for financial assets held as part of linked insurance/investment contracts the credit risk is predominantly borne by the policyholder. See page 347 and Note 31 on the financial statements for further details of collateral in respect of certain loans and advances and derivatives. Collateral available to mitigate credit risk is disclosed in the ‘Collateral’ section on page 187. Maximum exposure to credit risk (Audited) 2023 2022 Maximum exposure Offset Net Maximum exposure Offset Net $m $m $m $m $m $m Loans and advances to customers held at amortised cost 938,535 (22,607) 915,928 923,561 (20,315) 903,246 – personal 444,655 (2,470) 442,185 412,012 (2,575) 409,437 – corporate and commercial 419,852 (18,771) 401,081 444,882 (16,262) 428,620 – non-bank financial institutions 74,028 (1,366) 72,662 66,667 (1,478) 65,189 Loans and advances to banks at amortised cost 112,902 — 112,902 104,475 — 104,475 Other financial assets held at amortised cost 973,316 (13,919) 959,397 970,119 (8,969) 961,150 – cash and balances at central banks 285,868 — 285,868 327,002 — 327,002 – items in the course of collection from other banks 6,342 — 6,342 7,297 — 7,297 – Hong Kong Government certificates of indebtedness 42,024 — 42,024 43,787 — 43,787 – reverse repurchase agreements – non-trading 252,217 (13,919) 238,298 253,754 (8,969) 244,785 – financial investments 148,326 — 148,326 109,066 — 109,066 – assets held for sale 114,134 — 114,134 115,919 — 115,919 – prepayments, accrued income and other assets 124,405 — 124,405 113,294 — 113,294 Derivatives 229,714 (222,059) 7,655 284,159 (273,497) 10,662 Total on-balance sheet exposure to credit risk 2,254,467 (258,585) 1,995,882 2,282,314 (302,781) 1,979,533 Total off-balance sheet 1,007,885 — 1,007,885 934,329 — 934,329 – financial and other guarantees 111,102 — 111,102 106,861 — 106,861 – loan and other credit-related commitments 896,783 — 896,783 827,468 — 827,468 At 31 Dec 3,262,352 (258,585) 3,003,767 3,216,643 (302,781) 2,913,862 Concentration of exposure We have a number of global businesses with a broad range of products. We operate in a number of geographical markets with the majority of our exposures in Asia and Europe. For an analysis of: – financial investments, see Note 16 on the financial statements; – trading assets, see Note 11 on the financial statements; – derivatives, see page 190 and Note 15 on the financial statements; and – loans and advances by industry sector and by the location of the principal operations of the lending subsidiary (or, in the case of the operations of The Hongkong and Shanghai Banking Corporation Limited, HSBC Bank plc, HSBC Bank Middle East Limited and HSBC Bank USA, by the location of the lending branch), see page 176 for wholesale lending and page 190 for personal lending. Credit deterioration of financial instruments (Audited) A summary of our current policies and practices regarding the identification, treatment and measurement of stage 1, stage 2, stage 3 (credit impaired) and POCI financial instruments can be found in Note 1.2 on the financial statements. HSBC Holdings plc Annual Report and Accounts 2023 155 Risk review Measurement uncertainty and sensitivity analysis of ECL estimates (Audited) The recognition and measurement of ECL involves the use of significant judgement and estimation. We form multiple economic scenarios based on economic forecasts, apply these assumptions to credit risk models to estimate future credit losses, and probability weight the results to determine an unbiased ECL estimate. Management assessed the current economic environment, reviewed the latest economic forecasts and discussed key risks before selecting the economic scenarios and their weightings. Scenarios were constructed to reflect the latest geopolitical risks and macroeconomic developments, including the Israel-Hamas war and subsequent disruptions in the Red Sea, and current inflation and monetary policy expectations. Management judgemental adjustments are used where modelled ECL does not fully reflect the identified risks and related uncertainty, or to capture significant late-breaking events. At 31 December 2023, there was an overall reduction in management judgemental adjustments compared with 31 December 2022, as modelled outcomes better reflected the key risks at 31 December 2023. Methodology At 31 December 2023, four scenarios were used to capture the latest economic expectations and to articulate management’s view of the range of risks and potential outcomes. Each scenario is updated with the latest economic forecasts and estimates every quarter. Three scenarios, the Upside, Central and Downside, are drawn from external consensus forecasts, market data and distributional estimates of the entire range of economic outcomes. The fourth scenario, the Downside 2, represents management’s view of severe downside risks. The Central scenario is deemed the ‘most likely’ scenario, and usually attracts the largest probability weighting. It is created using consensus forecasts, which is the average of a panel of external forecasts. The outer scenarios represent the tails of the distribution and are less likely to occur. The consensus Upside and Downside scenarios are created with reference to distributions for select markets that capture forecasters’ views of the entire range of economic outcomes. In the later years of those scenarios, projections revert to long-term consensus trend expectations. Reversion to trend is done with reference to historically observed quarterly changes in the values of macroeconomic variables. The fourth scenario, the Downside 2, is designed to represent management’s view of severe downside risks. It is a globally consistent, narrative-driven scenario that explores a more extreme economic outcome than those captured by the consensus scenarios. In this scenario, variables do not, by design, revert to long-term trend expectations and may instead explore alternative states of equilibrium, where economic activity moves permanently away from past trends. The consensus Downside and the consensus Upside scenarios are each calibrated to be consistent with a 10% probability. The Downside 2 is calibrated to a 5% probability. The Central scenario is assigned the remaining 75%. This weighting scheme is deemed appropriate for the unbiased estimation of ECL in most circumstances. However, management may depart from this probability-based scenario weighting approach when the economic outlook and forecasts are determined to be particularly uncertain and risks are elevated. In the fourth quarter of 2023, the weights were consistent with the calibrated scenario probabilities, as key risk metrics implied a decline in the uncertainty attached to the Central scenario, compared with the fourth quarter of 2022. Economic forecasts for the Central scenario remained stable, and the dispersion within consensus forecast panels remained low, even as the Israel-Hamas war escalated. Risks, including the economic consequences of a broader war in the Middle East, were reflected in the Downside scenarios. Scenarios produced to calculate ECL are aligned to HSBC’s top and emerging risks. Description of economic scenarios The economic assumptions presented in this section have been formed by HSBC with reference to external forecasts and estimates, specifically for the purpose of calculating ECL. Forecasts remain subject to uncertainty and variability. Outer scenarios are constructed so that they capture risks that could alter the trajectory of the economy and are designed to encompass the potential crystallisation of key macro-financial risks. In our key markets, Central scenario forecasts remained broadly stable in the fourth quarter of 2023, compared with the third quarter of 2023. The key exception was with regard to monetary policy, where expectations for interest rate cuts were brought forward. There continue to be expectations that 2024 will be a period of below trend growth, with inflation remaining above central bank targets. At the end of 2023, risks to the economic outlook included a number of significant geopolitical issues. Within our Downside scenarios, the economic consequences from the crystallisation of those risks were captured by higher commodity and goods prices, the reacceleration of inflation, a further rise in interest rates and a global recession. The scenarios used to calculate ECL in the Annual Report and Accounts 2023 are described below. The consensus Central scenario HSBC’s Central scenario reflects expectations for a low growth and high interest rate environment across many of our key markets, where GDP growth is expected to be lower in 2024 than in the previous year. Expectations of lower GDP growth in many markets in 2024 are driven by the assumed lagged effects of higher interest rates and inflation in North America and Europe. In the scenario, household discretionary income remains under pressure and business margins deteriorate amid higher refinancing costs. Growth only returns to its long-term expected trend in later years, once inflation reverts back towards central bank targets and interest rates stabilise at lower levels. In mainland China and Hong Kong, growth is also expected to be moderately slower in 2024 relative to 2023. The economic boost from post-pandemic reopening has faded, and slower global growth and low trade volumes are expected to moderate activity. In mainland China, the continued fall in investment in the property sector is expected to act as a further brake on the economy, while in Hong Kong, higher interest rates are expected to drive a further decline in property valuations. Despite these headwinds, a steeper downturn is expected to be avoided as the authorities in mainland China increase fiscal and monetary support to the economy. Substantial fiscal expansion is anticipated for 2024, alongside additional credit easing. Global GDP is expected to grow by 2.2% in 2024 in the Central scenario, and the average rate of global GDP growth is forecast to be 2.6% over the five-year forecast period. This is below the average growth rate over the five-year period prior to the onset of the pandemic of 2.9%. The key features of our Central scenario are: – GDP growth rates in our main markets are expected to slow down in 2024, followed by a moderate recovery in 2025. The slowdown in the UK is particularly notable in this scenario, with growth close to zero through much of 2024. In the scenario, weaker growth is caused by high interest rates, which act to deter consumption and investment. – In most markets, unemployment is expected to rise moderately as economic activity slows, although it remains low by historical standards. Risk review 156 HSBC Holdings plc Annual Report and Accounts 2023 – Inflation is expected to continue to fall as commodity prices decline, supply disruptions abate, and wage growth moderates. It is anticipated that inflation converges towards central banks’ target rates by early 2025. In mainland China, weak consumption and excess supply has caused inflation to drop sharply but, in the scenario, deflation is not projected to persist. – Weak conditions in housing markets are expected to persist through 2024 and 2025 in many of our main markets, including the UK, Hong Kong and mainland China, as higher interest rates and, in many cases, declining prices, depress activity. – Challenging conditions are also forecast to continue in the commercial property sector in a number of our key markets. Structural changes to demand in the office segment in particular have driven lower valuations. – Policy interest rates in key markets are forecast to have peaked and are projected to decline in 2024. In the longer term, they are expected to remain at a higher level than in recent years. – The Brent crude oil price is forecast to average around $75 per barrel over the projection period. The Central scenario was created with forecasts available in late November, and reviewed continually until the end of December 2023. In accordance with HSBC’s scenario framework, a probability weight of 75% has been assigned to the Central scenario across all major markets. The following tables describe key macroeconomic variables in the consensus Central scenario. Consensus Central scenario 2024–2028 (as at 4Q23) UK US Hong Kong Mainland China Canada France UAE Mexico GDP (annual average growth rate, %) 2024 0.3 1.0 2.6 4.5 0.8 0.8 3.7 1.9 2025 1.2 1.8 2.7 4.4 2.0 1.5 4.0 2.2 2026 1.7 2.1 2.6 4.3 2.0 1.6 3.8 2.3 2027 1.6 2.0 2.6 3.8 2.0 1.5 3.4 2.4 2028 1.6 2.0 2.6 3.9 2.0 1.5 3.4 2.4 5-year average1 1.3 1.8 2.6 4.2 1.7 1.4 3.6 2.2 Unemployment rate (%) 2024 4.7 4.3 3.0 5.2 6.2 7.5 2.6 2.9 2025 4.6 4.2 3.0 5.1 5.9 7.3 2.6 2.9 2026 4.3 4.0 3.2 5.1 5.7 7.0 2.6 2.9 2027 4.2 4.0 3.2 5.1 5.7 6.8 2.6 2.9 2028 4.2 4.0 3.2 5.1 5.7 6.8 2.6 2.9 5-year average1 4.4 4.1 3.1 5.1 5.8 7.1 2.6 2.9 House prices (annual average growth rate, %) 2024 (5.5) 2.9 (6.6) (0.6) (4.8) (1.0) 12.6 6.5 2025 0.1 2.7 (0.7) 1.1 2.2 2.4 7.7 4.2 2026 3.5 3.1 2.6 2.6 2.8 4.0 4.4 4.2 2027 3.0 2.7 2.8 4.0 2.4 4.4 2.6 4.0 2028 3.0 2.1 3.0 4.5 2.8 4.0 2.3 4.0 5-year average1 0.8 2.7 0.2 2.3 1.1 2.8 5.9 4.6 Inflation (annual average growth rate, %) 2024 3.2 2.7 2.1 1.8 2.6 2.7 2.3 4.2 2025 2.2 2.2 2.1 2.0 2.1 1.8 2.2 3.6 2026 2.2 2.3 2.2 2.1 2.1 1.7 2.1 3.5 2027 2.3 2.2 2.4 2.0 2.1 1.9 2.1 3.5 2028 2.3 2.2 2.4 2.0 2.1 2.1 2.1 3.5 5-year average 2.4 2.3 2.2 2.0 2.2 2.0 2.1 3.7 Central bank policy rate (annual average, %) 2024 5.0 5.0 5.4 4.1 4.7 3.6 5.1 10.4 2025 4.3 4.0 4.4 4.2 3.9 2.8 4.1 8.6 2026 3.9 3.7 4.1 4.4 3.4 2.6 3.7 7.9 2027 3.8 3.7 4.1 4.6 3.2 2.6 3.7 7.9 2028 3.7 3.8 4.1 4.8 3.3 2.7 3.8 8.1 5-year average1 4.1 4.1 4.4 4.4 3.7 2.9 4.1 8.6 1 The five-year average is calculated over a projected period of 20 quarters from 1Q24 to 4Q28. HSBC Holdings plc Annual Report and Accounts 2023 157 Risk review Consensus Central scenario 2023–2027 (as at 4Q22) UK US Hong Kong Mainland China Canada France UAE2 Mexico GDP (annual average growth rate, %) 2023 (0.8) 0.2 2.7 4.6 0.6 0.2 3.7 1.2 2024 1.3 1.5 3.0 4.8 1.9 1.6 3.7 2.0 2025 1.7 2.0 2.7 4.7 2.0 1.5 3.1 2.3 2026 1.7 2.0 2.6 4.4 1.8 1.4 2.8 2.0 2027 1.7 2.0 2.6 4.4 1.8 1.4 2.9 2.0 5-year average1 1.1 1.5 2.7 4.6 1.6 1.2 3.2 1.9 Unemployment rate (%) 2023 4.4 4.3 3.7 5.2 6.1 7.6 2.9 3.7 2024 4.6 4.5 3.5 5.1 5.9 7.5 2.8 3.7 2025 4.3 4.2 3.4 5.0 6.0 7.3 2.8 3.5 2026 4.1 3.9 3.3 4.9 5.9 7.2 2.8 3.5 2027 4.1 4.0 3.3 4.8 5.9 7.2 2.8 3.5 5-year average1 4.3 4.2 3.4 5.0 5.9 7.3 2.8 3.6 House prices (annual average growth rate, %) 2023 0.2 (2.5) (10.0) (0.1) (15.6) 1.8 5.9 7.9 2024 (3.8) (3.2) (3.0) 2.9 (1.2) 2.0 5.2 5.2 2025 0.7 (1.0) 1.7 3.5 4.0 3.1 4.5 4.2 2026 2.1 0.7 2.8 4.1 4.1 3.5 3.3 4.1 2027 2.7 2.5 3.4 4.3 3.0 3.6 2.9 3.9 5-year average1 0.4 (0.7) (1.0) 2.9 (1.1) 2.8 4.4 5.1 Inflation (annual average growth rate,%) 2023 6.9 4.1 2.1 2.4 3.5 4.6 3.2 5.7 2024 2.5 2.5 2.1 2.2 2.2 2.0 2.2 4.1 2025 2.1 2.2 2.0 2.2 2.1 1.8 2.1 3.7 2026 2.0 2.3 2.1 2.1 2.0 1.7 2.1 3.7 2027 2.0 2.3 2.1 2.1 2.0 1.7 2.1 3.7 5-year average1 3.1 2.7 2.1 2.2 2.4 2.4 2.3 4.2 Central bank policy rate (annual average, %) 2023 4.4 4.7 5.2 4.6 4.3 2.7 6.1 10.3 2024 4.2 3.8 4.3 4.9 3.9 2.7 5.2 8.1 2025 3.7 3.0 3.5 5.1 3.4 2.4 4.4 7.2 2026 3.4 2.9 3.3 5.3 3.1 2.3 4.3 7.3 2027 3.1 2.9 3.3 5.5 3.2 2.3 4.3 7.8 5-year average1 3.8 3.5 3.9 5.1 3.6 2.5 4.9 8.1 1 The five-year average is calculated over a projected period of 20 quarters from 1Q23 to 4Q27. The graphs compare the Central scenario at the year end 2022 with economic expectations at the end of 2023. GDP growth: Comparison of Central scenarios Hong Kong Mainland China Risk review 158 HSBC Holdings plc Annual Report and Accounts 2023 Note: Real GDP shown as year-on-year percentage change. Note: Real GDP shown as year-on-year percentage change. 0 10 20 30 40 50 60 70 80 90 100 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 2023 2024 2026 2028 2025 4Q22 Central 2027 4Q23 Central 4Q22 Central 5Y Average: 2.7% 4Q23 Central 5Y Average: 2.6% 0 10 20 30 40 50 60 70 80 90 100 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 2023 2024 2026 2028 2025 4Q22 Central 2027 4Q23 Central 4Q22 Central 5Y Average: 4.6% 4Q23 Central 5Y Average: 4.2% Note: Real GDP shown as year-on-year percentage change. Note: Real GDP shown as year-on-year percentage change. The consensus Upside scenario Compared with the Central scenario, the consensus Upside scenario features stronger economic activity in the near term, before converging to long-run trend expectations. It also incorporates a faster fall in the rate of inflation than incorporated in the Central scenario. The scenario is consistent with a number of key upside risk themes. These include a faster fall in the rate of inflation that allows central banks to reduce interest rates more quickly, an easing in financial conditions, and a de-escalation in geopolitical tensions as the Israel- Hamas and Russia-Ukraine wars move towards conclusions, and the US-China relationship improves. The following tables describe key macroeconomic variables in the consensus Upside scenario. Consensus Upside scenario 2024–2028 (as at 4Q23) UK US Hong Kong Mainland China Canada France UAE Mexico GDP level (%, start-to-peak)1 10.8 (4Q28) 14.3 (4Q28) 21.8 (4Q28) 30.4 (4Q28) 14.9 (4Q28) 10.4 (4Q28) 30.7 (4Q28) 17.8 (4Q28) Unemployment rate (%, min)2 3.1 (4Q24) 3.1 (2Q25) 2.4 (3Q24) 4.8 (4Q25) 5.1 (4Q25) 6.2 (4Q25) 2.0 (4Q25) 2.4 (3Q24) House price index (%, start-to-peak)1 13.0 (4Q28) 21.9 (4Q28) 17.9 (4Q28) 19.7 (4Q28) 21.0 (4Q28) 19.6 (4Q28) 34.2 (4Q28) 30.6 (4Q28) Inflation rate (YoY % change, min)3 1.3 (2Q25) 1.4 (1Q25) 0.3 (4Q24) 0.6 (3Q24) 1.1 (1Q25) 1.5 (3Q24) 1.4 (1Q25) 2.7 (1Q25) Central bank policy rate (%, min)2 3.7 (3Q28) 3.7 (2Q27) 4.1 (1Q27) 4.0 (2Q24) 3.2 (2Q27) 2.6 (2Q26) 3.7 (1Q27) 7.8 (2Q25) 1 Cumulative change to the highest level of the series during the 20-quarter projection. 2 Lowest projected unemployment or policy interest rate in the scenario. 3 Lowest projected year-on-year percentage change in inflation in the scenario. Consensus Upside scenario 2023–2027 (as at 4Q22) UK US Hong Kong Mainland China Canada France UAE Mexico GDP level (%, start-to-peak)1 14.6 (4Q27) 13.6 (4Q27) 23.3 (4Q27) 31.5 (4Q27) 14.0 (4Q27) 10.2 (4Q27) 26.4 (4Q27) 16.4 (4Q27) Unemployment rate (%, min)2 3.5 (4Q23) 3.1 (3Q23) 3.0 (4Q23) 4.7 (3Q24) 5.2 (3Q24) 6.5 (4Q24) 2.2 (3Q24) 3.1 (3Q23) House price index (%, start-to-peak)1 7.8 (4Q27) 3.9 (4Q27) 8.6 (4Q27) 26.3 (4Q27) 12.3 (4Q27) 17.0 (4Q27) 30.6 (4Q27) 33.0 (4Q27) Inflation rate (YoY % change, min)3 0.7 (1Q24) 1.6 (1Q24) (0.1) (4Q23) 0.8 (4Q23) 1.0 (1Q24) 0.8 (4Q23) 1.5 (3Q24) 3.2 (1Q24) Central bank policy rate (%, min)2 3.1 (4Q27) 2.9 (1Q27) 3.3 (1Q27) 4.4 (1Q23) 3.1 (3Q26) 2.3 (3Q26) 4.3 (1Q27) 7.1 (3Q25) 1 Cumulative change to the highest level of the series during the 20-quarter projection. 2 Lowest projected unemployment or policy interest rate in the scenario. 3 Lowest projected year-on-year percentage change in inflation in the scenario. HSBC Holdings plc Annual Report and Accounts 2023 159 Risk review UK US 0 10 20 30 40 50 60 70 80 90 100 ‐2.5 ‐1.5 ‐0.5 0.5 1.5 2.5 3.5 2023 2024 2028 2025 4Q22 Central 2026 2027 4Q23 Central 4Q22 Central 5Y Average: 1.1% 4Q23 Central 5Y Average: 1.3% 0 10 20 30 40 50 60 70 80 90 100 ‐2.5 ‐1.5 ‐0.5 0.5 1.5 2.5 3.5 2023 2024 2028 2025 4Q22 Central 2026 2027 4Q23 Central 4Q22 Central 5Y Average: 1.5% 4Q23 Central 5Y Average: 1.8% Downside scenarios Downside scenarios explore the intensification and crystallisation of a number of key economic and financial risks. These include an escalation of geopolitical tensions, which disrupt key commodity and goods markets, causing inflation and interest rates to rise, and creating a global recession. As the geopolitical environment remains volatile and complex, risks include: – a broader and more prolonged conflict in the Middle East that undermines confidence, drives an increase in global energy costs and reduces trade and investment; – a potential escalation in the Russia-Ukraine war, which expands beyond Ukraine’s borders, and further disrupts energy, fertiliser and food supplies; and – continued differences between the US and China, which could affect economic confidence, the global goods trade and supply chains for critical technologies. High inflation and higher interest rates also remain key risks. Should geopolitical tensions escalate, energy and food prices could rise and increase pressure on household budgets and firms’ costs. A wage-price spiral, triggered by higher inflation and labour supply shortages, could put sustained upward pressure on wages and services prices, aggravating cost pressures and increasing the squeeze on household real incomes and corporate margins. In turn, it raises the risk of a more forceful policy response from central banks, a steeper trajectory for interest rates, significantly higher defaults and, ultimately, a deep economic recession. The consensus Downside scenario In the consensus Downside scenario, economic activity is weaker compared with the Central scenario. In this scenario, GDP declines, unemployment rates rise, and asset prices fall. The scenario features an escalation of geopolitical tensions, which causes a rise in inflation, as supply chain constraints intensify and energy prices rise. The scenario also features a temporary increase in interest rates above the Central scenario, before the effects of weaker consumption demand begin to dominate and commodity prices and inflation fall again. The following tables describe key macroeconomic variables in the consensus Downside scenario. Consensus Downside scenario 2024–2028 (as at 4Q23) UK US Hong Kong Mainland China Canada France UAE Mexico GDP level (%, start-to-trough)1 (1.0) (2Q25) (1.4) (3Q24) (1.6) (3Q25) (1.5) (1Q24) (1.7) (3Q24) (0.3) (2Q24) 1.4 (1Q24) (0.3) (4Q24) Unemployment rate (%, max)2 6.4 (1Q25) 5.6 (4Q24) 4.7 (4Q25) 6.9 (4Q25) 7.4 (3Q24) 8.5 (4Q24) 3.7 (4Q25) 3.5 (4Q25) House price index (%, start-to-trough)1 (12.0) (2Q25) (1.3) (3Q24) (9.6) (4Q24) (7.1) (3Q25) (12.0) (3Q25) (1.2) (3Q24) 0.3 (1Q24) 1.2 (1Q24) Inflation rate (YoY % change, max)3 4.1 (1Q24) 3.5 (4Q24) 3.8 (3Q24) 3.5 (4Q24) 3.4 (2Q24) 3.8 (2Q24) 3.0 (1Q24) 6.5 (4Q24) Central bank policy rate (%, max)2 5.7 (1Q24) 5.6 (1Q24) 6.0 (1Q24) 4.1 (3Q24) 5.6 (1Q24) 4.2 (1Q24) 5.7 (1Q24) 12.0 (3Q24) 1 Cumulative change to the lowest level of the series during the 20-quarter projection. 2 The highest projected unemployment or policy interest rate in the scenario. 3 The highest projected year-on-year percentage change in inflation in the scenario. Consensus Downside scenario 2023–2027 (as at 4Q22) UK US Hong Kong Mainland China Canada France UAE Mexico GDP level (%, start-to-trough)1 (3.0) (1Q25) (4.0) (4Q24) (2.3) (3Q24) (1.7) (2Q23) (3.9) (4Q23) (0.9) (2Q23) 0.1 (1Q23) (2.8) (4Q24) Unemployment rate (%, max)2 5.8 (2Q24) 5.9 (1Q24) 5.2 (3Q24) 5.9 (4Q23) 7.6 (3Q23) 8.8 (4Q23) 4.1 (3Q23) 4.4 (1Q23) House price index (%, start-to-trough)1 (15.0) (4Q24) (11.6) (4Q25) (11.9) (1Q24) (1.0) (4Q23) (20.1) (4Q24) (0.7) (3Q23) (4.0) (3Q23) 1.2 (1Q23) Inflation rate (YoY % change, max)3 10.8 (1Q23) 6.2 (1Q23) 3.7 (4Q23) 4.0 (4Q23) 6.0 (1Q23) 7.2 (1Q23) 4.5 (1Q23) 7.9 (1Q23) Central bank policy rate (%, max)2 5.1 (3Q23) 5.2 (3Q23) 5.7 (3Q23) 5.2 (4Q23) 5.6 (3Q23) 3.4 (4Q23) 6.6 (3Q23) 12.1 (3Q23) 1 Cumulative change to the lowest level of the series during the 20-quarter projection. 2 The highest projected unemployment or policy interest rate in the scenario. 3 The highest projected year-on-year percentage change in inflation in the scenario. Downside 2 scenario The Downside 2 scenario features a deep global recession and reflects management’s view of the tail of the economic distribution. It incorporates the crystallisation of a number of risks simultaneously, including a further escalation of geopolitical crises globally, which creates severe supply disruptions to goods and energy markets. In the scenario, as inflation surges and central banks tighten monetary policy further, confidence evaporates. However, this impulse is assumed to prove short lived, as recession takes hold, causing commodity prices to correct sharply and global price inflation to fall. Risk review 160 HSBC Holdings plc Annual Report and Accounts 2023 The following tables describe key macroeconomic variables in the Downside 2 scenario. Downside 2 scenario 2024–2028 (as at 4Q23) UK US Hong Kong Mainland China Canada France UAE Mexico GDP level (%, start-to-trough)1 (8.8) (2Q25) (4.6) (1Q25) (8.2) (1Q25) (6.4) (1Q25) (4.8) (1Q25) (6.6) (1Q25) (4.9) (2Q25) (8.1) (2Q25) Unemployment rate (%, max)2 8.4 (2Q25) 9.3 (2Q25) 6.4 (4Q24) 7.0 (4Q25) 11.9 (1Q25) 10.2 (4Q25) 4.3 (3Q24) 4.9 (2Q25) House price index (%, start-to-trough)1 (30.2) (4Q25) (14.7) (4Q24) (32.8) (3Q26) (25.5) (4Q25) (42.7) (2Q25) (14.5) (2Q26) (2.9) (4Q25) 1.2 (1Q24) Inflation rate (YoY % change, max)3 10.1 (2Q24) 4.8 (2Q24) 4.1 (3Q24) 4.1 (4Q24) 5.4 (2Q24) 8.6 (2Q24) 3.5 (2Q24) 7.0 (4Q24) Central bank policy rate (%, max)2 6.0 (1Q24) 6.1 (1Q24) 6.4 (1Q24) 4.8 (3Q24) 5.8 (1Q24) 5.2 (1Q24) 6.1 (1Q24) 12.7 (3Q24) 1 Cumulative change to the lowest level of the series during the 20-quarter projection. 2 The highest projected unemployment or policy interest rate in the scenario. 3 The highest projected year-on-year percentage change in inflation in the scenario. Downside 2 scenario 2023–2027 (as at 4Q22) UK US Hong Kong Mainland China Canada France UAE Mexico GDP level (%, start-to-trough)1 (7.5) (2Q24) (5.2) (2Q24) (10.1) (2Q24) (6.9) (1Q24) (7.1) (4Q24) (7.4) (2Q24) (4.3) (2Q24) (8.2) (2Q24) Unemployment rate (%, max)2 8.7 (2Q24) 9.5 (4Q24) 5.8 (1Q24) 6.8 (4Q24) 11.6 (2Q24) 10.3 (4Q24) 4.6 (2Q24) 5.6 (2Q24) House price index (%, start-to-trough)1 (32.9) (1Q25) (21.6) (1Q24) (26.6) (2Q26) (23.2) (4Q24) (41.2) (3Q24) (11.4) (2Q25) (4.8) (2Q24) 1.1 (1Q23) Inflation rate (YoY % change, max)3 13.5 (2Q23) 6.3 (1Q23) 4.3 (4Q23) 4.6 (4Q23) 6.5 (1Q23) 10.4 (2Q23) 4.8 (1Q23) 7.9 (1Q23) Central bank policy rate (%, max)2 5.6 (4Q23) 5.5 (3Q23) 5.9 (3Q23) 5.1 (3Q23) 6.1 (3Q23) 4.1 (4Q23) 6.8 (3Q23) 12.3 (3Q23) 1 Cumulative change to the lowest level of the series during the 20-quarter projection. 2 The highest projected unemployment or policy interest rate in the scenario. 3 The highest projected year-on-year percentage change in inflation in the scenario. The following graphs show the historical and forecasted GDP growth rate for the various economic scenarios in our four largest markets. Hong Kong Mainland China HSBC Holdings plc Annual Report and Accounts 2023 161 Risk review UK US 0 10 20 30 40 50 60 70 80 90 100 ‐8.0 ‐6.0 ‐4.0 ‐2.0 0.0 2.0 4.0 6.0 8.0 10.0 12.0 2023 2024 2025 2026 2027 2028 Central Upside Downside Downside 2 0 10 20 30 40 50 60 70 80 90 100 ‐8.0 ‐6.0 ‐4.0 ‐2.0 0.0 2.0 4.0 6.0 8.0 10.0 12.0 2023 2024 2025 2026 2027 2028 Central Upside Downside Downside 2 0 10 20 30 40 50 60 70 80 90 100 ‐10.0 ‐8.0 ‐6.0 ‐4.0 ‐2.0 0.0 2.0 4.0 6.0 2023 2024 2025 2026 2027 2028 Central Upside Downside Downside 2 0 10 20 30 40 50 60 70 80 90 100 ‐10.0 ‐8.0 ‐6.0 ‐4.0 ‐2.0 0.0 2.0 4.0 6.0 2023 2024 2025 2026 2027 2028 Central Upside Downside Downside 2 Scenario weighting In reviewing the economic environment, the level of risk and uncertainty, management has considered both global and country- specific factors. In the fourth quarter of 2023, key considerations around uncertainty attached to the Central scenario projections focused on: – the risk that the Israel-Hamas war escalates and affects economic expectations; – the lagged impact of elevated interest rates on household finances and businesses, and the implications of recent changes to monetary policy expectations on growth and employment; and – the outlook for real estate in our key markets, particularly in the US, UK, Hong Kong and mainland China. Although these risk factors remain significant, management assessed that they were adequately reflected in the scenarios at their calibrated probability. It was noted that despite the escalation of geopolitical risk in the Middle East, economic forecasts had remained stable, and dispersion of forecasts around the consensus were either stable, or have moved lower. Financial market measures of volatility also remained low through the fourth quarter of 2023. This has led management to assign scenario probabilities that are aligned to the standard scenario probability calibration framework. This entailed assigning a 75% probability weighting to the Central scenario in our major markets. The consensus Upside scenario was awarded a 10% weighting, and the consensus Downside scenario was given 10%. The Downside 2 was assigned a 5% weighting. In support of the decision, it was noted that in mainland China recent policy announcements suggest fiscal and monetary stimulus will increase significantly through 2024. This suggests that there will be increased official support to current economic headwinds, which would reduce the uncertainty attached to current forecasts. In the UK, the Central scenario reflects a weak growth environment in which recession risks remain high. Similarly, in the US, the Central scenario reflects expectations for a weaker growth environment in 2024 as the economy adjusts to the higher rates environment. For the UAE, it was agreed that there has been an increase in geopolitical uncertainty since the outbreak of the Israel-Hamas war, with the potential for regional escalation remaining a risk. However, economic and market impacts have been limited and oil production remains unaffected. Management concluded that consensus expectations for Mexico, France and Canada were also consistent with its view of the economic outlook, while assessments of uncertainty were also aligned to historical averages. In the fourth quarter of 2022, management varied the applied scenario weights to reflect greater uncertainty around the inflation and interest rate outlook, amid supply disruption to energy and food commodity markets due to the Ukraine-Russia war. In Hong Kong and mainland China, uncertainty assessments focused on the upside and downside risks of post-pandemic reopening. Those factors were reflected in the measures of risk and uncertainty used to inform judgements around the Central scenario. In particular, large forecast changes were observed, alongside wide dispersion of forecasts around consensus estimates and heightened financial market volatility. The following tables describe the probabilities assigned in each scenario. Standard weights UK US Hong Kong Mainland China Canada France UAE Mexico 4Q23 Upside scenario 10 10 10 10 10 10 10 10 10 Central scenario 75 75 75 75 75 75 75 75 75 Downside scenario 10 10 10 10 10 10 10 10 10 Downside 2 scenario 5 5 5 5 5 5 5 5 5 4Q22 Upside scenario 10 5 5 20 20 5 5 5 5 Central scenario 75 60 70 55 55 70 60 70 70 Downside scenario 10 25 20 20 20 15 25 20 20 Downside 2 scenario 5 10 5 5 5 10 10 5 5 Scenario weightings, % At 31 December 2023, the consensus Upside and Central scenarios for all markets had a combined weighting of 85%. At 31 December 2022, mainland China, Hong Kong and the US each had a combined weighting of 75% for the consensus Upside and Central scenarios. The UK had a combined weighting of 65%. Critical estimates and judgements The calculation of ECL under IFRS 9 involved significant judgements, assumptions and estimates at 31 December 2023. These included: – the selection of weights to apply to the economic scenarios given the rapidly changing economic conditions and the inherent uncertainty of the underlying forecast under each scenario; – the selection of scenarios to consider given the changing nature of macroeconomic and geopolitical risks that the Group and wider economy faces; and – estimating the economic effects of those scenarios on ECL, particularly sector and portfolio-specific risks, and the uncertainty of default and recovery experience under all scenarios. How economic scenarios are reflected in ECL calculations Models are used to reflect economic scenarios on ECL estimates. As described above, modelled assumptions and linkages based on historical information could not alone produce relevant information under the conditions experienced in 2023, and management judgemental adjustments were still required to support modelled outcomes. We have developed globally consistent methodologies for the application of forward economic guidance into the calculation of ECL for wholesale and retail credit risk. These standard approaches are described below, followed by the management judgemental adjustments made, including those to reflect the circumstances experienced in 2023. Risk review 162 HSBC Holdings plc Annual Report and Accounts 2023 For our wholesale portfolios, a global methodology is used for the estimation of the term structure of probability of default (‘PD’) and loss given default (‘LGD’). For PDs, we consider the correlation of forward economic guidance to default rates for a particular industry in a country. For LGD calculations, we consider the correlation of forward economic guidance to collateral values and realisation rates for a particular country and industry. PDs and LGDs are estimated for the entire term structure of each instrument. For impaired loans, allowance for ECL estimates are derived based on discounted cash flow (‘DCF’) calculations for internal forward-looking scenarios specific to individual borrower circumstances (see page 348). Probability-weighted outcomes are applied, and depending on materiality and status of the borrower, the number of scenarios considered will change. Where relevant for the case being assessed, forward economic guidance is incorporated as part of these scenarios. LGD-driven proxy and modelled estimates are used for certain less material cases. For our retail portfolios, the models are predominantly based on historical observations and correlations with default rates and collateral values. For PD, the impact of economic scenarios is modelled for each portfolio, using historical relationships between default rates and macroeconomic variables. These are included within IFRS 9 ECL estimates using either economic response models or models that contain internal, external and macroeconomic variables. The macroeconomic impact on PD is modelled over the period equal to the remaining maturity of the underlying assets. For LGD, the impact is modelled for mortgage portfolios by forecasting future loan-to-value profiles for the remaining maturity of the asset, using national level house price index forecasts and applying the corresponding LGD expectation relative to the updated forecast collateral values. Management judgemental adjustments are described below. Management judgemental adjustments In the context of IFRS 9, management judgemental adjustments are typically short-term increases or decreases to the modelled allowance for ECL at either a customer, segment or portfolio level where management believes allowances do not sufficiently reflect the credit risk/expected credit losses at the reporting date. These can relate to risks or uncertainties that are not reflected in the models and/or to any late-breaking events with significant uncertainty, subject to management review and challenge. This includes refining model inputs and outputs and using adjustments to ECL based on management judgement and quantitative analysis for impacts that are difficult to model. The effects of management judgemental adjustments are considered for both balances and allowance for ECL when determining whether or not a significant increase in credit risk has occurred and is allocated to a stage where appropriate. This is in accordance with the internal adjustments framework. Management judgemental adjustments are reviewed under the governance process for IFRS 9 (as detailed in the section ‘Credit risk management’ on page 147). Review and challenge focuses on the rationale and quantum of the adjustments with a further review carried out by the second line of defence where significant. For some management judgemental adjustments, internal frameworks establish the conditions under which these adjustments should no longer be required and as such are considered as part of the governance process. This internal governance process allows management judgemental adjustments to be reviewed regularly and, where possible, to reduce the reliance on these through model recalibration or redevelopment, as appropriate. The drivers of management judgemental adjustments continue to evolve with the economic environment and as new risks emerge. In addition to management judgemental adjustments there are also ‘Other adjustments’, which are made to address process limitations and data/model deficiencies. ‘Management judgemental adjustments’ and ‘Other adjustments’ constitute the total value of adjustments to modelled allowance for ECL. For the wholesale portfolio, defaulted exposures are assessed individually and management judgemental adjustments are made only to the performing portfolio. At 31 December 2023, there was a $0.2bn reduction in management judgemental adjustments compared with 31 December 2022. For the wholesale portfolio, this was due to modelled outcomes better reflecting the key risks at 31 December 2023. For the retail portfolio, there was an increase in other credit judgements due to the potential delayed impact of economic scenarios on unsecured portfolio defaults, primarily within the UK . Management judgemental adjustments made in estimating the scenario-weighted reported allowance for ECL at 31 December 2023 are set out in the following table. Management judgemental adjustments to ECL at 31 December 20231 Retail Wholesale2 Total $bn $bn $bn Modelled ECL (A)3 2.6 2.4 5.0 Banks, sovereigns, government entities and low-risk counterparties 0.0 0.0 Corporate lending adjustments 0.1 0.1 Inflation related adjustments 0.1 0.1 Other credit judgements 0.5 0.5 Total management judgemental adjustments (B)4 0.6 0.1 0.7 Other adjustments (C)5 0.0 0.0 0.0 Final ECL (A + B + C)6 3.2 2.5 5.7 HSBC Holdings plc Annual Report and Accounts 2023 163 Risk review Management judgemental adjustments to ECL at 31 December 20221 (continued) Retail Wholesale2 Total $bn $bn $bn Modelled ECL (A)3 3.0 2.6 5.6 Banks, sovereigns, government entities and low-risk counterparties 0.1 0.1 Corporate lending adjustments 0.5 0.5 Inflation-related adjustments 0.1 0.1 Other credit judgements 0.2 0.2 Total management judgemental adjustments (B)4 0.3 0.6 0.9 Other adjustments (C)5 0.0 (0.1) (0.1) Final ECL (A + B + C)6 3.3 3.1 6.4 1 Management judgemental adjustments presented in the table reflect increases or (decreases) to allowance for ECL, respectively. 2 The wholesale portfolio corresponds to adjustments to the performing portfolio (stage 1 and stage 2). 3 (A) refers to probability-weighted allowance for ECL before any adjustments are applied. 4 (B) refers to adjustments that are applied where management believes allowance for ECL does not sufficiently reflect the credit risk/expected credit losses of any given portfolio at the reporting date. These can relate to risks or uncertainties that are not reflected in the model and/or to any late- breaking events. 5 (C) refers to adjustments to allowance for ECL made to address process limitations and data/model deficiencies. 6 As presented within our internal credit risk governance (see page 147). Management judgemental adjustments at 31 December 2023 were an increase to allowance for ECL of $0.1bn for the wholesale portfolio and an increase to ECL of $0.6bn for the retail portfolio. At 31 December 2023, wholesale management judgemental adjustments were an increase to allowance for ECL of $0.1bn (31 December 2022: $0.6bn increase). – Management judgemental adjustments to corporate exposures increased allowance for ECL by $0.1bn at 31 December 2023 (31 December 2022: $0.5bn increase), mostly due to management judgements to reflect heightened uncertainty in specific sectors and geographies, including adjustments to exposures to the real estate sectors in mainland China, the UK and the US. The decrease in adjustments to allowances compared with 31 December 2022 is attributed to a crystallisation of existing risks at that date through downgrades, and an improved reflection of emerging risks in macroeconomic scenarios and modelled outcomes. At 31 December 2023, retail management judgemental adjustments were an increase to allowance for ECL of $0.6bn (31 December 2022: $0.3bn increase). The increase in adjustments to allowance for ECL compared with 31 December 2022 was primarily due to the increase in management judgemental adjustments in other credit judgements (detailed below). – Management judgemental adjustments in relation to inflation increased allowance for ECL by $0.1bn (31 December 2022: $0.1bn). These adjustments addressed where increasing inflation and interest rates result in affordability risks that were not fully captured by the modelled output. – Management judgemental adjustments in relation to other credit judgements increased allowance for ECL by $0.5bn (31 December 2022: $0.2bn). These adjustments were primarily to capture the potential delayed impact of economic scenarios on unsecured portfolio defaults in the UK. Economic scenarios sensitivity analysis of ECL estimates Management considered the sensitivity of the ECL outcome against the economic forecasts as part of the ECL governance process by recalculating the allowance for ECL under each scenario described above for selected portfolios, applying a 100% weighting to each scenario in turn. The weighting is reflected in both the determination of a significant increase in credit risk and the measurement of the resulting allowances. The allowance for ECL calculated for the Upside and Downside scenarios should not be taken to represent the upper and lower limits of possible ECL outcomes. The impact of defaults that might occur in the future under different economic scenarios is captured by recalculating allowances for loans at the balance sheet date. There is a particularly high degree of estimation uncertainty in numbers representing tail risk scenarios when assigned a 100% weighting. For wholesale credit risk exposures, the sensitivity analysis excludes allowance for ECL and financial instruments related to defaulted (stage 3) obligors. The measurement of stage 3 ECL is relatively more sensitive to credit factors specific to the obligor than future economic scenarios, and therefore the effects of macroeconomic factors are not necessarily the key consideration when performing individual assessments of allowances for obligors in default. Loans to defaulted obligors are a small portion of the overall wholesale lending exposure, even if representing the majority of the allowance for ECL. Due to the range and specificity of the credit factors to which the ECL is sensitive, it is not possible to provide a meaningful alternative sensitivity analysis for a consistent set of risks across all defaulted obligors. For retail mortgage exposures the sensitivity analysis includes allowance for ECL for defaulted obligors of loans and advances. This is because the retail ECL for secured mortgage portfolios, including loans in all stages, is sensitive to macroeconomic variables. Wholesale and retail sensitivity The wholesale and retail sensitivity tables present the 100% weighted results. These exclude portfolios held by the insurance business and small portfolios, and as such cannot be directly compared with personal and wholesale lending presented in other credit risk tables. In both the wholesale and retail analysis, the comparative period results for Downside 2 scenarios are also not directly comparable with the current period, because they reflect different risks relative to the consensus scenarios for the period end. The wholesale and retail sensitivity analysis is stated inclusive of management judgemental adjustments, as appropriate to each scenario. For both retail and wholesale portfolios, the gross carrying amount of financial instruments are the same under each scenario. For exposures with similar risk profile and product characteristics, the sensitivity impact is therefore largely the result of changes in macroeconomic assumptions. Risk review 164 HSBC Holdings plc Annual Report and Accounts 2023 Wholesale analysis Reported Gross carrying amount4 Reported allowance for ECL Consensus Central scenario allowance for ECL Consensus Upside scenario allowance for ECL Consensus Downside scenario allowance for ECL Downside 2 scenario allowance for ECL By geography at 31 Dec 2023 $m $m $m $m $m $m UK 426,427 820 754 599 1,041 2,487 US 191,104 215 199 189 268 441 Hong Kong 447,480 609 566 433 807 1,393 Mainland China 129,945 258 217 142 414 945 Canada5 84,092 89 75 56 107 487 Mexico 30,159 60 56 46 73 226 UAE 52,074 32 32 30 34 40 France 178,827 98 102 90 124 141 Other geographies6 450,271 325 298 245 410 882 Total 1,990,378 2,507 2,301 1,829 3,278 7,043 of which: Stage 1 1,820,843 754 702 553 860 854 Stage 2 169,535 1,753 1,599 1,276 2,418 6,189 IFRS 9 ECL sensitivity to future economic conditions1,2,3 By geography at 31 Dec 2022 UK 421,685 769 624 484 833 2,240 US 190,858 277 241 227 337 801 Hong Kong 415,875 925 819 592 1,315 2,161 Mainland China 125,466 295 242 144 415 1,227 Canada5 83,274 126 80 60 148 579 Mexico 26,096 88 80 67 116 313 UAE 45,064 45 41 30 55 93 France 173,146 110 102 90 121 145 Other geographies6 445,758 447 384 304 527 1,054 Total 1,927,222 3,083 2,612 2,000 3,866 8,612 1 Allowance for ECL sensitivity includes off-balance sheet financial instruments. These are subject to significant measurement uncertainty. 2 Includes low credit-risk financial instruments such as debt instruments at FVOCI, which have high carrying amounts but low ECL under all the above scenarios. 3 Excludes defaulted obligors. For a detailed breakdown of performing and non-performing wholesale portfolio exposures, see page 176. 4 Staging refers only to probability-weighted/reported gross carrying amount. Stage allocation of gross exposures varies by scenario, with higher allocation to stage 2 under the Downside 2 scenario. 5 Classified as held for sale at 31 December 2023 and 31 December 2022. 6 Includes small portfolios that use less complex modelling approaches and are not sensitive to macroeconomic changes. At 31 December 2023, the highest level of 100% scenario-weighted allowance for ECL was observed in the UK and Hong Kong. This higher ECL impact was largely driven by significant exposure in these regions. Compared with 31 December 2022, the Downside 2 allowance for ECL was lower in Hong Kong and mainland China, mostly due to the crystallisation of defaults for certain high-risk exposures and a decrease of the associated downside uncertainty. In the wholesale portfolio, off-balance sheet financial instruments have a lower likelihood to be fully converted to a funded exposure at the point of default, and consequently the sensitivity of the allowance for ECL is lower in relation to its nominal amount, when compared with an on-balance sheet exposure with a similar risk profile. HSBC Holdings plc Annual Report and Accounts 2023 165 Risk review Retail analysis IFRS 9 ECL sensitivity to future economic conditions1 Reported gross carrying amount Reported allowance for ECL Consensus Central scenario allowance for ECL Consensus Upside scenario allowance for ECL Consensus Downside scenario allowance for ECL Downside 2 scenario allowance for ECL By geography at 31 December 2023 $m $m $m $m $m $m UK Mortgages 161,127 189 180 172 201 334 Credit cards 7,582 344 340 302 353 486 Other 8,183 341 333 273 383 515 Mexico Mortgages 8,666 188 180 150 235 363 Credit cards 2,445 295 286 206 376 489 Other 4,529 513 503 426 600 731 Hong Kong Mortgages 106,136 2 2 1 3 5 Credit cards 9,128 287 239 214 395 887 Other 6,269 109 100 88 124 256 UAE Mortgages 2,001 25 25 25 25 25 Credit cards 471 24 24 22 25 32 Other 721 20 20 19 21 28 France3 Mortgages 20,589 50 50 50 51 51 Other 1,328 44 44 43 45 48 US Mortgages 14,385 8 4 3 4 10 Credit cards 204 15 15 10 15 16 Canada2 Mortgages 25,464 67 65 64 70 99 Credit cards 338 13 13 12 16 15 Other 1,368 13 13 12 14 33 Other geographies Mortgages 55,368 152 149 144 158 198 Credit cards 3,655 173 166 151 202 291 Other 2,416 91 86 83 95 137 Total 442,373 2,962 2,835 2,471 3,411 5,049 of which: mortgages Stage 1 347,874 101 92 77 145 303 Stage 2 43,451 264 249 225 280 429 Stage 3 2,412 316 314 307 322 352 of which: credit cards Stage 1 18,557 249 232 180 329 604 Stage 2 4,953 707 657 546 859 1,415 Stage 3 312 193 193 192 194 197 of which: others Stage 1 19,551 218 151 205 272 501 Stage 2 4,542 540 423 519 636 868 Stage 3 722 373 370 373 375 379 Risk review 166 HSBC Holdings plc Annual Report and Accounts 2023 IFRS 9 ECL sensitivity to future economic conditions1 (continued) Reported gross carrying amount Reported allowance for ECL Consensus Central scenario allowance for ECL Consensus Upside scenario allowance for ECL Consensus Downside scenario allowance for ECL Downside 2 scenario allowance for ECL By geography at 31 December 2022 $m $m $m $m $m $m UK Mortgages 147,306 204 188 183 189 399 Credit cards 6,518 455 434 396 442 719 Other 7,486 368 333 274 383 605 Mexico Mortgages 6,319 152 127 102 183 270 Credit cards 1,616 198 162 97 233 289 Other 3,447 438 400 318 503 618 Hong Kong Mortgages 100,107 1 1 — 1 1 Credit cards 8,003 261 227 180 417 648 Other 5,899 85 81 74 100 123 UAE Mortgages 2,170 37 37 36 38 38 Credit cards 441 41 37 21 68 86 Other 718 17 17 15 19 22 France Mortgages 21,440 51 50 50 51 52 Other 1,433 54 53 52 55 59 US Mortgages 13,489 7 6 6 8 15 Credit cards 219 26 25 23 27 36 Canada Mortgages 25,163 45 44 43 46 58 Credit cards 299 10 9 8 11 11 Other 1,399 16 14 13 17 36 Other geographies Mortgages 56,383 199 190 183 205 253 Credit cards 3,871 192 176 150 219 324 Other 3,630 115 111 107 119 159 Total 417,356 2,972 2,722 2,331 3,334 4,821 1 Allowance for ECL sensitivities exclude portfolios utilising less complex modelling approaches. 2 Classified as ‘assets held for sale’ at 31 December 2023. 3 Includes balances and allowance for ECL, which have been reclassified from ‘loans and advances to customers’ to ‘assets held for sale’ in the balance sheet at 31 December 2023. This also includes any balances and allowance for ECL, which continue to be reported as personal lending in ‘loans and advances to customers’ that are in accordance with the basis of inclusion for retail sensitivity analysis. At 31 December 2023, the most significant level of allowance for ECL sensitivity was observed in the UK, Mexico and Hong Kong. Mortgages reflected the lowest level of allowance for ECL sensitivity across most markets given the significant levels of collateral relative to the exposure values. Credit cards and other unsecured lending across stage 1 and 2 are more sensitive to economic forecasts and therefore reflected the highest level of allowance for ECL sensitivity during 2023. There is limited sensitivity in credit cards and other unsecured lending in stage 3 as levels of loss on defaulted exposures remain consistent through various economic conditions. The alternative downside is from the tail of the economic distribution where allowance for ECL is more sensitive based on historical experience. The reported gross carrying amount by stage is representative of the weighted scenario allowance for ECL. The allowance for ECL sensitivity to the other scenarios includes changes in allowance for ECL due to the levels of loss and the migration of additional lending balances in or out of stage 2. Group ECL sensitivity results The allowance for ECL of the scenarios and management judgemental adjustments is highly sensitive to movements in economic forecasts. Based upon the sensitivity tables presented above, if the Group allowance for ECL balance was estimated solely on the basis of the Central scenario, Downside scenario or the Downside 2 scenario at 31 December 2023, it would increase/ (decrease) as presented in the below table. Retail1 Wholesale1 Total Group ECL at 31 December 2023 $bn $bn Reported allowance for ECL 3.0 2.5 Scenarios 100% Consensus Central scenario (0.1) (0.2) 100% Consensus Upside scenario (0.5) (0.7) 100% Consensus Downside scenario 0.4 0.8 100% Downside 2 scenario 2.1 4.5 Total Group ECL at 31 December 2022 Reported allowance for ECL 3.0 3.1 Scenarios 100% Consensus Central scenario (0.2) (0.5) 100% Consensus Upside scenario (0.6) (1.1) 100% Consensus Downside scenario 0.4 0.8 100% Downside 2 scenario 1.8 5.5 1 On the same basis as retail and wholesale sensitivity analysis. HSBC Holdings plc Annual Report and Accounts 2023 167 Risk review At 31 December 2023, the Group allowance for ECL remained unchanged in the retail portfolio and decreased by $0.6bn in the wholesale portfolio, compared with 31 December 2022. The decrease in the Downside 2 scenario sensitivity within the wholesale portfolio since 31 December 2022 has been mostly driven by the crystallisation of defaults of higher risk exposures to the mainland China real estate sector and a reduction of related uncertainty. Within the retail portfolio, the increase in the Downside 2 scenario sensitivity was due to portfolio growth in Mexico and scenario forecast deterioration in Hong Kong. At 31 December 2023, the sensitivity of the allowance for ECL to the consensus Central and consensus Upside scenarios decreased for both retail and wholesale portfolios due to lower macroeconomic forecast uncertainty, and the return to standardised weighting for the probability-weighted reported allowance. Reconciliation from reported exposure and ECL to sensitised exposure and weighted ECL Wholesale Retail Total Gross carrying/ nominal amount Allowance for ECL Gross carrying/ nominal amount Allowance for ECL Gross carrying/ nominal amount Allowance for ECL $m $m $m $m $m $m Included in sensitivity analysis 1,990,378 (2,507) 442,373 (2,962) 2,432,751 (5,469) – Exclusions from sensitivity as described in the section above1 17,024 (6,237) 308,569 (93) 325,593 (6,330) – Debt instruments measured at fair value through other comprehensive income2 (302,348) 97 — — (302,348) 97 – Performance guarantees2 (93,312) 35 — — (93,312) 35 – Other financial assets at amortised cost not presented as wholesale or personal lending, including held for sale2 (579,534) 93 (41,129) 174 (620,663) 267 – Other3 2,704 (84) (4,175) (11) (1,471) (95) As reported in the Summary of credit risk (excluding debt instruments measured at FVOCI) by stage distribution and ECL coverage by industry sector at 31 December 2023 1,034,912 (8,603) 705,638 (2,892) 1,740,550 (11,495) Other financial assets at amortised cost 960,271 (422) Total reported in the Summary of credit risk (excluding debt instruments measured at FVOCI) by stage distribution and ECL coverage by industry sector at 31 December 2023 2,700,821 (11,917) 1 Comprises wholesale defaulted obligors, retail portfolios utilising less complex modelling approaches, private banking and insurance. 2 The sensitivity analysis includes certain items reported in Other assets at amortised cost, which are not allocated to an industry in the credit tables. It also includes FVOCI and performance guarantees, which are presented separately in the credit tables. 3 Includes FX and other operational variances. Reconciliations of changes in gross carrying/nominal amount and allowances for loans and advances to banks and customers including loan commitments and financial guarantees The following disclosure provides a reconciliation by stage of the Group’s gross carrying/nominal amount and allowances for loans and advances to banks and customers, including loan commitments and financial guarantees. In addition, a reconciliation by stage of the Group’s gross carrying amount and allowances for loans and advances to banks and customers and a reconciliation by stage of the Group’s nominal amount and allowances for loan commitments and financial guarantees were included in this section following the adoption of the recommendations of the DECL Taskforce‘s third report. Movements are calculated on a quarterly basis and therefore fully capture stage movements between quarters. If movements were calculated on a year-to-date basis they would only reflect the opening and closing position of the financial instrument. The transfers of financial instruments represents the impact of stage transfers upon the gross carrying/nominal amount and associated allowance for ECL. The net remeasurement of ECL arising from transfer of stage represents the increase or decrease due to these transfers, for example, moving from a 12-month (stage 1) to a lifetime (stage 2) ECL measurement basis. Net remeasurement excludes the underlying customer risk rating (‘CRR’)/probability of default (‘PD’) movements of the financial instruments transferring stage. This is captured, along with other credit quality movements in the ‘changes to risk parameters – credit quality’ line item. Changes in ‘Net new and further lending/repayments’ represents the impact from volume movements within the Group’s lending portfolio and includes ‘New financial assets originated or purchased’, ‘assets derecognised (including final repayments)’ and ‘changes to risk parameters – further lending/repayment’. Risk review 168 HSBC Holdings plc Annual Report and Accounts 2023 Reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to banks and customers including loan commitments and financial guarantees (Audited) Non-credit impaired Credit impaired Stage 1 Stage 2 Stage 3 POCI Total Gross carrying/ nominal amount Allowance for ECL Gross carrying/ nominal amount Allowance for ECL Gross carrying/ nominal amount Allowance for ECL Gross carrying/ nominal amount Allowance for ECL Gross carrying/ nominal amount Allowance for ECL $m $m $m $m $m $m $m $m $m $m At 1 Jan 2023 1,433,643 (1,257) 177,223 (3,710) 21,207 (6,949) 129 (38) 1,632,202 (11,954) Transfers of financial instruments: (18,948) (1,048) 10,286 2,228 8,662 (1,180) — — — — – transfers from stage 1 to stage 2 (150,728) 442 150,728 (442) — — — — — — – transfers from stage 2 to stage 1 133,079 (1,467) (133,079) 1,467 — — — — — — – transfers to stage 3 (1,986) 23 (8,600) 1,379 10,586 (1,402) — — — — – transfers from stage 3 687 (46) 1,237 (176) (1,924) 222 — — — — Net remeasurement of ECL arising from transfer of stage — 917 — (973) — (124) — — — (180) Net new and further lending/repayments 77,693 (185) (36,795) 661 (4,956) 1,117 (36) 3 35,906 1,596 Changes to risk parameters – credit quality — 307 — (1,262) — (3,896) — 21 — (4,830) Changes to models used for ECL calculation — (22) — 46 — 7 — — — 31 Assets written off — — — — (3,922) 3,922 — — (3,922) 3,922 Credit-related modifications that resulted in derecognition — — — — (119) 95 — — (119) 95 Foreign exchange and others1 4,417 (12) 2,370 (92) (73) (55) (8) (16) 6,706 (175) At 31 Dec 2023 1,496,805 (1,300) 153,084 (3,102) 20,799 (7,063) 85 (30) 1,670,773 (11,495) ECL income statement change for the period 1,017 (1,528) (2,896) 24 (3,383) Recoveries 268 Others (195) Total ECL income statement change for the period (3,310) 1 Total includes $7.7bn of gross carrying loans and advances to customers and banks, which were classified to assets held for sale, and a corresponding allowance for ECL of $70m, reflecting business disposals as disclosed in Note 23 ‘Assets held for sale and liabilities of disposal groups held for sale’ on page 401. At 31 Dec 2023 12 months ended 31 Dec 2023 Gross carrying/ nominal amount Allowance for ECL ECL charge   $m $m $m As above 1,670,773 (11,495) (3,310) Other financial assets measured at amortised cost 960,271 (422) (35) Non-trading reverse purchase agreement commitments 69,777 — — Performance and other guarantees not considered for IFRS 9 — — (44) Summary of financial instruments to which the impairment requirements in IFRS 9 are applied/Summary consolidated income statement 2,700,821 (11,917) (3,389) Debt instruments measured at FVOCI 302,348 (97) (58) Total allowance for ECL/total income statement ECL change for the period n/a (12,014) (3,447) As shown in the previous table, the allowance for ECL for loans and advances to customers and banks and relevant loan commitments and financial guarantees decreased $459m during the period from $11,954m at 31 December 2022 to $11,495m at 31 December 2023. This decrease was driven by: – $3,922m of assets written off; – $1,596m relating to volume movements, which included the allowance for ECL associated with new originations, assets derecognised and further lending/repayment; – $95m relating to credit-related modifications, which resulted in derecognition; and – $31m of changes to models used for ECL calculation. These were partly offset by: – $4,830m relating to underlying credit quality changes, including the credit quality impact of financial instruments transferring between stages; – $180m relating to the net remeasurement impact of stage transfers; and – foreign exchange and other movements of $175m. HSBC Holdings plc Annual Report and Accounts 2023 169 Risk review The ECL charge for the period of $3,383m presented in the previous table consisted of $4,830m relating to underlying credit quality changes, including the credit quality impact of financial instruments transferring between stages and $180m relating to the net remeasurement impact of stage transfers. This was partly offset by $1,596m relating to underlying net book volume movement and $31m in changes to models used for ECL calculation. Summary views of the movement in wholesale and personal lending are presented on pages 179 and 192. Reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to banks and customers including loan commitments and financial guarantees (Audited) Non-credit impaired Credit impaired Stage 1 Stage 2 Stage 3 POCI Total Gross exposure Allowance/ provision for ECL Gross exposure Allowance/ provision for ECL Gross exposure Allowance/ provision for ECL Gross exposure Allowance/ provision for ECL Gross exposure Allowance/ provision for ECL $m $m $m $m $m $m $m $m $m $m At 1 Jan 2022 1,575,808 (1,552) 155,654 (3,323) 19,796 (6,928) 275 (64) 1,751,533 (11,867) Transfers of financial instruments: (98,940) (794) 88,974 1,616 9,966 (822) — — — — – transfers from stage 1 to stage 2 (225,458) 469 225,458 (469) — — — — — — – transfers from stage 2 to stage 1 128,170 (1,211) (128,170) 1,211 — — — — — — – transfers to stage 3 (2,392) 9 (10,083) 1,132 12,475 (1,141) — — — — – transfers from stage 3 740 (61) 1,769 (258) (2,509) 319 — — — — Net remeasurement of ECL arising from transfer of stage — 735 — (948) — (148) — — — (361) Net new and further lending/ repayments 99,253 (175) (44,877) 435 (3,399) 674 (133) 3 50,844 937 Changes to risk parameters – credit quality — 400 — (1,671) — (3,019) — 32 — (4,258) Changes to models used for ECL calculation — 4 — (151) — 13 — — — (134) Assets written off — — — — (2,791) 2,791 (10) 10 (2,801) 2,801 Credit-related modifications that resulted in derecognition — — — — (32) 9 — — (32) 9 Foreign exchange and others1 (142,478) 125 (22,528) 332 (2,333) 481 (3) (19) (167,342) 919 At 31 Dec 2022 1,433,643 (1,257) 177,223 (3,710) 21,207 (6,949) 129 (38) 1,632,202 (11,954) ECL income statement change for the period — 964 — (2,335) 0 (2,480) — 35 — (3,816) Recoveries — — — — — — — — — 316 Others — — — — — — — — — (28) Total ECL income statement change for the period — — — — — — — — — (3,528) 1 Total includes $82.7bn of gross carrying loans and advances to customers and banks, which were classified to assets held for sale, and a corresponding allowance for ECL of $426m, reflecting business disposals as disclosed in Note 23 ‘Assets held for sale and liabilities of disposal groups held for sale’ on page 401. At 31 Dec 2022 12 months ended 31 Dec 2022 Gross carrying/ nominal amount Allowance for ECL ECL charge   $m $m $m As above 1,632,202 (11,954) (3,528) Other financial assets measured at amortised cost 954,934 (493) (38) Non-trading reverse purchase agreement commitments 44,921 — — Performance and other guarantees not considered for IFRS 9 — — 39 Summary of financial instruments to which the impairment requirements in IFRS 9 are applied/Summary consolidated income statement 2,632,057 (12,447) (3,527) Debt instruments measured at FVOCI 265,147 (126) (57) Total allowance for ECL/total income statement ECL change for the period n/a (12,573) (3,584) Risk review 170 HSBC Holdings plc Annual Report and Accounts 2023 Reconciliation of changes in gross carrying amount and allowances for loans and advances to banks and customers Non-credit impaired Credit impaired Stage 1 Stage 2 Stage 3 POCI Total Gross carrying amount Allowance for ECL Gross carrying amount Allowance for ECL Gross carrying amount Allowance for ECL Gross carrying amount Allowance for ECL Gross carrying amount Allowance for ECL $m $m $m $m $m $m $m $m $m $m At 1 Jan 2023 879,023 (1,109) 140,816 (3,518) 19,586 (6,851) 129 (38) 1,039,554 (11,516) Transfers of financial instruments: (19,276) (980) 11,250 2,154 8,026 (1,174) — — — — – transfers from stage 1 to stage 2 (108,758) 423 108,758 (423) — — — — — — – transfers from stage 2 to stage 1 90,655 (1,382) (90,655) 1,382 — — — — — — – transfers to stage 3 (1,692) 22 (7,975) 1,367 9,667 (1,389) — — — — – transfers from stage 3 519 (43) 1,122 (172) (1,641) 215 — — — — Net remeasurement of ECL arising from transfer of stage — 859 — (934) — (118) — — — (193) Net new and further lending/ repayments 55,024 (210) (32,069) 685 (4,233) 1,026 (40) 3 18,682 1,504 Changes to risk parameters – credit quality — 311 — (1,292) — (3,804) — 21 — (4,764) Changes to models used for ECL calculation — (17) — 28 — 7 — — — 18 Assets written off — — — — (3,922) 3,922 — — (3,922) 3,922 Credit-related modifications that resulted in derecognition — — — — (119) 95 — — (119) 95 Foreign exchange and others1 6,092 6 2,310 (90) (63) (55) (8) (16) 8,331 (155) At 31 Dec 2023 920,863 (1,140) 122,307 (2,967) 19,275 (6,952) 81 (30) 1,062,526 (11,089) ECL income statement change for the period 943 (1,513) (2,889) 24 (3,435) Recoveries 268 Others (203) Total ECL income statement change for the period (3,370) 1 Total includes $7.7bn of gross carrying loans and advances to customers and banks, which were classified to assets held for sale, and a corresponding allowance for ECL of $70m, reflecting business disposals as disclosed in Note 23 ‘Assets held for sale and liabilities of disposal groups held for sale’ on page 401. Reconciliation of changes in nominal amount and allowances for loan commitments and financial guarantees Non-credit impaired Credit impaired Stage 1 Stage 2 Stage 3 POCI Total Nominal amount Allowance for ECL Nominal amount Allowance for ECL Nominal amount Allowance for ECL Nominal amount Allowance for ECL Nominal amount Allowance for ECL $m $m $m $m $m $m $m $m $m $m At 1 Jan 2023 554,620 (148) 36,407 (192) 1,621 (98) — — 592,648 (438) Transfers of financial instruments: 328 (68) (964) 74 636 (6) — — — — – transfers from stage 1 to stage 2 (41,970) 19 41,970 (19) — — — — — — – transfers from stage 2 to stage 1 42,424 (85) (42,424) 85 — — — — — — – transfers to stage 3 (294) 1 (625) 12 919 (13) — — — — – transfers from stage 3 168 (3) 115 (4) (283) 7 — — — — Net remeasurement of ECL arising from transfer of stage — 58 — (39) — (6) — — — 13 Net new and further lending/ repayments 22,669 25 (4,726) (24) (723) 91 4 — 17,224 92 Changes to risk parameters – credit quality — (4) — 30 — (92) — — — (66) Changes to models used for ECL calculation — (5) — 18 — — — — — 13 Foreign exchange and others (1,675) (18) 60 (2) (10) — — — (1,625) (20) At 31 Dec 2023 575,942 (160) 30,777 (135) 1,524 (111) 4 — 608,247 (406) ECL income statement change for the period 74 (15) (7) — 52 Recoveries — Others 8 Total ECL income statement change for the period 60 HSBC Holdings plc Annual Report and Accounts 2023 171 Risk review Credit quality Credit quality of financial instruments (Audited) We assess the credit quality of all financial instruments that are subject to credit risk. The credit quality of financial instruments is a point-in-time assessment of PD, whereas stages 1 and 2 are determined based on relative deterioration of credit quality since initial recognition for the majority of portfolios. Accordingly, for non-credit- impaired financial instruments, there is no direct relationship between the credit quality assessment and stages 1 and 2, although typically the lower credit quality bands exhibit a higher proportion in stage 2. The five credit quality classifications provided below each encompass a range of granular internal credit rating grades assigned to wholesale and personal lending businesses and the external ratings attributed by external agencies to debt securities, as shown in the table on page 148. Distribution of financial instruments by credit quality at 31 December 2023 (Audited) Gross carrying/notional amount Allowance for ECL/ other credit provisions Net Strong Good Satisfactory Sub- standard Credit impaired Total $m $m $m $m $m $m $m $m In-scope for IFRS 9 ECL Loans and advances to customers held at amortised cost 497,665 206,476 197,582 28,532 19,354 949,609 (11,074) 938,535 – personal 346,562 62,656 32,314 2,485 3,505 447,522 (2,867) 444,655 – corporate and commercial 118,123 123,713 145,249 25,531 15,039 427,655 (7,803) 419,852 – non-bank financial institutions 32,980 20,107 20,019 516 810 74,432 (404) 74,028 Loans and advances to banks held at amortised cost 101,057 4,640 6,363 855 2 112,917 (15) 112,902 Cash and balances at central banks 284,723 1,068 77 — — 285,868 — 285,868 Items in the course of collection from other banks 6,327 15 — — — 6,342 — 6,342 Hong Kong Government certificates of indebtedness 42,024 — — — — 42,024 — 42,024 Reverse repurchase agreements – non-trading 170,494 46,884 34,206 633 — 252,217 — 252,217 Financial investments 143,333 3,814 1,137 62 — 148,346 (20) 148,326 Assets held for sale 68,501 16,403 14,812 2,939 531 103,186 (324) 102,862 Other assets 99,857 11,967 9,965 366 133 122,288 (78) 122,210 – endorsements and acceptances 2,405 2,666 2,707 161 18 7,957 (18) 7,939 – accrued income and other 97,452 9,301 7,258 205 115 114,331 (60) 114,271 Debt instruments measured at fair value through other comprehensive income1 288,959 12,037 7,897 805 5 309,703 (97) 309,606 Out-of-scope for IFRS 9 ECL Trading assets 122,695 20,595 20,746 1,326 135 165,497 — 165,497 Other financial assets designated and otherwise mandatorily measured at fair value through profit or loss 52,649 11,517 4,733 84 6 68,989 — 68,989 Derivatives 196,098 27,377 6,041 187 11 229,714 — 229,714 Assets held for sale 12,495 — — — — 12,495 — 12,495 Total gross carrying amount on balance sheet 2,086,877 362,793 303,559 35,789 20,177 2,809,195 (11,608) 2,797,587 Percentage of total credit quality (%) 74.3 12.9 10.8 1.3 0.7 100 Loan and other credit-related commitments 436,359 142,500 73,230 7,782 1,144 661,015 (367) 660,648 Financial guarantees 7,700 4,146 4,080 699 384 17,009 (39) 16,970 In-scope: Irrevocable loan commitments and financial guarantees 444,059 146,646 77,310 8,481 1,528 678,024 (406) 677,618 Loan and other credit-related commitments 92,509 77,891 61,462 3,896 377 236,135 — 236,135 Performance and other guarantees 39,784 32,231 19,445 1,853 964 94,277 (145) 94,132 Out-of-scope: Revocable loan commitments and non- financial guarantees 132,293 110,122 80,907 5,749 1,341 330,412 (145) 330,267 1 For the purposes of this disclosure, gross carrying amount is defined as the amortised cost of a financial asset before adjusting for any loss allowance. As such, the gross carrying amount of debt instruments at FVOCI as presented above will not reconcile to the balance sheet as it excludes fair value gains and losses. Risk review 172 HSBC Holdings plc Annual Report and Accounts 2023 Distribution of financial instruments by credit quality at 31 December 2022 (continued) (Audited) Gross carrying/notional amount Allowance for ECL/other credit provisions Net Strong Good Satisfactory Sub- standard Credit impaired Total $m $m $m $m $m $m $m $m In-scope for IFRS 9 ECL Loans and advances to customers held at amortised cost 492,711 196,735 196,486 29,443 19,633 935,008 (11,447) 923,561 – personal 333,839 45,590 28,918 3,196 3,339 414,882 (2,870) 412,012 – corporate and commercial 126,521 132,128 153,841 24,887 15,825 453,202 (8,320) 444,882 – non-bank financial institutions 32,351 19,017 13,727 1,360 469 66,924 (257) 66,667 Loans and advances to banks held at amortised cost 92,675 4,833 5,643 1,311 82 104,544 (69) 104,475 Cash and balances at central banks 325,119 1,296 590 — — 327,005 (3) 327,002 Items in the course of collection from other banks 7,280 12 5 — — 7,297 — 7,297 Hong Kong Government certificates of indebtedness 43,787 — — — — 43,787 — 43,787 Reverse repurchase agreements – non-trading 170,386 41,659 41,686 20 3 253,754 — 253,754 Financial investments 103,379 3,212 2,334 161 — 109,086 (20) 109,066 Assets held for sale 67,616 17,993 13,972 2,333 642 102,556 (415) 102,141 Other assets 91,006 11,126 8,875 290 152 111,449 (55) 111,394 – endorsements and acceptances 2,350 3,059 2,815 175 25 8,424 (17) 8,407 – accrued income and other 88,656 8,067 6,060 115 127 103,025 (38) 102,987 Debt instruments measured at fair value through other comprehensive income1 260,654 9,957 5,730 1,910 7 278,258 (126) 278,132 Out-of-scope for IFRS 9 ECL Trading assets 91,330 14,371 23,414 820 133 130,068 — 130,068 Other financial assets designated and otherwise mandatorily measured at fair value through profit or loss 49,602 11,116 3,145 187 — 64,050 — 64,050 Derivatives 241,918 34,181 7,843 181 36 284,159 — 284,159 Assets held for sale 15,254 — — — — 15,254 — 15,254 Total gross carrying amount on balance sheet 2,052,717 346,491 309,723 36,656 20,688 2,766,275 (12,135) 2,754,140 Percentage of total credit quality (%) 74.2 12.6 11.2 1.3 0.7 100 — — Loan and other credit-related commitments 402,972 132,402 74,410 7,632 1,372 618,788 (386) 618,402 Financial guarantees 8,281 4,669 4,571 1,013 249 18,783 (52) 18,731 In-scope: Irrevocable loan commitments and financial guarantees 411,253 137,071 78,981 8,645 1,621 637,571 (438) 637,133 Loan and other credit-related commitments 76,098 69,667 59,452 3,360 489 209,066 — 209,066 Performance and other guarantees 37,943 30,029 17,732 2,137 399 88,240 (110) 88,130 Out-of-scope: Revocable loan commitments and non-financial guarantees 114,041 99,696 77,184 5,497 888 297,306 (110) 297,196 1 For the purposes of this disclosure, gross carrying amount is defined as the amortised cost of a financial asset before adjusting for any loss allowance. As such, the gross carrying amount of debt instruments at FVOCI as presented above will not reconcile to the balance sheet as it excludes fair value gains and losses. HSBC Holdings plc Annual Report and Accounts 2023 173 Risk review Distribution of financial instruments to which the impairment requirements in IFRS 9 are applied, by credit quality and stage allocation (Audited) Gross carrying/notional amount Allowance for ECL Net Strong Good Satisfactory Sub- standard Credit impaired Total $m $m $m $m $m $m $m $m Loans and advances to customers at amortised cost 497,665 206,476 197,582 28,532 19,354 949,609 (11,074) 938,535 – stage 1 478,422 177,410 147,940 5,612 — 809,384 (1,130) 808,254 – stage 2 19,243 29,066 49,642 22,920 — 120,871 (2,964) 117,907 – stage 3 — — — — 19,273 19,273 (6,950) 12,323 – POCI — — — — 81 81 (30) 51 Loans and advances to banks at amortised cost 101,057 4,640 6,363 855 2 112,917 (15) 112,902 – stage 1 101,011 4,631 5,550 287 — 111,479 (10) 111,469 – stage 2 46 9 813 568 — 1,436 (3) 1,433 – stage 3 — — — — 2 2 (2) — – POCI — — — — — — — — Other financial assets measured at amortised cost 815,259 80,151 60,197 4,000 664 960,271 (422) 959,849 – stage 1 814,776 78,486 53,095 516 — 946,873 (109) 946,764 – stage 2 483 1,665 7,102 3,484 — 12,734 (132) 12,602 – stage 3 — — — — 664 664 (181) 483 – POCI — — — — — — — — Loan and other credit-related commitments 436,359 142,500 73,230 7,782 1,144 661,015 (367) 660,648 – stage 1 432,017 135,192 61,213 2,527 — 630,949 (153) 630,796 – stage 2 4,342 7,308 12,017 5,255 — 28,922 (128) 28,794 – stage 3 — — — — 1,140 1,140 (86) 1,054 – POCI — — — — 4 4 — 4 Financial guarantees 7,700 4,146 4,080 699 384 17,009 (39) 16,970 – stage 1 7,497 3,943 3,204 102 — 14,746 (7) 14,739 – stage 2 203 203 876 597 — 1,879 (7) 1,872 – stage 3 — — — — 384 384 (25) 359 – POCI — — — — — — — — At 31 Dec 2023 1,858,040 437,913 341,452 41,868 21,548 2,700,821 (11,917) 2,688,904 Debt instruments at FVOCI1 – stage 1 288,909 12,037 7,579 — — 308,525 (37) 308,488 – stage 2 50 — 318 805 — 1,173 (59) 1,114 – stage 3 — — — — 5 5 (1) 4 – POCI — — — — — — — — At 31 Dec 2023 288,959 12,037 7,897 805 5 309,703 (97) 309,606 Loans and advances to customers at amortised cost 492,711 196,735 196,486 29,443 19,633 935,008 (11,447) 923,561 – stage 1 458,706 170,055 142,408 5,130 — 776,299 (1,092) 775,207 – stage 2 34,005 26,680 54,078 24,313 — 139,076 (3,488) 135,588 – stage 3 — — — — 19,504 19,504 (6,829) 12,675 – POCI — — — — 129 129 (38) 91 Loans and advances to banks at amortised cost 92,675 4,833 5,643 1,311 82 104,544 (69) 104,475 – stage 1 92,377 4,465 5,466 415 — 102,723 (18) 102,705 – stage 2 298 368 177 896 — 1,739 (29) 1,710 – stage 3 — — — — 82 82 (22) 60 – POCI — — — — — — — — Other financial assets measured at amortised cost 808,573 75,298 67,462 2,804 797 954,934 (493) 954,441 – stage 1 807,893 70,794 59,887 224 — 938,798 (95) 938,703 – stage 2 680 4,504 7,575 2,580 — 15,339 (165) 15,174 – stage 3 — — — — 797 797 (233) 564 – POCI — — — — — — — — Loan and other credit-related commitments 402,972 132,402 74,410 7,632 1,372 618,788 (386) 618,402 – stage 1 398,120 121,581 60,990 2,692 — 583,383 (141) 583,242 – stage 2 4,852 10,821 13,420 4,940 — 34,033 (180) 33,853 – stage 3 — — — — 1,372 1,372 (65) 1,307 – POCI — — — — — — — — Financial guarantees 8,281 4,669 4,571 1,013 249 18,783 (52) 18,731 – stage 1 8,189 4,245 3,488 149 — 16,071 (6) 16,065 – stage 2 92 424 1,083 864 — 2,463 (13) 2,450 – stage 3 — — — — 249 249 (33) 216 – POCI — — — — — — — — At 31 Dec 2022 1,805,212 413,937 348,572 42,203 22,133 2,632,057 (12,447) 2,619,610 Debt instruments at FVOCI1 – stage 1 260,411 9,852 5,446 — — 275,709 (67) 275,642 – stage 2 243 105 284 1,910 — 2,542 (58) 2,484 – stage 3 — — — — 5 5 (1) 4 – POCI — — — — 2 2 — 2 At 31 Dec 2022 260,654 9,957 5,730 1,910 7 278,258 (126) 278,132 1 For the purposes of this disclosure, gross carrying amount is defined as the amortised cost of a financial asset before adjusting for any loss allowance. As such, the gross carrying amount of debt instruments at FVOCI as presented above will not reconcile to the balance sheet as it excludes fair value gains and losses. Risk review 174 HSBC Holdings plc Annual Report and Accounts 2023 Credit-impaired loans (Audited) We determine that a financial instrument is credit impaired and in stage 3 by considering relevant objective evidence, primarily whether: – contractual payments of either principal or interest are past due for more than 90 days; – there are other indications that the borrower is unlikely to pay, such as when a concession has been granted to the borrower for economic or legal reasons relating to the borrower’s financial condition; and – the loan is otherwise considered to be in default. If such unlikeliness to pay is not identified at an earlier stage, it is deemed to occur when an exposure is 90 days past due. Therefore, the definitions of credit impaired and default are aligned as far as possible so that stage 3 represents all loans that are considered defaulted or otherwise credit impaired. Forbearance The following table shows the gross carrying amounts and allowances for ECL of the Group’s holdings of forborne loans and advances to customers by industry sector and by stages. A summary of our current policies and practices for forbearance is set out in ‘Credit risk management’ on page 147. Forborne loans and advances to customers at amortised cost by stage allocation Performing forborne Non-performing forborne Total forborne Stage 2 Stage 3 POCI Total $m $m $m $m Gross carrying amount Personal 816 1,282 — 2,098 – first lien residential mortgages 530 815 — 1,345 –  second lien residential mortgages 1 8 — 9 –  guaranteed loans in respect of residential property 24 20 — 44 – other personal lending which is secured 1 6 — 7 –  credit cards 96 83 — 179 – other personal lending which is unsecured 155 349 — 504 – motor vehicle finance 9 1 — 10 Wholesale 5,848 5,505 68 11,421 – corporate and commercial 5,778 5,459 68 11,305 – non-bank financial institutions 70 46 — 116 At 31 Dec 2023 6,664 6,787 68 13,519 Allowance for ECL Personal (113) (307) — (420) – first lien residential mortgages (50) (113) — (163) –  second lien residential mortgages — (3) — (3) –  guaranteed loans in respect of residential property — (2) — (2) – other personal lending which is secured — (1) — (1) –  credit cards (17) (46) — (63) – other personal lending which is unsecured (43) (142) — (185) – motor vehicle finance (3) — — (3) Wholesale (259) (1,932) (28) (2,219) – corporate and commercial (257) (1,920) (28) (2,205) – non-bank financial institutions (2) (12) — (14) At 31 Dec 2023 (372) (2,239) (28) (2,639) Gross carrying amount Personal 651 1,171 — 1,822 – first lien residential mortgages 369 738 — 1,107 –  second lien residential mortgages — 7 — 7 –  guaranteed loans in respect of residential property — 4 — 4 – other personal lending which is secured 5 13 — 18 –  credit cards 93 75 — 168 – other personal lending which is unsecured 179 334 — 513 – motor vehicle finance 5 — — 5 Wholesale 4,873 4,576 107 9,556 – corporate and commercial 4,859 4,562 107 9,528 – non-bank financial institutions 14 14 — 28 At 31 Dec 2022 5,524 5,747 107 11,378 Allowance for ECL Personal (124) (302) — (426) – first lien residential mortgages (49) (118) — (167) –  second lien residential mortgages — (3) — (3) –  guaranteed loans in respect of residential property — (3) — (3) – other personal lending which is secured — (2) — (2) –  credit cards (19) (44) — (63) – other personal lending which is unsecured (54) (132) — (186) – motor vehicle finance (2) — — (2) Wholesale (152) (1,497) (25) (1,674) – corporate and commercial (151) (1,490) (25) (1,666) – non-bank financial institutions (1) (7) — (8) At 31 Dec 2022 (276) (1,799) (25) (2,100) HSBC Holdings plc Annual Report and Accounts 2023 175 Risk review Forborne loans and advances to customers by legal entities HSBC UK Bank plc HSBC Bank plc The Hongkong and Shanghai Banking Corporation Limited HSBC Bank Middle East Limited HSBC North America Holdings Inc. Grupo Financiero HSBC, S.A. de C.V. Other trading entities Total $m $m $m $m $m $m $m $m Gross carrying amount Performing forborne 1,478 2,081 1,574 31 954 503 43 6,664 Non-performing forborne 1,936 1,199 2,250 471 430 233 336 6,855 At 31 Dec 2023 3,414 3,280 3,824 502 1,384 736 379 13,519 Allowance for ECL Performing forborne (75) (25) (142) (1) (43) (84) (2) (372) Non-performing forborne (289) (400) (986) (225) (74) (126) (167) (2,267) At 31 Dec 2023 (364) (425) (1,128) (226) (117) (210) (169) (2,639) Gross carrying amount Performing forborne 899 2,222 276 435 997 530 165 5,524 Non-performing forborne 1,723 913 1,562 554 209 195 698 5,854 At 31 Dec 2022 2,622 3,135 1,838 989 1,206 725 863 11,378 Allowance for ECL Performing forborne (63) (31) (21) (7) (50) (79) (25) (276) Non-performing forborne (257) (310) (525) (356) (21) (111) (244) (1,824) At 31 Dec 2022 (320) (341) (546) (363) (71) (190) (269) (2,100) Wholesale lending This section provides further details on the major legal entities, countries, territories and products comprising wholesale loans and advances to customers and banks. Product granularity is also provided by stage with legal entity data presented for loans and advances to customers, banks, other credit commitments, financial guarantees and similar contracts. Additionally, this section provides a reconciliation of the opening 1 January 2023 to 31 December 2023 closing gross carrying/nominal amounts and the associated allowance for ECL. At 31 December 2023, wholesale lending for loans and advances to banks and customers of $615bn decreased by $9.6bn compared with 31 December 2022. This included favourable foreign exchange movements of $6.1bn. Excluding foreign exchange movements, the total loans and advances to customers decrease of $24.6bn was driven by a $31.5bn decrease in corporate and commercial balances, partly offset by a $6.9bn increase in balances from non-bank financial institutions. In addition, there was a $8.9bn increase in loans and advances to banks. The underlying reduction in corporate and commercial lending was mainly driven by decreases in Hong Kong (down $18.6bn), in the UK (down $5.4bn), in mainland China (down $2.2bn), in France (down $1.6bn), in the US (down $1.3bn). These were partly offset by increased lending in India (up $1.8bn). There was a $2.1bn decrease from the merger of our business in Oman. The underlying decrease in loans advances to corporate and commercial customers within stage 2 included repayments within our commercial real estate portfolio in Hong Kong, together with de- risking measures in our mainland China commercial real estate portfolio. In addition, there was a further decrease in the wholesale and retail trade portfolio in the UK largely from repayments and improvements in the economic outlook that led to upgrades to stage 1. The underlying growth in loans and advances to non-bank financial institutions was mainly driven by the formation of HSBC Innovation Banking, following the acquisition of SVB UK, in the UK (up $6.4bn). In addition, increases in France (up $1.4bn) were partly offset by decreases in mainland China (down $0.9bn). The underlying growth in loans and advances to banks was mainly driven by central bank balances and money market lending growth in Singapore (up $6.5bn), Hong Kong (up $5.1bn), the UK (up $2.8bn) and Egypt (up $1.5bn). These were partly offset by reductions in mainland China (down $2.6bn), Malaysia (down $1.6bn), Switzerland (down $1.4bn) and the UAE (down $1.2bn). There was also a $0.6bn decrease from the merger of our business in Oman. Loan commitments and financial guarantees increased by $27.5bn since 31 December 2022 to $419.9bn at 31 December 2023. Excluding favourable foreign exchange movements of $8.7bn, loan commitments and financial guarantees grew by $18.8bn. This can be mainly attributed to a $23.2bn increase in unsettled reverse repurchase agreements, partly offset by a decrease of $6.3bn in loan commitments with corporate and commercial customers. The allowance for ECL attributable to loans and advances to banks and customers of $8.2bn at 31 December 2023 decreased from $8.6bn at 31 December 2022. This included adverse foreign exchange movements of $0.1bn. Excluding foreign exchange movements, the total decrease in the wholesale allowance for ECL attributable to loans and advances to customers and banks was mostly driven by a $0.6bn decrease in corporate and commercial balances, partly offset by a $0.1bn increase in loans to non-bank financial institutions and banks. The allowance for ECL attributable to loan commitments and financial guarantees at 31 December 2023 remained stable at $0.4bn compared with 31 December 2022. The table below provides a breakdown by industry sector and stage of the Group’s gross carrying amount and allowances for ECL for wholesale loans and advances to banks and customers. Counterparties or exposures are classified when presenting comparable economic characteristics, or engaged in similar activities so that their collective ability to meet contractual obligations is uniformly affected by changes in economic, political or other conditions. Therefore, the industry classification does not adhere to Nomenclature des Activités Économiques dans la Communauté Européenne (‘NACE’), which is applicable to other financial regulatory reporting. Risk review 176 HSBC Holdings plc Annual Report and Accounts 2023 Total wholesale lending for loans and advances to banks and customers by stage distribution Gross carrying amount Allowance for ECL Stage 1 Stage 2 Stage 3 POCI Total Stage 1 Stage 2 Stage 3 POCI Total $m $m $m $m $m $m $m $m $m $m Corporate and commercial 342,878 69,738 14,958 81 427,655 (499) (1,500) (5,774) (30) (7,803) – agriculture, forestry and fishing 5,207 1,662 312 — 7,181 (13) (53) (64) — (130) – mining and quarrying 6,260 638 325 — 7,223 (7) (11) (83) — (101) – manufacturing 69,690 13,744 1,877 22 85,333 (89) (194) (839) (21) (1,143) – electricity, gas, steam and air- conditioning supply 12,817 1,283 255 — 14,355 (14) (17) (88) — (119) – water supply, sewerage, waste management and remediation 2,753 407 102 — 3,262 (5) (7) (51) — (63) – real estate and construction 73,701 21,871 5,835 48 101,455 (96) (629) (2,554) (7) (3,286) – of which: commercial real estate 59,883 19,107 4,552 47 83,589 (73) (603) (2,091) (7) (2,774) – wholesale and retail trade, repair of motor vehicles and motorcycles 66,083 10,676 2,358 4 79,121 (80) (127) (1,132) (2) (1,341) – transportation and storage 17,117 3,894 445 — 21,456 (18) (52) (160) — (230) – accommodation and food 9,681 5,135 1,058 — 15,874 (27) (118) (112) — (257) – publishing, audiovisual and broadcasting 17,455 2,066 210 — 19,731 (42) (81) (50) — (173) – professional, scientific and technical activities 22,686 3,327 733 7 26,753 (32) (63) (306) — (401) – administrative and support services 19,055 2,551 597 — 22,203 (31) (63) (174) — (268) – public administration and defence, compulsory social security 1,037 5 — — 1,042 — — — — — – education 1,137 277 46 — 1,460 (3) (8) (4) — (15) – health and care 3,245 808 183 — 4,236 (9) (21) (26) — (56) – arts, entertainment and recreation 1,666 196 99 — 1,961 (5) (6) (31) — (42) – other services 7,065 972 318 — 8,355 (26) (37) (90) — (153) – activities of households 684 10 — — 694 — — — — — – extra-territorial organisations and bodies activities 100 1 — — 101 — — — — — – government 5,420 202 205 — 5,827 (2) — (10) — (12) – asset-backed securities 19 13 — — 32 — (13) — — (13) Non-bank financial institutions 69,972 3,650 810 — 74,432 (52) (30) (322) — (404) Loans and advances to banks 111,479 1,436 2 — 112,917 (10) (3) (2) — (15) At 31 Dec 2023 524,329 74,824 15,770 81 615,004 (561) (1,533) (6,098) (30) (8,222) By legal entity HSBC UK Bank plc 76,793 18,735 3,769 — 99,297 (213) (474) (593) — (1,280) HSBC Bank plc 82,025 8,452 2,673 40 93,190 (69) (138) (1,035) (7) (1,249) The Hongkong and Shanghai Banking Corporation Limited 287,876 37,402 7,077 38 332,393 (185) (696) (3,349) (21) (4,251) HSBC Bank Middle East Limited 21,927 1,598 894 3 24,422 (17) (11) (571) (2) (601) HSBC North America Holdings Inc. 30,797 5,712 583 — 37,092 (24) (145) (127) — (296) Grupo Financiero HSBC, S.A. de C.V. 13,714 1,186 382 — 15,282 (39) (56) (231) — (326) Other trading entities 11,164 1,739 392 — 13,295 (14) (13) (192) — (219) Holding companies, shared service centres and intra-Group eliminations 33 — — — 33 — — — — — At 31 Dec 2023 524,329 74,824 15,770 81 615,004 (561) (1,533) (6,098) (30) (8,222) Total wholesale lending for loans and other credit-related commitments and financial guarantees to banks and customers by stage distribution1 Nominal amount Allowance for ECL Stage 1 Stage 2 Stage 3 POCI Total Stage 1 Stage 2 Stage 3 POCI Total $m $m $m $m $m $m $m $m $m $m Corporate and commercial 256,367 22,218 1,066 4 279,655 (126) (125) (107) — (358) Financial 135,039 5,111 103 — 140,253 (11) (10) (2) — (23) At 31 Dec 2023 391,406 27,329 1,169 4 419,908 (137) (135) (109) — (381) By legal entity HSBC UK Bank plc 31,982 5,760 350 — 38,092 (31) (32) (56) — (119) HSBC Bank plc 148,980 9,466 310 4 158,760 (20) (27) (27) — (74) The Hongkong and Shanghai Banking Corporation Limited 70,436 3,975 79 — 74,490 (59) (39) (16) — (114) HSBC Bank Middle East Limited 6,944 323 56 — 7,323 (4) (1) (3) — (8) HSBC North America Holdings Inc. 101,067 5,103 248 — 106,418 (14) (27) (1) — (42) HSBC Bank Canada 28,156 2,461 66 — 30,683 (8) (8) (3) — (19) Grupo Financiero HSBC, S.A. de C.V. 2,092 34 — — 2,126 (1) — — — (1) Other trading entities 1,749 207 60 — 2,016 — (1) (3) — (4) At 31 Dec 2023 391,406 27,329 1,169 4 419,908 (137) (135) (109) — (381) 1 Included in loans and other credit-related commitments and financial guarantees is $70bn relating to unsettled reverse repurchase agreements, which once drawn are classified as ‘Reverse repurchase agreements – non-trading’. HSBC Holdings plc Annual Report and Accounts 2023 177 Risk review Total wholesale lending for loans and advances to banks and customers by stage distribution (continued) Gross carrying amount Allowance for ECL Stage 1 Stage 2 Stage 3 POCI Total Stage 1 Stage 2 Stage 3 POCI Total $m $m $m $m $m $m $m $m $m $m Corporate and commercial 351,885 85,492 15,696 129 453,202 (488) (1,907) (5,887) (38) (8,320) – agriculture, forestry and fishing 4,805 1,505 261 — 6,571 (10) (44) (68) — (122) – mining and quarrying 6,424 1,463 232 1 8,120 (5) (21) (145) (1) (172) – manufacturing 70,144 15,251 2,016 49 87,460 (93) (164) (867) (29) (1,153) – electricity, gas, steam and air- conditioning supply 14,402 1,799 277 — 16,478 (10) (31) (67) — (108) – water supply, sewerage, waste management and remediation 2,690 277 26 — 2,993 (3) (5) (13) — (21) – real estate and construction 81,830 27,104 5,625 26 114,585 (107) (954) (2,229) (3) (3,293) – of which: commercial real estate 68,120 23,608 4,648 19 96,395 (82) (865) (1,799) — (2,746) – wholesale and retail trade, repair of motor vehicles and motorcycles 63,752 15,867 2,805 5 82,429 (97) (225) (1,341) (3) (1,666) – transportation and storage 19,068 5,062 556 — 24,686 (30) (65) (153) — (248) – accommodation and food 9,862 6,523 787 2 17,174 (23) (139) (81) (1) (244) – publishing, audiovisual and broadcasting 16,574 1,537 249 28 18,388 (22) (36) (58) (1) (117) – professional, scientific and technical activities 15,164 2,229 542 — 17,935 (21) (51) (200) — (272) – administrative and support services 20,592 3,505 962 18 25,077 (25) (90) (293) — (408) – public administration and defence, compulsory social security 1,166 14 — — 1,180 — (1) — — (1) – education 1,325 181 87 — 1,593 (4) (5) (22) — (31) – health and care 2,993 643 266 — 3,902 (6) (17) (67) — (90) – arts, entertainment and recreation 1,264 452 146 — 1,862 (4) (16) (57) — (77) – other services 10,335 1,547 589 — 12,471 (25) (30) (219) — (274) – activities of households 730 14 — — 744 — — — — — – extra-territorial organisations and bodies activities 47 — — — 47 — — — — — – government 8,699 506 270 — 9,475 (3) — (7) — (10) – asset-backed securities 19 13 — — 32 — (13) — — (13) Non-bank financial institutions 61,737 4,718 469 — 66,924 (43) (77) (137) — (257) Loans and advances to banks 102,723 1,739 82 — 104,544 (18) (29) (22) — (69) At 31 Dec 2022 516,345 91,949 16,247 129 624,670 (549) (2,013) (6,046) (38) (8,646) By legal entity HSBC UK Bank plc 64,930 18,856 4,439 28 88,253 (165) (445) (643) (1) (1,254) HSBC Bank plc 83,174 9,175 2,631 3 94,983 (56) (181) (1,075) — (1,312) The Hongkong and Shanghai Banking Corporation Limited 292,022 50,708 6,934 80 349,744 (216) (1,074) (3,125) (24) (4,439) HSBC Bank Middle East Limited 21,922 1,777 946 4 24,649 (11) (21) (684) (3) (719) HSBC North America Holdings Inc. 30,816 6,861 211 — 37,888 (24) (194) (22) — (240) Grupo Financiero HSBC, S.A. de C.V. 9,969 1,979 399 — 12,347 (48) (62) (225) — (335) Other trading entities 13,512 2,593 687 14 16,806 (29) (36) (272) (10) (347) Holding companies, shared service centres and intra-Group eliminations — — — — — — — — — — At 31 Dec 2022 516,345 91,949 16,247 129 624,670 (549) (2,013) (6,046) (38) (8,646) Total wholesale lending for loans and other credit-related commitments and financial guarantees by stage distribution1 (continued) Nominal amount Allowance for ECL Stage 1 Stage 2 Stage 3 POCI Total Stage 1 Stage 2 Stage 3 POCI Total $m $m $m $m $m $m $m $m $m $m Corporate and commercial 252,860 29,116 798 — 282,774 (116) (178) (96) — (390) Financial 105,950 3,683 23 — 109,656 (5) (14) (2) — (21) At 31 Dec 2022 358,810 32,799 821 — 392,430 (121) (192) (98) — (411) By legal entity HSBC UK Bank plc 26,036 5,527 208 — 31,771 (24) (45) (38) — (107) HSBC Bank plc 142,100 11,710 291 — 154,101 (16) (41) (47) — (104) The Hongkong and Shanghai Banking Corporation Limited 67,473 6,081 114 — 73,668 (54) (53) (9) — (116) HSBC Bank Middle East Limited 6,683 231 14 — 6,928 (2) (2) — — (4) HSBC North America Holdings Inc. 88,039 3,959 87 — 92,085 (13) (32) (2) — (47) HSBC Bank Canada 24,395 4,671 84 — 29,150 (8) (15) — — (23) Grupo Financiero HSBC, S.A. de C.V. 2,468 240 3 — 2,711 (1) — — — (1) Other trading entities 1,616 380 20 — 2,016 (3) (4) (2) — (9) At 31 Dec 2022 358,810 32,799 821 — 392,430 (121) (192) (98) — (411) 1 Included in loans and other credit-related commitments and financial guarantees is $45bn relating to unsettled reverse repurchase agreements, which once drawn are classified as ‘Reverse repurchase agreements – non-trading’. Risk review 178 HSBC Holdings plc Annual Report and Accounts 2023 Wholesale lending – reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to banks and customers including loan commitments and financial guarantees (Audited) Non-credit impaired Credit impaired Stage 1 Stage 2 Stage 3 POCI Total Gross carrying/ nominal amount Allowance for ECL Gross carrying/ nominal amount Allowance for ECL Gross carrying/ nominal amount Allowance for ECL Gross carrying/ nominal amount Allowance for ECL Gross carrying/ nominal amount Allowance for ECL $m $m $m $m $m $m $m $m $m $m At 1 Jan 2023 830,322 (670) 124,660 (2,205) 17,068 (6,144) 129 (38) 972,179 (9,057) Transfers of financial instruments: (16,804) (429) 10,247 1,141 6,557 (712) — — — — – transfers from stage 1 to stage 2 (93,511) 172 93,511 (172) — — — — — — – transfers from stage 2 to stage 1 77,772 (605) (77,772) 605 — — — — — — – transfers to stage 3 (1,444) 20 (6,255) 765 7,699 (785) — — — — – transfers from stage 3 379 (16) 763 (57) (1,142) 73 — — — — Net remeasurement of ECL arising from transfer of stage — 354 — (294) — (45) — — — 15 Net new and further lending/repayments 43,282 (138) (32,082) 311 (3,787) 973 (36) 3 7,377 1,149 Change to risk parameters – credit quality — 203 — (621) — (2,941) — 21 — (3,338) Changes to models used for ECL calculation — (9) — 25 — — — — — 16 Assets written off — — — — (2,596) 2,596 — — (2,596) 2,596 Credit-related modifications that resulted in derecognition — — — — (119) 95 — — (119) 95 Foreign exchange and others1 (10,818) (9) (696) (25) (184) (29) (8) (16) (11,706) (79) At 31 Dec 2023 845,982 (698) 102,129 (1,668) 16,939 (6,207) 85 (30) 965,135 (8,603) ECL income statement change for the period 410 (579) (2,013) 24 (2,158) Recoveries 42 Others (203) Total ECL income statement change for the period (2,319) 1 Total includes $13.5bn of gross carrying loans and advances to customers and banks, which were classified to assets held for sale during the year, and a corresponding allowance for ECL of $61m, reflecting business disposals as disclosed in Note 23 ‘Assets held for sale and liabilities of disposal groups held for sale’ on page 401. As shown in the above table, the allowance for ECL for loans and advances to customers and banks and relevant loan commitments and financial guarantees decreased by $454m during the period from $9,057m at 31 December 2022 to $8,603m at 31 December 2023. This decrease was driven by: – $2,596m of assets written off; – $1,149m relating to volume movements, which included the allowance for ECL associated with new originations, assets derecognised and further lending/repayments; – $95m relating to credit-related modification, which resulted in derecognition; – $16m relating to changes to models used for ECL calculation; and – $15m relating to the net remeasurement impact of stage transfers. These were partly offset by: – $3,338m of changes to models used for ECL calculation; and – foreign exchange and other movements of $79m. The ECL charge for the period of $2,158m presented in the previous table consisted of $3,338m relating to underlying credit quality changes, including the credit quality impact of financial instruments transferring between stages. This was partly offset by $1,149m relating to underlying net book volume movement, $16m in changes to models used for ECL calculation and $15m relating to the net remeasurement impact of stage transfers. During the period, there was a net transfer to stage 2 of $15,739m gross carrying/nominal amounts. It was primarily driven by $8,792m in Hong Kong, mainly due to deterioration in the real estate and construction sectors, and $6,273m in the UK, mainly driven by increased interest rates affecting the corporate and commercial portfolio. HSBC Holdings plc Annual Report and Accounts 2023 179 Risk review Wholesale lending – reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to banks and customers including loan commitments and financial guarantees (Audited) Non-credit impaired Credit impaired Stage 1 Stage 2 Stage 3 POCI Total Gross carrying/ nominal amount Allowance for ECL Gross carrying/ nominal amount Allowance for ECL Gross carrying/ nominal amount Allowance for ECL Gross carrying/ nominal amount Allowance for ECL Gross carrying/ nominal amount Allowance for ECL $m $m $m $m $m $m $m $m $m $m At 1 Jan 2022 880,181 (860) 137,493 (2,103) 14,685 (5,702) 275 (64) 1,032,634 (8,729) Transfers of financial instruments: (58,104) (298) 49,485 942 8,619 (644) — — — — – transfers from stage 1 to stage 2 (157,443) 202 157,443 (202) — — — — — — – transfers from stage 2 to stage 1 100,810 (484) (100,810) 484 — — — — — — – transfers to stage 3 (1,829) 8 (8,101) 770 9,930 (778) — — — — – transfers from stage 3 358 (24) 953 (110) (1,311) 134 — — — — Net remeasurement of ECL arising from transfer of stage — 240 — (369) — (63) — — — (192) Net new and further lending/ repayments 68,616 (158) (45,336) 201 (3,253) 583 (133) 3 19,894 629 Changes to risk parameters – credit quality — 318 — (995) — (2,196) — 32 — (2,841) Changes to models used for ECL calculation — 6 — (56) — — — — — (50) Assets written off — — — — (1,579) 1,579 (10) 10 (1,589) 1,589 Credit-related modifications that resulted in derecognition — — — — (32) 9 — — (32) 9 Foreign exchange and others1 (60,371) 82 (16,982) 175 (1,372) 290 (3) (19) (78,728) 528 At 31 Dec 2022 830,322 (670) 124,660 (2,205) 17,068 (6,144) 129 (38) 972,179 (9,057) ECL income statement change for the period 406 (1,219) (1,676) 35 (2,454) Recoveries 33 Others — — — — — — — — — (25) Total ECL income statement change for the period (2,446) 1 Total includes $33.1bn of gross carrying loans and advances to customers and banks, which were classified to assets held for sale during the year, and a corresponding allowance for ECL of $204m, reflecting business disposals as disclosed in Note 23 ‘Assets held for sale and liabilities of disposal groups held for sale’ on page 401. Wholesale lending – distribution of financial instruments to which the impairment requirements of IFRS 9 are applied by credit quality Gross carrying amount Allowance for ECL Net Strong Good Satisfactory Sub- standard Credit impaired Total $m $m $m $m $m $m $m $m By legal entity HSBC UK Bank plc 20,777 30,245 36,206 8,300 3,769 99,297 (1,280) 98,017 HSBC Bank plc 41,149 20,962 24,164 4,202 2,713 93,190 (1,249) 91,941 The Hongkong and Shanghai Banking Corporation Limited 165,255 72,683 78,566 8,774 7,115 332,393 (4,251) 328,142 HSBC Bank Middle East Limited 13,660 3,082 6,270 513 897 24,422 (601) 23,821 HSBC North America Holdings Inc. 6,244 13,668 13,094 3,503 583 37,092 (296) 36,796 Grupo Financiero HSBC, S.A. de C.V. 1,853 6,543 5,882 622 382 15,282 (326) 14,956 Other trading entities 3,189 1,277 7,449 988 392 13,295 (219) 13,076 Holding companies, shared service centres and intra-Group eliminations 33 — — — — 33 — 33 At 31 Dec 2023 252,160 148,460 171,631 26,902 15,851 615,004 (8,222) 606,782 Percentage of total credit quality (%) 41.0 24.1 27.9 4.4 2.6 100.0 By legal entity HSBC UK Bank plc 17,533 28,685 32,388 5,180 4,467 88,253 (1,254) 86,999 HSBC Bank plc 41,687 21,058 24,560 5,044 2,634 94,983 (1,312) 93,671 The Hongkong and Shanghai Banking Corporation Limited 167,209 81,128 84,661 9,732 7,014 349,744 (4,439) 345,305 HSBC Bank Middle East Limited 13,023 4,119 5,879 678 950 24,649 (719) 23,930 HSBC North America Holdings Inc. 7,226 13,220 12,673 4,558 211 37,888 (240) 37,648 Grupo Financiero HSBC, S.A. de C.V. 1,024 5,540 4,612 772 399 12,347 (335) 12,012 Other trading entities 3,845 2,228 8,438 1,594 701 16,806 (347) 16,459 At 31 Dec 2022 251,547 155,978 173,211 27,558 16,376 624,670 (8,646) 616,024 Percentage of total credit quality (%) 40.3 25.0 27.7 4.4 2.6 100.0 Risk review 180 HSBC Holdings plc Annual Report and Accounts 2023 Our risk rating system facilitates the internal ratings-based approach under the Basel framework adopted by the Group to support calculation of our minimum credit regulatory capital requirement. The credit quality classifications can be found on page 148. Wholesale lending – credit risk profile by obligor grade for loans and advances at amortised cost Gross carrying amount Allowance for ECL Basel one-year PD range Stage 1 Stage 2 Stage 3 POCI Total Stage 1 Stage 2 Stage 3 POCI Total ECL coverage Mapped external rating % $m $m $m $m $m $m $m $m $m $m % Corporate and commercial 342,878 69,738 14,958 81 427,655 (499) (1,500) (5,774) (30) (7,803) 1.8 – CRR 1 0.000 to 0.053 34,097 715 — — 34,812 (4) (3) — — (7) — AA- and above – CRR 2 0.054 to 0.169 81,131 2,180 — — 83,311 (23) (14) — — (37) — A+ to A- – CRR 3 0.170 to 0.740 112,322 11,391 — — 123,713 (106) (87) — — (193) 0.2 BBB+ to BBB- – CRR 4 0.741 to 1.927 72,654 16,904 — — 89,558 (156) (130) — — (286) 0.3 BB+ to BB- – CRR 5 1.928 to 4.914 37,631 18,060 — — 55,691 (169) (240) — — (409) 0.7 BB- to B – CRR 6 4.915 to 8.860 2,675 7,341 — — 10,016 (24) (176) — — (200) 2.0 B- – CRR 7 8.861 to 15.000 1,031 6,319 — — 7,350 (10) (246) — — (256) 3.5 CCC+ – CRR 81 15.001 to 99.999 1,337 6,828 — — 8,165 (7) (604) — — (611) 7.5 CCC to C – CRR 9/10 100.000 — — 14,958 81 15,039 — — (5,774) (30) (5,804) 38.6 D Non-bank financial institutions 69,972 3,650 810 — 74,432 (52) (30) (322) — (404) 0.5 – CRR 1 0.000 to 0.053 15,475 211 — — 15,686 (2) — — — (2) — AA- and above – CRR 2 0.054 to 0.169 16,920 374 — — 17,294 (6) (2) — — (8) — A+ to A- – CRR 3 0.170 to 0.740 19,195 912 — — 20,107 (10) (4) — — (14) 0.1 BBB+ to BBB- – CRR 4 0.741 to 1.927 11,480 1,032 — — 12,512 (19) (5) — — (24) 0.2 BB+ to BB- – CRR 5 1.928 to 4.914 6,635 872 — — 7,507 (9) (15) — — (24) 0.3 BB- to B – CRR 6 4.915 to 8.860 232 116 — — 348 (6) (1) — — (7) 2.0 B- – CRR 7 8.861 to 15.000 25 93 — — 118 — (2) — — (2) 1.7 CCC+ – CRR 8 15.001 to 99.999 10 40 — — 50 — (1) — — (1) 2.0 CCC to C – CRR 9/10 100.000 — — 810 — 810 — — (322) — (322) 39.8 D Banks 111,479 1,436 2 — 112,917 (10) (3) (2) — (15) — – CRR 1 0.000 to 0.053 89,112 10 — — 89,122 (4) — — — (4) — AA- and above – CRR 2 0.054 to 0.169 11,899 36 — — 11,935 (2) — — — (2) — A+ to A- – CRR 3 0.170 to 0.740 4,631 9 — — 4,640 (1) — — — (1) — BBB+ to BBB- – CRR 4 0.741 to 1.927 2,488 58 — — 2,546 (1) — — — (1) — BB+ to BB- – CRR 5 1.928 to 4.914 3,062 755 — — 3,817 (2) (1) — — (3) 0.1 BB- to B – CRR 6 4.915 to 8.860 22 20 — — 42 — — — — — — B- – CRR 7 8.861 to 15.000 1 — — — 1 — — — — — — CCC+ – CRR 8 15.001 to 99.999 264 548 — — 812 — (2) — — (2) 0.2 CCC to C – CRR 9/10 100.000 — — 2 — 2 — — (2) — (2) 100.0 D At 31 Dec 2023 524,329 74,824 15,770 81 615,004 (561) (1,533) (6,098) (30) (8,222) 1.3 1 Corporate and commercial lending reported in CRR 8 for stage 1 includes $782m related to the UK Bounce Back Loan Scheme with immaterial allowances for ECL. HSBC Holdings plc Annual Report and Accounts 2023 181 Risk review Wholesale lending – credit risk profile by obligor grade for loans and advances at amortised cost (continued) Basel one-year PD range Gross carrying amount Allowance for ECL ECL coverage Mapped external rating Stage 1 Stage 2 Stage 3 POCI Total Stage 1 Stage 2 Stage 3 POCI Total % $m $m $m $m $m $m $m $m $m $m % Corporate and commercial 351,885 85,492 15,696 129 453,202 (488) (1,907) (5,887) (38) (8,320) 1.8 – CRR 1 0.000 to 0.053 35,574 330 — — 35,904 (6) (1) — — (7) — AA- and above – CRR 2 0.054 to 0.169 87,383 3,234 — — 90,617 (28) (15) — — (43) 0.1 A+ to A- – CRR 3 0.170 to 0.740 114,403 17,725 — — 132,128 (128) (122) — — (250) 0.2 BBB+ to BBB- – CRR 4 0.741 to 1.927 74,100 21,550 — — 95,650 (155) (210) — — (365) 0.4 BB+ to BB- – CRR 5 1.928 to 4.914 36,563 21,628 — — 58,191 (145) (361) — — (506) 0.9 BB- to B – CRR 6 4.915 to 8.860 2,512 9,171 — — 11,683 (16) (236) — — (252) 2.2 B- – CRR 7 8.861 to 15.000 1,164 5,477 — — 6,641 (8) (336) — — (344) 5.2 CCC+ – CRR 8 15.001 to 99.999 186 6,377 — — 6,563 (2) (626) — — (628) 9.6 CCC to C – CRR 9/10 100.000 — — 15,696 129 15,825 — — (5,887) (38) (5,925) 37.4 D Non-bank financial institutions 61,737 4,718 469 — 66,924 (43) (77) (137) — (257) 0.4 – CRR 1 0.000 to 0.053 15,082 421 — — 15,503 (2) (1) — — (3) — AA- and above – CRR 2 0.054 to 0.169 16,351 497 — — 16,848 (3) (1) — — (4) — A+ to A- – CRR 3 0.170 to 0.740 17,253 1,764 — — 19,017 (9) (13) — — (22) 0.1 BBB+ to BBB- – CRR 4 0.741 to 1.927 7,059 717 — — 7,776 (19) (4) — — (23) 0.3 BB+ to BB- – CRR 5 1.928 to 4.914 5,215 736 — — 5,951 (10) (10) — — (20) 0.3 BB- to B – CRR 6 4.915 to 8.860 716 90 — — 806 — (4) — — (4) 0.5 B- – CRR 7 8.861 to 15.000 46 32 — — 78 — (3) — — (3) 3.9 CCC+ – CRR 8 15.001 to 99.999 15 461 — — 476 — (41) — — (41) 8.6 CCC to C – CRR 9/10 100.000 — — 469 — 469 — — (137) — (137) 29.2 D Banks 102,723 1,739 82 — 104,544 (18) (29) (22) — (69) 0.1 – CRR 1 0.000 to 0.053 79,217 120 — — 79,337 (8) — — — (8) — AA- and above – CRR 2 0.054 to 0.169 13,160 178 — — 13,338 (2) — — — (2) — A+ to A- – CRR 3 0.170 to 0.740 4,465 368 — — 4,833 (3) — — — (3) 0.1 BBB+ to BBB- – CRR 4 0.741 to 1.927 2,154 5 — — 2,159 (1) — — — (1) 0.1 BB+ to BB- – CRR 5 1.928 to 4.914 3,312 172 — — 3,484 (4) (1) — — (5) 0.1 BB- to B – CRR 6 4.915 to 8.860 — 5 — — 5 — — — — — — B- – CRR 7 8.861 to 15.000 1 861 — — 862 — (27) — — (27) 3.1 CCC+ – CRR 8 15.001 to 99.999 414 30 — — 444 — (1) — — (1) 0.2 CCC to C – CRR 9/10 100.000 — — 82 — 82 — — (22) — (22) 26.8 D At 31 Dec 2022 516,345 91,949 16,247 129 624,670 (549) (2,013) (6,046) (38) (8,646) 1.4 Wholesale lending – credit risk profile by obligor grade for loan and other credit-related commitments and financial guarantees Nominal amount Allowance for ECL Basel one-year PD range Stage 1 Stage 2 Stage 3 POCI Total Stage 1 Stage 2 Stage 3 POCI Total ECL coverage Mapped external rating % $m $m $m $m $m $m $m $m $m $m % Loan and other credit- related commitments 377,766 25,463 785 4 404,018 (130) (128) (84) — (342) 0.1 – CRR 1 0.000 to 0.053 65,730 1,676 — — 67,406 (5) (1) — — (6) — AA- and above – CRR 2 0.054 to 0.169 152,224 2,490 — — 154,714 (13) (6) — — (19) — A+ to A- – CRR 3 0.170 to 0.740 105,569 6,044 — — 111,613 (46) (24) — — (70) 0.1 BBB+ to BBB- – CRR 4 0.741 to 1.927 38,102 4,751 — — 42,853 (33) (20) — — (53) 0.1 BB+ to BB- – CRR 5 1.928 to 4.914 14,054 5,367 — — 19,421 (28) (31) — — (59) 0.3 BB- to B – CRR 6 4.915 to 8.860 1,170 2,453 — — 3,623 (4) (15) — — (19) 0.5 B- – CRR 7 8.861 to 15.000 780 848 — — 1,628 (1) (10) — — (11) 0.7 CCC+ – CRR 8 15.001 to 99.999 137 1,834 — — 1,971 — (21) — — (21) 1.1 CCC to C – CRR 9/10 100.000 — — 785 4 789 — — (84) — (84) 10.6 D Financial guarantees 13,640 1,866 384 — 15,890 (7) (7) (25) — (39) 0.2 – CRR 1 0.000 to 0.053 2,553 1 — — 2,554 — — — — — — AA- and above – CRR 2 0.054 to 0.169 4,212 202 — — 4,414 (1) — — — (1) — A+ to A- – CRR 3 0.170 to 0.740 3,584 202 — — 3,786 (2) — — — (2) 0.1 BBB+ to BBB- – CRR 4 0.741 to 1.927 1,932 407 — — 2,339 (2) (1) — — (3) 0.1 BB+ to BB- – CRR 5 1.928 to 4.914 1,266 455 — — 1,721 (2) (2) — — (4) 0.2 BB- to B – CRR 6 4.915 to 8.860 91 387 — — 478 — (1) — — (1) 0.2 B- – CRR 7 8.861 to 15.000 1 76 — — 77 — — — — — — CCC+ – CRR 8 15.001 to 99.999 1 136 — — 137 — (3) — — (3) 2.2 CCC to C – CRR 9/10 100.000 — — 384 — 384 — — (25) — (25) 6.5 D At 31 Dec 2023 391,406 27,329 1,169 4 419,908 (137) (135) (109) — (381) 0.1 Risk review 182 HSBC Holdings plc Annual Report and Accounts 2023 Commercial real estate Commercial real estate lending includes the financing of corporate, institutional and high net worth customers who are investing primarily in income-producing assets and, to a lesser extent, in their construction and development. The portfolio has larger concentrations in Hong Kong, the UK, mainland China and the US. Our global exposure is centred largely on cities with economic, political or cultural significance. In more developed markets, our exposure mainly comprises the financing of investment assets, the redevelopment of existing stock and the augmentation of both commercial and residential markets to support economic and population growth. In less developed commercial real estate markets, our exposures comprise lending for development assets on relatively short tenors with a particular focus on supporting larger, better capitalised developers involved in residential construction or assets supporting economic expansion. Excluding favourable foreign exchange movements of $1.1bn, commercial real estate lending decreased by $13.8bn, mainly from $7.4bn in Hong Kong due to loan repayments. The decrease included loan sales of $0.5bn in the US as part of an initiative to reduce the portfolio exposure. Despite the lower exposure, allowance for ECL remained at $2.8bn, reflecting the challenging conditions in the commercial property sector, including the impact of lower valuations in the office segment. Commercial real estate lending to customers of which: HSBC UK Bank plc HSBC Bank plc The Hongkong and Shanghai Banking Corporation Limited HSBC Bank Middle East Limited HSBC North America Holdings Inc.1 Grupo Financiero HSBC, S.A. de C.V. Other trading entities Total UK Hong Kong $m $m $m $m $m $m $m $m $m $m Gross loans and advances Stage 1 10,304 4,218 41,307 1,126 1,803 685 440 59,883 10,790 28,846 Stage 2 3,262 400 13,229 189 1,956 70 1 19,107 3,294 10,375 Stage 3 444 184 3,570 145 166 25 18 4,552 470 3,226 POCI — 32 15 — — — — 47 32 15 At 31 Dec 2023 14,010 4,834 58,121 1,460 3,925 780 459 83,589 14,586 42,462 – of which: forborne loans 461 69 2,454 126 433 52 — 3,595 519 2,227 Allowance for ECL (148) (49) (2,399) (55) (98) (15) (10) (2,774) (172) (2,149) Gross loans and advances Stage 1 11,409 5,083 46,700 1,094 2,096 832 906 68,120 12,209 35,905 Stage 2 2,763 828 16,311 323 3,249 43 91 23,608 3,008 11,068 Stage 3 702 277 3,320 264 — 28 57 4,648 827 3,029 POCI — — 19 — — — — 19 — 19 At 31 Dec 2022 14,874 6,188 66,350 1,681 5,345 903 1,054 96,395 16,044 50,021 – of which: forborne loans 215 143 763 449 428 47 23 2,068 336 654 Allowance for ECL (216) (153) (2,094) (153) (93) (24) (13) (2,746) (323) (1,878) 1 During 1Q23, we aligned the classification of commercial real estate across the Group and re-presented commercial real estate exposure in HSBC North America Holdings Inc. at 31 December 2022 as $5.3bn, which had a corresponding ECL charge of $0.1bn. of which: HSBC UK Bank plc HSBC Bank plc The Hongkong and Shanghai Banking Corporation Limited HSBC Bank Middle East Limited HSBC North America Holdings Inc. Grupo Financiero HSBC, S.A. de C.V. Other trading entities Total UK Hong Kong $m $m $m $m $m $m $m $m $m $m Wealth and Personal Banking 409 377 66 — 2 — 423 1,277 409 66 Commercial Banking 13,601 3,322 37,826 733 3,923 780 36 60,221 13,686 27,811 Global Banking and Markets — 1,135 20,066 727 — — — 21,928 491 14,444 Corporate Centre — — 163 — — — — 163 — 141 At 31 Dec 2023 14,010 4,834 58,121 1,460 3,925 780 459 83,589 14,586 42,462 Commercial real estate lending to customers by global business HSBC Holdings plc Annual Report and Accounts 2023 183 Risk review of which: HSBC UK Bank plc HSBC Bank plc The Hongkong and Shanghai Banking Corporation Limited HSBC Bank Middle East Limited HSBC North America Holdings Inc. Grupo Financiero HSBC, S.A. de C.V. Other trading entities Total UK Hong Kong $m $m $m $m $m $m $m $m $m $m Wealth and Personal Banking 532 2 70 — 4 — 826 1,434 534 70 Commercial Banking 14,342 4,390 42,803 951 5,341 903 205 68,935 14,638 33,123 Global Banking and Markets — 1,796 23,333 730 — — 23 25,882 872 16,684 Corporate Centre — — 144 — — — — 144 — 144 At 31 Dec 2022 14,874 6,188 66,350 1,681 5,345 903 1,054 96,395 16,044 50,021 Commercial real estate lending to customers by global business (continued) Commercial real estate lending to customers by credit quality of which: HSBC UK Bank plc HSBC Bank plc The Hongkong and Shanghai Banking Corporation Limited HSBC Bank Middle East Limited HSBC North America Holdings Inc. Grupo Financiero HSBC, S.A. de C.V. Other trading entities Total UK Hong Kong $m $m $m $m $m $m $m $m $m $m Strong 3,940 740 12,394 255 25 65 16 17,435 4,191 6,527 Good 2,555 2,054 17,777 246 781 130 18 23,561 2,592 12,004 Satisfactory 6,370 1,642 19,509 634 1,691 500 407 30,753 6,575 16,290 Sub-standard 701 182 4,856 180 1,262 60 — 7,241 726 4,400 Credit impaired 444 216 3,585 145 166 25 18 4,599 502 3,241 At 31 Dec 2023 14,010 4,834 58,121 1,460 3,925 780 459 83,589 14,586 42,462 Strong 3,951 1,444 16,063 303 352 29 72 22,214 4,681 10,061 Good 3,094 1,448 20,692 359 864 190 4 26,651 3,244 15,209 Satisfactory 6,819 2,647 20,930 539 2,397 616 881 34,829 6,959 16,775 Sub-standard 308 372 5,326 216 1,732 40 40 8,034 333 4,928 Credit impaired 702 277 3,339 264 — 28 57 4,667 827 3,048 At 31 Dec 2022 14,874 6,188 66,350 1,681 5,345 903 1,054 96,395 16,044 50,021 Refinance risk in commercial real estate Commercial real estate lending tends to require the repayment of a significant proportion of the principal at maturity. Typically, a customer will arrange repayment through the acquisition of a new loan to settle the existing debt. Refinance risk is the risk that a customer, being unable to repay the debt on maturity, fails to refinance it at commercial terms. We monitor our commercial real estate portfolio closely, assessing indicators for signs of potential issues with refinancing. Commercial real estate gross loans and advances to customers maturity analysis of which: HSBC UK Bank plc HSBC Bank plc The Hongkong and Shanghai Banking Corporation Limited HSBC Bank Middle East Limited HSBC North America Holdings Inc.1 Grupo Financiero HSBC, S.A. de C.V. Other trading entities Total UK Hong Kong $m $m $m $m $m $m $m $m $m $m < 1 year 3,553 1,496 25,427 396 1,472 619 437 33,400 3,950 19,887 1–2 years 4,514 474 14,144 175 623 60 2 19,992 4,571 10,923 2–5 years 5,411 2,149 16,052 441 1,814 71 3 25,941 5,520 9,885 > 5 years 532 715 2,498 448 16 30 17 4,256 545 1,767 At 31 Dec 2023 14,010 4,834 58,121 1,460 3,925 780 459 83,589 14,586 42,462 < 1 year 8,315 2,059 23,468 423 1,883 241 703 37,092 9,211 18,675 1–2 years 3,518 1,503 18,007 218 810 115 228 24,399 3,678 13,873 2–5 years 2,385 1,644 21,804 664 2,624 449 60 29,630 2,472 14,963 > 5 years 656 982 3,071 376 28 98 63 5,274 683 2,510 At 31 Dec 2022 14,874 6,188 66,350 1,681 5,345 903 1,054 96,395 16,044 50,021 1 During 1Q23, we aligned the classification of commercial real estate across the Group and re-presented commercial real estate exposure in HSBC North America Holdings Inc. at 31 December 2022 as $5.3bn, which had a corresponding ECL charge of $0.1bn. Risk review 184 HSBC Holdings plc Annual Report and Accounts 2023 The following table presents the Group’s exposure to borrowers classified in the commercial real estate sector where the ultimate parent is based in mainland China, as well as all commercial real estate exposures booked on mainland China balance sheets. The exposures at 31 December 2023 are split by country/territory and credit quality including allowances for ECL by stage. Mainland China commercial real estate (Audited) Hong Kong Mainland China Rest of the Group Total $m $m $m $m Loans and advances to customers1 6,033 4,917 839 11,789 Guarantees issued and others2 255 66 37 358 Total mainland China commercial real estate exposure at 31 Dec 2023 6,288 4,983 876 12,147 Distribution of mainland China commercial real estate exposure by credit quality Strong 781 1,723 6 2,510 Good 604 953 421 1,978 Satisfactory 679 1,704 261 2,644 Sub-standard 1,298 327 188 1,813 Credit impaired 2,926 276 — 3,202 At 31 Dec 2023 6,288 4,983 876 12,147 Allowance for ECL by credit quality Strong — (3) — (3) Good — (5) (1) (6) Satisfactory (3) (27) — (30) Sub-standard (66) (87) (16) (169) Credit impaired (1,726) (125) — (1,851) At 31 Dec 2023 (1,795) (247) (17) (2,059) Allowance for ECL by stage distribution Stage 1 — (10) — (10) Stage 2 (69) (112) (17) (198) Stage 3 (1,726) (125) — (1,851) At 31 Dec 2023 (1,795) (247) (17) (2,059) ECL coverage % 28.5 5.0 1.9 17.0 1 Amounts represent gross carrying amount. 2 Amounts represent nominal amount for guarantees and other contingent liabilities. HSBC Holdings plc Annual Report and Accounts 2023 185 Risk review Mainland China commercial real estate (continued) Hong Kong Mainland China Rest of the Group Total (audited)1 (audited)2 (unaudited)1 (unaudited)2 $m $m $m $m Loans and advances to customers2 9,129 5,752 860 15,741 Guarantees issued and others3 249 755 18 1,022 Total mainland China commercial real estate exposure at 31 Dec 2022 9,378 6,507 878 16,763 Distribution of mainland China commercial real estate exposure by credit quality Strong 1,425 2,118 220 3,763 Good 697 1,087 370 2,154 Satisfactory 1,269 2,248 77 3,594 Sub-standard 2,887 779 193 3,859 Credit impaired 3,100 275 18 3,393 At 31 Dec 2022 9,378 6,507 878 16,763 Allowance for ECL by credit quality Strong — (5) — (5) Good — (8) (1) (9) Satisfactory (20) (81) — (101) Sub-standard (458) (42) (3) (503) Credit impaired (1,268) (105) — (1,373) At 31 Dec 2022 (1,746) (241) (4) (1,991) Allowance for ECL by stage distribution Stage 1 (1) (9) (1) (11) Stage 2 (477) (127) (3) (607) Stage 3 (1,268) (105) — (1,373) At 31 Dec 2022 (1,746) (241) (4) (1,991) ECL coverage % 18.6 3.7 0.5 11.9 1 Disclosures in respect of mainland China commercial real estate exposures in Hong Kong and mainland China form part of the scope of the audit of the Group’s Annual Report and Accounts 2022. Amounts disclosed for mainland China commercial real estate exposures elsewhere in the Group have not been audited but are provided for completeness. 2 Amounts represent gross carrying amount. 3 Amounts represent nominal amount for guarantees and other contingent liabilities. (Unaudited) Commercial real estate financing refers to lending that focuses on commercial development and investment in real estate and covers commercial, residential and industrial assets. The exposures in the table are related to companies whose primary activities are focused on these activities. Lending is generally focused on tier 1 and 2 cities. The table also includes financing provided to a corporate or financial entity for the purchase or financing of a property that supports the overall operations of the business. Such exposures are outside of our normal definition of commercial real estate, as applied elsewhere in this report, but are provided here for a more comprehensive view of our mainland China property exposure. The table above shows 59% ($7.1bn) of total exposure with a credit quality of ’satisfactory’ or above, which was slightly higher in proportion compared with 31 December 2022 (57%, $9.5bn). Total ‘credit impaired’ exposures increased to 26% ($3.2bn) (31 December 2022: 20%, $3.4bn), reflecting sustained stress in the China commercial real estate market, including weakness in both property market fundamentals and financing conditions for borrowers operating in this sector. Allowances for ECL are substantially against unsecured exposures. For secured exposures, allowances for ECL are minimal, reflecting the nature and value of the security held. Facilities booked in Hong Kong continued to represent the largest proportion of mainland China commercial real estate exposures, although total exposures reduced to $6.3bn, down $3.1bn since 31 December 2022, as a result of de-risking measures, repayments and write-offs. This portfolio remains relatively higher risk, with 33% (31 December 2022: 36%) of exposure booked with a credit quality of ‘satisfactory’ or above and 47% ‘credit impaired’ (31 December 2022: 33%). At 31 December 2023, the Group had allowances for ECL of $1.8bn (31 December 2022: $1.7bn) held against mainland China commercial real estate exposures booked in Hong Kong. ECL coverage increased to 28.5% (31 December 2022: 18.6%), reflecting a further credit deterioration during the year. Approximately half of the unimpaired exposure in the Hong Kong portfolio is lending to state-owned enterprises and relatively strong private-owned enterprises. This is reflected in the relatively low allowance for ECL in this part of the portfolio. Market conditions are likely to remain subdued with a protracted recovery as sentiment and domestic residential demand remain weak, with ongoing refinancing and liquidity risk for corporates operating in this market. The divergence between privately-owned enterprises and state-owned enterprises is likely to continue, with state-owned enterprises achieving above-market sales performance, and benefiting from market share gains and better access to funding. The Group has additional exposures to mainland China commercial real estate as a result of lending to multinational corporates booked outside of mainland China, which is not incorporated in the table above. Risk review 186 HSBC Holdings plc Annual Report and Accounts 2023 Collateral and other credit enhancements (Audited) Although collateral can be an important mitigant of credit risk, it is the Group’s practice to lend on the basis of the customer’s ability to meet their obligations out of cash flow resources rather than placing primary reliance on collateral and other credit risk enhancements. Depending on the customer’s standing and the type of product, facilities may be provided without any collateral or other credit enhancements. For other lending, a charge over collateral is obtained and considered in determining the credit decision and pricing. In the event of default, the Group may utilise the collateral as a source of repayment. Depending on its form, collateral can have a significant financial effect in mitigating our exposure to credit risk. Where there is sufficient collateral, an expected credit loss is not recognised. This is the case for reverse repurchase agreements and for certain loans and advances to customers where the loan to value (‘LTV’) is very low. Mitigants may include a charge on borrowers’ specific assets, such as real estate or financial instruments. Other credit risk mitigants include short positions in securities and financial assets held as part of linked insurance/investment contracts where the risk is predominantly borne by the policyholder. Additionally, risk may be managed by employing other types of collateral and credit risk enhancements, such as second charges, other liens and unsupported guarantees. Guarantees are normally taken from corporates and export credit agencies. Corporates would normally provide guarantees as part of a parent/ subsidiary relationship and span a number of credit grades. The export credit agencies will normally be investment grade. Certain credit mitigants are used strategically in portfolio management activities. While single name concentrations arise in portfolios managed by Global Banking and Corporate Banking, it is only in Global Banking that their size requires the use of portfolio level credit mitigants. Across Global Banking, risk limits and utilisations, maturity profiles and risk quality are monitored and managed proactively. This process is key to the setting of risk appetite for these larger, more complex, geographically distributed customer groups. While the principal form of risk management continues to be at the point of exposure origination, through the lending decision-making process, Global Banking also utilises loan sales and credit default swap (‘CDS’) hedges to manage concentrations and reduce risk. These transactions are the responsibility of a dedicated Global Banking portfolio management team. Hedging activity is carried out within agreed credit parameters, and is subject to market risk limits and a robust governance structure. Where applicable, CDSs are entered into directly with a central clearing house counterparty. Otherwise, the Group’s exposure to CDS protection providers is diversified among mainly banking counterparties with strong credit ratings. CDS mitigants are held at portfolio level and are not included in the expected credit loss calculations. CDS mitigants are not reported in the following tables. Collateral on loans and advances Collateral held is analysed separately for commercial real estate and for other corporate, commercial and financial (non-bank) lending. The following tables include off-balance sheet loan commitments, primarily undrawn credit lines. The collateral measured in the following tables consists of fixed first charges on real estate, and charges over cash and marketable financial instruments. The values in the tables represent the expected market value on an open market basis. No adjustment has been made to the collateral for any expected costs of recovery. Marketable securities are measured at their fair value. Other types of collateral such as unsupported guarantees and floating charges over the assets of a customer’s business are not measured in the following tables. While such mitigants have value, often providing rights in insolvency, their assignable value is not sufficiently certain and they are therefore assigned no value for disclosure purposes. The LTV ratios presented are calculated by directly associating loans and advances with the collateral that individually and uniquely supports each facility. When collateral assets are shared by multiple loans and advances, whether specifically or, more generally, by way of an all monies charge, the collateral value is pro-rated across the loans and advances protected by the collateral. For credit-impaired loans, the collateral values cannot be directly compared with impairment allowances recognised. The LTV figures use open market values with no adjustments. Impairment allowances are calculated on a different basis, by considering other cash flows and adjusting collateral values for costs of realising collateral as explained further on page 348. Commercial real estate loans and advances The value of commercial real estate collateral is determined by using a combination of external and internal valuations and physical inspections. For commercial real estate, where the facility exceeds regulatory threshold requirements, Group policy requires an independent review of the valuation at least every three years, or more frequently as the need arises. In Hong Kong, market practice is typically for lending to major property companies to be either secured by guarantees or unsecured. In Europe, facilities of a working capital nature are generally not secured by a first fixed charge, and are therefore disclosed as not collateralised. HSBC Holdings plc Annual Report and Accounts 2023 187 Risk review Gross carrying/nominal amount ECL coverage Stage 1 Stage 2 Stage 3 POCI Total Stage 1 Stage 2 Stage 3 POCI Total $m $m $m $m $m % % % % % Not collateralised 36,754 5,128 2,543 — 44,425 0.1 3.9 72.4 — 4.7 Fully collateralised by LTV ratio 46,212 15,177 1,963 — 63,352 0.1 2.5 12.0 — 1.0 – less than 50% 24,391 7,413 574 — 32,378 0.1 1.9 13.1 — 0.7 – 51% to 75% 16,086 5,240 657 — 21,983 0.1 3.1 9.3 — 1.1 – 76% to 90% 3,140 1,437 454 — 5,031 0.1 3.5 11.8 — 2.1 – 91% to 100% 2,595 1,087 278 — 3,960 0.2 2.3 16.6 — 1.9 Partially collateralised (A): LTV > 100% 7,075 1,487 156 50 8,768 0.1 1.8 30.2 14.5 1.0 – collateral value on A 4,004 1,061 115 26 5,206 Total at 31 Dec 2023 90,041 21,792 4,662 50 116,545 0.1 2.8 45.6 14.5 2.4 of which: UK Not collateralised 4,644 1,288 97 — 6,029 0.4 2.0 12.4 — 0.9 Fully collateralised by LTV ratio 9,762 2,512 295 — 12,569 0.1 1.3 13.9 — 0.7 – less than 50% 3,514 507 51 — 4,072 0.1 1.9 21.6 — 0.6 – 51% to 75% 4,826 1,418 103 — 6,347 0.1 1.1 16.4 — 0.6 – 76% to 90% 749 292 80 — 1,121 0.1 1.3 14.9 — 1.5 – 91% to 100% 673 295 61 — 1,029 0.1 1.6 1.9 — 0.6 Partially collateralised (B): LTV > 100% 1,580 239 82 35 1,936 0.1 1.1 34.2 20.7 2.0 – collateral value on B 524 171 62 17 774 Total UK at 31 Dec 2023 15,986 4,039 474 35 20,534 0.2 1.5 17.1 20.7 0.9 of which: Hong Kong Not collateralised 16,889 2,323 2,215 — 21,427 — 6.5 78.7 — 8.8 Fully collateralised by LTV ratio 20,783 8,447 989 — 30,219 — 2.1 5.0 — 0.8 – less than 50% 15,425 5,604 294 — 21,323 — 1.5 1.4 — 0.5 – 51% to 75% 4,102 2,140 312 — 6,554 0.1 3.8 2.1 — 1.4 – 76% to 90% 657 619 315 — 1,591 0.1 1.8 8.0 — 2.3 – 91% to 100% 599 84 68 — 751 — 0.1 20.5 — 1.9 Partially collateralised (C): LTV > 100% 1,770 616 52 15 2,453 — 0.8 24.5 — 0.7 – collateral value on C 1,569 535 39 8 2,151 Total Hong Kong at 31 Dec 2023 39,442 11,386 3,256 15 54,099 — 2.9 55.5 — 4.0 Not collateralised 43,987 9,779 2,612 — 56,378 0.1 5.7 53.7 — 3.6 Fully collateralised by LTV ratio 54,003 17,619 1,617 — 73,239 0.1 1.8 10.9 — 0.7 – less than 50% 29,635 6,523 544 — 36,702 0.1 1.9 16.5 — 0.7 – 51% to 75% 18,664 8,312 594 — 27,570 0.1 1.3 4.4 — 0.5 – 76% to 90% 3,220 911 315 — 4,446 0.1 2.1 4.1 — 0.8 – 91% to 100% 2,484 1,873 164 — 4,521 0.2 3.5 28.7 — 2.6 Partially collateralised (A): LTV > 100% 4,965 1,924 513 19 7,421 0.1 2.2 54.2 — 4.4 – collateral value on A 2,804 1,192 293 8 4,297 Total at 31 Dec 20221 102,955 29,322 4,742 19 137,038 0.1 3.1 39.1 — 2.1 of which: UK Not collateralised 5,960 2,511 295 — 8,766 0.3 1.5 35.3 — 1.8 Fully collateralised by LTV ratio 10,293 2,025 372 — 12,690 0.1 0.9 6.5 — 0.4 – less than 50% 2,900 664 53 — 3,617 0.2 0.9 3.8 — 0.4 – 51% to 75% 6,361 1,197 291 — 7,849 0.1 0.9 2.1 — 0.3 – 76% to 90% 556 140 11 — 707 0.2 1.4 18.2 — 0.7 – 91% to 100% 476 24 17 — 517 0.2 0.4 76.5 — 2.8 Partially collateralised (B): LTV > 100% 1,920 179 176 — 2,275 0.2 1.1 68.8 — 5.5 – collateral value on B 1,113 144 72 — 1,329 Total UK at 31 Dec 2022 18,173 4,715 843 — 23,731 0.2 1.3 29.5 — 1.5 of which: Hong Kong Not collateralised 20,263 4,648 2,123 — 27,034 — 10.6 56.9 — 6.3 Fully collateralised by LTV ratio 27,892 7,457 864 — 36,213 — 1.1 5.2 — 0.4 – less than 50% 21,185 3,539 318 — 25,042 — 1.4 2.2 — 0.3 – 51% to 75% 5,365 3,536 205 — 9,106 0.1 1.0 3.4 — 0.5 – 76% to 90% 995 134 264 — 1,393 — 0.1 1.9 — 0.4 – 91% to 100% 347 248 77 — 672 — 0.2 32.5 — 3.9 Partially collateralised (C): LTV > 100% 804 390 73 19 1,286 — 2.8 61.6 — 4.4 – collateral value on C 584 249 39 8 880 Total Hong Kong at 31 Dec 2022 48,959 12,495 3,060 19 64,533 — 4.7 42.5 — 2.9 Wholesale lending – commercial real estate loans and advances to customers including loan commitments by level of collateral for key countries/territories (by stage) (Audited) 1 During 1Q23, we aligned the classification of commercial real estate across the Group and re-presented commercial real estate exposure in HSBC North America Holdings Inc. at 31 December 2022 as $5.3bn, which had a corresponding ECL charge of $0.1bn. Risk review 188 HSBC Holdings plc Annual Report and Accounts 2023 Other corporate, commercial and financial (non-bank) loans and advances Other corporate, commercial and financial (non-bank) loans are analysed separately in the following table, which focuses on the countries/territories containing the majority of our loans and advances balances. For financing activities in other corporate and commercial lending, collateral value is not strongly correlated to principal repayment performance. Collateral values are generally refreshed when an obligor’s general credit performance deteriorates and we have to assess the likely performance of secondary sources of repayment should it prove necessary to rely on them. Stage 1 Stage 2 Stage 3 POCI Total Stage 1 Stage 2 Stage 3 POCI Total $m $m $m $m $m % % % % % Not collateralised 672,142 76,261 7,702 8 756,113 0.1 0.9 40.0 6.8 0.6 Fully collateralised by LTV ratio 113,339 19,747 2,629 23 135,738 0.1 1.4 10.7 89.8 0.5 – less than 50% 42,953 7,069 1,168 — 51,190 0.1 1.5 11.8 — 0.5 – 51% to 75% 24,011 8,222 887 — 33,120 0.1 1.3 6.4 — 0.6 – 76% to 90% 10,194 2,531 421 23 13,169 0.1 1.6 10.3 90.6 0.9 – 91% to 100% 36,181 1,925 153 — 38,259 — 1.1 27.6 — 0.2 Partially collateralised (A): LTV > 100% 53,686 9,019 2,233 3 64,941 0.1 0.7 32.2 38.4 1.3 – collateral value on A 24,505 4,266 993 1 29,765 Total at 31 Dec 2023 839,167 105,027 12,564 34 956,792 0.1 1.0 32.5 67.1 0.6 of which: UK Not collateralised 117,824 20,401 3,423 — 141,648 0.2 1.9 23.2 — 1.0 Fully collateralised by LTV ratio 22,217 5,912 1,162 — 29,291 0.1 1.7 3.7 — 0.6 – less than 50% 7,385 2,340 601 — 10,326 0.1 1.2 1.3 — 0.5 – 51% to 75% 6,966 2,292 434 — 9,692 0.1 1.7 3.6 — 0.7 – 76% to 90% 2,256 809 106 — 3,171 0.2 2.5 15.8 — 1.3 – 91% to 100% 5,610 471 21 — 6,102 0.1 2.1 14.5 — 0.3 Partially collateralised (B): LTV > 100% 6,335 1,732 299 — 8,366 0.2 1.8 18.4 — 1.2 – collateral value on B 3,508 1,080 175 — 4,763 Total UK at 31 Dec 2023 146,376 28,045 4,884 — 179,305 0.2 1.8 18.3 — 0.9 of which: Hong Kong — Not collateralised 114,025 7,523 906 — 122,454 — 0.4 57.5 — 0.5 Fully collateralised by LTV ratio 32,857 8,918 877 22 42,674 0.1 1.3 6.6 94.7 0.5 – less than 50% 16,175 2,898 230 — 19,303 0.1 1.4 11.8 — 0.4 – 51% to 75% 9,461 4,515 336 — 14,312 0.1 1.2 3.1 — 0.5 – 76% to 90% 4,245 863 253 22 5,383 0.1 1.8 2.0 94.7 0.9 – 91% to 100% 2,976 642 58 — 3,676 — 0.4 27.0 — 0.5 Partially collateralised (C): LTV > 100% 16,152 2,887 704 — 19,743 — 0.6 30.2 — 1.2 – collateral value on C 6,619 1,306 318 — 8,243 Total Hong Kong at 31 Dec 2023 163,034 19,328 2,487 22 184,871 0.1 0.8 31.8 94.7 0.6 Not collateralised 632,889 79,009 8,278 64 720,240 0.1 1.1 38.4 18.8 0.6 Fully collateralised by LTV ratio 94,789 27,422 1,948 24 124,183 0.1 1.1 13.7 91.7 0.5 – less than 50% 36,747 10,643 678 — 48,068 0.1 1.1 18.6 — 0.6 – 51% to 75% 29,108 10,457 503 1 40,069 0.1 1.2 11.3 — 0.5 – 76% to 90% 9,643 2,987 402 23 13,055 0.1 1.0 4.7 95.7 0.6 – 91% to 100% 19,291 3,335 365 — 22,991 0.1 0.8 17.5 — 0.4 Partially collateralised (A): LTV > 100% 54,794 12,830 2,120 22 69,766 0.1 0.9 37.3 18.2 1.4 – collateral value on A 27,775 6,289 1,133 16 35,213 — — — — — Total at 31 Dec 2022 782,472 119,261 12,346 110 914,189 0.1 1.0 34.3 34.6 0.7 of which: UK Not collateralised 105,126 16,886 3,783 28 125,823 0.1 2.2 17.8 3.6 0.9 Fully collateralised by LTV ratio 21,192 6,511 699 — 28,402 0.1 1.3 4.6 — 0.5 – less than 50% 6,928 2,872 175 — 9,975 0.1 1.0 3.4 — 0.5 – 51% to 75% 7,611 2,656 336 — 10,603 0.1 1.5 6.5 — 0.6 – 76% to 90% 1,889 578 102 — 2,569 0.1 1.9 1.0 — 0.5 – 91% to 100% 4,764 405 86 — 5,255 — 1.2 3.5 — 0.2 Partially collateralised (B): LTV > 100% 6,480 2,288 308 — 9,076 0.1 1.2 25.6 — 1.2 – collateral value on B 3,470 1,197 158 — 4,825 — — — — Total UK at 31 Dec 2022 132,798 25,685 4,790 28 163,301 0.1 1.9 16.4 3.6 0.9 of which: Hong Kong Not collateralised 109,919 9,901 939 — 120,759 — 0.7 56.0 — 0.5 Fully collateralised by LTV ratio 38,083 12,693 665 24 51,465 0.1 1.0 3.8 91.7 0.4 – less than 50% 15,695 4,577 175 — 20,447 0.1 0.9 1.7 — 0.3 – 51% to 75% 13,893 5,413 115 1 19,422 0.1 1.2 7.8 — 0.5 – 76% to 90% 4,964 1,479 268 23 6,734 0.1 0.7 0.4 95.7 0.6 – 91% to 100% 3,531 1,224 107 — 4,862 0.1 0.3 10.3 — 0.3 Partially collateralised (C): LTV > 100% 17,704 3,379 777 14 21,874 0.1 0.6 30.9 — 1.2 – collateral value on C 7,737 1,524 397 13 9,671 — — — — Total Hong Kong at 31 Dec 2022 165,706 25,973 2,381 38 194,098 0.1 0.8 33.2 57.9 0.6 Wholesale lending – other corporate, commercial and financial (non-bank) loans and advances including loan commitments by level of collateral for key countries/territories (by stage) (Audited) Gross carrying/nominal amount ECL coverage HSBC Holdings plc Annual Report and Accounts 2023 189 Risk review Other credit risk exposures In addition to collateralised lending, other credit enhancements are employed and methods used to mitigate credit risk arising from financial assets. These are summarised below: – Some securities issued by governments, banks and other financial institutions benefit from additional credit enhancements provided by government guarantees that cover the assets. – Debt securities issued by banks and financial institutions include asset-backed securities (‘ABSs’) and similar instruments, which are supported by underlying pools of financial assets. Credit risk associated with ABSs is reduced through the purchase of credit default swap (‘CDS’) protection. – Trading loans and advances mainly pledged against cash collateral are posted to satisfy margin requirements. There is limited credit risk on cash collateral posted since in the event of default of the counterparty this would be set off against the related liability. Reverse repos and stock borrowing are by their nature collateralised. Collateral accepted as security that the Group is permitted to sell or repledge under these arrangements is described on page 390 of the financial statements. The Group’s maximum exposure to credit risk includes financial guarantees and similar contracts granted, as well as loan and other credit-related commitments. Depending on the terms of the arrangement, we may use additional credit mitigation if a guarantee is called upon or a loan commitment is drawn and subsequently defaults. For further information on these arrangements, see Note 33 on the financial statements. Derivatives We participate in transactions exposing us to counterparty credit risk. Counterparty credit risk is the risk of financial loss if the counterparty to a transaction defaults before satisfactorily settling it. It arises principally from over-the-counter (‘OTC’) derivatives and securities financing transactions and is calculated in both the trading and non- trading books. Transactions vary in value by reference to a market factor such as an interest rate, exchange rate or asset price. The counterparty risk from derivative transactions is taken into account when reporting the fair value of derivative positions. The adjustment to the fair value is known as the credit valuation adjustment (‘CVA’). For an analysis of CVAs, see Note 12 on the financial statements. The following table reflects by risk type the fair values and gross notional contract amounts of derivatives cleared through an exchange, central counterparty or non-central counterparty. Notional contract amounts and fair values of derivatives 2023 20221 Notional amount Fair value Notional amount Fair value Assets Liabilities Assets Liabilities $m $m $m $m $m $m Total OTC derivatives 24,551,539 337,066 343,098 23,649,591 421,324 423,909 – total OTC derivatives cleared by central counterparties 11,130,785 116,520 118,796 11,360,730 149,193 154,167 – total OTC derivatives not cleared by central counterparties 13,420,754 220,546 224,302 12,288,861 272,131 269,742 Total exchange traded derivatives 1,111,247 9,134 8,159 1,146,426 3,822 2,840 Gross 25,662,786 346,200 351,258 24,796,017 425,146 426,749 Offset (116,486) (116,486) (140,987) (140,987) At 31 Dec 229,714 234,772 284,159 285,762 1 From 1 January 2023, we adopted IFRS 17 ‘Insurance Contracts’, which replaced IFRS 4 ‘Insurance Contracts’. We have restated 2022 comparative data. The purposes for which HSBC uses derivatives are described in Note 15 on the financial statements. The International Swaps and Derivatives Association (‘ISDA’) master agreement is our preferred agreement for documenting derivatives activity. It is common, and our preferred practice, for the parties involved in a derivative transaction to execute a credit support annex (‘CSA’) in conjunction with the ISDA master agreement. Under a CSA, collateral is passed between the parties to mitigate the counterparty risk inherent in outstanding positions. The majority of our CSAs are with financial institutional clients. We manage the counterparty exposure on our OTC derivative contracts by using collateral agreements with counterparties and netting agreements. Currently, we do not actively manage our general OTC derivative counterparty exposure in the credit markets, although we may manage individual exposures in certain circumstances. We place strict policy restrictions on collateral types and as a consequence the types of collateral received and pledged are, by value, highly liquid and of a strong quality, being predominantly cash. Where a collateral type is required to be approved outside the collateral policy, approval is required from a committee of senior representatives from Markets, Legal and Risk. See Note 31 on the financial statements for details regarding legally enforceable right of offset in the event of counterparty default and collateral received in respect of derivatives. Personal lending This section presents further disclosures related to personal lending. It provides details of the major legal entities, countries and products that are driving the change observed in personal loans and advances to customers, with the impact of foreign exchange separately identified. Additionally, Hong Kong and UK mortgage book LTV data is provided. This section also provides reconciliations of the opening 1 January 2023 to 31 December 2023 closing gross carrying/nominal amounts and associated allowance for ECL by product. Further product granularity is also provided by stage, with data for major legal entities presented for loans and advances to customers, loan and other credit-related commitments and financial guarantees. At 31 December 2023, total personal lending for loans and advances to customers of $447.5bn increased by $32.6bn compared with 31 December 2022. This increase included favourable foreign exchange movements of $11.5bn. Excluding foreign exchange movements, the increase of $21.1bn was mainly driven by growth in the UK (up $6.6bn), in Hong Kong (up $5.8bn), in Mexico (up $2.3bn) and in Australia (up $1.4bn). Additionally, France increased by $7.8bn due to the retention of the home loan portfolio, which is no longer classified as assets held for sale. The increase was partly offset by a $1.2bn decrease from the merger of our business in Oman and a $1.0bn decrease from the sale of our retail mortgage loan portfolio in New Zealand. Risk review 190 HSBC Holdings plc Annual Report and Accounts 2023 The allowance for ECL attributable to personal lending, excluding off- balance sheet loan commitments and guarantees, remained broadly stable at $2.9bn at 31 December 2023, as net releases were offset by adverse foreign exchange movements of $0.1bn. Excluding foreign exchange movements and reclassifications to held for sale, mortgage lending balances increased by $15.5bn to $360.9bn at 31 December 2023, mainly in Hong Kong (up $5.9bn), in the UK (up $4.9bn), in Mexico (up $1.7bn), in the US (up $1.5bn) and in Australia (up $1.4bn). The allowance for ECL attributable to mortgages remained broadly stable at $0.6bn when compared with 31 December 2022. Total personal lending gross carrying amounts in stage 2 decreased by $1.4bn compared with 31 December 2022. Excluding favourable foreign exchange movements of $2.3bn, the decrease of $3.7bn was driven by favourable economic conditions and the model updates for interest-only and offset mortgages at a portfolio level in the UK. The quality of both our Hong Kong and UK mortgage books remained strong, with low levels of impairment allowances. The average LTV ratio on new mortgage lending in Hong Kong was 64%, compared with an estimated 60% for the overall mortgage portfolio. The average LTV ratio on new lending in the UK was 65%, compared with an estimated 53% for the overall mortgage portfolio. Excluding foreign exchange movements and reclassifications to held for sale, other personal lending balances at 31 December 2023 increased by $7.8bn compared with 31 December 2022. This was mainly from the retained home loan portfolio in France (up $7.4bn), which is no longer classified as assets held for sale. In addition, our credit card portfolio in Mexico increased by $0.6bn. The allowance for ECL, excluding foreign exchange movements, attributable to other personal lending of $2.3bn remained unchanged from 31 December 2022. The allowance for ECL attributable to credit cards decreased by $0.1bn, offset by adverse foreign exchange movements of $0.1bn in other personal lending. Total personal lending for loans and advances to customers at amortised cost by stage distribution Gross carrying amount Allowance for ECL Stage 1 Stage 2 Stage 3 Total Stage 1 Stage 2 Stage 3 Total $m $m $m $m $m $m $m $m By portfolio First lien residential mortgages 320,410 38,287 2,212 360,909 (102) (200) (269) (571) – of which: interest-only (including offset) 21,895 2,923 139 24,957 (4) (27) (31) (62) – affordability (including US adjustable rate mortgages) 14,380 381 291 15,052 (3) (1) (10) (14) Other personal lending 76,124 9,196 1,293 86,613 (477) (1,234) (585) (2,296) – second lien residential mortgages 317 58 21 396 — (3) (5) (8) – guaranteed loans in respect of residential property 8,001 502 90 8,593 (1) (5) (14) (20) – other personal lending which is secured 28,900 424 157 29,481 (13) (5) (24) (42) – credit cards 19,909 4,419 352 24,680 (236) (697) (203) (1,136) – other personal lending which is unsecured 17,010 3,582 659 21,251 (212) (505) (331) (1,048) – motor vehicle finance 1,987 211 14 2,212 (15) (19) (8) (42) At 31 Dec 2023 396,534 47,483 3,505 447,522 (579) (1,434) (854) (2,867) By legal entity HSBC UK Bank plc 146,354 35,190 1,218 182,762 (152) (490) (255) (897) HSBC Bank plc 14,598 1,747 273 16,618 (24) (22) (91) (137) The Hongkong and Shanghai Banking Corporation Limited 191,382 7,741 948 200,071 (165) (402) (162) (729) HSBC Bank Middle East Limited 3,335 397 47 3,779 (19) (33) (36) (88) HSBC North America Holdings Inc. 18,096 553 364 19,013 (5) (14) (16) (35) Grupo Financiero HSBC, S.A. de C.V. 12,717 1,740 536 14,993 (197) (463) (273) (933) Other trading entities 10,052 115 119 10,286 (17) (10) (21) (48) At 31 Dec 2023 396,534 47,483 3,505 447,522 (579) (1,434) (854) (2,867) Total personal lending for loans and other credit-related commitments and financial guarantees by stage distribution Nominal amount Allowance for ECL Stage 1 Stage 2 Stage 3 Total Stage 1 Stage 2 Stage 3 Total $m $m $m $m $m $m $m $m HSBC UK Bank plc 52,093 734 88 52,915 (11) — (2) (13) HSBC Bank plc 1,630 36 4 1,670 — — — — The Hongkong and Shanghai Banking Corporation Limited 181,967 2,479 223 184,669 (3) — — (3) HSBC Bank Middle East Limited 1,978 7 1 1,986 — — — — HSBC North America Holdings Inc. 3,695 72 8 3,775 — — — — HSBC Bank Canada 6,610 113 30 6,753 — — — — Grupo Financiero HSBC, S.A. de C.V. 4,308 — — 4,308 (8) — — (8) Other trading entities 2,008 31 1 2,040 (1) — — (1) At 31 Dec 2023 254,289 3,472 355 258,116 (23) — (2) (25) HSBC Holdings plc Annual Report and Accounts 2023 191 Risk review Total personal lending for loans and advances to customers at amortised cost by stage distribution (continued) Gross carrying amount Allowance for ECL Stage 1 Stage 2 Stage 3 Total Stage 1 Stage 2 Stage 3 Total $m $m $m $m $m $m $m $m By portfolio First lien residential mortgages 294,919 39,860 2,042 336,821 (74) (231) (270) (575) – of which: interest-only (including offset) 19,636 4,485 169 24,290 (3) (46) (41) (90) – affordability (including US adjustable rate mortgages) 14,773 369 240 15,382 (5) (3) (4) (12) Other personal lending 67,758 9,006 1,297 78,061 (487) (1,273) (535) (2,295) – second lien residential mortgages 353 20 6 379 (1) (2) (3) (6) – guaranteed loans in respect of residential property 1,121 121 125 1,367 (1) (3) (30) (34) – other personal lending which is secured 31,306 594 206 32,106 (15) (10) (30) (55) – credit cards 16,705 4,423 260 21,388 (225) (776) (160) (1,161) – other personal lending which is unsecured 16,512 3,681 687 20,880 (234) (469) (305) (1,008) – motor vehicle finance 1,761 167 13 1,941 (11) (13) (7) (31) At 31 Dec 2022 362,677 48,866 3,339 414,882 (561) (1,504) (805) (2,870) By legal entity HSBC UK Bank plc 128,590 37,394 1,012 166,996 (135) (688) (227) (1,050) HSBC Bank plc 6,377 740 127 7,244 (10) (18) (38) (66) The Hongkong and Shanghai Banking Corporation Limited 185,723 8,698 1,117 195,538 (138) (362) (187) (687) HSBC Bank Middle East Limited 3,657 184 86 3,927 (26) (37) (52) (115) HSBC North America Holdings Inc. 16,906 375 270 17,551 (12) (23) (6) (41) Grupo Financiero HSBC, S.A. de C.V. 9,542 1,099 377 11,018 (213) (331) (194) (738) Other trading entities 11,882 376 350 12,608 (27) (45) (101) (173) At 31 Dec 2022 362,677 48,866 3,339 414,882 (561) (1,504) (805) (2,870) Total personal lending for loans and other credit-related commitments and financial guarantees by stage distribution (continued) Nominal amount Allowance for ECL Stage 1 Stage 2 Stage 3 Total Stage 1 Stage 2 Stage 3 Total $m $m $m $m $m $m $m $m HSBC UK Bank plc 50,535 439 104 51,078 (11) (1) — (12) HSBC Bank plc 2,440 131 7 2,578 — — — — The Hongkong and Shanghai Banking Corporation Limited 170,104 2,916 634 173,654 (2) — — (2) HSBC Bank Middle East Limited 1,717 8 1 1,726 (1) — — (1) HSBC North America Holdings Inc. 3,914 24 17 3,955 (1) — — (1) HSBC Bank Canada 6,346 115 30 6,491 — — — — Grupo Financiero HSBC, S.A. de C.V. 3,198 — — 3,198 (9) — — (9) Other trading entities 2,390 64 7 2,461 (2) — — (2) At 31 Dec 2022 240,644 3,697 800 245,141 (26) (1) — (27) Exposure to UK interest-only mortgage loans The following information is presented for HSBC branded interest- only mortgage loans. This excludes offset mortgages in first direct and private banking mortgages. At the end of 2023, the average LTV ratio of the interest-only mortgage loans was 44% (2022: 41%), and 97% (2022: 99%) had an LTV ratio of 75% or less. Of the interest-only mortgage loans that expired in 2021, 82% were repaid within 12 months of expiry with a total of 96% being repaid within 24 months of expiry. For those expiring during 2022, 92% were repaid within 12 months of expiry. At 31 December 2023, interest-only mortgage loan exposures were $15.2bn (2022: $14.4bn) and the maturity profile was as follows: UK interest-only mortgage loans $m Expired interest-only mortgage loans 141 Interest-only mortgage loans by maturity – 2024 141 – 2025 242 – 2026 315 – 2027 436 – 2028–2032 2,919 – post-2032 11,010 At 31 Dec 2023 15,204 Risk review 192 HSBC Holdings plc Annual Report and Accounts 2023 UK interest-only mortgage loans (continued) $m Expired interest-only mortgage loans 134 Interest-only mortgage loans by maturity – 2023 219 – 2024 215 – 2025 300 – 2026 383 – 2027–2031 2,951 – post-2031 10,248 At 31 Dec 2022 14,450 Exposure to offset mortgage in first direct The offset mortgage in first direct is a flexible way for our customers to take control of their finances. It works by grouping together the customer’s mortgage, savings and current accounts to offset their credit and debit balances against their mortgage exposure. At 31 December 2023, exposures were worth a total $5.0bn with an average LTV ratio of 29% (2022: $5.5bn exposure and 32% LTV ratio). Reconciliations of changes in personal lending gross carrying/nominal amount and allowances for loans and advances to customers including loan commitments and financial guarantees The following disclosure provides a reconciliation by stage of the Group’s personal lending gross carrying/nominal amount and allowances for loans and advances to customers, including loan commitments and financial guarantees. In addition, three reconciliations by stage of the Group’s gross carrying/nominal amount and allowances for first lien mortgages, credit cards and other personal lending, including loan commitments and financial guarantees were added at 31 December 2023 following the adoption of the recommendations of the DECL Taskforce’s third report. Personal lending – reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to customers including loan commitments and financial guarantees (Audited) Non-credit impaired Credit impaired Stage 1 Stage 2 Stage 3 Total Gross carrying/ nominal amount Allowance for ECL Gross carrying/ nominal amount Allowance for ECL Gross carrying/ nominal amount Allowance for ECL Gross carrying/ nominal amount Allowance for ECL $m $m $m $m $m $m $m $m At 1 Jan 2023 603,321 (587) 52,563 (1,505) 4,139 (805) 660,023 (2,897) Transfers of financial instruments: (2,144) (619) 39 1,087 2,105 (468) — — – transfers from stage 1 to stage 2 (57,217) 270 57,217 (270) — — — — – transfers from stage 2 to stage 1 55,307 (862) (55,307) 862 — — — — – transfers to stage 3 (542) 3 (2,345) 614 2,887 (617) — — – transfers from stage 3 308 (30) 474 (119) (782) 149 — — Net remeasurement of ECL arising from transfer of stage — 563 — (679) — (79) — (195) Net new and further lending/repayments 34,411 (47) (4,713) 350 (1,169) 144 28,529 447 Change to risk parameters – credit quality — 104 — (641) — (955) — (1,492) Changes to models used for ECL calculation — (13) — 21 — 7 — 15 Assets written off — — — — (1,326) 1,326 (1,326) 1,326 Foreign exchange and others1,2 15,235 (3) 3,066 (67) 111 (26) 18,412 (96) At 31 Dec 2023 650,823 (602) 50,955 (1,434) 3,860 (856) 705,638 (2,892) ECL income statement change for the period 607 (949) (883) (1,225) Recoveries 226 Others 8 Total ECL income statement change for the period (991) 1 Total includes $7.8bn of gross carrying loans and advances and a corresponding allowance for ECL of $11m, due to the retention of certain balances previously classified as assets held for sale of our retail banking operations in France. For further details, see Note 23 ‘Assets held for sale and liabilities of disposal groups held for sale’ on page 401. 2 Total includes $2.0bn of gross carrying loans and advances to customers, which were classified to assets held for sale, and a corresponding allowance for ECL of $20m, reflecting business disposals, as disclosed in Note 23 ‘Assets held for sale and liabilities of disposal groups held for sale’ on page 401. As shown in the above table, the allowance for ECL for loans and advances to customers and relevant loan commitments and financial guarantees decreased by $5m during the period from $2,897m at 31 December 2022 to $2,892m at 31 December 2023. This decrease was driven by: – $1,326m of assets written off; – $447m relating to volume movements, which included the allowance for ECL associated with new originations, assets derecognised and further lending/repayment; and – $15m of changes to models used for ECL calculation. HSBC Holdings plc Annual Report and Accounts 2023 193 Risk review These were partly offset by: – $1,492m relating to underlying credit quality changes, including the credit quality impact of financial instruments transferring between stages; – $195m relating to the net remeasurement impact of stage transfers; and – foreign exchange and other movements of $96m. The ECL charge for the period of $1,225m presented in the above table consisted of $1,492m relating to underlying credit quality changes, including the credit quality impact of financial instruments transferring between stages, and $195m relating to the net remeasurement impact of stage transfers. This was partly offset by $447m relating to underlying net book volume movements and $15m in changes to models used for the calculation of ECL. During the period, there was a net transfer to stage 2 of $1,910m gross carrying/nominal amounts. This increase was mainly driven by $1,550m in Mexico, due to slight deterioration in the unsecured portfolio. Personal lending – reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to customers including loan commitments and financial guarantees (Audited) Non-credit impaired Credit impaired Stage 1 Stage 2 Stage 3 Total Gross carrying/ nominal amount Allowance for ECL Gross carrying/ nominal amount Allowance for ECL Gross carrying/ nominal amount Allowance for ECL Gross carrying/ nominal amount Allowance for ECL $m $m $m $m $m $m $m $m At 1 Jan 2022 695,627 (692) 18,161 (1,220) 5,111 (1,226) 718,899 (3,138) Transfers of financial instruments: (40,836) (496) 39,489 674 1,347 (178) — — – transfers from stage 1 to stage 2 (68,016) 268 68,016 (268) — — — — – transfers from stage 2 to stage 1 27,359 (730) (27,359) 730 — — — — – transfers to stage 3 (561) 2 (1,983) 361 2,544 (363) — — – transfers from stage 3 382 (36) 815 (149) (1,197) 185 — — Net remeasurement of ECL arising from transfer of stage — 495 — (579) — (85) — (169) Net new and further lending/repayments 30,637 (17) 459 234 (146) 91 30,950 308 Change to risk parameters – credit quality — 82 — (676) — (823) — (1,417) Changes to models used for ECL calculation — (2) — (95) — 13 — (84) Assets written off — — — — (1,212) 1,212 (1,212) 1,212 Foreign exchange and others1 (82,107) 43 (5,546) 157 (961) 191 (88,614) 391 At 31 Dec 2022 603,321 (587) 52,563 (1,505) 4,139 (805) 660,023 (2,897) ECL income statement change for the period 558 (1,116) (804) (1,362) Recoveries 283 Others (3) Total ECL income statement change for the period (1,082) 1 Total includes $49.6bn of gross carrying loans and advances to customers, which were classified to assets held for sale, and a corresponding allowance for ECL of $221m, reflecting business disposals, as disclosed in Note 23 ‘Assets held for sale and liabilities of disposal groups held for sale’ on page 401. First lien residential mortgages – reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to customers including loan commitments and financial guarantees Non-credit impaired Credit impaired Stage 1 Stage 2 Stage 3 Total Gross carrying/ nominal amount Allowance for ECL Gross carrying/ nominal amount Allowance for ECL Gross carrying/ nominal amount Allowance for ECL Gross carrying/ nominal amount Allowance for ECL $m $m $m $m $m $m $m $m At 1 Jan 2023 317,666 (74) 40,048 (231) 2,230 (270) 359,944 (575) Transfers of financial instruments: (1,182) (109) 421 138 761 (29) — — – transfers from stage 1 to stage 2 (41,207) 28 41,207 (28) — — — — – transfers from stage 2 to stage 1 40,164 (117) (40,164) 117 — — — — – transfers to stage 3 (354) 1 (958) 100 1,312 (101) — — – transfers from stage 3 215 (21) 336 (51) (551) 72 — — Net remeasurement of ECL arising from transfer of stage — 72 — (79) — (67) — (74) Net new and further lending/repayments 15,447 (3) (3,939) 22 (751) 322 10,757 341 Change to risk parameters – credit quality — 16 — (67) — (269) — (320) Changes to models used for ECL calculation — (2) — 28 — — — 26 Assets written off — — — — (53) 53 (53) 53 Foreign exchange and others 8,833 (9) 1,983 (13) 71 (4) 10,887 (26) At 31 Dec 2023 340,764 (109) 38,513 (202) 2,258 (264) 381,535 (575) ECL income statement change for the period 83 (96) (14) (27) Recoveries 10 Others 13 Total ECL income statement change for the period (4) Risk review 194 HSBC Holdings plc Annual Report and Accounts 2023 Credit cards – reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to customers including loan commitments and financial guarantees Non-credit impaired Credit impaired Stage 1 Stage 2 Stage 3 Total Gross carrying/ nominal amount Allowance for ECL Gross carrying/ nominal amount Allowance for ECL Gross carrying/ nominal amount Allowance for ECL Gross carrying/ nominal amount Allowance for ECL $m $m $m $m $m $m $m $m At 1 Jan 2023 140,519 (244) 6,747 (777) 353 (160) 147,619 (1,181) Transfers of financial instruments: 199 (292) (848) 496 649 (204) — — – transfers from stage 1 to stage 2 (7,855) 102 7,855 (102) — — — — – transfers from stage 2 to stage 1 8,124 (391) (8,124) 391 — — — — – transfers to stage 3 (82) 1 (621) 227 703 (228) — — – transfers from stage 3 12 (4) 42 (20) (54) 24 — — Net remeasurement of ECL arising from transfer of stage — 185 — (301) — (5) — (121) Net new and further lending/repayments 13,206 27 621 169 12 (41) 13,839 155 Change to risk parameters – credit quality — 82 — (281) — (301) — (500) Changes to models used for ECL calculation — (9) — 15 — 1 — 7 Assets written off — — — — (571) 571 (571) 571 Foreign exchange and others (632) (2) 27 (19) 7 (5) (598) (26) At 31 Dec 2023 153,292 (253) 6,547 (698) 450 (144) 160,289 (1,095) ECL income statement change for the period 285 (398) (346) (459) Recoveries 108 Others (200) Total ECL income statement change for the period (551) Other personal lending – reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to customers including loan commitments and financial guarantees Non-credit impaired Credit impaired Stage 1 Stage 2 Stage 3 Total Gross carrying/ nominal amount Allowance for ECL Gross carrying/ nominal amount Allowance for ECL Gross carrying/ nominal amount Allowance for ECL Gross carrying/ nominal amount Allowance for ECL $m $m $m $m $m $m $m $m At 1 Jan 2023 145,136 (269) 5,768 (497) 1,556 (375) 152,460 (1,141) Transfers of financial instruments: (1,161) (218) 466 453 695 (235) — — – transfers from stage 1 to stage 2 (8,155) 140 8,155 (140) — — — — – transfers from stage 2 to stage 1 7,019 (354) (7,019) 354 — — — — – transfers to stage 3 (106) 1 (766) 287 872 (288) — — – transfers from stage 3 81 (5) 96 (48) (177) 53 — — Net remeasurement of ECL arising from transfer of stage — 306 — (299) — (7) — — Net new and further lending/repayments 5,758 (71) (1,395) 159 (430) (137) 3,933 (49) Change to risk parameters – credit quality — 6 — (293) — (385) — (672) Changes to models used for ECL calculation — (2) — (22) — 6 — (18) Assets written off — — — — (702) 702 (702) 702 Foreign exchange and others1 7,034 8 1,056 (35) 33 (17) 8,123 (44) At 31 Dec 2023 156,767 (240) 5,895 (534) 1,152 (448) 163,814 (1,222) ECL income statement change for the period 239 (455) (523) (739) Recoveries 108 Others 195 Total ECL income statement change for the period (436) 1 Total includes $7.2bn of gross carrying loans and advances and a corresponding allowance for ECL of $10m, due to the retention of certain balances previously classified as assets held for sale of our retail banking operations in France. For further details, see Note 23 ‘Assets held for sale and liabilities of disposal groups held for sale’ on page 401. HSBC Holdings plc Annual Report and Accounts 2023 195 Risk review Personal lending – credit risk profile by internal PD band for loans and advances to customers at amortised cost Gross carrying amount Allowance for ECL PD range1 Stage 1 Stage 2 Stage 3 Total Stage 1 Stage 2 Stage 3 Total ECL coverage % $m $m $m $m $m $m $m $m % First lien residential mortgages2 320,410 38,287 2,212 360,909 (102) (200) (269) (571) 0.2 – Band 1 0.000 to 0.250 229,188 3,174 — 232,362 (16) (14) — (30) — – Band 2 0.251 to 0.500 54,891 12,266 — 67,157 (11) (17) — (28) — – Band 3 0.501 to 1.500 28,159 16,140 — 44,299 (22) (49) — (71) 0.2 – Band 4 1.501 to 5.000 7,451 4,559 — 12,010 (52) (30) — (82) 0.7 – Band 5 5.001 to 20.000 599 1,097 — 1,696 — (11) — (11) 0.6 – Band 6 20.001 to 99.999 122 1,051 — 1,173 (1) (79) — (80) 6.8 – Band 7 100.000 — — 2,212 2,212 — — (269) (269) 12.2 Credit cards 19,909 4,419 352 24,680 (236) (697) (203) (1,136) 4.6 – Band 1 0.000 to 0.250 9,490 1 — 9,491 (32) — — (32) 0.3 – Band 2 0.251 to 0.500 2,481 6 — 2,487 (21) (1) — (22) 0.9 – Band 3 0.501 to 1.500 4,799 294 — 5,093 (56) (17) — (73) 1.4 – Band 4 1.501 to 5.000 2,787 2,291 — 5,078 (93) (158) — (251) 4.9 – Band 5 5.001 to 20.000 352 1,374 — 1,726 (34) (258) — (292) 16.9 – Band 6 20.001 to 99.999 — 453 — 453 — (263) — (263) 58.1 – Band 7 100.000 — — 352 352 — — (203) (203) 57.7 Other personal lending (excluding credit cards) 56,215 4,777 941 61,933 (241) (537) (382) (1,160) 1.9 – Band 1 0.000 to 0.250 28,115 30 — 28,145 (34) (1) — (35) 0.1 – Band 2 0.251 to 0.500 6,634 286 — 6,920 (11) (1) — (12) 0.2 – Band 3 0.501 to 1.500 12,935 329 — 13,264 (61) (9) — (70) 0.5 – Band 4 1.501 to 5.000 7,215 1,447 — 8,662 (79) (46) — (125) 1.4 – Band 5 5.001 to 20.000 1,137 2,005 — 3,142 (55) (199) — (254) 8.1 – Band 6 20.001 to 99.999 179 680 — 859 (1) (281) — (282) 32.8 – Band 7 100.000 — — 941 941 — — (382) (382) 40.6 At 31 Dec 2023 396,534 47,483 3,505 447,522 (579) (1,434) (854) (2,867) 0.6 First lien residential mortgages2 294,919 39,860 2,042 336,821 (74) (231) (270) (575) 0.2 – Band 1 0.000 to 0.250 247,330 21,220 — 268,550 (13) (4) — (17) — – Band 2 0.251 to 0.500 19,615 7,900 — 27,515 (4) (3) — (7) — – Band 3 0.501 to 1.500 21,323 5,691 — 27,014 (18) (7) — (25) 0.1 – Band 4 1.501 to 5.000 6,594 2,694 — 9,288 (39) (24) — (63) 0.7 – Band 5 5.001 to 20.000 34 1,024 — 1,058 — (40) — (40) 3.8 – Band 6 20.001 to 99.999 23 1,331 — 1,354 — (153) — (153) 11.3 – Band 7 100.000 — — 2,042 2,042 — — (270) (270) 13.2 Other personal lending 67,758 9,006 1,297 78,061 (487) (1,273) (535) (2,295) 2.9 – Band 1 0.000 to 0.250 30,150 153 — 30,303 (54) (13) — (67) 0.2 – Band 2 0.251 to 0.500 7,219 251 — 7,470 (26) (1) — (27) 0.4 – Band 3 0.501 to 1.500 17,077 1,499 — 18,576 (82) (44) — (126) 0.7 – Band 4 1.501 to 5.000 10,344 2,036 — 12,380 (170) (103) — (273) 2.2 – Band 5 5.001 to 20.000 2,501 3,692 — 6,193 (154) (520) — (674) 10.9 – Band 6 20.001 to 99.999 467 1,375 — 1,842 (1) (592) — (593) 32.2 – Band 7 100.000 — — 1,297 1,297 — — (535) (535) 41.2 At 31 Dec 2022 362,677 48,866 3,339 414,882 (561) (1,504) (805) (2,870) 0.7 1 12-month point in time adjusted for multiple economic scenarios. 2 PD bands do not consider the impact of any management judgemental adjustments on stage or allowances for ECL including the impact of new models not yet formally implemented. For a list of management judgemental adjustments see page 163. Risk review 196 HSBC Holdings plc Annual Report and Accounts 2023 Personal lending – credit risk profile by internal PD band for loan and other credit-related commitments and financial guarantees Nominal amount Allowance for ECL PD range1 Stage 1 Stage 2 Stage 3 Total Stage 1 Stage 2 Stage 3 Total ECL coverage % $m $m $m $m $m $m $m $m % Loan and other credit- related commitments 253,183 3,459 355 256,997 (23) — (2) (25) — – Band 1 0.000 to 0.250 196,201 114 — 196,315 (15) — — (15) — – Band 2 0.251 to 0.500 17,861 63 — 17,924 (1) — — (1) — – Band 3 0.501 to 1.500 29,623 1,262 — 30,885 (1) — — (1) — – Band 4 1.501 to 5.000 8,550 1,334 — 9,884 (4) — — (4) — – Band 5 5.001 to 20.000 508 564 — 1,072 (2) — — (2) 0.2 – Band 6 20.001 to 99.999 440 122 — 562 — — — — — – Band 7 100.000 — — 355 355 — — (2) (2) 0.6 Financial guarantees 1,106 13 — 1,119 — — — — — – Band 1 0.000 to 0.250 348 — — 348 — — — — — – Band 2 0.251 to 0.500 386 — — 386 — — — — — – Band 3 0.501 to 1.500 359 1 — 360 — — — — — – Band 4 1.501 to 5.000 3 — — 3 — — — — — – Band 5 5.001 to 20.000 2 12 — 14 — — — — — – Band 6 20.001 to 99.999 8 — — 8 — — — — — – Band 7 100.000 — — — — — — — — — At 31 Dec 2023 254,289 3,472 355 258,116 (23) — (2) (25) — 1 12-month point in time adjusted for multiple economic scenarios. Collateral on loans and advances (Audited) The following table provides a quantification of the value of fixed charges we hold over specific assets where we have a history of enforcing, and are able to enforce, collateral in satisfying a debt in the event of the borrower failing to meet its contractual obligations, and where the collateral is cash or can be realised by sale in an established market. The collateral valuation excludes any adjustments for obtaining and selling the collateral and, in particular, loans shown as not collateralised or partially collateralised may also benefit from other forms of credit mitigants. Personal lending – residential mortgage loans including loan commitments by level of collateral for key countries/territories by stage (Audited) Gross carrying/nominal amount ECL coverage Stage 1 Stage 2 Stage 3 Total Stage 1 Stage 2 Stage 3 Total $m $m $m $m % % % % Fully collateralised by LTV ratio 331,279 38,378 2,129 371,786 — 0.5 10.1 0.1 – less than 50% 140,992 19,715 1,165 161,872 — 0.3 7.1 0.1 – 51% to 70% 113,043 12,636 568 126,247 — 0.6 10.9 0.1 – 71% to 80% 37,866 4,111 229 42,206 — 0.9 15.2 0.2 – 81% to 90% 23,278 1,499 109 24,886 — 1.2 17.3 0.2 – 91% to 100% 16,100 417 58 16,575 — 1.6 28.9 0.2 Partially collateralised (A): LTV > 100% 9,529 136 129 9,794 — 3.4 42.0 0.6 – collateral value on A 8,968 123 104 9,195 Total at 31 Dec 2023 340,808 38,514 2,258 381,580 — 0.5 11.9 0.1 of which: UK Fully collateralised by LTV ratio 146,739 33,597 759 181,095 — 0.3 9.7 0.1 – less than 50% 60,403 17,629 458 78,490 — 0.2 7.9 0.1 – 51% to 70% 49,945 11,248 207 61,400 — 0.4 9.4 0.1 – 71% to 80% 20,293 3,275 61 23,629 — 0.6 13.4 0.1 – 81% to 90% 12,946 1,161 18 14,125 — 0.8 17.5 0.1 – 91% to 100% 3,152 284 15 3,451 — 1.0 41.6 0.3 Partially collateralised (B): LTV > 100% 317 19 27 363 0.1 1.7 17.5 1.4 – collateral value on B 244 15 22 281 Total UK at 31 Dec 2023 147,056 33,616 786 181,458 — 0.3 9.9 0.1 of which: Hong Kong Fully collateralised 97,414 1,354 93 98,861 — — 0.3 — – less than 50% 41,903 831 66 42,800 — — 0.1 — – 51% to 70% 29,762 330 15 30,107 — — 0.5 — – 71% to 80% 5,260 48 2 5,310 — 0.1 0.4 — – 81% to 90% 8,161 61 4 8,226 — 0.1 1.9 — – 91% to 100% 12,328 84 6 12,418 — 0.3 1.8 — Partially collateralised (C): LTV > 100% 8,973 86 4 9,063 — 0.9 7.8 — – collateral value on C 8,535 81 4 8,620 Total Hong Kong at 31 Dec 2023 106,387 1,440 97 107,924 — 0.1 0.7 — HSBC Holdings plc Annual Report and Accounts 2023 197 Risk review Personal lending – residential mortgage loans including loan commitments by level of collateral for key countries/territories by stage (continued) (Audited) Gross carrying/nominal amount ECL coverage Stage 1 Stage 2 Stage 3 Total Stage 1 Stage 2 Stage 3 Total $m $m $m $m % % % % Fully collateralised by LTV ratio 310,705 39,906 2,097 352,708 — 0.6 9.9 0.1 – less than 50% 154,337 12,250 1,077 167,664 — 0.7 7.2 0.1 – 51% to 70% 102,191 16,989 537 119,717 — 0.5 9.5 0.1 – 71% to 80% 25,458 6,770 212 32,440 — 0.5 14.7 0.2 – 81% to 90% 17,106 3,388 147 20,641 — 0.5 17.8 0.2 – 91% to 100% 11,613 509 124 12,246 — 1.1 18.1 0.3 Partially collateralised (A): LTV > 100% 6,964 143 133 7,240 — 6.9 46.9 1.0 – collateral value on A 6,521 123 79 6,723 Total at 31 Dec 2022 317,669 40,049 2,230 359,948 — 0.6 12.1 0.2 of which: UK Fully collateralised by LTV ratio 134,044 34,541 676 169,261 — 0.4 11.1 0.1 – less than 50% 70,936 10,387 448 81,771 — 0.6 9.4 0.1 – 51% to 70% 43,617 14,943 158 58,718 — 0.4 11.6 0.1 – 71% to 80% 12,849 5,922 33 18,804 — 0.3 19.7 0.1 – 81% to 90% 5,922 2,918 10 8,850 — 0.2 24.5 0.1 – 91% to 100% 720 371 27 1,118 — 0.2 22.5 0.6 Partially collateralised (B): LTV > 100% 329 49 12 390 — 0.3 9.8 0.3 – collateral value on B 237 38 4 279 Total UK at 31 Dec 2022 134,373 34,590 688 169,651 — 0.4 11.1 0.1 of which: Hong Kong Fully collateralised by LTV ratio 94,949 981 237 96,167 — — 0.1 — – less than 50% 44,740 577 105 45,422 — — — — – 51% to 70% 28,123 256 37 28,416 — — 0.3 — – 71% to 80% 4,167 37 25 4,229 — — 0.1 — – 81% to 90% 7,883 51 27 7,961 — 0.1 — — – 91% to 100% 10,036 60 43 10,139 — 0.2 — — Partially collateralised (C): LTV > 100% 6,441 47 1 6,489 — 0.2 0.3 — – collateral value on C 6,146 44 1 6,191 Total Hong Kong at 31 Dec 2022 101,390 1,028 238 102,656 — — 0.1 — Supplementary information Wholesale lending – loans and advances to customers at amortised cost by country/territory Gross carrying amount Allowance for ECL Corporate and commercial of which: real estate and construction1 Non-bank financial institutions Total Corporate and commercial of which: real estate and construction1 Non-bank financial institutions Total $m $m $m $m $m $m $m $m UK 105,536 17,852 18,343 123,879 (1,451) (246) (231) (1,682) – of which: HSBC UK Bank plc (ring-fenced bank) 80,248 17,060 9,372 89,620 (1,212) (212) (66) (1,278) – of which: HSBC Bank plc (non-ring-fenced bank) 24,791 792 8,971 33,762 (240) (34) (165) (405) – of which: Other trading entities 497 — — 497 1 — — 1 France 27,017 4,796 5,701 32,718 (636) (53) (18) (654) Germany 6,667 240 632 7,299 (74) — — (74) Switzerland 1,168 423 378 1,546 (12) (1) — (12) Hong Kong 125,340 48,594 19,319 144,659 (3,099) (2,147) (57) (3,156) Australia 12,685 4,443 1,564 14,249 (49) (1) — (49) India 10,856 2,083 5,315 16,171 (47) (7) (4) (51) Indonesia 3,100 162 411 3,511 (136) (58) — (136) Mainland China 28,655 6,709 7,775 36,430 (313) (212) (11) (324) Malaysia 5,797 1,137 258 6,055 (69) (15) — (69) Singapore 15,845 3,458 948 16,793 (321) (40) (1) (322) Taiwan 4,512 30 81 4,593 — — — — Egypt 899 45 86 985 (128) (10) (1) (129) UAE 13,740 1,979 823 14,563 (543) (296) — (543) US 26,993 5,143 9,155 36,148 (239) (101) (58) (297) Mexico 11,326 865 1,349 12,675 (320) (19) (5) (325) Other 27,519 3,496 2,294 29,813 (366) (80) (18) (384) At 31 Dec 2023 427,655 101,455 74,432 502,087 (7,803) (3,286) (404) (8,207) Risk review 198 HSBC Holdings plc Annual Report and Accounts 2023 Wholesale lending – loans and advances to customers at amortised cost by country/territory (continued) Gross carrying amount Allowance for ECL Corporate and commercial of which: real estate and construction Non-bank financial institutions Total Corporate and commercial of which: real estate and construction Non-bank financial institutions Total $m $m $m $m $m $m $m $m UK 104,775 18,747 12,662 117,437 (1,522) (420) (131) (1,653) – of which: HSBC UK Bank plc (ring-fenced bank) 78,249 17,121 2,980 81,229 (1,247) (279) (6) (1,253) – of which: HSBC Bank plc (non-ring-fenced bank) 26,526 1,625 9,682 36,208 (275) (141) (125) (400) France 27,571 4,607 4,152 31,723 (621) (49) (4) (625) Germany 6,603 252 713 7,316 (154) — (3) (157) Switzerland 988 635 298 1,286 (8) — — (8) Hong Kong 144,256 58,531 20,798 165,054 (2,997) (1,980) (35) (3,032) Australia 11,641 3,339 1,157 12,798 (97) (1) — (97) India 9,052 1,901 4,267 13,319 (80) (26) (10) (90) Indonesia 3,214 206 226 3,440 (187) (5) — (187) Mainland China 31,790 7,499 8,908 40,698 (327) (174) (30) (357) Malaysia 5,986 1,351 180 6,166 (133) (38) — (133) Singapore 15,905 4,031 1,192 17,097 (387) (44) (1) (388) Taiwan 4,701 36 65 4,766 (1) — — (1) Egypt 1,262 111 101 1,363 (117) (6) (1) (118) UAE 13,503 2,091 149 13,652 (674) (342) — (674) US 28,249 6,491 8,640 36,889 (214) (95) (26) (240) Mexico 9,784 1,081 717 10,501 (334) (34) (1) (335) Other 33,922 3,676 2,699 36,621 (467) (79) (15) (482) At 31 Dec 2022 453,202 114,585 66,924 520,126 (8,320) (3,293) (257) (8,577) 1 Real estate lending within this disclosure corresponds solely to the industry of the borrower. Commercial real estate on page 183 includes borrowers in multiple industries investing in income-producing assets and, to a lesser extent, their construction and development. Personal lending – loans and advances to customers at amortised cost by country/territory Gross carrying amount Allowance for ECL First lien residential mortgages Other personal of which: credit cards Total First lien residential mortgages Other personal of which: credit cards Total $m $m $m $m $m $m $m $m UK 168,469 19,503 8,056 187,972 (209) (697) (339) (906) – of which: HSBC UK Bank plc (ring-fenced bank) 164,878 17,884 7,975 182,762 (205) (692) (336) (897) – of which: HSBC Bank plc (non-ring-fenced bank) 3,226 141 81 3,367 (3) (5) (2) (8) – of which: Other trading entities 365 1,478 — 1,843 (1) — (1) (1) France1 436 7,476 1 7,912 (13) (8) — (21) Germany — 165 — 165 — — — — Switzerland 1,770 5,466 — 7,236 (1) (20) — (21) Hong Kong 107,182 31,248 9,663 138,430 (2) (417) (286) (419) Australia 23,001 446 396 23,447 (5) (19) (18) (24) India 1,537 680 185 2,217 (4) (16) (12) (20) Indonesia 58 288 137 346 (2) (11) (7) (13) Mainland China 7,503 754 287 8,257 (3) (49) (39) (52) Malaysia 2,313 2,115 882 4,428 (23) (87) (36) (110) Singapore 8,151 5,589 521 13,740 — (38) (17) (38) Taiwan 5,607 1,370 309 6,977 — (17) (4) (17) Egypt — 341 89 341 — (1) (1) (1) UAE 1,957 1,325 440 3,282 (10) (62) (24) (72) US 18,340 673 199 19,013 (15) (19) (14) (34) Mexico 8,778 6,215 2,465 14,993 (176) (757) (297) (933) Other 5,807 2,959 1,050 8,766 (108) (78) (42) (186) At 31 Dec 2023 360,909 86,613 24,680 447,522 (571) (2,296) (1,136) (2,867) HSBC Holdings plc Annual Report and Accounts 2023 199 Risk review Personal lending – loans and advances to customers at amortised costs by country/territory (continued) Gross carrying amount Allowance for ECL First lien residential mortgages Other personal of which: credit cards Total First lien residential mortgages Other personal of which: credit cards Total $m $m $m $m $m $m $m $m UK 154,519 16,793 6,622 171,312 (227) (838) (449) (1,065) – of which: HSBC UK Bank plc (ring-fenced bank) 151,188 15,808 6,556 166,996 (222) (828) (447) (1,050) – of which: HSBC Bank plc (non-ring-fenced bank) 3,331 985 66 4,316 (5) (10) (2) (15) France1 30 76 9 106 (14) (8) — (22) Germany — 234 — 234 — — — — Switzerland 1,378 5,096 — 6,474 — (20) — (20) Hong Kong 101,478 31,409 8,644 132,887 (1) (352) (258) (353) Australia 21,372 456 396 21,828 (11) (18) (18) (29) India 1,078 590 162 1,668 (4) (18) (13) (22) Indonesia 70 278 141 348 (1) (17) (12) (18) Mainland China 9,305 921 378 10,226 (3) (61) (49) (64) Malaysia 2,292 2,437 843 4,729 (27) (92) (31) (119) Singapore 7,501 6,264 422 13,765 — (35) (14) (35) Taiwan 5,428 1,189 284 6,617 — (18) (5) (18) Egypt — 310 83 310 — (2) (1) (2) UAE 2,104 1,339 426 3,443 (14) (84) (41) (98) US 16,847 704 213 17,551 (10) (31) (23) (41) Mexico 6,124 4,894 1,615 11,018 (145) (593) (196) (738) Other 7,295 5,071 1,150 12,366 (118) (108) (51) (226) At 31 Dec 2022 336,821 78,061 21,388 414,882 (575) (2,295) (1,161) (2,870) 1 Included in other personal lending at 31 December 2023 is $7,424m (31 December 2022: nil) guaranteed by Crédit Logement. Summary of financial instruments to which the impairment requirements in IFRS 9 are applied – by global business Gross carrying/nominal amount Allowance for ECL Stage 1 Stage 2 Stage 3 POCI Total Stage 1 Stage 2 Stage 3 POCI Total $m $m $m $m $m $m $m $m $m $m – WPB 630,661 54,069 4,233 — 688,963 (621) (1,551) (977) — (3,149) – CMB 464,893 66,688 12,698 49 544,328 (508) (1,336) (4,995) (23) (6,862) – GBM 696,377 14,247 3,002 32 713,658 (119) (199) (1,161) (7) (1,486) – Corporate Centre 75,805 37 6 — 75,848 (1) (13) — — (14) Total gross carrying amount on-balance sheet at 31 Dec 2023 1,867,736 135,041 19,939 81 2,022,797 (1,249) (3,099) (7,133) (30) (11,511) – WPB 253,333 3,811 333 — 257,477 (22) — (2) — (24) – CMB 142,206 16,238 877 — 159,321 (100) (101) (102) — (303) – GBM 250,007 10,752 314 4 261,077 (38) (34) (7) — (79) – Corporate Centre 149 — — — 149 — — — — — Total nominal amount off-balance sheet at 31 Dec 2023 645,695 30,801 1,524 4 678,024 (160) (135) (111) — (406) – WPB 124,747 406 — — 125,153 (14) (17) — — (31) – CMB 86,021 405 — — 86,426 (9) (18) — — (27) – GBM 88,229 173 1 — 88,403 (13) (6) (1) — (20) – Corporate Centre 2,201 165 — — 2,366 (1) (18) — — (19) Debt instruments measured at FVOCI at 31 Dec 2023 301,198 1,149 1 — 302,348 (37) (59) (1) — (97) – WPB 593,424 53,302 3,959 — 650,685 (602) (1,586) (980) — (3,168) – CMB 440,638 82,087 13,072 112 535,909 (484) (1,620) (4,988) (38) (7,130) – GBM 700,267 20,577 3,344 17 724,205 (116) (463) (1,116) — (1,695) – Corporate Centre 83,491 188 8 — 83,687 (3) (13) — — (16) Total gross carrying amount on-balance sheet at 31 Dec 2022 1,817,820 156,154 20,383 129 1,994,486 (1,205) (3,682) (7,084) (38) (12,009) – WPB 239,357 4,388 770 — 244,515 (25) (1) — — (26) – CMB 130,342 20,048 642 — 151,032 (83) (136) (81) — (300) – GBM 229,507 12,059 209 — 241,775 (39) (56) (17) — (112) – Corporate Centre 248 1 — — 249 — — — — — Total nominal amount off-balance sheet at 31 Dec 2022 599,454 36,496 1,621 — 637,571 (147) (193) (98) — (438) – WPB 112,591 1,066 — 1 113,658 (17) (17) — — (34) – CMB 71,445 735 — — 72,180 (9) (14) — — (23) – GBM 75,228 434 — 1 75,663 (10) (8) — — (18) – Corporate Centre 3,347 299 — — 3,646 (31) (19) (1) — (51) Debt instruments measured at FVOCI at 31 Dec 2022 262,611 2,534 — 2 265,147 (67) (58) (1) — (126) Risk review 200 HSBC Holdings plc Annual Report and Accounts 2023 Loans and advances to customers and banks – other supplementary information Gross carrying amount of which: stage 3 and POCI Allowance for ECL of which: stage 3 and POCI Change in ECL Write-offs Recoveries $m $m $m $m $m $m $m First lien residential mortgages 360,909 2,212 (571) (269) (10) (53) 10 – second lien residential mortgages 396 21 (8) (5) (1) (1) 2 – guaranteed loans in respect of residential property 8,593 90 (20) (14) 2 (8) 2 – other personal lending which is secured 29,481 157 (42) (24) 8 (2) 2 – credit cards 24,680 352 (1,136) (203) (577) (571) 108 – other personal lending which is unsecured 21,251 659 (1,048) (331) (380) (663) 99 – motor vehicle finance 2,212 14 (42) (8) (61) (28) 3 Other personal lending 86,613 1,293 (2,296) (585) (1,009) (1,273) 216 Personal lending 447,522 3,505 (2,867) (854) (1,019) (1,326) 226 – agriculture, forestry and fishing 7,181 312 (130) (64) (21) (9) — – mining and quarrying 7,223 325 (101) (83) 27 (49) — – manufacturing 85,333 1,899 (1,143) (860) (355) (273) 11 – electricity, gas, steam and air-conditioning supply 14,355 255 (119) (88) (26) (10) — – water supply, sewerage, waste management and remediation 3,262 102 (63) (51) (44) (2) — – real estate and construction 101,455 5,883 (3,286) (2,561) (1,358) (1,191) 6 – wholesale and retail trade, repair of motor vehicles and motorcycles 79,121 2,362 (1,341) (1,134) (124) (447) 12 – transportation and storage 21,456 445 (230) (160) (87) (42) — – accommodation and food 15,874 1,058 (257) (112) (33) (26) — – publishing, audiovisual and broadcasting 19,731 210 (173) (50) (106) (73) — – professional, scientific and technical activities 26,753 740 (401) (306) (262) (110) 1 – administrative and support services 22,203 597 (268) (174) 39 (137) — – public administration and defence, compulsory social security 1,042 — — — — — — – education 1,460 46 (15) (4) (1) (22) — – health and care 4,236 183 (56) (26) 40 (7) — – arts, entertainment and recreation 1,961 99 (42) (31) 15 (8) — – other services 8,355 318 (153) (90) 22 (181) 12 – activities of households 694 — — — — — — – extra-territorial organisations and bodies activities 101 — — — — — — – government 5,827 205 (12) (10) (15) — — – asset-backed securities 32 — (13) — — — — Corporate and commercial 427,655 15,039 (7,803) (5,804) (2,289) (2,587) 42 Non-bank financial institutions 74,432 810 (404) (322) (168) (9) — Wholesale lending 502,087 15,849 (8,207) (6,126) (2,457) (2,596) 42 Loans and advances to customers 949,609 19,354 (11,074) (6,980) (3,476) (3,922) 268 Loans and advances to banks 112,917 2 (15) (2) 53 — — At 31 Dec 2023 1,062,526 19,356 (11,089) (6,982) (3,423) (3,922) 268 HSBC Holdings plc Annual Report and Accounts 2023 201 Risk review Loans and advances to customers and banks – other supplementary information (continued) Gross carrying amount of which: stage 3 and POCI Allowance for ECL of which: stage 3 and POCI Change in ECL Write-offs Recoveries $m $m $m $m $m $m $m First lien residential mortgages 336,821 2,042 (575) (270) 180 (48) 26 – second lien residential mortgages 379 6 (6) (3) 9 (1) 4 – guaranteed loans in respect of residential property 1,367 125 (34) (30) (11) (9) 2 – other personal lending which is secured 32,106 206 (55) (30) (16) (5) 1 – credit cards 21,388 260 (1,161) (160) (638) (471) 126 – other personal lending which is unsecured 20,880 687 (1,008) (305) (655) (660) 119 – motor vehicle finance 1,941 13 (31) (7) 39 (18) 5 Other personal lending 78,061 1,297 (2,295) (535) (1,272) (1,164) 257 Personal lending 414,882 3,339 (2,870) (805) (1,092) (1,212) 283 – agriculture, forestry and fishing 6,571 261 (122) (68) (32) (42) — – mining and quarrying 8,120 233 (172) (146) (24) (46) — – manufacturing 87,460 2,065 (1,153) (896) (191) (171) 3 – electricity, gas, steam and air-conditioning supply 16,478 277 (108) (67) (75) (16) — – water supply, sewerage, waste management and remediation 2,993 26 (21) (13) 3 (1) — – real estate and construction 114,585 5,651 (3,293) (2,232) (1,630) (310) 8 – wholesale and retail trade, repair of motor vehicles and motorcycles 82,429 2,810 (1,666) (1,344) (344) (667) 8 – transportation and storage 24,686 556 (248) (153) (13) (82) 1 – accommodation and food 17,174 789 (244) (82) 103 (29) — – publishing, audiovisual and broadcasting 18,388 277 (117) (59) 9 (47) 1 – professional, scientific and technical activities 17,935 542 (272) (200) (81) (31) 1 – administrative and support services 25,077 980 (408) (293) (27) (27) 1 – public administration and defence, compulsory social security 1,180 — (1) — 5 — — – education 1,593 87 (31) (22) 1 (3) — – health and care 3,902 266 (90) (67) (30) (7) 1 – arts, entertainment and recreation 1,862 146 (77) (57) 1 (17) — – other services 12,471 589 (274) (219) 120 (92) 7 – activities of households 744 — — — — — — – extra-territorial organisations and bodies activities 47 — — — 1 — 1 – government 9,475 270 (10) (7) (5) — — – asset-backed securities 32 — (13) — (4) — — Corporate and commercial 453,202 15,825 (8,320) (5,925) (2,213) (1,588) 32 Non-bank financial institutions 66,924 469 (257) (137) (165) (1) 1 Wholesale lending 520,126 16,294 (8,577) (6,062) (2,378) (1,589) 33 Loans and advances to customers 935,008 19,633 (11,447) (6,867) (3,470) (2,801) 316 Loans and advances to banks 104,544 82 (69) (22) (53) — — At 31 Dec 2022 1,039,552 19,715 (11,516) (6,889) (3,523) (2,801) 316 HSBC Holdings (Audited) Risk in HSBC Holdings is overseen by the HSBC Holdings Asset and Liability Management Committee. The major risks faced by HSBC Holdings are credit risk, liquidity risk and market risk (in the form of interest rate risk and foreign exchange risk). Credit risk in HSBC Holdings primarily arises from transactions with Group subsidiaries. In HSBC Holdings, the maximum exposure to credit risk arises from two components: – financial assets on the balance sheet, where maximum exposure equals the carrying amount (see page 338); and – financial guarantees and other guarantees, where the maximum exposure is the maximum that we would have to pay if the guarantees were called upon (see Note 34). In the case of our derivative asset balances (see page 338), there is a legally enforceable right of offset in the event of counterparty default and where, as a result, there is a net exposure for credit risk purposes. However, as there is no intention to settle these balances on a net basis under normal circumstances, they do not qualify for net presentation for accounting purposes. These offsets also include collateral received in cash and other financial assets. The total offset relating to our derivative asset balances was $3.0bn at 31 December 2023 (2022: $3.1bn). The credit quality of loans and advances and financial investments, both of which consist of intra-Group lending and US Treasury bills and bonds, is assessed as ‘strong’, with 100% of the exposure being neither past due nor impaired (2022: 100%). For further details of credit quality classification, see page 148. Risk review 202 HSBC Holdings plc Annual Report and Accounts 2023 Treasury risk Contents 203 Overview 203 Treasury risk management 205 Other Group risks 206 Capital risk in 2023 210 Liquidity and funding risk in 2023 213 Structural foreign exchange risk in 2023 214 Interest rate risk in the banking book in 2023 Overview Treasury risk is the risk of having insufficient capital, liquidity or funding resources to meet financial obligations and satisfy regulatory requirements, including the risk of adverse impact on earnings or capital due to structural and transactional foreign exchange exposures, as well as changes in market interest rates, together with pension and insurance risk. Treasury risk arises from changes to the respective resources and risk profiles driven by customer behaviour, management decisions or the external environment. Approach and policy (Audited) Our objective in the management of treasury risk is to maintain appropriate levels of capital, liquidity, funding, foreign exchange and market risk to support our business strategy, and meet our regulatory and stress testing-related requirements. Our approach to treasury management is driven by our strategic and organisational requirements, taking into account the regulatory, economic and commercial environment. We aim to maintain a strong capital and liquidity base to support the risks inherent in our business and invest in accordance with our strategy, meeting both consolidated and local regulatory requirements at all times. Our policy is underpinned by our risk management framework. The risk management framework incorporates a number of measures aligned to our assessment of risks for both internal and regulatory purposes. These risks include credit, market, operational, pensions, structural and transactional foreign exchange risk, and interest rate risk in the banking book. For further details, refer to our Pillar 3 Disclosures at 31 December 2023. Treasury risk management Key developments in 2023 – Following high-profile banking failures in the first quarter of 2023, we reviewed our liquidity monitoring and metric assumptions as part of our internal liquidity adequacy assessment process cycle to ensure they continued to cover observed and emerging risks. – In 2023, we reverted to a policy of paying quarterly dividends, with the Board approving three interim dividends of $0.10 per share. We announced $7bn of share buy-backs during 2023. – Effective July 2023, the Bank of England’s Financial Policy Committee doubled the UK countercyclical capital buffer rate from 1% to 2%, in line with the usual 12-month implementation lag. This change increased our CET1 requirement by 0.2 percentage points. – We further stabilised our net interest income against a backdrop of fluctuating interest rate expectations as the trajectory of inflation for major economies was reassessed. – Following the acquisition of SVB UK in the first quarter of 2023, we launched HSBC Innovation Banking in June, which combined the expertise of SVB UK with the reach of our international network. We are in the process of integrating HSBC Innovation Banking into the Group. The acquisition was funded from existing resources, and the impacts on our Group LCR and CET1 ratio were minimal. – In the fourth quarter of 2023, we reclassified our retail banking operations in France as held for sale, recognising a $2.0bn loss. In the first quarter, we had recognised a $2.1bn partial reversal of impairment for this business. The net result for the year was a favourable $0.1bn impact. On 1 January 2024, we completed the sale of this business with no material incremental impact on CET1. – Having entered into an agreement to sell our banking business in Canada in 2022, the transaction is expected to complete at the end of the first quarter of 2024. The associated gain on sale is expected to add approximately 1.2 percentage points to the CET1 ratio as it stood at 31 December 2023. For quantitative disclosures on capital ratios, own funds and risk- weighted assets (‘RWAs’), see pages 206 to 207. For quantitative disclosures on liquidity and funding metrics, see pages 210 to 211. For quantitative disclosures on interest rate risk in the banking book, see pages 214 to 216. Governance and structure The Global Head of Traded and Treasury Risk Management and Risk Analytics is the accountable risk steward for all treasury risks. The Group Treasurer is the risk owner for all treasury risks, with the exception of pension risk and insurance risk. The Group Treasurer co- owns pension risk with the Group Head of Performance, Reward and Employee Relations. Insurance risk is owned by the Chief Executive Officer for Global Insurance. Capital risk, liquidity risk, interest rate risk in the banking book, structural foreign exchange risk and transactional foreign exchange risk are the responsibility of the Group Executive Committee and the Group Risk Committee (‘GRC’). Global Treasury actively manages these risks on an ongoing basis, supported by the Holdings Asset and Liability Management Committee (‘ALCO’) and local ALCOs, overseen by Treasury Risk Management and Risk Management Meetings. Pension risk is overseen by a network of local and regional pension risk management meetings. The Global Pensions Risk Management Meeting provides oversight of all pension plans sponsored by HSBC globally, and is chaired by the accountable risk steward. Insurance risk is overseen by the Global Insurance Risk Management Meeting, chaired by the Chief Risk and Compliance Officer for Global Insurance. Capital, liquidity and funding risk management processes Assessment and risk appetite Our capital management policy is supported by a global capital management framework. The framework sets out our approach to determining key capital risk appetites including CET1, total capital, minimum requirements for own funds and eligible liabilities (‘MREL’), the leverage ratio and double leverage. Our internal capital adequacy assessment process (‘ICAAP’) is an assessment of the Group’s capital position, outlining both regulatory and internal capital resources and requirements resulting from HSBC’s business model, strategy, risk profile and management, performance and planning, risks to capital, and the implications of stress testing. Our assessment of capital adequacy is driven by an assessment of risks. These risks include credit, market, operational, pensions, insurance, structural foreign exchange, interest rate risk in the banking book and Group risk. Climate risk is also considered as part of the ICAAP, and we are continuing to develop our approach. The Group’s ICAAP supports the determination of the consolidated capital risk appetite and target ratios, as well as enables the assessment and determination of capital requirements by regulators. Subsidiaries prepare ICAAPs in line with global guidance, while considering their local regulatory regimes to determine their own risk appetites and ratios. HSBC Holdings plc Annual Report and Accounts 2023 203 Risk review HSBC Holdings is the provider of MREL to its subsidiaries, including equity and non-equity capital. These investments are funded by HSBC Holdings’ own equity capital and MREL-eligible debt. MREL includes own funds and liabilities that can be written down or converted into capital resources in order to absorb losses or recapitalise a bank in the event of its failure. In line with our existing structure and business model, HSBC has three resolution groups – the European resolution group, the Asian resolution group and the US resolution group. There are some smaller entities that fall outside these resolution groups. HSBC Holdings seeks to maintain a prudent balance between the composition of its capital and its investments in subsidiaries. As a matter of long-standing policy, the holding company group retains a substantial holdings capital buffer comprising cash and other high-quality liquid assets, which at 31 December 2023 was in excess of $27bn, within risk appetite. We aim to ensure that management has oversight of our liquidity and funding risks at Group and entity level through robust governance, in line with our risk management framework. We manage liquidity and funding risk at an operating entity level in accordance with globally consistent policies, procedures and reporting standards. This ensures that obligations can be met in a timely manner, in the jurisdiction where they fall due. Operating entities are required to meet internal minimum requirements and any applicable regulatory requirements at all times. These requirements are assessed through our internal liquidity adequacy assessment process (‘ILAAP’), which ensures that operating entities have robust strategies, policies, processes and systems for the identification, measurement, management and monitoring of liquidity risk over an appropriate set of time horizons, including intra-day. The ILAAP informs the validation of risk tolerance and the setting of risk appetite. It also assesses the capability to manage liquidity and funding effectively in each major entity. These metrics are set and managed locally but are subject to robust global review and challenge to ensure consistency of approach and application of the Group’s policies and controls. Planning and performance Capital and RWA plans form part of the annual financial resource plan that is approved by the Board. Capital and RWA forecasts are submitted to the Group Executive Committee on a monthly basis, and capital and RWAs are monitored and managed against the plan. The responsibility for global capital allocation principles rests with the Group Chief Financial Officer, supported by the Group Capital Management Meeting. This is a specialist forum addressing capital management, reporting into Holdings ALCO. Through our internal governance processes, we seek to strengthen discipline over our investment and capital allocation decisions, and to ensure that returns on investment meet management’s objectives. Our strategy is to allocate capital to businesses and entities to support growth objectives where returns above internal hurdle levels have been identified and in order to meet their regulatory and economic capital needs. We evaluate and manage business returns by using a return on average tangible equity measure and a related economic profit measure. Funding and liquidity plans also form part of the financial resource plan that is approved by the Board. The Board-level appetite measures are the liquidity coverage ratio (‘LCR’) and net stable funding ratio (‘NSFR’), together with an internal liquidity metric. In addition, we use a wider set of measures to manage an appropriate funding and liquidity profile, including legal entity depositor concentration limits, intra-day liquidity, forward-looking funding assessments and other key measures. Risks to capital and liquidity Outside the stress testing framework, other risks may be identified that have the potential to affect our RWAs, capital and/or liquidity position. Downside and Upside scenarios are assessed against our management objectives, and mitigating actions are assigned as necessary. We closely monitor future regulatory developments and continue to evaluate the impact of these upon our capital and liquidity requirements, particularly those related to the UK’s implementation of the outstanding measures to be implemented from the Basel III reforms (‘Basel 3.1‘). Regulatory developments Future changes to our ratios will occur with the implementation of Basel 3.1. The Prudential Regulation Authority (‘PRA‘) has published its consultation paper on the UK’s implementation, with a proposed implementation date of 1 July 2025. The PRA has also published a set of near-final rules in relation to some Basel 3.1 elements. We are currently assessing the impact of implementation. The RWA output floor under Basel 3.1 is proposed to be subject to a four-and-a-half year transitional provision. Any impact from the output floor is expected be towards the end of the transition period. Regulatory reporting processes and controls The quality of regulatory reporting remains a key priority for management and regulators. We are progressing with a comprehensive programme to strengthen our global processes, improve consistency and enhance controls across regulatory reports. The ongoing programme of work focuses on our material regulatory reports and is being phased over a number of years. This programme includes data enhancement, transformation of the reporting systems and an uplift to the control environment over the report production process. While this programme continues, there may be further impacts on some of our regulatory ratios, such as the CET1, LCR and NSFR, as we implement recommended changes and continue to enhance our controls across the process. Stress testing and recovery and resolution planning The Group uses stress testing to inform management of the capital and liquidity needed to withstand internal and external shocks, including a global economic downturn or a systems failure. Stress testing results are also used to inform risk mitigation actions, input into global business performance measures through tangible equity allocation, and recovery and resolution planning, as well as to re- evaluate business plans where analysis shows capital, liquidity and/or returns do not meet their target. In addition to a range of internal stress tests, we are subject to supervisory stress testing in many jurisdictions. These include the programmes of the Bank of England (‘BoE’), the US Federal Reserve Board, the European Banking Authority, the European Central Bank and the Hong Kong Monetary Authority. The results of regulatory stress testing and our internal stress tests are used when assessing our internal capital and liquidity requirements through the ICAAP and ILAAP. The outcomes of stress testing exercises carried out by the PRA and other regulators feed into the setting of regulatory minimum ratios and buffers. We maintain recovery plans for the Group and material entities, which set out potential options management could take in a range of stress scenarios that could result in a breach of capital or liquidity buffers. The Group recovery plan sets out the framework and governance arrangements to support restoring HSBC to a stable and viable position, and so lowering the probability of failure from either idiosyncratic company-specific stress or systemic market-wide issues. Our material entities’ recovery plans provide detailed actions that management would consider taking in a stress scenario should their positions deteriorate and threaten to breach risk appetite and regulatory minimum levels. This is to help ensure that HSBC entities can stabilise their financial position and recover from financial losses in a stress environment. The Group also has capabilities, resources and arrangements in place to address the unlikely event that HSBC might not be recoverable and would therefore need to be resolved by regulators. The Group and the BoE publicly disclosed the status of HSBC’s progress against the BoE’s Resolvability Assessment Framework in June 2022, following the submission of HSBC’s inaugural resolvability self-assessment in October 2021. HSBC has continued to enhance its resolvability capabilities since this time and submitted its second self-assessment in October 2023. A subsequent update was provided to the BoE in January 2024. Further public disclosure by the Group and the BoE as Risk review 204 HSBC Holdings plc Annual Report and Accounts 2023 to HSBC’s progress against the Resolvability Assessment Framework will be made in June 2024. Overall, HSBC’s recovery and resolution planning helps safeguard the Group’s financial and operational stability. The Group is committed to further developing its recovery and resolution capabilities, including in relation to the Resolvability Assessment Framework. Measurement of interest rate risk in the banking book processes Assessment and risk appetite Interest rate risk in the banking book is the risk of an adverse impact to earnings or capital due to changes in market interest rates. It is generated by our non-traded assets and liabilities, specifically loans, deposits and financial instruments that are not held for trading intent or in order to hedge positions held with trading intent. Interest rate risk that can be economically hedged may be transferred to Global Treasury. Hedging is generally executed through interest rate derivatives or fixed-rate government bonds. Any interest rate risk that Global Treasury cannot economically hedge is not transferred and will remain within the global business where the risks originate. Global Treasury uses a number of measures to monitor and control interest rate risk in the banking book, including: – net interest income sensitivity; – banking net interest income sensitivity; and – economic value of equity sensitivity. Net interest income and banking net interest income sensitivity A principal part of our management of non-traded interest rate risk is to monitor the sensitivity of expected net interest income (‘NII’) under varying interest rate scenarios (i.e. simulation modelling), where all other economic variables are held constant. This monitoring is undertaken at an entity and Group level, where a range of interest rate scenarios are monitored on a one-year basis. NII sensitivity figures represent the effect of pro forma movements in projected yield curves based on a static balance sheet size and structure, except for certain mortgage products where balances are impacted by interest rate sensitive prepayments. These sensitivity calculations do not incorporate actions that would be taken by Global Treasury or in the business that originates the risk to mitigate the effect of interest rate movements. The NII sensitivity calculations assume that interest rates of all maturities move by the same amount in the ‘up-shock’ scenario. The sensitivity calculations in the ‘down-shock’ scenarios reflect no floors to the shocked market rates. However, customer product-specific interest rate floors are recognised where applicable. During 2023, we introduced an additional metric to measure and manage the sensitivity of our NII to interest rate shocks. In addition to NII sensitivity, we now also monitor banking NII sensitivity. HSBC has a significant quantity of trading book assets that are funded by banking book liabilities, and the NII sensitivity measure does not include the sensitivity of the internal transfer income from this funding. Banking NII sensitivity includes an adjustment on top of NII sensitivity to reflect this. Going forwards, this will be our primary metric for monitoring and management of interest rate risk in the banking book. Economic value of equity sensitivity Economic value of equity (‘EVE’) represents the present value of the future banking book cash flows that could be distributed to equity holders under a managed run-off scenario. This equates to the current book value of equity plus the present value of future NII in this scenario. An EVE sensitivity represents the expected movement in EVE due to pre-specified interest rate shocks, where all other economic variables are held constant. Operating entities are required to monitor EVE sensitivities as a percentage of capital resources. Further details of HSBC’s risk management of interest rate risk in the banking book can be found in the Group’s Pillar 3 Disclosures at 31 December 2023. Other Group risks Non-trading book foreign exchange exposures Structural foreign exchange exposures Structural foreign exchange exposures arise from net assets or capital investments in foreign operations, together with any associated hedging. A foreign operation is defined as a subsidiary, associate, joint arrangement or branch where the activities are conducted in a currency other than that of the reporting entity. An entity’s functional reporting currency is normally that of the primary economic environment in which the entity operates. Exchange differences on structural exposures are recognised in other comprehensive income (‘OCI’). We use the US dollar as our presentation currency in our consolidated financial statements because the US dollar and currencies linked to it form the major currency bloc in which we transact and fund our business. Therefore, our consolidated balance sheet is affected by exchange differences between the US dollar and all the non-US dollar functional currencies of underlying foreign operations. Our structural foreign exchange exposures are managed with the primary objective of ensuring, where practical, that our consolidated capital ratios and the capital ratios of individual banking subsidiaries are largely protected from the effect of changes in exchange rates. We hedge structural foreign exchange positions where it is capital efficient to do so, and subject to approved limits. This is achieved through a combination of net investment hedges and economic hedges. Hedging positions are monitored and rebalanced periodically to manage RWA or downside risks associated with HSBC’s foreign currency investments. For further details of our structural foreign exchange exposures, see page 213. Transactional foreign exchange exposures Transactional foreign exchange risk arises primarily from day-to-day transactions in the banking book generating profit and loss or fair value through other comprehensive income (‘FVOCI’) reserves in a currency other than the reporting currency of the operating entity. Transactional foreign exchange exposure generated through profit and loss is periodically transferred to Markets and Securities Services and managed within limits, with the exception of limited residual foreign exchange exposure arising from timing differences or for other reasons. Transactional foreign exchange exposure generated through OCI reserves is managed by Global Treasury within approved appetite. HSBC Holdings risk management As a financial services holding company, HSBC Holdings has limited market risk activities. Its activities predominantly involve maintaining sufficient capital resources to support the Group’s diverse activities; allocating these capital resources across the Group’s businesses; earning dividend and interest income on its investments in the businesses; payment of operating expenses; providing dividend payments to its equity shareholders and interest payments to providers of debt capital; and maintaining a supply of short-term liquid assets for deployment under extraordinary circumstances. The main market risks to which HSBC Holdings is exposed are banking book interest rate risk and foreign currency risk. Exposure to these risks arises from short-term cash balances, funding positions held, loans to subsidiaries, investments in long-term financial assets, financial liabilities including debt capital issued, and structural foreign exchange hedges. The objective of HSBC Holdings’ market risk management strategy is to manage volatility in capital resources, cash flows and distributable reserves that could be caused by movements in market parameters. Market risk for HSBC Holdings is monitored by Holdings ALCO in accordance with its risk appetite statement. HSBC Holdings plc Annual Report and Accounts 2023 205 Risk review HSBC Holdings uses interest rate swaps and cross-currency interest rate swaps to manage the interest rate risk and foreign currency risk arising from its long-term debt issues. It also uses forward foreign exchange contracts to manage its structural foreign exchange exposures. For quantitative disclosures on interest rate risk in the banking book, see pages 214 to 216. Pension risk management processes Our global pensions strategy is to move from defined benefit to defined contribution plans, where local law allows and it is considered competitive to do so. Our most material defined benefit plans have been closed to new entrants for many years, and the majority (including the largest plan in the UK) are also closed to future accrual. In defined contribution pension plans, the contributions that HSBC is required to make are known, while the ultimate pension benefit will vary, typically with investment returns achieved by investment choices made by the employee. While the market risk to HSBC of defined contribution plans is low, the Group is still exposed to operational and reputational risk. In defined benefit pension plans, the level of pension benefit is known. Therefore, the level of contributions required by HSBC will vary due to a number of risks, including: – investments delivering a return below the level required to provide the projected plan benefits; – the prevailing economic environment leading to corporate failures, thus triggering write-downs in asset values (both equity and debt); – a change in either interest rates or inflation expectations, causing an increase in the value of plan liabilities; and – plan members living longer than expected (known as longevity risk). Pension risk is assessed using an economic capital model that takes into account potential variations in these factors. The impact of these variations on both pension assets and pension liabilities is assessed using a one-in-200-year stress test. Scenario analysis and other stress tests are also used to support pension risk management, including the review of de-risking opportunities. To fund the benefits associated with defined benefit plans, sponsoring Group companies, and in some instances employees, make regular contributions in accordance with advice from actuaries and in consultation with the plan’s fiduciaries where relevant. These contributions are normally set to ensure that there are sufficient funds to meet the cost of the accruing benefits for the future service of active members. However, higher contributions are required when plan assets are considered insufficient to cover the existing pension liabilities. Contribution rates are typically revised annually or once every three years, depending on the plan. The defined benefit plans invest contributions in a range of investments designed to limit the risk of assets failing to meet a plan’s liabilities. Any changes in expected returns from the investments may also change future contribution requirements. In pursuit of these long-term objectives, an overall target allocation is established between asset classes of the defined benefit plan. In addition, each permitted asset class has its own benchmarks, such as stock-market or property valuation indices or liability characteristics. The benchmarks are reviewed at least once every three to five years and more frequently if required by local legislation or circumstances. The process generally involves an extensive asset and liability review. In addition, some of the Group’s pension plans hold longevity swap contracts. These arrangements provide long-term protection to the relevant plans against costs resulting from pensioners or their dependants living longer than initially expected. The most sizeable plan to do this is the HSBC Bank (UK) Pension Scheme, which holds longevity swaps covering approximately 50% of the plan’s pensioner liabilities. Capital risk in 2023 Capital overview Capital adequacy metrics At 31 Dec 31 Dec 2023 2022 Risk-weighted assets (‘RWAs’) ($bn) Credit risk 683.9 679.1 Counterparty credit risk 35.5 37.1 Market risk 37.5 37.6 Operational risk 97.2 85.9 Total RWAs 854.1 839.7 Capital on a transitional basis ($bn) Common equity tier 1 (‘CET1’) capital 126.5 119.3 Tier 1 capital 144.2 139.1 Total capital 171.2 162.4 Capital ratios on a transitional basis (%) Common equity tier 1 ratio 14.8 14.2 Tier 1 ratio 16.9 16.6 Total capital ratio 20.0 19.3 Capital on an end point basis ($bn) Common equity tier 1 (‘CET1’) capital 126.5 119.3 Tier 1 capital 144.2 139.1 Total capital 167.1 157.2 Capital ratios on an end point basis (%) Common equity tier 1 ratio 14.8 14.2 Tier 1 ratio 16.9 16.6 Total capital ratio 19.6 18.7 Liquidity coverage ratio (‘LCR’) Total high-quality liquid assets ($bn) 647.5 647.0 Total net cash outflow ($bn) 477.1 490.8 LCR (%) 136 132 Net stable funding ratio (‘NSFR’) Total available stable funding ($bn) 1,601.9 1,552.0 Total required stable funding ($bn) 1,202.4 1,138.4 NSFR (%) 133 136 Risk review 206 HSBC Holdings plc Annual Report and Accounts 2023 References to EU regulations and directives (including technical standards) should, as applicable, be read as references to the UK’s version of such regulation or directive, as onshored into UK law under the European Union (Withdrawal) Act 2018, and as may be subsequently amended under UK law. Capital figures and ratios in the previous table are calculated in accordance with the regulatory requirements of the Capital Requirements Regulation and Directive, the CRR II regulation and the PRA Rulebook (‘CRR II’). The table presents them under the transitional arrangements in CRR II for capital instruments and after their expiry, known as the end point. The liquidity coverage ratio is based on the average month-end value over the preceding 12 months. The net stable funding ratio is the average of the preceding four quarters. Regulatory numbers and ratios are as presented at the date of reporting. Small changes may exist between these numbers and ratios and those submitted in regulatory filings. Where differences are significant, we may restate in subsequent periods. Own funds disclosure (Audited) At 31 Dec 31 Dec 2023 2022 Ref* $m $m Common equity tier 1 (‘CET1’) capital: instruments and reserves 1 Capital instruments and the related share premium accounts 22,964 23,406 – ordinary shares 22,964 23,406 2,3 Retained earnings, accumulated other comprehensive income (and other reserves)1 128,419 121,609 5 Minority interests (amount allowed in consolidated CET1) 3,917 4,444 5a Independently reviewed net profits net of any foreseeable charge or dividend 10,568 8,633 6 Common equity tier 1 capital before regulatory adjustments1 165,868 158,092 28 Total regulatory adjustments to common equity tier1 (39,367) (38,801) 29 Common equity tier 1 capital 126,501 119,291 36 Additional tier 1 capital before regulatory adjustments 17,732 19,836 43 Total regulatory adjustments to additional tier 1 capital (70) (60) 44 Additional tier 1 capital 17,662 19,776 45 Tier 1 capital 144,163 139,067 51 Tier 2 capital before regulatory adjustments 28,148 24,779 57 Total regulatory adjustments to tier 2 capital (1,107) (1,423) 58 Tier 2 capital 27,041 23,356 59 Total capital 171,204 162,423 * The references identify lines prescribed in the PRA template, which are applicable and where there is a value. 1 On adoption of IFRS 17 ‘Insurance Contracts’, comparative data previously published under IFRS 4 ‘Insurance Contracts’ have been restated for 2022, with no impact on CET1 and total capital. At 31 December 2023, our CET1 capital ratio increased to 14.8% from 14.2% at 31 December 2022, reflecting an increase in CET1 capital of $7.2bn, partly offset by an increase in RWAs of $14.4bn. The key drivers of the overall rise in our CET1 ratio during the year were: – a 1.0 percentage point increase from capital generation, mainly through profits less dividends and share buy-backs; – a 0.3 percentage point reduction due to an increase in regulatory deductions, primarily for expected excess loss and intangible assets; and – a 0.1 percentage point decrease from the adverse impact of foreign exchange fluctuations and the increase in the underlying RWAs. The impairment of BoCom had an insignificant impact on our capital and CET1 ratio. This is because the impairment charge had a partially offsetting reduction in threshold deductions from regulatory capital. For regulatory capital purposes, our share of BoCom’s profits is not capital accretive, although the dividends we receive from BoCom are capital accretive. Our Pillar 2A requirement at 31 December 2023, as per the PRA’s Individual Capital Requirement based on a point-in-time assessment, was equivalent to 2.6% of RWAs, of which 1.5% was required to be met by CET1. Throughout 2023, we complied with the PRA’s regulatory capital adequacy requirements. Risk-weighted assets RWAs by global business WPB CMB1 GBM1 Corporate Centre Total RWAs $bn $bn $bn $bn $bn Credit risk 155.3 319.1 131.5 78.0 683.9 Counterparty credit risk 1.9 1.5 32.0 0.1 35.5 Market risk 1.3 1.0 22.2 13.0 37.5 Operational risk 34.4 32.9 32.8 (2.9) 97.2 At 31 Dec 2023 192.9 354.5 218.5 88.2 854.1 At 31 Dec 2022 182.9 342.4 225.9 88.5 839.7 1 In the first quarter of 2023, following an internal review to assess which global businesses were best suited to serve our customers’ respective needs, a portfolio of our customers within our entities in Latin America was transferred from GBM to CMB for reporting purposes. Comparative data have been re-presented accordingly. HSBC Holdings plc Annual Report and Accounts 2023 207 Risk review RWAs by legal entities1 HSBC UK Bank plc HSBC Bank plc The Hongkong and Shanghai Banking Corporation Limited HSBC Bank Middle East Limited HSBC North America Holdings Inc HSBC Bank Canada Grupo Financiero HSBC, S.A. de C.V. Other trading entities Holding companies, shared service centres and intra-Group eliminations Total RWAs $bn $bn $bn $bn $bn $bn $bn $bn $bn $bn Credit risk 110.7 73.4 314.0 17.1 59.3 27.1 25.9 48.0 8.4 683.9 Counterparty credit risk 0.3 17.8 8.7 0.7 3.1 0.5 0.7 3.7 — 35.5 Market risk2 0.2 22.7 27.4 2.8 2.6 0.8 0.7 1.6 9.3 37.5 Operational risk 18.0 17.6 46.6 3.7 7.2 3.5 5.3 6.3 (11.0) 97.2 At 31 Dec 2023 129.2 131.5 396.7 24.3 72.2 31.9 32.6 59.6 6.7 854.1 At 31 Dec 2022 110.9 127.0 407.0 22.5 72.5 31.9 26.7 60.3 8.1 839.7 1 Balances are on a third-party Group consolidated basis. 2 Market risk RWAs are non-additive across the legal entities due to diversification effects within the Group. RWA movement by global business by key driver Credit risk, counterparty credit risk and operational risk WPB CMB1 GBM1 Corporate Centre Market risk Total RWAs $bn $bn $bn $bn $bn $bn RWAs at 1 Jan 2023 181.2 341.3 202.3 77.3 37.6 839.7 Asset size2 15.6 3.2 3.2 2.6 1.6 26.2 Asset quality 2.8 1.5 (0.6) (1.2) — 2.5 Model updates (1.3) (0.1) (0.3) — (0.9) (2.6) Methodology and policy (6.2) (1.8) (7.5) (3.5) (0.9) (19.9) Acquisitions and disposals (1.3) 8.0 (0.7) 0.1 0.1 6.2 Foreign exchange movements3 0.8 1.4 (0.1) (0.1) — 2.0 Total RWA movement 10.4 12.2 (6.0) (2.1) (0.1) 14.4 RWAs at 31 Dec 2023 191.6 353.5 196.3 75.2 37.5 854.1 1 In the first quarter of 2023, following an internal review to assess which global businesses were best suited to serve our customers’ respective needs, a portfolio of our customers within our entities in Latin America was transferred from GBM to CMB for reporting purposes. Comparative data have been re-presented accordingly. 2 The movements in asset size include the increase in operational risk RWAs, which was driven by revenue. 3 Credit risk foreign exchange movements in this disclosure are computed by retranslating the RWAs into US dollars based on the underlying transactional currencies. RWA movement by legal entities by key driver1 Credit risk, counterparty credit risk and operational risk HSBC UK Bank plc HSBC Bank plc The Hongkong and Shanghai Banking Corporation Limited HSBC Bank Middle East Limited HSBC North America Holdings Inc HSBC Bank Canada Grupo Financiero HSBC, S.A. de C.V. Other trading entities Holding companies, shared service centres and intra-Group eliminations Market risk Total RWAs $bn $bn $bn $bn $bn $bn $bn $bn $bn $bn $bn RWAs at 1 Jan 2023 110.8 106.5 378.4 20.8 69.5 31.1 26.2 58.0 0.8 37.6 839.7 Asset size2 5.1 0.2 5.8 1.8 0.4 (0.2) 2.9 12.1 (3.5) 1.6 26.2 Asset quality 2.3 (0.9) (1.9) (1.0) 0.8 0.3 (0.5) 3.3 0.1 — 2.5 Model updates (1.0) (0.3) (0.4) 0.1 — — — (0.1) — (0.9) (2.6) Methodology and policy (4.0) 0.8 (11.2) (0.3) (1.1) (0.7) 0.2 (2.5) (0.2) (0.9) (19.9) Acquisitions and disposals 9.5 (0.2) (0.1) — — — — (3.2) 0.1 0.1 6.2 Foreign exchange movements3 6.3 2.7 (1.3) 0.1 — 0.6 3.1 (9.6) 0.1 — 2.0 Total RWA movement 18.2 2.3 (9.1) 0.7 0.1 — 5.7 — (3.4) (0.1) 14.4 RWAs at 31 Dec 2023 129.0 108.8 369.3 21.5 69.6 31.1 31.9 58.0 (2.6) 37.5 854.1 1 Balances are on a third-party Group consolidated basis. 2 The movements in asset size include the increase in operational risk RWAs, which was driven by revenue. 3 Credit risk foreign exchange movements in this disclosure are computed by retranslating the RWAs into US dollars based on the underlying transactional currencies. Risk review 208 HSBC Holdings plc Annual Report and Accounts 2023 Risk-weighted assets (‘RWAs’) rose by $14.4bn during the year, driven by an increase of $34.4bn from increased lending, higher operational risk RWAs, business acquisitions and foreign exchange movements. These were partly offset by a reduction of $19.9bn due to methodology and policy changes. Asset size Asset size RWAs increased by $26.2bn, including a $10.4bn rise in operational risk RWAs driven by growth in NII. WPB RWAs increased by $15.6bn, notably due to an expansion of retail lending in Asia, the UK and Mexico, additional sovereign exposures in Asia and other trading entities, including a $2.9bn rise in operational risk RWAs. CMB RWAs increased by $3.2bn, reflecting an increase in operational risk RWAs of $5.2bn and additional sovereign exposures across various entities. This was partly offset by a net decrease in corporate lending in Asia, the US and Europe. GBM RWAs increased by $3.2bn, mainly from the $4.0bn rise in operational risk RWAs and additional sovereign exposures across various entities. This was partly offset by a fall in lending in Asia and Europe. Corporate Centre RWAs rose by $2.6bn, primarily due to an increase in corporate exposures in Saudi Awwal Bank (‘SAB’). Asset quality Asset quality contributed to an RWA increase of $2.5bn due to credit risk rating migrations and portfolio mix changes, notably in Asia, the US and Europe. Model updates Model updates decreased RWAs by $2.6bn, mainly due to a change in our risk approach to multilateral development banks’ exposures, following approval for change from the PRA, the implementation of the exposure at default mortgage model in the UK, and changes to the incremental risk charge model. Methodology and policy The decrease of RWAs from methodology and policy of $19.9bn was mainly driven by a decline of $7.7bn from regulatory changes related to the risk-weighting of residential mortgages in Hong Kong, and credit risk parameter refinements mainly in Asia and Europe. Acquisitions and disposals The increase in RWAs from acquisitions and disposals of $6.2bn was primarily due to a rise of $9.6bn from the acquisition of SVB UK. This was partly offset by a decline of $3.2bn from the disposal of our business in Oman. Foreign currency movements increased total RWAs by $2.0bn. Leverage ratio 1 At 31 Dec 31 Dec 2023 2022 $bn $bn Tier 1 capital (leverage) 144.2 139.1 Total leverage ratio exposure 2,574.8 2,417.2 % % Leverage ratio 5.6 5.8 1 Leverage ratio calculation is in line with the PRA’s UK leverage rules. This includes IFRS 9 transitional arrangement and excludes central bank claims. Our leverage ratio was 5.6% at 31 December 2023, down from 5.8% at 31 December 2022. The increase in the leverage exposure was primarily due to growth in the balance sheet, which led to a fall of 0.4 percentage points in the leverage ratio. This was partly offset by a rise of 0.2 percentage points due to an increase in tier 1 capital. At 31 December 2023, our UK minimum leverage ratio requirement of 3.25% was supplemented by a leverage ratio buffer of 0.9%, which consists of an additional leverage ratio buffer of 0.7% and a countercyclical leverage ratio buffer of 0.2%. These buffers translated into capital values of $18.0bn and $5.1bn respectively. Regulatory and other developments In September 2023, the PRA announced changes to the UK implementation of Basel 3.1 with a new proposed implementation date of 1 July 2025. For further details related to the November 2022 consultation, see page 6 of our Pillar 3 Disclosures at 31 December 2022. We are currently assessing the impact of the consultation paper and the associated implementation challenges (including data provision) on our RWAs upon initial implementation. The RWA output floor under Basel 3.1 is now proposed to be subject to a four-and-a- half year transitional provision. Any impact from the output floor is expected to be towards the end of the transition period. Regulatory transitional arrangements for IFRS 9 ‘Financial Instruments’ We have adopted the regulatory transitional arrangements of the Capital Requirements Regulation for IFRS 9, including paragraph four of article 473a. These allow banks to add back to their capital base a proportion of the impact that IFRS 9 has upon their loan loss allowances. Our capital and ratios are presented under these arrangements throughout the tables in this section, including the end point figures. Pillar 3 disclosure requirements Pillar 3 of the Basel regulatory framework is related to market discipline and aims to make financial services firms more transparent by requiring publication of wide-ranging information on their risks, capital and management. For further details, see our Pillar 3 Disclosures at 31 December 2023, which is expected to be published on or around 21 February 2024 at www.hsbc.com/investors. HSBC Holdings plc Annual Report and Accounts 2023 209 Risk review Liquidity and funding risk in 2023 Liquidity metrics At 31 December 2023, all of the Group’s material operating entities were above the required regulatory minimum liquidity and funding levels. Each entity maintains sufficient unencumbered liquid assets to comply with local and regulatory requirements. Each entity maintains a sufficient stable funding profile and is assessed using the NSFR or other appropriate metrics. In addition to regulatory metrics, we use a wide set of measures to manage our liquidity and funding profile. The Group liquidity and funding position on an average basis is analysed in the following sections. Operating entities’ liquidity1 At 31 December 2023 LCR HQLA Net outflows NSFR % $bn $bn % HSBC UK Bank plc (ring-fenced bank)2 201 118 59 158 HSBC Bank plc (non-ring-fenced bank)3 148 132 89 116 The Hongkong and Shanghai Banking Corporation – Hong Kong branch4 192 147 77 127 HSBC Singapore5 292 26 9 174 Hang Seng Bank 254 52 21 163 HSBC Bank China 170 24 14 139 HSBC Bank USA 172 82 48 131 HSBC Continental Europe 6,7 158 83 52 137 HSBC Bank Middle East Ltd – UAE branch 281 13 5 163 HSBC Canada 164 21 13 129 HSBC Mexico 149 8 5 124 At 31 December 2022 HSBC UK Bank plc (ring-fenced bank)2 226 136 60 164 HSBC Bank plc (non-ring-fenced bank)3 143 128 90 115 The Hongkong and Shanghai Banking Corporation – Hong Kong branch4 179 147 82 130 HSBC Singapore5 247 21 9 173 Hang Seng Bank 228 50 22 156 HSBC Bank China 183 23 13 132 HSBC Bank USA 164 85 52 131 HSBC Continental Europe6 151 55 37 132 HSBC Bank Middle East Ltd – UAE branch 239 12 5 158 HSBC Canada 149 22 15 122 HSBC Mexico 155 8 5 129 1 The LCR and NSFR ratios presented in the above table are based on average values. The LCR is the average of the preceding 12 months. The NSFR is the average of the preceding four quarters. 2 HSBC UK Bank plc refers to the HSBC UK liquidity group, which comprises five legal entities: HSBC UK Bank plc, Marks and Spencer Financial Services plc, HSBC Private Bank (UK) Ltd, HSBC Innovation Bank Limited and HSBC Trust Company (UK) Limited, managed as a single operating entity, in line with the application of UK liquidity regulation as agreed with the PRA. 3 HSBC Bank plc includes overseas branches and special purpose entities consolidated by HSBC for financial statements purposes. 4 The Hongkong and Shanghai Banking Corporation – Hong Kong branch represents the material activities of The Hongkong and Shanghai Banking Corporation Limited. It is monitored and controlled for liquidity and funding risk purposes as a stand-alone operating entity. 5 HSBC Singapore includes HSBC Bank Singapore Limited and The Hongkong and Shanghai Banking Corporation – Singapore branch. Liquidity and funding risk is monitored and controlled at country level in line with the local regulator’s approval. 6 In response to the requirement for an intermediate parent undertaking in line with the EU Capital Requirements Directive (’CRD V’), HSBC Continental Europe acquired control of HSBC Germany and HSBC Bank Malta on 30 November 2022. The averages for LCR and NSFR include the impact of the inclusion of the two entities from November 2022. 7 HSBC Continental Europe NSFR includes the impact of the sale of our retail banking operations in France. Consolidated liquidity metrics Net stable funding ratio We manage funding risk based on the PRA’s NSFR rules. The Group’s NSFR at 31 December 2023, calculated from the average of the four preceding quarters average, was 133%. At1 31 Dec 30 Jun 31 Dec 2023 2023 2022 $bn $bn $bn Total available stable funding ($bn) 1,602 1,575 1,552 Total required stable funding ($bn) 1,202 1,172 1,138 NSFR ratio (%) 133 134 136 1 Group NSFR numbers above are based on average values. The NSFR number is the average of the preceding four quarters. Risk review 210 HSBC Holdings plc Annual Report and Accounts 2023 Liquidity coverage ratio At 31 December 2023, the average high-quality liquid assets (‘HQLA‘) held at entity level amounted to $795bn (31 December 2022: $812bn). The Group consolidation methodology includes a deduction to reflect the impact of limitations in the transferability of entity liquidity around the Group. That resulted in an adjustment of $147bn to LCR HQLA and $7bn to LCR inflows on an average basis. Furthermore, this methodology was enhanced in 2023 to consider more accurately non-convertible currencies. At1 31 Dec 30 Jun 31 Dec 2023 2023 2022 $bn $bn $bn High-quality liquid assets (in entities) 795 796 812 EC Delegated Act adjustment for transfer restrictions2 (154) (172) (174) Group LCR HQLA 648 631 647 Net outflows 477 478 491 Liquidity coverage ratio (%) 136 132 132 1 Group LCR numbers above are based on average values. The LCR is the average of the preceding 12 months. 2 This includes adjustments made to high-quality liquid assets and inflows in entities to reflect liquidity transfer restrictions. Liquid assets After the $147bn deduction, the average Group LCR HQLA of $648bn (31 December 2022: $647bn) was held in a range of asset classes and currencies. Of these, 97% were eligible as level 1 (31 December 2022: 97%). The following tables reflect the composition of the average liquidity pool by asset type and currency at 31 December 2023. Liquidity pool by asset type1 Liquidity pool Cash Level 12 Level 22 $bn $bn $bn $bn Cash and balance at central bank 310 310 — — Central and local government bonds 319 — 303 16 Regional government public sector entities 2 — 2 — International organisation and multilateral developments banks 10 — 10 — Covered bonds 6 — 2 4 Other 1 — — 1 Total at 31 Dec 2023 648 310 317 21 Total at 31 Dec 2022 647 344 284 19 1 Group liquid assets numbers are based on average values. 2 As defined in EU regulations, level 1 assets means ‘assets of extremely high liquidity and credit quality’, and level 2 assets means ‘assets of high liquidity and credit quality’. Liquidity pool by currency1 $ £ € HK$ Other Total $bn $bn $bn $bn $bn $bn Liquidity pool at 31 Dec 2023 184 173 112 51 128 648 Liquidity pool at 31 Dec 2022 167 191 98 54 137 647 1 Group liquid assets numbers are based on average values. Sources of funding Our primary sources of funding are customer current accounts and savings deposits payable on demand or at short notice. We issue secured and unsecured wholesale securities to supplement customer deposits, meet regulatory obligations and to change the currency mix, maturity profile or location of our liabilities. The following ‘Funding sources’ and ‘Funding uses’ tables provide a view of how our consolidated balance sheet is funded. In practice, all the principal operating entities are required to manage liquidity and funding risk on a stand-alone basis. The tables analyse our consolidated balance sheet according to the assets that primarily arise from operating activities and the sources of funding primarily supporting these activities. Assets and liabilities that do not arise from operating activities are presented at a net balancing source or deployment of funds. Funding sources (Audited) 2023 20221 $m $m Customer accounts 1,611,647 1,570,303 Deposits by banks 73,163 66,722 Repurchase agreements – non-trading 172,100 127,747 Debt securities in issue 93,917 78,149 Cash collateral, margin and settlement accounts 85,255 88,476 Liabilities of disposal groups held for sale2 108,406 114,597 Subordinated liabilities 24,954 22,290 Financial liabilities designated at fair value 141,426 127,321 Insurance contract liabilities 120,851 108,816 Trading liabilities 73,150 72,353 – repos 12,198 16,254 – stock lending 3,322 3,541 – other trading liabilities 57,630 52,558 Total equity 192,610 185,197 Other balance sheet liabilities 341,198 387,315 At 31 Dec 3,038,677 2,949,286 Funding uses (Audited) 2023 20221 $m $m Loans and advances to customers 938,535 923,561 Loans and advances to banks 112,902 104,475 Reverse repurchase agreements – non-trading 252,217 253,754 Cash collateral, margin and settlement accounts 89,911 82,984 Assets held for sale2 114,134 115,919 Trading assets 289,159 218,093 – reverse repos 16,575 14,798 – stock borrowing 14,609 10,706 – other trading assets 257,975 192,589 Financial investments 442,763 364,726 Cash and balances with central banks 285,868 327,002 Other balance sheet assets 513,188 558,772 At 31 Dec 3,038,677 2,949,286 1 From 1 January 2023, we adopted IFRS 17 ‘Insurance Contracts’, which replaced IFRS 4 ‘Insurance Contracts’. We have restated 2022 comparative data. 2 ‘Liabilities of disposal groups held for sale’ includes $82bn and ‘Assets held for sale’ includes $88bn in respect of the planned sale of our banking business in Canada. ‘Liabilities of disposal groups held for sale’ includes $26bn and ‘Assets of disposal groups held for sale’ includes $28bn in respect of the sale of our retail banking operations in France. . HSBC Holdings plc Annual Report and Accounts 2023 211 Risk review Wholesale term debt maturity profile The maturity profile of our wholesale term debt obligations is set out in the following table. The balances in the table are not directly comparable with those in the consolidated balance sheet because the table presents gross cash flows relating to principal payments and not the balance sheet carrying value, which includes debt securities and subordinated liabilities measured at fair value. Wholesale funding cash flows payable by HSBC under financial liabilities by remaining contractual maturities1 Due not more than 1 month Due over 1 month but not more than 3 months Due over 3 months but not more than 6 months Due over 6 months but not more than 9 months Due over 9 months but not more than 1 year Due over 1 year but not more than 2 years Due over 2 years but not more than 5 years Due over 5 years Total $m $m $m $m $m $m $m $m $m Debt securities issued 17,620 9,798 14,284 13,226 12,226 20,882 64,010 50,045 202,091 – unsecured CDs and CP 6,400 6,777 7,601 6,429 6,513 1,179 1,073 925 36,897 – unsecured senior MTNs 8,190 1,160 4,365 3,627 3,267 12,903 54,984 41,007 129,503 – unsecured senior structured notes 2,307 1,491 1,617 2,513 1,978 2,924 2,793 5,910 21,533 – secured covered bonds — — — — — — 1,275 — 1,275 – secured asset-backed commercial paper 426 — — — — — — — 426 – secured ABS 22 44 62 58 55 188 861 539 1,829 – others 275 326 639 599 413 3,688 3,024 1,664 10,628 Subordinated liabilities — 2,013 — — — 3,358 4,282 27,234 36,887 – subordinated debt securities — 2,000 — — — 3,358 4,282 25,441 35,081 – preferred securities — 13 — — — — — 1,793 1,806 At 31 Dec 2023 17,620 11,811 14,284 13,226 12,226 24,240 68,292 77,279 238,978 Debt securities issued 11,959 11,266 12,532 8,225 8,212 26,669 52,435 52,952 184,250 – unsecured CDs and CP 3,821 6,017 7,088 4,137 3,123 1,264 707 1,004 27,161 – unsecured senior MTNs 5,973 2,351 3,534 1,363 3,238 19,229 44,023 44,021 123,732 – unsecured senior structured notes 1,264 1,421 1,247 1,850 1,627 4,463 2,609 5,990 20,471 – secured covered bonds — — — — — — 602 — 602 – secured asset-backed commercial paper 690 — — — — — — — 690 – secured ABS 15 28 40 38 36 123 656 220 1,156 – others 196 1,449 623 837 188 1,590 3,838 1,717 10,438 Subordinated liabilities — — 11 160 — 2,000 5,581 25,189 32,941 – subordinated debt securities — — 11 160 — 2,000 5,581 23,446 31,198 – preferred securities — — — — — — — 1,743 1,743 At 31 Dec 2022 11,959 11,266 12,543 8,385 8,212 28,669 58,016 78,141 217,191 1 Excludes financial liabilities of disposal groups. Risk review 212 HSBC Holdings plc Annual Report and Accounts 2023 Structural foreign exchange risk in 2023 Structural foreign exchange exposures represent net assets or capital investments in subsidiaries, branches, joint arrangements or associates, together with any associated hedges, the functional currencies of which are currencies other than the US dollar. Exchange differences on structural exposures are usually recognised in ‘other comprehensive income’. Hong Kong dollars 39,014 (5,792) 33,222 (7,979) — 25,243 Pounds sterling 46,661 (16,415) 30,246 — (1,275) 28,971 Chinese renminbi 33,809 (3,299) 30,510 (1,066) — 29,444 Euros 15,673 (515) 15,158 — (1,384) 13,774 Canadian dollars 5,418 (1,076) 4,342 — — 4,342 Indian rupees 6,286 (2,110) 4,176 — — 4,176 Mexican pesos 4,883 — 4,883 — — 4,883 Saudi riyals 4,312 — 4,312 — — 4,312 UAE dirhams 4,995 (613) 4,382 (2,761) — 1,621 Malaysian ringgit 2,754 — 2,754 — — 2,754 Singapore dollars 2,345 (224) 2,121 — — 2,121 Australian dollars 2,362 — 2,362 — — 2,362 Taiwanese dollars 2,212 (1,127) 1,085 — — 1,085 Indonesian rupiah 1,535 (512) 1,023 — — 1,023 Swiss francs 1,191 (526) 665 — — 665 Korean won 1,354 (864) 490 — — 490 Thai baht 1,022 — 1,022 — — 1,022 Egyptian pound 959 — 959 — — 959 Qatari rial 834 (215) 619 (299) — 320 Argentinian peso 794 — 794 — — 794 Vietnamese dong 872 — 872 — — 872 Others, each less than $700m 4,386 (487) 3,899 — — 3,899 At 31 Dec 183,671 (33,775) 149,896 (12,105) (2,659) 135,132 20223 Hong Kong dollars 39,191 (4,597) 34,594 (8,363) — 26,231 Pounds sterling 39,298 (14,000) 25,298 — (1,205) 24,093 Chinese renminbi 35,712 (3,532) 32,180 (994) — 31,186 Euros 14,436 (777) 13,659 — (2,402) 11,257 Canadian dollars 4,402 (811) 3,591 — — 3,591 Indian rupees 4,967 (1,380) 3,587 — — 3,587 Mexican pesos 3,932 — 3,932 — — 3,932 Saudi riyals 4,182 (109) 4,073 — — 4,073 UAE dirhams 4,534 (731) 3,803 (2,285) — 1,518 Malaysian ringgit 2,715 — 2,715 — — 2,715 Singapore dollars 2,517 (358) 2,159 — (559) 1,600 Australian dollars 2,264 — 2,264 — — 2,264 Taiwanese dollars 2,058 (1,140) 918 — — 918 Indonesian rupiah 1,453 (469) 984 — — 984 Swiss francs 1,233 (727) 506 — — 506 Korean won 1,283 (817) 466 — — 466 Thai baht 908 — 908 — — 908 Egyptian pound 746 — 746 — — 746 Qatari rial 785 (200) 585 (277) — 308 Argentinian peso 1,010 — 1,010 — — 1,010 Vietnamese dong 665 — 665 — — 665 Others, each less than $700m 4,470 (495) 3,975 (36) — 3,939 At 31 Dec 172,761 (30,143) 142,618 (11,955) (4,166) 126,497 Net structural foreign exchange exposures 2023 Currency of structural exposure Net investment in foreign operations (excl non- controlling interest) Net investment hedges Structural foreign exchange exposures (pre- economic hedges) Economic hedges – structural FX hedges1 Economic hedges – equity securities (AT1)2 Net structural foreign exchange exposures $m $m $m $m $m $m 1 Represents hedges that do not qualify as net investment hedges for accounting purposes. 2 Represents foreign currency-denominated preference share and AT1 instruments. These are accounted for at historical cost under IFRS Accounting Standards and do not qualify as net investment hedges for accounting purposes. The gain or loss arising from changes in the US dollar value of these instruments is recognised on redemption in retained earnings. 3 From 1 January 2023, we adopted IFRS 17 ‘Insurance Contracts’, which replaced IFRS 4 ‘Insurance Contracts’. Comparative data for the financial year ended 31 December 2022 have been restated accordingly. For a definition of structural foreign exchange exposures, see page 205. HSBC Holdings plc Annual Report and Accounts 2023 213 Risk review Interest rate risk in the banking book in 2023 Net interest income and banking net interest income sensitivity We have introduced a new metric to analyse sensitivity of our income to interest rate shocks. In addition to NII sensitivity, we are also disclosing banking NII sensitivity. HSBC has trading book assets that are funded by banking book liabilities and the NII sensitivity measure does not include the sensitivity of the internal transfer income from this funding. Banking NII sensitivity includes an adjustment on top of NII sensitivity to reflect this. The currency split of banking NII sensitivities includes the impact of vanilla foreign exchange swaps to optimise cash management across the Group. In this disclosure we present the banking NII sensitivity alongside the NII sensitivity. Over time we expect to phase out NII sensitivity once the appropriate prior period comparables are available for banking NII sensitivity. The following tables set out the assessed impact to a hypothetical base case projection of our NII and banking NII under an immediate shock of 100bps to the current market-implied path of interest rates across all currencies on 1 January 2024 (effects in the first, second and third years). For example, Year 3 shows the impact of an immediate rate shock on the NII and banking NII projected for the third year. The sensitivities shown represent a hypothetical simulation of the base case income, assuming a static balance sheet (specifically no assumed migration from current account to term deposits), and no management actions from Global Treasury. This also incorporates the effect of interest rate behaviouralisation, hypothetical managed rate product pricing assumptions, prepayment of mortgages and deposit stability. The sensitivity calculations exclude pensions, insurance, and interests in associates. The sensitivity analysis performed in the case of a down-shock does not include floors to market rates, and it does not include floors on some wholesale assets and liabilities. However, floors have been maintained for deposits and loans to customers where this is contractual or where negative rates would not be applied. As market and policy rates move, the degree to which these changes are passed on to customers will vary based on a number of factors, including the absolute level of market rates, regulatory and contractual frameworks, and competitive dynamics. To aid comparability between markets, we have simplified the basis of preparation for our disclosure and have used a 50% pass-on assumption for major entities on certain interest-bearing deposits. Our pass-through asset assumptions are largely in line with our contractual agreements or established market practice, which typically results in a significant portion of interest rate changes being passed on. An immediate interest rate rise of 100bps would increase projected NII for the 12 months to 31 December 2024 by $1.1bn and banking NII by $2.8bn. An immediate interest rate fall of 100bps would decrease projected NII for the 12 months to 31 December 2024 by $1.6bn and banking NII by $3.4bn. The sensitivity of NII for 12 months as at 31 December 2023 decreased by $2.5bn in the plus 100bps parallel shock and by $2.4bn in the minus 100bps parallel shock, when compared with 31 December 2022. The key drivers of the reduction in NII sensitivity are the increase in stabilisation activities in line with our strategy, as well as deposit migration. For further details of measurement of interest rate risk in the banking book, see page 205. NII sensitivity to an instantaneous change in yield curves (12 months) – Year 1 sensitivity by currency Currency $ HK$ £ € Other Total $m $m $m $m $m $m Change in Jan 2024 to Dec 2024 (based on balance sheet at 31 December 2023) +100bps parallel (1,155) 148 325 503 1,232 1,053 -100bps parallel 1,004 (230) (432) (522) (1,391) (1,571) Change in Jan 2023 to Dec 2023 (based on balance sheet at 31 December 2022) +100bps parallel (267) 413 1,026 674 1,689 3,535 -100bps parallel 236 (476) (1,177) (765) (1,787) (3,969) NII sensitivity to an instantaneous down 100bps parallel change in yield curves – Year 2 and Year 3 sensitivity by currency Currency $ HK$ £ € Other Total $m $m $m $m $m $m Change in NII (based on balance sheet at 31 December 2023) Year 2 (Jan 2025 to Dec 2025) 488 (431) (768) (552) (1,733) (2,996) Year 3 (Jan 2026 to Dec 2026) 213 (499) (1,269) (624) (1,861) (4,040) Change in NII (based on balance sheet at 31 December 2022) Year 2 (Jan 2024 to Dec 2024) (43) (532) (1,580) (810) (1,979) (4,944) Year 3 (Jan 2025 to Dec 2025) (404) (636) (1,954) (839) (2,092) (5,925) Banking NII sensitivity to an instantaneous change in yield curves (12 months) – Year 1 sensitivity by currency Currency $ HK$ £ € Other Total $m $m $m $m $m $m Change in Jan 2024 to Dec 2024 (based on balance sheet at 31 December 2023) +100bps parallel 343 411 496 285 1,297 2,832 -100bps parallel (494) (493) (602) (304) (1,460) (3,353) Risk review 214 HSBC Holdings plc Annual Report and Accounts 2023 Banking NII sensitivity to an instantaneous down 100bps parallel change in yield curves – Year 2 and Year 3 sensitivity by currency Currency $ HK$ £ € Other Total $m $m $m $m $m $m Change in banking NII (based on balance sheet at 31 December 2023) Year 2 (Jan 2025 to Dec 2025) (1,015) (693) (938) (333) (1,798) (4,777) Year 3 (Jan 2026 to Dec 2026) (1,289) (761) (1,439) (405) (1,926) (5,820) Non-trading value at risk Non-trading portfolios comprise positions that primarily arise from the interest rate management of our retail and commercial banking assets and liabilities, financial investments measured at fair value through other comprehensive income, debt instruments measured at amortised cost, and exposures arising from our insurance operations. Value at risk of non-trading portfolios Value at risk (‘VaR’) is a technique for estimating potential losses on risk positions as a result of movements in market rates and prices over a specified time horizon and to a given level of confidence. The use of VaR is integrated into the market risk management of non- trading portfolios to have a complete picture of risk, complementing risk sensitivity analysis. Our models are predominantly based on historical simulation that incorporates the following features: – historical market rates and prices, which are calculated with reference to interest rates, credit spreads and the associated volatilities; – potential market movements that are calculated with reference to data from the past two years; and – calculations to a 99% confidence level and using a one-day holding period. Although a valuable guide to risk, VaR is used for non-trading portfolios with awareness of its limitations. For example: – The use of historical data as a proxy for estimating future market moves may not encompass all potential market events, particularly those that are extreme in nature. As the model is calibrated on the last 500 business days, it does not adjust instantaneously to a change in the market regime. – The use of a one-day holding period for risk management purposes of non-trading books is only an indication of exposure and not indicative of the time period required to hedge or liquidate positions. – The use of a 99% confidence level by definition does not take into account losses that might occur beyond this level of confidence. The interest rate risk on the fixed-rate securities issued by HSBC Holdings is not included in the Group non-trading VaR. The management of this risk is described on page 217. Non-trading VaR also excludes the equity risk on securities held at fair value and non-trading book foreign exchange risk. The daily levels of total non-trading VaR in 2023 are set out in the graph below. Daily VaR (non-trading portfolios), 99% 1 day ($m) Non-trading total Interest rate Credit spread Diversification Dec-22 Jan-23 Feb-23 Mar-23 Apr-23 May-23 Jun-23 Jul-23 Aug-23 Sep-23 Oct-23 Nov-23 Dec-23 -140 -120 -100 -80 -60 -40 -20 0 20 40 60 80 100 120 140 160 180 200 220 240 260 The Group non-trading VaR for 2023 is shown in the table below. Interest rate Credit spread Portfolio diversification1 Total2 $m $m $m $m Balance at 31 Dec 2023 173.8 112.8 (104.2) 182.4 Average 156.2 84.2 (63.7) 176.6 Maximum 201.9 116.4 224.3 Minimum 108.8 55.2 127.0 Non-trading VaR, 99% 1 day (Audited) HSBC Holdings plc Annual Report and Accounts 2023 215 Risk review Interest rate Credit spread Portfolio diversification1 Total2 $m $m $m $m Balance at 31 Dec 2022 159.8 56.6 (45.3) 171.1 Average 134.6 56.9 (35.9) 155.6 Maximum 225.5 84.7 265.3 Minimum 98.3 43.4 106.3 Non-trading VaR, 99% 1 day (continued) (Audited) 1 Portfolio diversification is the market risk dispersion effect of holding a portfolio containing different risk types. It represents the reduction in unsystematic market risk that occurs when combining a number of different risk types – such as interest rate and credit spreads – together in one portfolio. It is measured as the difference between the sum of the VaR by individual risk type and the combined total VaR. A negative number represents the benefit of portfolio diversification. As the maximum and minimum occurs on different days for different risk types, it is not meaningful to calculate a portfolio diversification benefit for these measures. 2 The total VaR is non-additive across risk types due to diversification effects. The VaR for non-trading activity increased by $11m from $171m at 31 December 2022 to $182m at 31 December 2023 due to relatively small changes in risk profile over the year. The average portfolio diversification effect between interest rate and credit spread exposure increased during the year, with the offset increasing to $104m from $45m. Sensitivity of capital and reserves Global Treasury maintains a portfolio of high-quality liquid assets for contingent liquidity and NII stabilisation purposes, which is in part accounted for under a hold-to-collect-and-sell business model. This hold-to-collect-and-sell portfolio, together with any associated derivatives in designated hedge accounting relationships, is accounted for at fair value through other comprehensive income and has an impact on CET1. The portfolio represents the vast majority of our hold-to-collect-and-sell capital risk and is risk managed with a variety of tools, including risk sensitivities and value at risk measures. The table below measures the sensitivity of the value of this portfolio to an instantaneous 100 basis point increase in interest rates, based on the risk sensitivity of a shift in value for a 1 basis point (‘bps‘) parallel movement in interest rates. Sensitivity of hold-to-collect-and-sell reserves to interest rate movements $m At 31 Dec 2023 +100 basis point parallel move in all yield curves (2,264) As a percentage of total shareholders’ equity (1.22)% At 31 Dec 2022 +100 basis point parallel move in all yield curves (1,199) As a percentage of total shareholders’ equity (0.64)% The increase in the sensitivity of the portfolio during 2023 was mainly driven by an increase in NII stabilisation in line with our strategy. The figures in the table above do not take into account the effects of interest rate convexity. The portfolio mostly comprises vanilla sovereign bonds in a variety of currencies, and the primary risk is interest rate duration risk, although the portfolio also generates asset swap, credit spread and asset spread risks that are managed within appetite as part of our risk management framework. A minus 100bps shock would lead to an approximately symmetrical gain. Alongside our monitoring of the hold-to-collect-and-sell reserve sensitivity, we also monitor the sensitivity of reported cash flow hedging reserves to interest rate movements on a yearly basis by assessing the expected reduction in valuation of cash flow hedges due to parallel movements of plus or minus 100bps in all yield curves. The following table describes the sensitivity of our cash flow hedging reserves to the stipulated movements in yield curves at the year end. The sensitivities are indicative and based on simplified scenarios. These particular exposures form only a part of our overall interest rate exposure. We apply flooring on negative rates in the minus 100bps scenario in this assessment. Due to increases in interest rates in most markets, the effect of this flooring is immaterial at the end of 2023. Comparing 31 December 2023 with 31 December 2022, the sensitivity of the cash flow hedging reserve increased by $1,537m in the plus 100bps scenario and increased by $1,562m in the minus 100bps scenario. The increase in the sensitivity of this reserve was mainly driven by an increase in our NII stabilisation. Our exposure to fixed rate pound sterling hedges continued to be the largest in size and in terms of year-on-year increase. Hong Kong dollar and euro hedges contributed to the majority of the rest of the increase in exposure, partly offset by a reduction in the size of US dollar hedges. Sensitivity of cash flow hedging reported reserves to interest rate movements $m At 31 Dec 2023 +100 basis point parallel move in all yield curves (3,436) As a percentage of total shareholders’ equity (1.85)% -100 basis point parallel move in all yield curves 3,474 As a percentage of total shareholders’ equity 1.87% At 31 Dec 2022 +100 basis point parallel move in all yield curves (1,899) As a percentage of total shareholders’ equity (1.01)% -100 basis point parallel move in all yield curves 1,912 As a percentage of total shareholders’ equity 1.02% Risk review 216 HSBC Holdings plc Annual Report and Accounts 2023 Third-party assets in Markets Treasury Third-party assets in Markets Treasury increased by 5% compared with 31 December 2022. The net increase of $38bn is partly reflective of higher commercial surpluses during the year, with the increase of $76bn in ‘Financial Investments’ and the decrease of $39bn in ‘Cash and balances at central banks’ largely driven by NII stabilisation activity. Third-party assets in Markets Treasury 2023 2022 $m $m Cash and balances at central banks 278,289 317,479 Trading assets 238 498 Loans and advances: – to banks 78,667 67,612 – to customers 1,083 2,102 Reverse repurchase agreements 45,419 53,016 Financial investments 396,259 319,852 Other 34,651 36,192 At 31 Dec 834,606 796,751 Defined benefit pension plans Market risk arises within our defined benefit pension plans to the extent that the obligations of the plans are not fully matched by assets with determinable cash flows. For details of our defined benefit plans, including asset allocation, see Note 5 on the financial statements, and for pension risk management, see page 206. Additional market risk measures applicable only to the parent company HSBC Holdings monitors and manages foreign exchange risk and interest rate risk. In order to manage interest rate risk, HSBC Holdings uses the projected sensitivity of its NII to future changes in yield curves. Foreign exchange risk HSBC Holdings’ foreign exchange exposures derive almost entirely from the execution of structural foreign exchange hedges on behalf of the Group. At 31 December 2023, HSBC Holdings had forward foreign exchange contracts of $33.8bn (2022: $30.1bn) to manage the Group’s structural foreign exchange exposures. For further details of our structural foreign exchange exposures, see page 213. Sensitivity of net interest income HSBC Holdings monitors NII sensitivity in the first, second and third years, reflecting the longer-term perspective on interest rate risk management appropriate to a financial services holding company. These sensitivities assume that any issuance where HSBC Holdings has an option to redeem at a future call date is called at this date. The tables below set out the effect on HSBC Holdings’ future NII of an immediate shock of +/-100bps to the current market-implied path of interest rates across all currencies on 1 January 2024. The NII sensitivities shown are indicative and based on simplified scenarios. An immediate interest rate rise of 100bps would decrease projected NII for the 12 months to 31 December 2024 by $233m. Conversely, an immediate fall of 100bps would increase projected NII for the 12 months to 31 December 2024 $233m. Overall the NII sensitivity is mainly driven by floating liabilities funding equity (non-interest bearing) investments in subsidiaries. During 2023, HSBC Holdings hedged $3.6bn of previously unhedged issuances, which increased the negative NII sensitivity to positive parallel shifts in interest rates. In year 1, that impact is offset by a shorter repricing profile of assets. As of the Annual Report and Accounts 2023, HSBC Holdings is no longer disclosing the interest rate repricing gap table, as the sensitivity of net interest income table captures HSBC Holdings‘ exposure to interest rate risk and is aligned to the way we disclose interest rate risk internally to key management. NII sensitivity to an instantaneous change in yield curves (12 months) – Year 1 sensitivity by currency $ HK$ £ € Other Total $m $m $m $m $m $m Change in Jan 2024 to Dec 2024 (based on balance sheet at 31 December 2023) +100bps parallel (258) — 12 5 8 (233) -100bps parallel 258 — (12) (5) (8) 233 Change in Jan 2023 to Dec 2023 (based on balance sheet at 31 December 2022) +100bps parallel (265) — 16 9 — (240) -100bps parallel 265 — (16) (9) — 240 $ HK$ £ € Other Total $m $m $m $m $m $m Change in NII (based on balance sheet at 31 December 2023) Year 2 (Jan 2025 to Dec 2025) 219 — (12) 1 (9) 199 Year 3 (Jan 2026 to Dec 2026) 218 — (12) — (10) 196 Change in NII (based on balance sheet at 31 December 2022) — Year 2 (Jan 2024 to Dec 2024) 182 — (12) (8) — 162 Year 3 (Jan 2025 to Dec 2025) 160 — (10) (7) — 143 NII sensitivity to an instantaneous down 100bps parallel change in yield curves – Year 2 and Year 3 sensitivity by currency The figures represent hypothetical movements in NII based on our projected yield curve scenarios, HSBC Holdings’ current interest rate risk profile and assumed changes to that profile during the next three years. The sensitivities represent our assessment of the change to a hypothetical base case based on a static balance sheet assumption, and do not take into account the effect of actions that could be taken to mitigate this interest rate risk. HSBC Holdings plc Annual Report and Accounts 2023 217 Risk review Market risk Contents 218 Overview 218 Market risk management 219 Market risk in 2023 219 Trading portfolios 220 Market risk balance sheet linkages Overview Market risk is the risk of an adverse financial impact on trading activities arising from changes in market parameters such as interest rates, foreign exchange rates, asset prices, volatilities, correlations and credit spreads. Market risk arises from both trading portfolios and non-trading portfolios. For further details of market risk in non-trading portfolios, see page 215 of the Annual Report and Accounts 2023. Market risk management Key developments in 2023 There were no material changes to our policies and practices for the management of market risk in 2023. Governance and structure The following diagram summarises the main business areas where trading market risks reside and the market risk measures used to monitor and limit exposures. Risk types Trading risk – Foreign exchange and commodities – Interest rates – Credit spreads – Equities Global business GBM Risk measure Value at risk | Sensitivity | Stress testing The objective of our risk management policies and measurement techniques is to manage and control market risk exposures to optimise return on risk while maintaining a market profile consistent with our established risk appetite. Market risk is managed and controlled through limits approved by the Group Chief Risk and Compliance Officer for HSBC Holdings. These limits are allocated across business lines and to the Group’s legal entities. Each major operating entity has an independent market risk management and control sub-function, which is responsible for measuring, monitoring and reporting market risk exposures against limits on a daily basis. Each operating entity is required to assess the market risks arising in its business and to transfer them either to its local Markets and Securities Services or Markets Treasury unit for management, or to separate books managed under the supervision of the local ALCO. The Traded Risk function enforces the controls around trading in permissible instruments approved for each site as well as changes that follow completion of the new product approval process. Traded Risk also restricts trading in the more complex derivative products to only those offices with appropriate levels of product expertise and control systems. Key risk management processes Monitoring and limiting market risk exposures Our objective is to manage and control market risk exposures while maintaining a market profile consistent with our risk appetite. We use a range of tools to monitor and limit market risk exposures including sensitivity analysis, VaR and stress testing. Sensitivity analysis Sensitivity analysis measures the impact of movements in individual market factors on specific instruments or portfolios, including interest rates, foreign exchange rates and equity prices. We use sensitivity measures to monitor the market risk positions within each risk type. Granular sensitivity limits are set for trading desks with consideration of market liquidity, customer demand and capital constraints, among other factors. Value at risk (Audited) VaR is a technique for estimating potential losses on risk positions as a result of movements in market rates and prices over a specified time horizon and to a given level of confidence. The use of VaR is integrated into market risk management and calculated for all trading positions regardless of how we capitalise them. Where we do not calculate VaR explicitly, we use alternative tools as summarised in the ‘Stress testing’ section below. Our models are predominantly based on historical simulation that incorporates the following features: – historical market rates and prices, which are calculated with reference to foreign exchange rates, commodity prices, interest rates, equity prices and the associated volatilities; – potential market movements that are calculated with reference to data from the past two years; and – calculations to a 99% confidence level and using a one-day holding period. The models also incorporate the effect of option features on the underlying exposures. The nature of the VaR models means that an increase in observed market volatility will lead to an increase in VaR without any changes in the underlying positions. VaR model limitations Although a valuable guide to risk, VaR is used with awareness of its limitations. For example: – The use of historical data as a proxy for estimating future market moves may not encompass all potential market events, particularly those that are extreme in nature. As the model is calibrated on the last 500 business days, it does not adjust instantaneously to a change in the market regime. – The use of a one-day holding period for risk management purposes of trading books assumes that this short period is sufficient to hedge or liquidate all positions. – The use of a 99% confidence level by definition does not take into account losses that might occur beyond this level of confidence. – VaR is calculated on the basis of exposures outstanding at the close of business and therefore does not reflect intra-day exposures. Risk not in VaR framework The risks not in VaR (‘RNIV’) framework captures and capitalises material market risks that are not adequately covered in the VaR model. Risk factors are reviewed on a regular basis and are either incorporated directly in the VaR models, where possible, or quantified through either the VaR-based RNIV approach or a stress test approach within the RNIV framework. While VaR-based RNIVs are calculated by using historical scenarios, stress-type RNIVs are estimated on the basis of stress scenarios whose severity is calibrated to be in line with the capital adequacy requirements. The outcome of the VaR-based RNIV approach is included in the overall VaR calculation but excluded from the VaR measure used for regulatory back-testing. Stress-type RNIVs include a deal contingent derivatives capital charge to capture risk for these transactions and a de-peg risk measure to capture risk to pegged and heavily managed currencies. Risk review 218 HSBC Holdings plc Annual Report and Accounts 2023 Stress testing Stress testing is an important procedure that is integrated into our market risk management framework to evaluate the potential impact on portfolio values of more extreme, although plausible, events or movements in a set of financial variables. In such scenarios, losses can be much greater than those predicted by VaR modelling. Stress testing and reverse stress testing provide senior management with insights regarding the ‘tail risk’ beyond VaR. Stress testing is implemented at legal entity, regional and overall Group levels. A set of scenarios is used consistently across all regions within the Group. Market risk stress testing incorporates both historical and hypothetical events. Market risk reverse stress tests are designed to identify vulnerabilities in our portfolios by looking for scenarios that lead to loss levels considered severe for the relevant portfolio. These scenarios may be local or idiosyncratic in nature and complement the systematic top-down stress testing. The risk appetite around potential stress losses for the Group is set and monitored against limits. Trading portfolios Trading portfolios comprise positions held for client servicing and market-making, with the intention of short-term resale and/or to hedge risks resulting from such positions. Back-testing We routinely validate the accuracy of our VaR models by back-testing the VaR metric against both actual and hypothetical profit and loss. Hypothetical profit and loss excludes non-modelled items such as fees, commissions and revenue of intra-day transactions. The hypothetical profit and loss reflects the profit and loss that would be realised if positions were held constant from the end of one trading day to the end of the next. This measure of profit and loss does not align with how risk is dynamically hedged, and is not therefore necessarily indicative of the actual performance of the business. The number of hypothetical loss back-testing exceptions, together with a number of other indicators, is used to assess model performance and to consider whether enhanced internal monitoring of a VaR model is required. We back-test our VaR at set levels of our Group entity hierarchy. Market risk in 2023 During 2023, global financial markets were mainly driven by the inflation outlook, interest rate expectations and recession risks, coupled with banking failures in March, and rising geopolitical tensions in the Middle East from October. Major central banks maintained restrictive monetary policies, and bond markets experienced a volatile year. After rising significantly in the second and third quarters of 2023, US treasury bond yields fell during the fourth quarter, as lower inflation pressures led markets to expect that key rates would be cut in 2024. The interest rate outlook was also a major driver of performance in global equity markets, alongside resilient corporate earnings and positive sentiment in the technology sector. Equities in developed markets advanced significantly amid low volatility, while performance in emerging markets was more subdued. In foreign exchange markets, the US dollar fluctuated against other major currencies, mostly in line with US Federal Reserve policy and bond yields expectations. Investor sentiment remained resilient in credit markets. High-yield and investment-grade credit spreads narrowed, in general, as fears of contagion in the banking sector in the first quarter of 2023 abated, and economic growth remained resilient throughout the year. We continued to manage market risk prudently during 2023. Sensitivity exposures and VaR remained within appetite as the business pursued its core market-making activity in support of our customers. Market risk was managed using a complementary set of risk measures and limits, including stress testing and scenario analysis. Trading portfolios Value at risk of the trading portfolios Trading VaR was predominantly generated by the Markets and Securities Services business. Trading VaR as at 31 December 2023 increased by $3.3m compared with 31 December 2022. Interest rate risk factors were the major contributors to VaR at the end of December 2023. The VaR increase during 2023 peaked in September, and was mainly driven by: – interest rate risk exposures in currencies held across the Fixed Income and Foreign Exchange business lines to facilitate client- driven activity; and – the effects of relatively large short-term interest rate shocks for key currencies, which are captured in the VaR scenario window. These factors were partly offset by lower losses from equity risks and interest rate risks that were captured within the RNIV framework. The daily levels of total trading VaR during 2023 are set out in the graph below. Daily VaR (trading portfolios), 99% 1 day ($m) Trading total Interest rate (‘IR’) trading Equity (‘EQ’) trading Credit spread (‘CS’) trading intent Foreign exchange (‘FX’) trading Diversification Dec-22 Jan-23 Feb-23 Mar-23 Apr-23 May-23 Jun-23 Jul-23 Aug-23 Sep-23 Oct-23 Nov-23 Dec-23 -80 -60 -40 -20 0 20 40 60 80 100 120 HSBC Holdings plc Annual Report and Accounts 2023 219 Risk review The Group trading VaR for the year is shown in the table below. Trading VaR, 99% 1 day1 (Audited) Foreign exchange and commodity Interest rate Equity Credit spread Portfolio diversification2 Total3 $m $m $m $m $m $m Balance at 31 Dec 2023 13.4 55.9 15.2 7.2 (38.9) 52.8 Average 16.2 53.9 19.0 11.6 (40.8) 59.8 Maximum 24.6 86.0 27.8 16.5 98.2 Minimum 9.3 25.5 13.4 6.6 34.4 Balance at 31 Dec 2022 15.4 40.0 18.6 11.9 (36.4) 49.5 Average 13.6 29.6 16.1 16.8 (34.0) 42.1 Maximum 29.2 73.3 24.8 27.9 78.3 Minimum 5.7 20.2 11.5 9.1 29.1 1 Trading portfolios comprise positions arising from the market-making and warehousing of customer-derived positions. 2 Portfolio diversification is the market risk dispersion effect of holding a portfolio containing different risk types. It represents the reduction in unsystematic market risk that occurs when combining a number of different risk types – such as interest rate, equity and foreign exchange – together in one portfolio. It is measured as the difference between the sum of the VaR by individual risk type and the combined total VaR. A negative number represents the benefit of portfolio diversification. As the maximum and minimum occurs on different days for different risk types, it is not meaningful to calculate a portfolio diversification benefit for these measures. 3 The total VaR is non-additive across risk types due to diversification effects. The table below shows trading VaR at a 99% confidence level compared with trading VaR at a 95% confidence level at 31 December 2023. This comparison facilitates the benchmarking of the trading VaR, which can be stated at different confidence levels, with financial institution peers. The 95% VaR is unaudited. Comparison of trading VaR, 99% 1 day vs trading VaR, 95% 1 day Trading VaR, 99% 1 day Trading VaR, 95% 1 day $m $m Balance at 31 Dec 2023 52.8 35.3 Average 59.8 36.8 Maximum 98.2 53.3 Minimum 34.4 21.0 Balance at 31 Dec 2022 49.5 31.7 Average 42.1 24.6 Maximum 78.3 49.0 Minimum 29.1 17.5 Back-testing During 2023, the Group experienced no back-testing exceptions on losses against actual or hypothetical profit and losses. Market risk balance sheet linkages The following balance sheet lines in the Group’s consolidated position are subject to market risk: Trading assets and liabilities The Group’s trading assets and liabilities are in almost all cases originated by GBM. Other than a limited number of exceptions, these assets and liabilities are treated as traded risk for the purposes of market risk management. The exceptions primarily arise in Global Banking where the short-term acquisition and disposal of assets are linked to other non-trading-related activities such as loan origination. Derivative assets and liabilities We undertake derivative activity for three primary purposes: to create risk management solutions for clients, to manage the portfolio risks arising from client business, and to manage and hedge our own risks. Most of our derivative exposures arise from sales and trading activities within GBM. The assets and liabilities included in trading VaR give rise to a large proportion of the income included in net income from financial instruments held for trading or managed on a fair value basis. Adjustments to trading income such as valuation adjustments are not measured by the trading VaR model. For information on the accounting policies applied to financial instruments at fair value, see Note 1 on the financial statements. Risk review 220 HSBC Holdings plc Annual Report and Accounts 2023 Climate risk TCFD Contents 221 Overview 222 Climate risk management 223 Embedding our climate risk approach 225 Insights from climate scenario analysis Overview Our climate risk approach is aligned to the framework outlined by the Taskforce on Climate-related Financial Disclosures (‘TCFD’), which identifies two primary drivers of climate risk: – physical risk, which arises from the increased frequency and severity of extreme weather events, such as hurricanes and floods, or chronic gradual shifts in weather patterns or rises in the sea level; and – transition risk, which arises from the process of moving to a net zero economy, including changes in government policy and legislation, technology, market demand, and reputational implications triggered by a change in stakeholder expectations, action or inaction. In addition to these primary drivers of climate risk, we have also identified the following thematic issues related to climate risk, which are most likely to materialise in the form of reputational, regulatory compliance and litigation risks: – net zero alignment risk, which arises from the risk of HSBC failing to meet its net zero commitments or failing to meet external expectations related to net zero, because of inadequate ambition and/or plans, poor execution, or inability to adapt to changes in the external environment; and – the risk of greenwashing, which arises from the act of knowingly or unknowingly making inaccurate, unclear, misleading or unsubstantiated claims regarding sustainability to our stakeholders. Approach We recognise that the physical impacts of climate change and the transition to a net zero economy can create significant financial risks for companies, investors and the financial system. HSBC may be affected by climate risks either directly or indirectly through our relationships with our customers, which could result in both financial and non-financial impacts. Our climate risk approach aims to effectively manage the material climate risks that could impact our operations, financial performance and stability, and reputation. It is informed by the evolving expectations of our regulators. We are developing our climate risk capabilities across our businesses, by prioritising sectors, portfolios and counterparties with the highest impacts. We continue to make progress in enhancing our climate risk capabilities, and recognise it is a long-term iterative process. We aim to regularly review our approach to increase coverage and incorporate maturing data, climate analytics capabilities, frameworks and tools, as well as respond to emerging industry best practice and climate risk regulations. This includes updating our approach to reflect how the risks associated with climate change continue to evolve in the real world, and maturing how we embed climate risk factors into strategic planning, transactions and decision making across our businesses. Our climate risk approach is aligned to our Group-wide risk management framework and three lines of defence model, which sets out how we identify, assess and manage our risks. For further details of the three lines of defence framework, see page 138. The tables below provide an overview of the climate risk drivers and thematic issues considered within HSBC’s climate risk approach. Climate risk – risk drivers Details Potential impacts Time horizons Physical Acute Increased frequency and severity of weather events causing disruption to business operations – Decreased real estate values or stranded assets – Decreased household income and wealth – Increased costs of legal and compliance – Increased public scrutiny – Decreased profitability – Lower asset performance Short term Medium term Long term Chronic Longer-term shifts in climate patterns (e.g. sustained higher temperatures, sea level rise, shifting monsoons or chronic heat waves) Transition Policy and legal Mandates on, and regulation of products and services and/or policy support for low-carbon alternatives. Litigation from parties who have suffered loss and damage from climate impacts Technology Replacement of existing products with lower emissions options End-demand (market) Changing consumer demand from individuals and corporates Reputational Increased scrutiny following a change in stakeholder perceptions of climate-related action or inaction HSBC Holdings plc Annual Report and Accounts 2023 221 Risk review Climate risk – thematic issues Net zero alignment risk Net zero ambition risk Failing to set or adapt our net zero ambition and broader business strategy in alignment with key stakeholder expectations, latest scientific understanding and commercial objectives. Net zero execution risk Failing to meet our net zero targets due to taking insufficient or ineffective actions, or due to the actions of clients, suppliers and other stakeholders. Net zero reporting risk Failing to report emissions baselines and targets, and performance against these accurately due to data, methodology and model limitations. Risk of greenwashing Firm Making inaccurate, unclear, misleading, or unsubstantiated claims in relation to our sustainability commitments and targets, as well as the reporting of our performance towards them. Product Making inaccurate, unclear, misleading or unsubstantiated claims in relation to products or services offered to clients that have stated sustainability objectives, characteristics, impacts or features. Client Making inaccurate, unclear, misleading or unsubstantiated claims as a consequence of our relationships with clients or transactions we undertake with them, where their sustainability commitments or related performance are misrepresented or are not aligned to our own commitments. In 2023, we updated our climate risk materiality assessment, to understand how climate risk may impact across HSBC’s risk taxonomy. The assessment focused on a 12-month time horizon, as well as time horizons for the short-term, medium-term and long-term periods. We define short term as time periods up to 2025; medium term as between 2026 and 2035; and long term as between 2036 and 2050. These time periods align to the Climate Action 100+ disclosure framework v1.2. The table below provides a summary of how climate risk may impact a subset of HSBC’s principal risks. The assessment is refreshed annually, and the results may change as our understanding of climate risk and how it impacts HSBC evolve (for further details, see ‘Impact on reporting and financial statements’ on page 44). In addition to this assessment, we also consider climate risk in our emerging risk reporting and scenario analysis (for further details, see ‘Top and emerging risks’ on page 38). Climate risk drivers Credit risk Traded risk Reputational risk1 Regulatory compliance risk1 Resilience risk Other financial and non-financial risk types Physical risk ● ● ● ● ● Transition risk ● ● ● ● ● ● 1 Our climate risk approach identifies thematic issues such as HSBC net zero alignment risk and the risk of greenwashing, which are most likely to materialise in the form of reputational, regulatory compliance and litigation risks. Climate risk management Key developments in 2023 Our climate risk programme continues to support the development of our climate risk management capabilities. The following outlines key developments in 2023: – We updated our climate risk management approach to incorporate net zero alignment risk and developed guidance on how climate risk should be managed for non-financial risk types. – We enhanced our climate risk materiality assessment to consider longer time horizons. – We enhanced our approach to assessing the impact of climate change on capital, focusing on credit and market risks. – We further developed our risk metrics to monitor our performance against our net zero targets for both financed emissions and own operations. – We enhanced our internal climate scenario analysis, including through improvements to our use of customer transition plan data. For further details of scenario analysis, see page 65. – We have updated our merger and acquisition process to consider potential climate and sustainability-related targets, net zero transition plans and climate strategy, and how this relates to HSBC. While we have made progress in enhancing our climate risk framework, further work remains. This includes the need to develop additional metrics and tools to measure our exposure to climate- related risks, and to incorporate these tools within decision making. Governance and structure The Board takes overall supervisory responsibility for our ESG strategy, overseeing executive management in developing the approach, execution and associated reporting. The ESG Committee supports the development and delivery of our ESG strategy, key policies and material commitments by providing oversight, coordination and management of ESG commitments and initiatives. It is co-chaired by the Group Chief Sustainability Officer and the Group Chief Financial Officer. The Sustainability Execution Committee has oversight of the environmental strategy, including the commercial execution and operationalisation through the sustainability execution programme, which is a Group-wide programme established to enable the delivery of our sustainability agenda. The Group Reputational Risk Committee considers climate-related matters arising from customers, transactions and third parties that either present a serious potential reputational risk to the Group or merit a Group-led decision to ensure a consistent approach to reputational risk management across the regions, global businesses and global functions. The Group Risk Management Meeting and the Group Risk Committee receive regular updates on our climate risk profile and progress of our climate risk programme. The Group Chief Risk and Compliance Officer is the senior manager responsible for the management of climate risk under the UK Senior Managers Regime, which involves holding overall accountability for the Group’s climate risk programme. The Environmental Risk Oversight Forum (formerly the Climate Risk Oversight Forum) oversees risk activities relating to climate and sustainability risk management, including the transition and physical risks from climate change. Equivalent forums have been established at a regional level. For further details of the Group’s ESG governance structure, see page 88. Risk review 222 HSBC Holdings plc Annual Report and Accounts 2023 Risk appetite Our climate risk appetite forms part of the Group’s risk appetite statement and supports the business in delivering our net zero ambition effectively and sustainably. Our climate risk appetite statement is approved and overseen by the Board. It is supported by risk appetite metrics and tolerance thresholds. We have also defined additional key management information metrics. Both the risk appetite statement and key management information metrics are reported on a quarterly basis for oversight by the Group Risk Management Meeting and the Group Risk Committee. Policies, processes and controls We continue to integrate climate risk into policies, processes and controls across many areas of our organisation, and we will continue to update these as our climate risk management capabilities mature over time. For further details of how we manage climate risk across our global businesses, see page 65. Embedding our climate risk approach The table below provides further details of how we have embedded the management of climate risk across key risk types. For further details of our internal scenario analysis, see ‘Insights from climate scenario analysis’ on page 225. Wholesale credit risk We have metrics in place to monitor the exposure of our wholesale corporate lending portfolio to six high transition risk sectors, as shown in the below table. As at 31 December 2023, the overall exposure to six high transition risk sectors was $112bn. The sector classifications are based on internal HSBC definitions and can be judgemental in nature. The sector classifications are subject to the remediation of ongoing data quality challenges. This data will be enhanced and refined in future years. Our relationship managers engage with our key wholesale customers through a transition engagement questionnaire (formerly the transition and physical risk questionnaire) to gather information and assess the alignment of our wholesale customers’ business models to net zero and their exposure to physical and transition risks. We use the responses to the questionnaire to create a climate risk score for our key wholesale customers. Our credit policies require that relationship managers comment on climate risk factors in credit applications for new money requests and annual credit reviews. Our credit policies also require manual credit risk rating overrides if climate is deemed to have a material impact on credit risk under 12 months if not already captured under the original credit risk rating. Key developments to our framework in 2023 include expanding the scope of our transition engagement questionnaire to capture new countries, territories and sectors. Key challenges for further embedding climate risk into credit risk management relate to the availability of adequate physical risk data to assess impacts to our wholesale customers. Wholesale loan exposure to high transition risk sectors at 31 December 20231 Units Automotive Chemicals Construction and building materials Metals and mining Oil and gas Power and utilities Total 2023 Exposure to sector1, 2, 3, 4 $bn 21 17 20 14 18 22 112 Sector weight as a proportion of high transition risk sectors % 18 16 18 13 16 19 100 1 Amounts shown in the table also include green and other sustainable finance loans, which support the transition to the net zero economy. The methodology for quantifying our exposure to high transition risk sectors and the transition risk metrics will evolve over time as more data becomes available and is incorporated in our risk management systems and processes. 2 Counterparties are allocated to the high transition risk sectors via a two-step approach. Firstly, where the main business of a group of connected counterparties is in a high transition risk sector, all lending to the group is included in one high transition risk sector irrespective of the sector of each individual obligor within the group. Secondly, where the main business of a group of connected counterparties is not in a high transition risk sector, only lending to individual obligors in the high transition risk sectors is included. The main business of a group of connected counterparties is identified by the industry that generates the majority of revenue within a group. Customer revenue data utilised during this allocation process is the most recent readily available and will not align to our own reporting period. 3 These disclosures cover the whole of the value chain of the sector. For details of financed emissions coverage, please refer to page 53. 4 The six high transition risk sectors make up 17.4% of total wholesale loans and advances to customer and banks of $644bn. Amounts include assets held for sale. Risk type Our approach HSBC Holdings plc Annual Report and Accounts 2023 223 Risk review Retail credit risk We have implemented policies and tools to manage climate risk across our retail mortgage markets. Our retail credit risk management policy requires each mortgage market to conduct an annual review of their climate risk management procedures, including perils and data sources, to ensure they remain fit for purpose. In 2023 we introduced a global ‘soft trigger’ monitoring and review process for physical risk exposure where a market reaches or exceeds a set threshold, as this ensures markets are actively considering their balance sheet risk exposure to peril events. Within our mortgage portfolios, properties or areas with potentially heightened physical risk are identified and assessed locally and potential exposure is monitored through quarterly metrics. We have also set risk appetite metrics for physical risk in our largest mortgage markets, the UK and Hong Kong, as well as those with local regulatory requirements, including Singapore. The UK is our largest mortgage market, which as at September 2023 made up 40.0% of our global mortgage portfolio. We estimate that 0.2% of our UK retail mortgage portfolio is at very high risk of flooding and 3.5% is at high risk. This is based on approximately 94.2% climate risk data coverage by value of our UK portfolio as at September 2023. In the UK we also monitor the energy performance certificate (‘EPC’) ratings of individual properties in our mortgage portfolio. As at September 2023, approximately 64.5% of properties within the portfolio by value had a valid EPC dated within the last 10 years. Of these, 40.0% of properties had a current rating of A to C, and 97.0% had the potential to reach these rating bands, if appropriate energy efficiency improvement measures are taken. For both flood risk and EPC data, we disclose the end of September 2023 position. This is due to the time required for the data to be processed and our reliance on the government’s public EPC data, which usually lags one month behind. The table below outlines the UK retail mortgage portfolio tenor as at the end of December 2023 (by balance split by remaining term). This table shows that the majority of our portfolio tenor is greater than five years, and that the average remaining loan term in the UK is 21.5 years. Residential mortgages tenor (remaining mortgage term by balance $m)1 Tenor Remaining mortgage balance ($m) <1 years 382 1 to 5 years 3,469 >5 years 157,643 Weighted average of remaining mortgage term (years) 21.50 The average term for new mortgages in the UK is 25 years, although the average life of a loan is approximately five years due to refinancing. Despite this, our strategic approach to climate risk considers present day and long-term risk given customers may remain over the whole loan term. For further details of flood risk and the EPC breakdown of our UK retail mortgage portfolio, see our ESG Data Pack at www.hsbc.com/ esg. 1 The table includes instances where individual properties have multiple associated accounts and balances. These are aggregated to a property level and the longest term remaining is taken as the tenor. Treasury risk As part of our ICAAP in 2023, we enhanced our approach for assessing the impact of climate change on capital, focusing on credit and market risks. As part of our ILAAP, we conducted an initial analysis to identify the potential climate risk exposures across key liquidity risk drivers. We updated our treasury risk policies to ensure that the impact of climate risk is considered when assessing applicable treasury risks. We regularly discuss climate-related topics that may impact Global Treasury through climate-relevant governance forums, including the Treasury Risk Management Climate Risk Oversight Forum and the Group Treasury Sustainability Committee. Treasury portfolios are also included within the scope of the internal climate scenario analysis and the Hong Kong Monetary Authority’s climate risk stress test, with potential quantitative impacts on relevant hold-to-collect-and-sell positions estimated. Pensions risk We conduct an annual exercise to monitor the exposure of our largest pension plans to climate risk. Our pension policies have also been updated to explicitly reflect climate considerations. Insurance risk We have an evolving programme to support the identification and management of climate risk. In 2023, we updated our sustainability procedures to align with the Group’s updated energy and thermal coal-phase out policy. Traded risk We have implemented metrics and thresholds to monitor exposure to high physical and transition risk sectors for the different asset classes in the Markets and Securities Services (‘MSS‘) business. The metrics use a risk taxonomy that categorises countries/territories and sectors into high, medium and low risk, for which we have set corresponding thresholds. We have implemented these metrics for key entities. In addition, we have identified key regions and business lines that contribute the most to the total MSS high-climate sensitive exposures and developed reports to monitor trends and pockets of risks. We have developed tools to provide a better understanding of key profit and loss drivers under different climate scenarios along different dimensions such as risk factors and business lines. These reports are available to traded risk managers to help monitor and understand how climate-sensitive exposures are impacted under different scenarios. Stress testing results have been presented to senior management for visibility during dedicated review and challenge sessions to provide awareness on the impact to the MSS portfolio and underlying business lines. Reputational risk We manage the reputational impact of climate risk through our broader reputational risk framework, supported by our sustainability risk policies and metrics. Our sustainability risk policies set out our appetite for financing activities in certain sectors. Our thermal coal phase-out and energy policies aim to drive down greenhouse gas emissions while supporting a just transition. Our global network of sustainability risk managers provides local policy guidance to relationship managers for the oversight of policy compliance and in support of implementation across our wholesale banking activities. For further details of our sustainability risk policies, see the ESG review on page 42. We have developed risk appetite metrics to monitor our performance against our financed emissions targets. For further details of our targets, see page 57. Risk type Our approach Risk review 224 HSBC Holdings plc Annual Report and Accounts 2023 Regulatory compliance risk Our policies set the Group-wide standards that are required to manage the risk of breaches of our regulatory duty to customers, including those related to climate risk, ensuring fair customer outcomes are achieved. To make sure our responsibilities are met in this regard, our policies are subject to continuous review and enhancement. We are also focused on the ongoing development and improvement of our monitoring capabilities, ensuring appropriate alignment to the broader focus on regulatory compliance risks. Regulatory Compliance is particularly focused on mitigating climate risks inherent to the product lifecycle. To support this, we have enhanced a number of processes including: – ensuring Regulatory Compliance provides risk oversight and review of new product marketing materials with any reference to climate, sustainability and ESG; – developing our product marketing controls to ensure climate claims are robustly evidenced and substantiated within product marketing materials; and – clarifying and improving product marketing framework, procedures and associated guidance, to ensure product-related marketing materials comply with both internal and external standards, and are subject to robust governance. Regulatory Compliance operates an ESG and Climate Risk Working Group to track and monitor the integration and embedding of climate risk management into the functions’ activities, while monitoring regulatory and legislative changes across the ESG and climate risk agenda. Regulatory Compliance also continues to be an active member of the Group’s Environmental Risk Oversight Forums. Resilience risk Our Enterprise Risk Management function is responsible for overseeing the identification and assessment of physical and transition climate risks that may impact on the organisation’s operational and resilience capabilities. We have developed metrics to assess how physical risk may impact our critical properties. In 2023, we also developed an energy and travel risk appetite metric for our own operations to establish and monitor progress against our net zero ambitions. Our resilience risk policies are subject to continuous improvement to remain relevant to evolving climate risks. New developments relevant to our own operations are reviewed to ensure climate risk considerations are effectively captured. Model risk The impact of climate risk on model risk is driven by the increasing number of climate risk models and the expanding model use cases. Review and challenge of models mitigates some risk but given the nascent nature of climate modelling and the lack of benchmarks, the validation of model assumptions and results remains a key challenge. Model Risk has published a new climate risk and ESG model category standard, which sets out minimum control requirements for identifying, measuring and managing model risk for climate-related models. We completed independent model validation for a number of models used for financed emissions calculations and climate scenario analysis using both qualitative and quantitative assessments of modelling decisions and outputs. Financial reporting risk We have expanded the scope of financial reporting risk to explicitly include oversight over accuracy and completeness of ESG and climate reporting. In 2023, we updated the risk appetite statement to reference our ESG and climate-related disclosures. We also updated our internal controls to incorporate requirements for addressing the risk of misstatement in ESG and climate reporting. To support this, we have developed a framework to guide control implementation over ESG and climate reporting disclosures, which includes areas such as process and data governance, and risk assessment. As the landscape for ESG and climate-related disclosures develops, we continue to focus on horizon scanning and interpretation of relevant external reporting requirements, to ensure a timely response for producing the required disclosures. As the volume and nature of these requirements continue to evolve, the level of risk is heightened. Part of our response to this heightened risk includes undertaking a range of assurance procedures over these disclosures. Risk type Our approach Challenges While we have continued to develop our climate risk framework, our remaining challenges include: – the diverse range of internal and external data sources and data structures needed for climate-related reporting, which introduces data accuracy and reliability risks; – data limitations on customer assets and supply chains, and methodology gaps, which hinder our ability to assess physical risks accurately; – industry-wide data gaps on customer emissions and transition plan and methodology gaps, which limit our ability to assess transition risks accurately; and – limitations in our management of net zero alignment risk is due to known and unknown factors, including the limited accuracy and reliability of data, merging methodologies, and the need to develop new tools to better inform decision making. Insights from climate scenario analysis Scenario analysis supports our strategy by assessing our potential exposures to risks and vulnerabilities under a range of climate scenarios. It helps to build our awareness of climate change, plan for the future and meet our growing regulatory requirements. In 2023, we enhanced our internal climate scenario analysis exercise by focusing our efforts on generating more granular insights for key sectors and regions to support core decision-making processes, and to respond to our regulatory requirements. We also produced several climate stress tests for regulators around the world, including the Hong Kong Monetary Authority (‘HKMA’) and the Central Bank of the United Arab Emirates. We continue to enhance our climate scenario analysis exercises so that we can have a more comprehensive understanding of climate headwinds, risks and opportunities to support our strategic planning and actions. In climate scenario analysis, we consider, jointly, both physical risks and transition risks. For further details about these risks, see ‘Climate risk’ on page 221. We also analyse how these climate risks impact principal risk types within our organisation, including credit and traded market risks, non- financial risks, and pension risk. Our climate scenarios In our 2023 climate scenario analysis exercises, we explored five scenarios that were created to examine the potential impacts from climate change for the Group and its entities. The analysis considered the key regions in which we operate, and assessed the impact on our balance sheet across three distinct timeframes: short term up to 2025; medium term from 2026 to 2035; and long term from 2036 to 2050. The time horizons are aligned to the Climate Action 100+ framework v1.2. We created our internal scenarios using external publicly available climate scenarios as a reference, including those produced by the Network for Greening the Financial System (‘NGFS’), the Intergovernmental Panel on Climate Change (‘IPCC’) and the International Energy Agency. Using these external scenarios as a template, we adapted them by incorporating the unique climate risks and vulnerabilities to which our organisation and customers across different business sectors and regions are exposed. This helped us produce the scenarios, which vary by severity to analyse how climate risks will impact our portfolios. HSBC Holdings plc Annual Report and Accounts 2023 225 Risk review Our scenarios were: – the Net Zero scenario, which is consistent with the Paris Agreement. This assumes that there will be orderly but considerable climate action, limiting global warming to no more than 1.5°C by 2100, when compared with pre-industrial levels; – the Current Commitments scenario, which assumes that climate action is limited to current governmental committed policies, including already implemented actions, leading to global temperature rises of 2.4°C by 2100. This slow transition scenario helps us to determine the actions we need to take to reach our net zero ambition while operating in a world that is not net zero; – the Delayed Transition Risk scenario, which assumes that climate action is delayed until 2030 with a late disorderly transition to net zero but stringent and rapid enough to limit global warming to under 2°C by 2100. This scenario allows us to stress test severe but plausible transition risk impacts; – the Downside Physical Risk scenario, which assumes climate action is limited to currently implemented governmental policies, leading to extreme global warming with global temperatures increasing by greater than 4°C by 2100. This scenario allows us to assess physical risks associated with climate change; and – the Near Term scenario, which assumes both a sharp increase in policies that drive a disorderly transition towards net zero and a sharp increase in extreme climate events over a five-year period until 2027. This scenario focused on our business in Asia. We have chosen these scenarios to provide a holistic view that will supplement the Group’s current and future strategic thinking. They reflect inputs from our key stakeholders and experts across the Group, and have been reviewed through internal governance. Our scenarios reflect different levels of physical and transition risks over a variety of time periods. The scenario assumptions include varying levels of governmental climate policy changes, macroeconomic factors and technological developments. However, these scenarios rely on the development of technologies that are still unproven, such as global hydrogen production to decarbonise aviation and shipping. The nature of the scenarios, our developing capabilities, and limitations of the analysis lead to outcomes that are indicative of climate change headwinds, although they are not a direct forecast. Developments in climate science, data, methodology and scenario analysis techniques will help us shape our approach further. We therefore expect this view to change over time. Characteristics of our scenarios Scenarios Net zero Current Commitments Delayed Transition Risk Downside Physical Risk Near Term Scenario outcomes Rise in global temperatures by 2100 (vs pre-industrial levels) 1.5˚c 2.4˚c 1.6˚c 4.2˚c 1.4˚c Focus horizon Medium term Short/medium term Medium/long term Medium/long term Short/medium term Underlying assumptions based on global averages Assumed variation in global climate policies Low Medium High Low High Assumed pace of technology change and adoption Fast Gradual Accelerates from 2030 None Based on existing technology Assumed socioeconomic impact High Moderate Very high Very high (in long term) Very high 2030 2050 2030 2050 2030 2050 2030 2050 2027 Assumed carbon price ($/tCO2) 161 623 34 91 34 558 6 6 193 Assumed change in energy consumption (% change after 2022) (10)% (16)% 12% 17% 12% (11)% 5% 24% (14)% Assumed change in CO2 emissions (% change after 2022) (37)% (100)% (7)% (33)% (7)% (89)% 3% 11% (34)% Scenario risk characteristics Climate risk Physical q Lower u Moderate q Lower p Higher p Higher Transition p Higher u Moderate p Higher q Lower p Higher Our methodology For our scenario analysis, we used models to assess how transition and physical risks may impact our portfolios under different scenarios. Our models incorporate a range of climate-specific metrics that will have an impact on our customers, including expected production volumes, revenue, costs and capital expenditure. We assess how these metrics interplay with economic factors such as carbon prices, which represent the cost effect of climate-related policies that aim to discourage carbon-emitting activities and encourage low-carbon solutions. The expected result of higher carbon prices is a reduction in emissions as high-emission activities become uneconomical. We also assume carbon prices will vary from country to country. The models for our wholesale corporate lending portfolio consider our customers’ individual climate transition plans where available, while we refine and deepen our assessment of these plans. These results feed into the calculation of our risk-weighted assets and expected credit loss (‘ECL’) projections. For our real estate portfolio models, we focus on physical risk factors, including property locations, perils and insurance coverage when assessing the overall credit risk impact to the portfolio. The results are reviewed by our sector specialists who, subject to our governance procedures, make bespoke adjustments to our results based on their expert judgement where relevant. Our models support the calculation of outputs that inform us about the level of climate-related ECL provisions required under IFRS 9, and also support the shaping of our climate-related capital approach under ICAAP. In 2023, in addition to incorporating our customers’ transition plans, we enhanced our credit risk models for the wholesale portfolio by updating our assumptions regarding how we expect state- supported companies to be impacted, and improved how we model the impact of emissions on company financial forecasts. Modelling limitations We continue to look for ways of enhancing our methodology to improve the effectiveness of our climate scenario analyses. There are industry-wide limitations, particularly on data availability, although our models are designed to produce outputs that can support our assessment of the level of our climate resilience. Climate scenario analysis requires considerable amounts of data, although data is only available for a subset of our counterparties. As a result, we have to extrapolate the results observed in the subset to the wider population or dataset. We do not capture the second order Risk review 226 HSBC Holdings plc Annual Report and Accounts 2023 impacts of climate risk exposures within our modelling approach, such as impacts on our counterparties from their supply chains. We continue to enhance our capabilities by incorporating lessons learnt from previous exercises and feedback from key stakeholders, including regulators. For a broad overview of the models that we use for our climate scenario analysis, as well as graphs that show how global carbon prices and carbon emissions will differ under our climate scenarios, see our ESG Data Pack at www.hsbc.com/esg. Analysing the outputs of climate scenario analysis Climate scenario analysis allows us to model how different potential climate pathways may affect and impact the resilience of our customers and our portfolios, particularly in respect of credit losses. As the following chart shows, losses are influenced by their exposure to a variety of climate risks under different climate scenarios. 1 The counterfactual scenario is modelled on a scenario where there would be no losses due to climate change. 2 The dotted line in the chart shows the impact of modelled expected credit losses following our strategic responses to reduce the effect of climate risks under the Net Zero scenario. 3 The projections shown in this chart were modelled during 2023 and are not intended to reflect the final 31 December 2023 position that is disclosed elsewhere in the Annual Report and Accounts 2023. While climate-related losses are expected to remain minimal in the short term, they are likely to increase compared with the counterfactual scenario in the medium and longer term, driven by the transition to a net zero economy. These losses are lower in the Net Zero orderly transition scenario, than in the Delayed Transition Risk scenario where climate action begins later and is more rapid and disruptive as our customers will have less time to restructure their business models and reduce their carbon emissions. As the dotted line in the graph shows, losses in these scenarios can be mitigated through active management approaches, which include identifying new climate-related business opportunities and adapting our portfolios to reduce exposure to climate risks and losses. By building a more climate-resilient balance sheet, we can reduce impairment risks and improve longer-term stability. Under the Current Commitments scenario, we expect lower levels of losses relating to transition risks, although we would expect an increase in the effects of climate-related physical risks over the longer term. If the world does not align with a net zero path, physical risks in the medium to long term are expected to continue to rise due to the increasing frequency of extreme weather events. The Near Term scenario Our Near Term scenario allowed us to explore the combined impacts of a disorderly transition towards net zero and extreme acute physical events occurring simultaneously. The scenario was designed to meet HKMA regulatory requirements and will help us to improve how we assess short-term impacts across the Group. As part of the HKMA exercise, our initial analysis was focused on our portfolio in Asia. The exercise allowed us to understand the extent to which a stressed scenario exhibiting both high physical and transition risks in the near term could immediately impact our customers across all our sectors. In the following sections, we assess the impacts to our banking portfolios under different climate scenarios. How climate change is impacting our wholesale lending portfolio In our internal climate scenario analysis, we assessed the impact of climate-related risks on our corporate counterparties under different climate scenarios, which we measured by reviewing the modelled effect on our ECL. The climate scenario analysis exercise for the wholesale lending portfolio was designed to examine our climate risks and vulnerabilities, primarily in the short and medium term. We focused on the Current Commitment scenario, believing it to be the scenario most likely to unfold in this timeframe, and the Net Zero scenario, which allows us to assess the resilience of our strategy and to identify specific climate-related opportunities. Within our wholesale lending portfolio, customers in higher emitting sectors continue to be most exposed to larger climate-related losses. For each sector in both scenarios, we calculated the projected ECL increase as at 2035, where we compared the increase in ECL under the scenario against a counterfactual scenario that incorporates no climate change. We use the sector’s exposure at default (‘EAD’), which represents the size of our exposure to potential losses from customer defaults. This helps to identify which sectors are the most material to us in terms of the impact of climate change. The table below shows the relative size of exposures at default in 2023 and the increase in cumulative ECL under each scenario compared with a counterfactual scenario by 2035 (expressed as a multiple). Impact on wholesale lending portfolios Wholesale sectors Exposure at default (2023) ECL increase1 Current Commitments Net Zero Conglomerates and industrials n <1.1x <2.75x Construction and building materials n <1.25x <2.25x Chemicals n <1.1x <1.75x Power and utilities n <1.1x <1.75x Oil and gas n <1.1x <1.25x Automotive n <1.25x <1.75x Land transport and logistics n <1.1x <2.75x Agriculture & soft commodities n <1.1x <2.5x Metals and mining n <1.1x >3x Aviation n <1.1x <1.5x Marine n <1.1x <1.5x 1 Increase in cumulative ECL compared with counterfactual by 2035 expressed as a multiple. HSBC Holdings plc Annual Report and Accounts 2023 227 Risk review We have continued to incorporate information from our customers’ transition plans to consider more detailed information on how they and their sector will be impacted under different climate scenarios. The levels of ECL observed across our wholesale lending portfolio are driven by: our customers’ carbon emissions; the presence of realistic transition plans; the amount of capital investment required to support their transition; and the degree to which their competitive environment impacts their ability to pass on carbon costs. In 2022, we used scenario analysis to assess the impacts on our corporate counterparties across the sectors that are most affected by climate-related risks. In 2023, we enhanced our approach in some key high-emitting sectors, which includes the construction and building materials, power and utilities, and oil and gas sectors. The analysis below provides a more detailed view of the anticipated impacts on these portfolios and our customers, improving our understanding of climate risks and potential opportunities. The construction and building materials sector faces an increase in losses because it includes companies with high emissions from manufacturing processes, such as steel or cement, or from their supply chains, which will increase cost pressures due to carbon taxes. The sector also has a high proportion of customers without transition plans. Although our scenario analysis showed that companies with transition plans performed better on average, their plans typically fall short of requirements needed to meet net zero targets. Overall, we believe there are significant lending opportunities for us to help support our customers as they transition to a lower carbon economy while meeting their growing business demands. These opportunities include the exploration of less carbon-intensive fuel sources, electrification, the integration of carbon capture and storage, and the adoption of new technologies in the search to reduce emissions. In the power and utilities sector, our analysis showed that rising costs from increased carbon prices and the capital expenditure required to support transition requirements, infrastructure improvements and decommissioning costs, alongside greater downstream energy demands, will potentially lead to higher debt levels and worsening counterparty risk ratings for customers. As technologies mature, the capital cost of some renewables infrastructure is expected to fall, becoming cheaper than non- renewable sources due to improved efficiencies. This will reduce the required expenditure for companies. In the oil and gas sector, customers that commit to renewable energy should benefit from the additional greener revenue streams, which will help mitigate the impact of reduced profitability from fossil fuels and heightened carbon prices, enabling them to sustain their gross margins. This sector has relatively lower projected losses as a large proportion of customers provided transition plans with granular information about their climate-related impacts. We have the opportunity to ease potential negative impacts as transition risks increase by supporting our customers to diversify into more renewable and greener revenue streams, and invest in emission-reducing technologies. How climate change is impacting our retail mortgage portfolio As part of our 2023 internal climate scenario analysis, we completed a detailed climate risk assessment for the UK, Hong Kong, mainland China and Australia, which together represent 75% of the balances in our global retail mortgage portfolio. Our analysis shows that over the longer term, we expect minimal losses to materialise when considering the Current Commitments scenario. Although the severity of climate perils is expected to worsen over time, our overall losses also remain low under a Downside Physical Risk scenario. In 2023, we widened the scope of our climate modelling to include new markets, such as mainland China, and increased the peril coverage within markets already covered. In our analysis of the retail mortgage portfolio, we reassessed the physical perils that could impact the value of properties, which include flooding, wildfire and windstorms. The underlying peril data we use has been enhanced to include updated and higher resolution flood maps where available. We have also worked with external vendors to improve outputs from peril projections and to increase the granularity of data to provide more detailed insights into the impact of climate risks across our portfolio of properties, in particular the impact of wildfires. Our scenario analysis methodology was enriched further in 2023 by combining the impacts of physical risk with transition risks, including rising energy costs and impacts from direct government legislation such as homeowner energy efficiency upgrades in the UK. We have enhanced our modelling by considering customers’ affordability incorporating increased debt servicing costs and the impacts on property valuations. As insurance remains a key mitigator against climate losses, we further refined our assumptions including the assessment of insurance availability for properties that experience frequent climate events. Projected peril risk Flooding has the potential to drive significant impacts at an aggregate level but this is localised to specific areas that are close to water sources such as rivers or the coast, or areas that are located in valleys where surface water can ‘pool’. The ’Exposure to flooding’ table below shows that the majority of properties located in four of our largest markets are predicted to experience zero to low risk of flooding, with flood depths of less than 0.5 metres, under a 1-in-100-year event in each of the scenarios. Flood depths outlined here do not consider building type and property floor level, which would potentially further mitigate the impacts. However, they are considered within our climate risk modelling and loss projections. The table below sets out the proportion of properties with projected flood depths in a 1-in-100-year severity flood event, under the Current Commitments and Downside Physical Risk scenarios. Exposure to flooding (%) 1 Scenarios Number of properties2 Flood depth (metres) Baseline flood risk 20233 (%) Current Commitments 2050 (%) Downside Physical Risk 2050 (%) UK 0-0.5 97.4 97.4 96.9 n 0.5-1.5 2.4 2.5 2.8 >1.5 0.2 0.2 0.3 Hong Kong 0-0.5 85.3 81.4 79.5 n 0.5-1.5 14.6 18.4 20.4 >1.5 0.1 0.1 0.1 Australia 0-0.5 95.7 95.4 95.3 n 0.5-1.5 2.9 3.0 3.1 >1.5 1.5 1.5 1.5 Mainland China 0-0.5 88.0 86.5 84.7 0.5-1.5 11.1 12.5 12.7 n >1.5 0.9 1.0 2.7 1 Severe flood events include river and surface flooding and coastal inundation. The table compares 2050 snapshots under the Current Commitments and Downside Physical Risk scenarios with a baseline view in 2023. We do expect to see changes to our flood depth distributions as climate risk data is refreshed. 2 The size of the bubbles represents the size of the portfolios, in terms of number of properties where exposure to flooding data is available, relative to one another. 3 Baseline flood risk is the flood risk for a 1 in 100 year event, based on current peril data. Risk review 228 HSBC Holdings plc Annual Report and Accounts 2023 How climate change is impacting our commercial real estate portfolios We assessed our commercial real estate customers’ vulnerability to various perils, including flooding and windstorms. Our commercial real estate portfolio is globally diversified with larger concentrations in Hong Kong, the UK and the US. Geographical location is a key determinant in our exposure to potential physical risk events, which can lead to higher ECL due to the cost of repairing damage as well as impact property valuations in areas where physical risk events are increasing in frequency. The ‘Exposure to peril’ table below shows the proportion of our commercial real estate portfolio exposed to specific physical perils in our key markets. Exposure to peril (%) 1 Exposure at default2 Coastal inundation (%) Cyclone wind (%) Surface water flooding (%) Riverine flooding (%) Hong Kong n 2.0 94.8 19.0 10.0 UK n 15.8 0.0 16.5 7.1 US n 10.1 81.5 11.4 28.6 1 Proportion of our commercial real estate portfolio exposed to specific physical perils in the Downside Physical scenario. 2 The size of the bubbles represents the size of the portfolios, in terms of EAD, relative to one another. Overall, and in line with our 2022 disclosure, our commercial real estate portfolio remains resilient to climate risk, with the more severe impacts mitigated by insurance coverage. Our most significant credit exposure is in Hong Kong, a region with material physical risk exposures to wind and flooding due to strong tropical cyclones. The impact on prospective credit losses remains low, due to stringent building standards and existing measures in place against flooding and storm surges. Our largest exposure to transition risk is within our UK portfolio. Under the Net Zero scenario, we assessed the impacts of the UK government consultation on non-domestic rental properties being required to hold an energy performance certificate rating of at least ’B’ by 2030. To meet these proposed minimum standards, more than 80% of the properties in our portfolio would potentially need to be retrofitted, which would increase impairments and lead to a small uplift in ECL for this portfolio. In 2023, as part of the scenario analysis exercise for the Central Bank of the United Arab Emirates, we also assessed in more detail the climate risk impacts on our UAE portfolio. Our findings showed that many properties could become chronically exposed to permanent inundation over time due to their relatively low elevation above sea level. How we assess climate risk impacts on other risk types We use climate scenario analysis to assess the impacts on other risks beyond credit risk. These include traded market risks, non- financial risks and pension risk. Traded market risk In 2023, we explored the potential impacts of climate risks on our trading and banking portfolio under the Delayed Transition Risk and Downside Physical Risk scenarios. The analysis considered all relevant asset classes including interest rates, exchange rates, corporate and sovereign bonds and equities. The analysis applied shocks reflecting the impact of abrupt increases in carbon prices or physical risk perils resulting in structural economic impacts that affect the productivity of high-risk sectors at a country level. We have developed tools to provide us with a more granular understanding of the key profit and loss drivers under different climate scenarios. These can be viewed by risk factor, business line or at trading desk level to help traded risk managers to monitor and understand how climate sensitive exposures are impacted. Sovereign credit risk We assessed the impacts of climate risks on sovereign debt under the different climate scenarios. In particular, our models considered the impacts of climate change on a country’s GDP, the amount of headroom sovereign nations have in terms of their fiscal and external reserves, and their dependency and exposure to particular corporate sectors. Pension risk We modelled balance sheet and income statement projections for the main pension plans. Our modelling capability has been enhanced to incorporate climate-specific modelling over a longer timeframe, with the initial exercise being focused on assessing the impacts of a disruptive transition to net zero using the Delayed Transition scenario. Non-financial risk We assessed the potential impacts of errors in sustainable lending volumes contained within our ESG disclosures as part of our financial reporting risks. To understand our regulatory compliance risks we assessed any misrepresentations within the marketing of our ESG funds. Use of climate scenario analysis outputs Climate scenario analysis plays a crucial role helping us to identify and understand the impact of climate-related risks and potential opportunities as we navigate the transition to net zero. Scenario analysis results have been used to support the Group’s ICAAP. This is an internal assessment of the capital the Group needs to hold to meet the risks identified on a current and projected basis, including climate risk. In addition, scenario analysis informs our risk appetite statement metrics. As an example, it supports the calibration of physical risk metrics for our retail mortgage portfolios and it is used to consider climate impact in our IFRS 9 assessment. From a financial planning perspective, internal climate scenario analysis results are used to assess whether additional short-term climate-specific ECL are required within our financial plan. Next steps We plan to continue to enhance our capabilities for climate scenario analysis including addressing model limitations and data gaps and developing our assessment of liquidity, resilience and insurance risks. We also plan to use the results for decision making, particularly in: – client engagement, by identifying climate opportunities and vulnerabilities in specific regions and sectors such as renewables, carbon capture technologies and electric vehicles, and using this information to engage and support clients in their transition to net zero; – portfolio steering, by using scenario analysis outputs to inform how to reallocate our portfolio to maximise returns and mitigate risk while achieving our net zero targets; and – looking beyond climate change by building capabilities to assess our resilience to wider environmental risks. Understanding the resilience of our critical properties Climate change poses a physical risk to the buildings that we occupy as an organisation, including our offices, retail branches and data centres, both in terms of loss and damage, and business interruption. We measure the impacts of climate and weather events to our buildings on an ongoing basis using historical, current and scenario modelled forecast data. In 2023, there were 27 major storms that had a minor impact on five premises with no impact on the availability of our buildings. HSBC Holdings plc Annual Report and Accounts 2023 229 Risk review We use stress testing to evaluate the potential for impact on our owned or leased premises. Our scenario stress test, conducted in 2023, analysed how eight climate change-related hazards could impact 1,000 of our critical and important buildings. These hazards were coastal inundation, extreme heat, extreme winds, wildfires, riverine flooding, pluvial flooding, soil movement due to drought, and surface water flooding. The 2023 stress test modelled climate change with IPCC’s Taking the Highway scenario (SSP5-8.5), which projects that the rise in global temperatures will likely exceed 4°C by 2100. It also modelled a less severe IPCC Middle of the Road scenario (SSP2-4.5), which projects that global warming will likely be limited to 2°C. Key findings from the Taking the Highway scenario included that by 2050, 20 of our 1,000 critical and important buildings will have a high potential for impact due to climate change, with insurance-related losses estimated to be in excess of 10% of the insured value of the buildings. These include 16 retail properties primarily impacted by extreme temperatures and four data centres, where three face the risk of water stress and one faces extreme temperatures and water stress. This could lead to failure of mechanical cooling equipment or soil movement resulting from drought. A further 248 properties have the potential to be impacted by climate change, albeit to a lesser extent, with insurance-related losses estimated at between 5% and 10% of the insured value of our buildings. The principal risks are temperature extremes and water stress. A key finding from the Middle of the Road scenario showed that the total number of buildings at risk reduced from 20 to 13. The highlighted facilities are still at risk from the same perils of extreme temperature and water stress by 2050. This forward-looking data along with historical data helps inform real estate planning. We will continue to enhance our understanding of how extreme weather events impact our building portfolio as climate risk assessment tools improve and evolve. We buy insurance for property damage and business interruption and consider insurance as a loss mitigation strategy depending on its availability and price. We regularly review and enhance our building selection process and global engineering standards and will continue to assess historical claims data to help ensure our building selection and design standards address the potential impacts of climate change. Resilience risk Overview Resilience risk is the risk of sustained and significant business disruption from execution, delivery, physical security or safety events, causing the inability to provide critical services to our customers, affiliates and counterparties. Resilience risk arises from failures or inadequacies in processes, people, systems or external events. Resilience risk management Key developments in 2023 During the year, we carried out several initiatives to keep pace with geopolitical, regulatory and technology changes, and strengthened the management of resilience risk: – We focused on enhancing our understanding of our risk and control environment, by updating our risk taxonomy and control libraries, and refreshing risk and control assessments. – We continued to recognise that our customers are impacted by service disruptions, and responded to these urgently and aimed to recover with minimum delay. We continued to initiate post- incident review processes to prevent recurrence. Where we identify that investment is required to further enhance the Group’s operational resilience capabilities, findings are fed into the Group’s financial planning, helping to ensure we continue to meet the expectations of our customers and our regulators. – We continued to monitor markets affected by the Russia-Ukraine and Israel-Hamas wars, as well as other geopolitical events, for any potential impact they may have on our colleagues and operations. – We strengthened the way third-party risk is overseen and managed across all non-financial risks, and enhanced the processes, framework and reporting capabilities used by our global businesses, functions and regions. – We provided analysis and easy-to-access risk and control information and metrics to enable management to focus on non- financial risks in their decision making and appetite setting. – We further strengthened our non-financial risk governance and senior leadership, and improved our coverage and risk steward oversight for data risk and change execution. We prioritise our efforts on material risks and areas undergoing strategic growth, aligning our location strategy to this need. We also remotely provide oversight and stewardship, including support of chief risk officers, in territories where we have no physical presence. Governance and structure The Enterprise Risk Management target operating model provides a globally consistent view across resilience risks, strengthening our risk management oversight while operating effectively as part of a simplified non-financial risk structure. We view resilience risk across seven sub-risk types related to: third- party risk; technology and cybersecurity risk; transaction processing risk; business interruption and incident risk; data risk; change execution risk; and facilities availability, safety and security risk. Risk appetite and key escalations for resilience risk are reported to the Non-Financial Risk Management Board, chaired by the Group Chief Risk and Compliance Officer, with an escalation path to the Group Risk Management Meeting and Group Risk Committee. Key risk management processes Operational resilience is our ability to anticipate, prevent, adapt, respond to, recover and learn from operational disruption while minimising customer and market impact. Resilience is determined by assessing whether we can continue to provide our important business services, within an agreed impact tolerance. This is achieved via day-to-day oversight and periodic and ongoing assurance, such as deep dive reviews and controls testing, which may result in challenges being raised to the business by risk stewards. Further challenge is also raised in the form of risk steward opinion papers to formal governance. We accept we will not be able to prevent all disruption but we must prioritise investment to continually improve the response and recovery strategies for our important business services and important group business services to meet regulatory expectations. Business operations continuity We continue to monitor the Russia-Ukraine and Israel-Hamas wars, and remain ready to take measures to ensure business continuity in affected markets should the situations require. There have been no significant disruptions to our services, although businesses and functions in nearby markets continually review their plans and responses to minimise any potential impacts. Risk review 230 HSBC Holdings plc Annual Report and Accounts 2023 Regulatory compliance risk Overview Regulatory compliance risk is the risk associated with breaching our duty to clients and other counterparties, inappropriate market conduct (including unauthorised trading) and breaching related financial services regulatory standards. Regulatory compliance risk arises from the failure to observe relevant laws, codes, rules and regulations and can manifest itself in poor market or customer outcomes and lead to fines, penalties and reputational damage to our business. Regulatory compliance risk management Key developments in 2023 The dedicated programme to embed our updated purpose-led conduct approach has concluded. Work to map applicable regulations to our risks and controls continued in 2023, alongside the adoption of new tooling to support enterprise-wide horizon scanning for new regulatory obligations and supporting wider work on regulatory reporting enhancements. Climate risk has been integrated into regulatory compliance policies and processes, with enhancements made to the product governance framework and controls to ensure the effective consideration of climate – and in particular the risk of greenwashing – risks. Governance and structure The Compliance function has now been restructured and integrated into a combined Risk and Compliance function with the appointment of a Group Head of Regulatory Compliance reporting directly into the Group Chief Risk and Compliance Officer. Regulatory Compliance and Financial Crime teams work together and with relevant stakeholders to achieve good conduct outcomes, and provide enterprise-wide support on the compliance risk agenda in close collaboration with colleagues from the Group Risk and Compliance function. Key risk management processes The Global Regulatory Compliance capability is responsible for setting global policies, standards and risk appetite to guide the Group’s management of regulatory compliance risk. It also devises the required frameworks, support processes and tooling to protect against regulatory compliance risks. The Group capability provides oversight, review and challenge of the global market, regional and line of business teams to help them identify, assess and mitigate regulatory compliance risks, where required. The Group’s regulatory compliance risk policies are regularly reviewed. Global policies and procedures require the identification and escalation of any actual or potential regulatory breaches, and relevant events and issues are escalated to the Group’s Non-Financial Risk Management Board, the Group Risk Management Meeting and the Group Risk Committee, as appropriate. The Group Head of Regulatory Compliance reports to the Group Chief Risk and Compliance Officer, and attends the Risk and Compliance Executive Committee, the Group Risk Management Meeting and the Group Risk Committee. Financial crime risk Overview Financial crime risk is the risk that HSBC’s products and services will be exploited for criminal activity. This includes fraud, bribery and corruption, tax evasion, sanctions and export control violations, money laundering, terrorist financing and proliferation financing. Financial crime risk arises from day-to-day banking operations involving customers, third parties and employees. Financial crime risk management Key developments in 2023 We regularly review the effectiveness of our financial crime risk management framework, which includes continued consideration of the complex and dynamic nature of sanctions compliance and export control risk. We continued to respond to the financial sanctions and trade restrictions that have been imposed on Russia, including methods used to limit sanctions evasion. We continued to make progress with several key financial crime risk management initiatives, including: – We deployed our intelligence-led, dynamic risk assessment capability for customer account monitoring in additional entities and global businesses, including in the UK, the Channel Islands and the Isle of Man, Hong Kong and the UAE. – We deployed a next generation capability to increase our monitoring coverage on correspondent banking activity. – We successfully introduced the required changes to our transaction screening capability to accommodate the global change to payment systems formatting under ISO 20022 requirements. – We made enhancements in response to the rapidly evolving and complex global payments landscape and refined our digital assets and currencies strategy. Governance and structure The structure of the Financial Crime function remained substantively unchanged in 2023, although we continued to review the effectiveness of our governance framework to manage financial crime risk. The Group Head of Financial Crime and Group Money Laundering Reporting Officer continues to report to the Group Chief Risk and Compliance Officer, while the Group Risk Committee retains oversight of matters relating to financial crime. Key risk management processes We will not tolerate knowingly conducting business with individuals or entities believed to be engaged in criminal activity. We require everybody in HSBC to play their role in maintaining effective systems and controls to prevent and detect financial crime. Where we believe we have identified suspected criminal activity or vulnerabilities in our control framework, we will take appropriate mitigating action. We manage financial crime risk because it is the right thing to do to protect our customers, shareholders, staff, the communities in which we operate, as well as the integrity of the financial system on which we all rely. We operate in a highly regulated industry in which these same policy goals are codified in law and regulation. We are committed to complying with the laws and regulations of all the markets in which we operate and applying a consistently high financial crime standard globally. We continue to assess the effectiveness of our end-to-end financial crime risk management framework, and invest in enhancing our operational control capabilities and technology solutions to deter and detect criminal activity. We have simplified our framework and consolidated previously separate financial crime policies into a single policy to drive consistency and provide a more holistic assessment of financial crime risk. We further strengthened our financial crime risk HSBC Holdings plc Annual Report and Accounts 2023 231 Risk review taxonomy and control libraries and our monitoring capabilities through technology deployments. We developed more targeted metrics, and continued to seek to enhance our governance and reporting. We are committed to working in partnership with the wider industry and the public sector in managing financial crime risk and we participate in numerous public-private partnerships and information sharing initiatives around the world. In 2023, our focus remained on measures to improve the overall effectiveness of the global financial crime framework, notably by providing input into legislative and regulatory reform activities. We did this by contributing to the development of responses to consultation papers focused on how financial crime risk management frameworks can deliver more effective outcomes in detecting and deterring criminal activity. Through our work with the Wolfsberg Group and the Institute of International Finance, we supported the efforts of the global standard setter, the Financial Action Task Force. In addition, we participated in a number of public events related to enhancing public-private partnerships, payment transparency, asset recovery, tackling forestry crimes, wildlife trafficking and human trafficking. Model risk Overview Model risk is the risk of the potential for adverse consequences from model errors or the inappropriate use of modelled outputs to inform business decisions. Model risk arises in both financial and non-financial contexts whenever business decision making includes reliance on models. Key developments in 2023 In 2023, we continued to make improvements in our model risk management processes amid regulatory changes in model requirements. Initiatives during the year included: – Following regulatory feedback on a number of our model submissions for our internal ratings-based (‘IRB’) approach for credit risk, internal model method (‘IMM’) for counterparty credit risk and internal model approach (‘IMA’) for market risk, we implemented approved models for IMM and IMA alongside an approved IRB model for UK mortgages. We began a programme of work to address feedback from the PRA and other regulators on the IRB models for wholesale credit. – We made changes to our VaR model in response to multiple breaches that had been observed from market volatility resulting from changes in monetary policy in major markets. – We introduced a new procedure to ensure any new tool developed using generative AI would require validation by Model Risk Management before its use. – We enhanced our frameworks and controls as climate risk and AI and machine learning models become more embedded in business processes. – Following the publication of Supervisory Statement 1/23 – the PRA’s guiding principles for how model risks should be managed across the industry – we began a programme of work to seek to meet the enhanced model risk management requirements, with representation from all global businesses and key functions, including Internal Audit. Governance and structure Model risk governance committees at the Group, business and functional levels provide oversight of model risk. The committees include senior leaders from the three global businesses and the Group Risk and Compliance function, and focus on model-related concerns and are supported by key model risk metrics. We also have Model Risk Committees in our geographical regions focused on local delivery and requirements. The Group-level Model Risk Committee is chaired by the Group Chief Risk and Compliance Officer, and the heads of key businesses participate in these meetings. Key risk management processes We use a variety of modelling approaches, including regression, simulation, sampling, machine learning and judgemental scorecards for a range of business applications. These activities include customer selection, product pricing, financial crime transaction monitoring, creditworthiness evaluation and financial reporting. Global responsibility for managing model risk is delegated from the Board to the Group Chief Risk and Compliance Officer, who authorises the Group Model Risk Committee. This committee regularly reviews our model risk management policies and procedures, and requires the first line of defence to demonstrate comprehensive and effective controls based on a library of model risk controls provided by Model Risk Management. Model Risk Management also reports on model risk to senior management and the Group Risk Committee on a regular basis through the use of the risk map, risk appetite metrics and top and emerging risks. We regularly review the effectiveness of these processes, including the model risk committee structure, to help ensure appropriate understanding and ownership of model risk is embedded in the businesses and functions. Risk review 232 HSBC Holdings plc Annual Report and Accounts 2023 Insurance manufacturing operations risk Contents 233 Overview 233 Insurance manufacturing operations risk management 234 Insurance manufacturing operations risk in 2023 234 Measurement 235 Key risk types 235 – Market risk 236 – Credit risk 236 – Liquidity risk 237 – Insurance underwriting risk Overview The key risks for our insurance manufacturing operations are market risk, in particular interest rate and equity, credit risk and insurance underwriting risk. These have a direct impact on the financial results and capital positions of the insurance operations. Liquidity risk, while significant in other parts of the Group, is less material for our insurance operations. HSBC’s insurance business We sell insurance products through a range of channels including our branches, insurance sales forces, direct channels and third-party distributors. The majority of sales are through an integrated bancassurance model that provides insurance products principally for customers with whom we have a banking relationship, although the proportion of sales through other sources such as independent financial advisers, tied agents and digital platforms is increasing. For the insurance products we manufacture, the majority of sales are savings, universal life and protection contracts. We choose to manufacture these insurance products in HSBC subsidiaries based on an assessment of operational scale and risk appetite. Manufacturing insurance allows us to retain the risks and rewards associated with writing insurance contracts by keeping part of the underwriting profit and investment income within the Group. We have life insurance manufacturing subsidiaries in eight markets, which are Hong Kong, Singapore, mainland China, France, UK, Malta, Mexico and Argentina. In addition, we have: an interest in a life insurance manufacturing associate in India; a captive insurance entity in Bermuda that insures the non-financial risks of the wider Group; and a reinsurance entity in Bermuda. Where we do not have the risk appetite or operational scale to be an effective insurance manufacturer, we engage with a small number of leading external insurance companies in order to provide insurance products to our customers. These arrangements are generally structured with our exclusive strategic partners and earn the Group a combination of commissions, fees and a share of profits. We distribute insurance products in all of our geographical regions. This section focuses only on the risks relating to the insurance products we manufacture. Insurance manufacturing operations risk management Key developments in 2023 The insurance manufacturing subsidiaries follow the Group’s risk management framework. In addition, there are specific policies and practices relating to the risk management of insurance contracts, which did not change materially over 2023. During the year, there was continued market volatility observed across interest rates, equity and credit markets and foreign exchange rates. This was predominantly driven by geopolitical factors and wider inflationary concerns. One key area of risk management focus during 2023 was the implementation of the new accounting standard, IFRS 17 ‘Insurance Contracts’, which became effective on 1 January 2023. Given the fundamental change the new accounting standard represented in insurance accounting, and the complexity of the new standard, this presented additional financial reporting and model risks for the Group, which were managed via the IFRS 17 implementation project. Other areas of focus were the ongoing integration of the insurance business that was acquired through AXA Singapore in 2022 into the Group’s risk management framework, the establishment of a reinsurance entity in Bermuda and controls supporting IFRS 17 implementation. Governance and structure (Audited) Insurance manufacturing risks are managed to a defined risk appetite, which is aligned to the Group’s risk appetite and risk management framework, including its three lines of defence model. For details of the Group’s governance framework, see page 137. The Global Insurance Risk Management Meeting oversees the control framework globally and is accountable to the WPB Risk Management Meeting on risk matters relating to the insurance business. The monitoring of the risks within our insurance operations is carried out by Insurance Risk teams. The Group’s risk stewardship functions support the Insurance Risk teams in their respective areas of expertise. Stress and scenario testing (Audited) Stress testing forms a key part of the risk management framework for the insurance business. We participate in local and Group-wide regulatory stress tests, as well as internally developed stress and scenario tests, including Group internal stress test exercises. The results of these stress tests and the adequacy of management action plans to mitigate these risks are considered in the Group’s ICAAP and the entities’ regulatory Own Risk and Solvency Assessments, which are produced by all material entities. Key risk management processes Market risk (Audited) All our insurance manufacturing subsidiaries have market risk mandates and limits that specify the investment instruments in which they are permitted to invest and the maximum quantum of market risk that they may retain. They manage market risk by using, among others, some or all of the techniques listed below, depending on the nature of the contracts written: – We are able to adjust bonus rates to manage the liabilities to policyholders for products with participating features. The effect is that a significant proportion of the market risk is borne by the policyholder. – We use asset and liability matching where asset portfolios are structured to support projected liability cash flows. The Group manages its assets using an approach that considers asset quality, diversification, cash flow matching, liquidity, volatility and target investment return. We use models to assess the effect of a range of future scenarios on the values of financial assets and associated liabilities, and ALCOs employ the outcomes in determining how best to structure asset holdings to support liabilities. – We use derivatives and other financial instruments to protect against adverse market movements. – We design new products to mitigate market risk, such as changing the investment return sharing proportion between policyholders and the shareholder. HSBC Holdings plc Annual Report and Accounts 2023 233 Risk review Credit risk (Audited) Our insurance manufacturing subsidiaries also have credit risk mandates and limits within which they are permitted to operate, which consider the credit risk exposure, quality and performance of their investment portfolios. Our assessment of the creditworthiness of issuers and counterparties is based primarily upon internationally recognised credit ratings and other publicly available information. Stress testing is performed on investment credit exposures using credit spread sensitivities and default probabilities. We use a number of tools to manage and monitor credit risk. These include a credit report containing a watch-list of investments with current credit concerns, primarily investments that may be at risk of future impairment or where high concentrations to counterparties are present in the investment portfolio. Sensitivities to credit spread risk are assessed and monitored regularly. Capital and liquidity risk (Audited) Capital risk for our insurance manufacturing subsidiaries is assessed in the Group’s ICAAP based on their financial capacity to support the risks to which they are exposed. Capital adequacy is assessed on both the Group’s economic capital basis, and the relevant local insurance regulatory basis. Risk appetite buffers are set to ensure that the operations are able to remain solvent, allowing for business-as-usual volatility and extreme but plausible stress events. Liquidity risk is less material for the insurance business. It is managed by cash flow matching and maintaining sufficient cash resources, investing in high credit-quality investments with deep and liquid markets, monitoring investment concentrations and restricting them where appropriate, and establishing committed contingency borrowing facilities. Insurance manufacturing subsidiaries complete quarterly liquidity risk reports and an annual review of the liquidity risks to which they are exposed. Insurance underwriting risk Our insurance manufacturing subsidiaries primarily use the following frameworks and processes to manage and mitigate insurance underwriting risks: – a formal approval process for launching new products or making changes to products; – a product pricing and profitability framework, which requires initial and ongoing assessment of the adequacy of premiums charged on new insurance contracts to meet the risks associated with them; – a framework for customer underwriting; – reinsurance, which cedes risks to third-party reinsurers to keep risks within risk appetite, reduce volatility and improve capital efficiency; and – oversight by financial reporting committees in each of our entities of the methodology and assumptions that underpin IFRS 17 reporting. Insurance manufacturing operations risk in 2023 Measurement The following tables show the composition of the fair value of underlying items of the Group’s participating contracts at the reporting date. Balance sheet of insurance manufacturing subsidiaries by type of contract (Audited) Life direct participating and investment DPF contracts1 Life other contracts2 Other contracts3 Shareholder assets and liabilities Total At 31 Dec 2023 $m $m $m $m $m Financial assets 113,605 3,753 5,812 7,696 130,866 – trading assets — — — — — – financial assets designated and otherwise mandatorily measured at fair value through profit or loss 100,427 3,593 4,177 1,166 109,363 – derivatives 258 10 — 6 274 – financial investments – at amortised cost 1,351 67 1,157 4,772 7,347 – financial assets at fair value through other comprehensive income 8,859 — 5 693 9,557 – other financial assets 2,710 83 473 1,059 4,325 Insurance contract assets 13 213 — — 226 Reinsurance contract assets — 4,871 — — 4,871 Other assets and investment properties 2,782 164 35 1,636 4,617 Total assets at 31 Dec 2023 116,400 9,001 5,847 9,332 140,580 Liabilities under investment contracts designated at fair value — — 5,103 — 5,103 Insurance contract liabilities 116,389 3,961 — — 120,350 Reinsurance contract liabilities — 819 — — 819 Deferred tax — 1 — 3 4 Other liabilities — — — 6,573 6,573 Total liabilities 116,389 4,781 5,103 6,576 132,849 Total equity — — — 7,731 7,731 Total liabilities and equity at 31 Dec 2023 116,389 4,781 5,103 14,307 140,580 Risk review 234 HSBC Holdings plc Annual Report and Accounts 2023 Balance sheet of insurance manufacturing subsidiaries by type of contract (continued) (Audited) Life direct participating and investment DPF contracts1 Life other contracts2 Other contracts3 Shareholder assets and liabilities Total At 31 Dec 20224 $m $m $m $m $m Financial assets 102,539 4,398 6,543 7,109 120,589 – trading assets — — — — — – financial assets designated and otherwise mandatorily measured at fair value through profit or loss 89,671 3,749 4,916 1,088 99,424 – derivatives 432 9 21 15 477 – financial investments – at amortised cost 981 165 1,221 4,660 7,027 – financial assets at fair value through other comprehensive income 9,030 — — 569 9,599 – other financial assets 2,425 475 385 777 4,062 Insurance contract assets 4 130 — — 134 Reinsurance contract assets — 4,413 — — 4,413 Other assets and investment properties 2,443 60 30 1,666 4,199 Total assets at 31 Dec 20224 104,986 9,001 6,573 8,775 129,335 Liabilities under investment contracts designated at fair value — — 5,374 — 5,374 Insurance contract liabilities 104,662 3,766 — — 108,428 Reinsurance contract liabilities — 748 — — 748 Deferred tax 23 — — 2 25 Other liabilities — — — 7,524 7,524 Total liabilities 104,685 4,514 5,374 7,526 122,099 Total equity — — — 7,236 7,236 Total liabilities and equity at 31 Dec 20224 104,685 4,514 5,374 14,762 129,335 1 ‘Life direct participating and investment DPF contracts’ are substantially measured under the variable fee approach measurement model. 2 ‘Life other contracts’ are measured under the general measurement model and mainly includes protection insurance contracts as well as reinsurance contracts. The reinsurance contracts primarily provide diversification benefits over the life direct participating and investment discretionary participation feature (’DPF’) contracts. 3 ‘Other contracts’ includes investment contracts for which HSBC does not bear significant insurance risk. 4 From 1 January 2023, we adopted IFRS 17 ‘Insurance Contracts’, which replaced IFRS 4 ‘Insurance Contracts’. Comparative data have been restated accordingly. Key risk types Market risk (Audited) Description and exposure Market risk is the risk of changes in market factors affecting HSBC’s capital or profit. Market factors include interest rates, equity and growth assets, credit spreads and foreign exchange rates. Our exposure varies depending on the type of contract issued. Our most significant life insurance products are contracts with participating features. These products typically include some form of capital guarantee or guaranteed return on the sums invested by the policyholders, to which bonuses are added if allowed by the overall performance of the funds. These funds are primarily invested in fixed interest, with a proportion allocated to other asset classes to provide customers with the potential for enhanced returns. Participating products expose HSBC to the risk of variation in asset returns, which will impact our participation in the investment performance. In addition, in some scenarios the asset returns can become insufficient to cover the policyholders’ financial guarantees, in which case the shortfall has to be met by HSBC. Amounts are held against the cost of such guarantees, calculated by stochastic modelling in the larger entities. The cost of such guarantees are generally not material and are absorbed by the insurance fulfilment cash flows. For unit-linked contracts, market risk is substantially borne by the policyholder, but some market risk exposure typically remains, as fees earned are related to the market value of the linked assets. Sensitivities (Audited) The following table provides the impacts on the CSM, profit after tax and equity of our insurance manufacturing subsidiaries from reasonably possible effects of changes in selected interest rate, credit spread, equity price, growth assets and foreign exchange rate scenarios for the year. These sensitivities are prepared in accordance with current IFRS Accounting Standards and are based on changing one assumption at a time with other variables being held constant, which in practice could be correlated. Due in part to the impact of the cost of guarantees and hedging strategies, which may be in place, the relationship between the CSM, profit after tax and total equity and the risk factors is non-linear. Therefore, the results disclosed should not be extrapolated to measure sensitivities to different levels of stress. For the same reason, the impact of the stress is not necessarily symmetrical on the upside and downside. The sensitivities are stated before allowance for management actions, which may mitigate the effect of changes in the market environment. The method used for deriving sensitivity information and significant market risk factors remain consistent between 2022 and 2023. In 2022, due to a lower CSM level, some portfolios generated onerous contracts in the 100bps up scenarios for interest rate and credit spread sensitivities, generating income statement losses and equity reductions in those scenarios. This was less prevalent in 2023 as the base CSMs were higher from changing market conditions and changes in lapse rate assumptions. HSBC Holdings plc Annual Report and Accounts 2023 235 Risk review Sensitivity of HSBC’s insurance manufacturing subsidiaries to market risk factors1 (Audited) 2023 20222 Effect on profit after tax Effect on CSM Effect on total equity Effect on profit after tax Effect on CSM Effect on total equity $m $m $m $m $m $m +100 basis point parallel shift in yield curves 66 (92) 32 (210) (82) (240) – Insurance and reinsurance contracts 69 (92) 69 (214) (82) (214) – Financial instruments (3) — (37) 4 — (26) -100 basis point parallel shift in yield curves (137) (390) (103) (49) (57) (19) – Insurance and reinsurance contracts (133) (390) (133) (41) (57) (41) – Financial instruments (4) — 30 (8) — 22 +100 basis point shift in credit spreads (11) (884) (45) (324) (843) (354) – Insurance and reinsurance contracts (9) (884) (9) (322) (843) (322) – Financial Instruments (2) — (36) (2) — (32) -100 basis point shift in credit spreads 104 806 138 119 1,133 149 – Insurance and reinsurance contracts 102 806 102 117 1,133 117 – Financial instruments 2 — 36 2 — 32 10% increase in growth assets3 78 436 78 68 400 68 – Insurance and reinsurance contracts 43 436 43 38 400 38 – Financial instruments 35 — 35 30 — 30 10% decrease in growth assets3 (85) (507) (86) (81) (560) (81) – Insurance and reinsurance contracts (49) (507) (49) (49) (560) (49) – Financial instruments (36) — (36) (32) — (32) 10% appreciation in US dollar exchange rate against local functional currency 117 390 117 95 272 95 – Insurance and reinsurance contracts 27 390 27 20 272 20 – Financial instruments 90 — 90 75 — 75 10% depreciation in US dollar exchange rate against local functional currency (117) (390) (117) (95) (272) (95) – Insurance and reinsurance contracts (27) (390) (27) (20) (272) (20) – Financial instruments (90) — (90) (75) — (75) 1 Sensitivities presented for ‘Insurance and reinsurance Contracts’ includes the impact of the sensitivity stress on underlying assets held to support insurance and reinsurance contracts. Sensitivities presented for ‘Financial instruments’ includes the impact of the sensitivity stress on other financial instruments, primarily shareholder assets. 2 From 1 January 2023, we adopted IFRS 17 ‘Insurance Contracts’, which replaced IFRS 4 ‘Insurance Contracts’. Comparative data have been restated accordingly. 3 ‘Growth assets’ primarily comprise equity securities and investment properties. Variability in growth asset fair value constitutes a market risk to HSBC insurance manufacturing subsidiaries. Credit risk (Audited) Description and exposure Credit risk is the risk of financial loss if a customer or counterparty fails to meet their obligation under a contract. It arises in two main areas for our insurance manufacturers: – risk associated with credit spread volatility and default by debt security counterparties after investing premiums to generate a return for policyholders and shareholders; and – risk of default by reinsurance counterparties and non- reimbursement for claims made after ceding insurance risk. The amounts outstanding at the balance sheet date in respect of these items are shown in the table on page 234. The credit quality of the reinsurers’ share of liabilities under insurance contracts is assessed as ‘satisfactory’ or higher (as defined on page 148), with 100% of the exposure being neither past due nor impaired (2022: 100%). Credit risk on assets supporting unit-linked liabilities is predominantly borne by the policyholders. Therefore, our exposure is primarily related to liabilities under non-linked insurance and investment contracts and shareholders’ funds. The credit quality of insurance financial assets is included in the table on page 172. The risk associated with credit spread volatility is to a large extent mitigated by holding debt securities to maturity, and sharing a degree of credit spread experience with policyholders. Liquidity risk (Audited) Description and exposure Liquidity risk is the risk that an insurance operation, though solvent, either does not have sufficient financial resources available to meet its obligations when they fall due, or can secure them only at excessive cost. Liquidity risk may be able to be shared with policyholders for products with participating features. The remaining maturity of insurance contract liabilities is included in Note 4 on page 362. Risk review 236 HSBC Holdings plc Annual Report and Accounts 2023 The amounts of insurance contract liabilities that are payable on demand are set out by the product grouping below: Amounts payable on demand (Audited) 2023 20221 Amounts payable on demand Carrying amount for these contracts Amounts payable on demand Carrying amount for these contracts $m $m $m $m Life direct participating and investment DPF contracts 107,287 116,389 100,273 104,669 Life other contracts 2,765 3,961 2,813 3,759 At 31 Dec 110,052 120,350 103,086 108,428 1 From 1 January 2023, we adopted IFRS 17 ‘Insurance Contracts’, which replaced IFRS 4 ‘Insurance Contracts’. Comparative data have been restated accordingly. Insurance underwriting risk Description and exposure Insurance underwriting risk is the risk of loss through adverse experience, in either timing or amount, of insurance underwriting parameters (non-economic assumptions). These parameters include mortality, morbidity, longevity, lapse and expense rates. Lapse risk exposure on products with premium financing increased over the year as rising interest rates led to an increase in the cost of financing for customers. The principal risk we face is that, over time, the cost of the contract, including claims and benefits, may exceed the total amount of premiums and investment income received. The tables on pages 234 analyse our life insurance underwriting risk exposures by composition of the fair value of the underlying items. The insurance underwriting risk profile and related exposures remain largely consistent with those observed at 31 December 2022. Sensitivities (Audited) The following table shows the sensitivity of the CSM, profit and total equity to reasonably foreseeable changes in non-economic assumptions across all our insurance manufacturing subsidiaries. These sensitivities are prepared in accordance with current IFRS Accounting Standards, which have changed following the adoption of IFRS 17 ‘Insurance Contracts’, effective from 1 January 2023. Further information about the adoption of IFRS 17 is provided on page 342. Mortality and morbidity risk is typically associated with life insurance contracts. The effect on profit of an increase in mortality or morbidity depends on the type of business being written. Sensitivity to lapse rates depends on the type of contracts being written. An increase in lapse rates typically has a negative effect on CSM (and therefore expected future profits) due to the loss of future income on the lapsed policies. However, some contract lapses have a positive effect on profit due to the existence of policy surrender charges. Expense rate risk is the exposure to a change in the allocated cost of administering insurance contracts. To the extent that increased expenses cannot be passed on to policyholders, an increase in expense rates will have a negative effect on our profits. This risk is generally greatest for our smaller entities. The impact of changing insurance underwriting risk factors is primarily absorbed within the CSM, unless contracts are onerous in which case the impact is directly to profits. The impact of changes to the CSM is released to profits over the expected coverage periods of the related insurance contracts. Sensitivity of HSBC’s insurance manufacturing subsidiaries to insurance underwriting risk factors (Audited) Effect on CSM (gross)1 Effect on profit after tax (gross)1 Effect on profit after tax (net)2 Effect on total equity (gross)1 Effect on total equity (net)2 At 31 Dec 2023 $m $m $m $m $m 10% increase in mortality and/or morbidity rates (392) (49) (24) (49) (24) 10% decrease in mortality and/or morbidity rates 440 22 30 22 30 10% increase in lapse rates (316) (33) (24) (33) (24) 10% decrease in lapse rates 348 22 29 22 29 10% increase in expense rates (68) (9) (6) (9) (6) 10% decrease in expense rates 69 8 11 8 11 At 31 Dec 20223 10% increase in mortality and/or morbidity rates (354) (23) (21) (23) (21) 10% decrease in mortality and/or morbidity rates 374 16 18 16 18 10% increase in lapse rates (225) (23) (23) (23) (23) 10% decrease in lapse rates 232 22 22 22 22 10% increase in expense rates (59) (7) (7) (7) (7) 10% decrease in expense rates 60 4 5 4 5 1 The ‘gross’ sensitivities impacts are provided before considering the impacts of reinsurance contracts held as risk mitigation. 2 The ‘net’ sensitivities impacts are provided after considering the impacts of reinsurance contracts held as risk mitigation. 3 From 1 January 2023, we adopted IFRS 17 ‘Insurance Contracts’, which replaced IFRS 4 ‘Insurance Contracts’. Comparative data have been restated accordingly. HSBC Holdings plc Annual Report and Accounts 2023 237 Risk review We have a comprehensive range of policies and systems in place designed to help ensure that the Group is well managed, with effective oversight and control. HSBC continues to enhance its corporate governance practices and procedures to support the Board’s ambition of world-class governance. The corporate governance report contains the Report of the Directors and gives details of our Board of Directors, senior management, and Board committees. It outlines key aspects of our approach to corporate governance, including internal control. It also includes the Directors’ remuneration report, which explains our policies on remuneration and their application. 239 The Board 244 Senior management 248 How we are governed 254 Board matters considered and shareholder engagement 260 Board and committee effectiveness, performance and accountability 262 Board committees 279 Directors’ remuneration report 306 Share capital and other related governance disclosures 311 Internal control 313 Employees 315 Statement of compliance 316 Directors’ responsibility statement Corporate governance report 238 HSBC Holdings plc Annual Report and Accounts 2023 Chairman and executive Directors Mark E Tucker (66) N Group Chairman Appointed to the Board: September 2017 Group Chairman since: October 2017 Skills and experience: With over 35 years of experience in financial services in Asia, Africa, the US, the EU and the UK, including 30 years living and working in Hong Kong, Mark has a deep understanding of the industry and markets in which we operate. Career: Mark was previously Chairman, Group Chief Executive and President of AIA Group Limited (‘AIA’), and prior to AIA he was Group Chief Executive of Prudential plc. Mark previously served as a non-executive Director of the Court of the Bank of England and as an independent non-executive Director of Goldman Sachs Group. External appointments: – Non-executive Chairman of Discovery Limited – Supporting Chair of Chapter Zero – Member of the UK Investment Council – Member of the Advisory Group on Trade Finance to the International Chamber of Commerce – Member of the Trade Advisory Group on Financial Services to the UK Government’s Department for International Trade – Member of the Asia Business Council – Member of Hong Kong’s Chief Executive’s Advisory Council on Economic Development – Member of the Investment Advisory Council of the Supreme National Investment Committee of the Kingdom of Saudi Arabia – Chairman of the Multinational Chairman’s Group – Director, Peterson Institute for International Economics – Director, Institute of International Finance – Asia Society Global Board of Trustees – International Advisory Council of the China National Financial Regulatory Administration – Hong Kong Academy of Finance International Council of Advisors – Member of the Asia Global Institute – International Business Leaders’ Advisory Council to the Mayor of Beijing – Adviser to the Mayor – International Business Leaders’ Advisory Council to the Mayor of Shanghai – Adviser to the Mayor Noel Quinn (62) Group Chief Executive Appointed to the Board: August 2019 Group Chief Executive since: March 2020 Skills and experience: Having qualified as an accountant in 1987, Noel has more than 30 years of banking and financial services experience, both in the UK and Asia. Career: Noel was appointed Group Chief Executive in March 2020, having held the role on an interim basis since August 2019. Since joining HSBC and its constituent companies in 1987, Noel has held a variety of roles including Chief Executive Officer, Global Commercial Banking; Regional Head of Commercial Banking for Asia-Pacific; Head of Commercial Banking UK; and Head of Commercial Finance Europe. External appointments: – Independent non-executive Director of Sustainable Markets Initiative Limited and Chair of the Financial Services Task Force – Principal member of the Glasgow Financial Alliance for Net Zero – Member of the World Economic Forum’s International Business Council – Member of the World Bank Private Sector Investment Lab – Member of the Advisory Board of the China Children Development Fund – Founding member of CNBC ESG Council – Member of the British Infrastructure Council Georges Elhedery (49) Group Chief Financial Officer Appointed to the Board: January 2023 Skills and experience: Georges has over 25 years of experience in the banking industry across Europe, the Middle East and Asia, and has held a number of executive roles at both a regional and global business level. Career: Georges was appointed Group Chief Financial Officer and executive Director with effect from 1 January 2023. He is also responsible for the oversight of the Group’s transformation initiatives, strategy and corporate development activities. Georges was previously co-Chief Executive Officer, Global Banking and Markets and also Head of the Markets and Securities Services division of the business. Georges joined HSBC in 2005 with extensive trading experience in London, Paris and Tokyo. He has since held a number of senior leadership roles, including Head of Global Banking and Markets, Middle East and North Africa; Chief Executive Officer for HSBC, Middle East, North Africa and Türkiye; and Global Head of Markets based in London. The Board The Board, which seeks to promote the Group’s long-term success, deliver sustainable value to shareholders and promote a culture of openness and debate, comprises diverse, high-calibre members who have experience in our global markets. Board committee membership key Committee Chair A Group Audit Committee Ri Group Risk Committee R Group Remuneration Committee N Nomination & Corporate Governance Committee For full biographical details of our Board members, see www.hsbc.com/who-we-are/leadership-and-governance. Corporate governance HSBC Holdings plc Annual Report and Accounts 2023 239 Independent non-executive Directors Dame Carolyn Fairbairn (63) Ri R N Independent non-executive Director Appointed to the Board: September 2021 Skills and experience: Carolyn has significant experience across the media, government and finance sectors, and a deep understanding of the macroeconomic, regulatory, and political environment. Career: An economist by training, Carolyn has served as a partner at McKinsey & Company, a member of the UK prime minister John Major’s Number 10 Policy Unit, and as Director-General of the Confederation of British Industry, and held senior executive positions at the BBC and ITV plc. She has extensive board experience, having previously served as non-executive Director of Lloyds Banking Group plc, The Vitec Group plc, Capita plc and BAE Systems plc. She has also served as a non-executive Director of the UK Competition and Markets Authority and the Financial Services Authority. External appointments: – Independent non-executive Director of Tesco plc – Chair of Royal Mencap Society – Honorary Fellow of Gonville and Caius College, Cambridge Rachel Duan (53) A R N Independent non-executive Director Appointed to the Board: September 2021 Skills and experience: Rachel is an experienced business leader with exceptional international experience in the US, Japan, mainland China and Hong Kong. Career: Rachel spent 24 years at General Electric (‘GE’), where she held positions including Senior Vice President of GE, and President and Chief Executive Officer of GE’s Global Markets where she was responsible for driving GE’s growth in Asia-Pacific, the Middle East, Africa, Latin America, Russia and the Commonwealth of Independent States. She also previously served as President and Chief Executive Officer of GE Advanced Materials China and then of the Asia-Pacific; President and CEO of GE Healthcare China; and President and CEO of GE China. External appointments: – Independent non-executive Director of Sanofi S.A. – Independent non-executive Director of AXA S.A. – Independent non-executive Director of the Adecco Group AG Geraldine Buckingham (46) Ri R N Independent non-executive Director Appointed to the Board: May 2022 Skills and experience: Geraldine is an experienced executive within the global financial services industry, with significant leadership experience in Asia. Career: Geraldine is the former Chair and Head of Asia-Pacific at BlackRock, where she was responsible for all business activities across Hong Kong, mainland China, Japan, Australia, Singapore, India and Korea. After stepping down from this role, she acted as senior adviser to the Chairman and Chief Executive Officer of BlackRock. She earlier served as BlackRock’s Global Head of Corporate Strategy, and previously was a partner within McKinsey & Company’s financial services practice. External appointments: – Independent non-executive Director of Brunswick Group Partnership Ltd – Independent non-executive Director of H.R.L. Morrison & Co Limited – Member of the Advisory Board of ClimateWorks Centre Australia – Member of the Advisory Board of the McKinsey Health Institute 240 HSBC Holdings plc Annual Report and Accounts 2023 Report of the Directors | Corporate governance report James Forese (60) A Ri N Independent non-executive Director Appointed to the Board: May 2020 Skills and experience: Jamie has over 30 years of international business and management experience in the finance industry working in areas including global markets, investment and private banking. Career: Jamie formerly served as President of Citigroup. He began his career in securities trading with Salomon Brothers, one of Citigroup’s predecessor companies, in 1985. In addition to his most recent role as Citigroup’s President, he was Chief Executive Officer of Citigroup’s Institutional Clients Group. He has held the positions of Chief Executive of its Securities and Banking division and Head of its Global Markets business. External appointments: – Non-executive Chair of HSBC North America Holdings Inc – Non-executive Chairman of Global Bamboo Technologies Steven Guggenheimer (58) Ri N Independent non-executive Director Appointed to the Board: May 2020 Skills and experience: Steven brings extensive insight into technologies ranging from artificial intelligence to Cloud computing, through his experience advising businesses on digital transformation. Career: Steven has more than 25 years of experience at Microsoft, including more than a decade as Corporate Vice President, where he led teams focused on original equipment manufacturers, developers and independent software vendors and artificial intelligence solutions. External appointments: – Independent non-executive Director of BT Group plc – Independent non-executive Director of Leupold & Stevens, Inc – Independent non-executive Director of Forrit Holdings Limited Ann Godbehere (68) R N Independent non-executive Director Appointed to the Board: September 2023 Skills and experience: Ann brings deep financial acumen and extensive financial services experience over a 30-year career spanning insurance, retail and private banking, and wealth management. She also provides global perspectives, drawing upon experiences and insights gained from a long career in international business. Career: After joining Swiss Re in 1996, Ann served as the company’s Chief Financial Officer from 2003 to 2007. She was also Interim Chief Financial Officer of Northern Rock Bank from 2008 to 2009 in the period immediately after its nationalisation. Ann also has extensive board experience, including with FTSE 100 companies, having previously served as non-executive Director of Prudential plc, British American Tobacco plc, UBS AG, UBS Group AG and as Senior Independent non-executive Director of Rio Tinto plc and Rio Tinto Limited. External appointments: – Non-executive Director and Chair of the Audit Committee of Stellantis N.V. – Non-executive Director and Chair of the Audit Committee of Shell plc Corporate governance HSBC Holdings plc Annual Report and Accounts 2023 241 Dr José Antonio Meade Kuribreña (54) R N Independent non-executive Director Appointed to the Board: March 2019 Workforce engagement non-executive Director since: June 2022 Skills and experience: José has extensive experience in public administration, banking and financial policy. Career: José has held Cabinet-level positions in the federal government of Mexico, including as Secretary of Finance and Public Credit, Secretary of Social Development, Secretary of Foreign Affairs and Secretary of Energy. Prior to his appointment to the Cabinet, he served as Undersecretary and as Chief of Staff in the Ministry of Finance and Public Credit. José is also a former Director General of Banking and Savings at the Ministry of Finance and Public Credit, and served as Chief Executive Officer of the National Bank for Rural Credit. External appointments: – Independent non-executive Director of Alfa S.A.B. de C.V. – Independent non-executive Director of Grupo Comercial Chedraui, S.A.B. de C.V. – Board member of the Global Center on Adaptation – Member of the Advisory Board of the University of California, Centre for US Mexican Studies – Member of the UNICEF Mexico Advisory Board Eileen Murray (65) A R N Independent non-executive Director Appointed to the Board: July 2020 Skills and experience: Eileen has extensive knowledge in financial services, technology and corporate strategy from a career spanning more than 40 years. Career: Eileen previously served as co-Chief Executive Officer of Bridgewater Associates, LP. Before this, she was Chief Executive Officer for Investment Risk Management LLC, and President and co-Chief Executive Officer of Duff Capital Advisors. Eileen started her professional career at Morgan Stanley, where she held positions including Controller, Treasurer, and Global Head of Technology and Operations, as well as Chief Operating Officer for its Institutional Securities Group. She was also Head of Global Technology, Operations and Product Control at Credit Suisse. External appointments: – Independent non-executive Director of Guardian Life Insurance Company of America – Independent non-executive Director of Broadridge Financial Solutions, Inc – Member of the Advisory Board of Mobilize Capital Partners Kalpana Morparia (74) Ri N Independent non-executive Director Appointed to the Board: March 2023 Skills and experience: Kalpana is a skilled business leader with significant experience gained through a 45- year career in banking across Asia, primarily in India. Career: Kalpana’s most recent executive role was as Chair of J.P. Morgan, South and Southeast Asia and a member of J.P. Morgan’s Asia executive committee, which she held until her retirement in 2021. Before J.P. Morgan, she was the Joint Managing Director of ICICI Bank, India’s second- largest bank, from 2001 to 2007. External appointments: – Independent non-executive Director of Hindustan Unilever Limited – Independent non-executive Director of Dr. Reddy’s Laboratories Ltd. – Independent non-executive Director of Philip Morris International Inc – Governing board member of the Bharti Foundation – Governing board member of Foundation for Audit Quality – Governing board member of the Generation India Foundation – Governing council member of Krea University 242 HSBC Holdings plc Annual Report and Accounts 2023 Report of the Directors | Corporate governance report Aileen Taylor (51) Group Company Secretary and Chief Governance Officer Appointed: November 2019 Skills and experience: Aileen is a solicitor with significant governance and regulatory experience across various roles in the banking industry. She is a member of the European Corporate Governance Council, the GC100 and the Financial Conduct Authority’s Listing Authority Advisory Panel. Career: Prior to joining HSBC, Aileen spent 19 years at the Royal Bank of Scotland Group, holding various legal, risk and compliance roles. She was appointed Group Secretary in 2010 and subsequently Chief Governance Officer and Board Counsel. Swee Lian Teo (64) Ri N Independent non-executive Director Appointed to the Board: October 2023 Skills and experience: Swee Lian brings extensive experience within the international financial services industry, having previously spent over 27 years with the Monetary Authority of Singapore (‘MAS‘). Career: During Swee Lian’s time at the MAS, she worked in foreign reserves management, financial sector development, strategic planning and financial supervision, before she became the Deputy Managing Director for Financial Supervision. She retired from the MAS in 2015 after serving as Special Advisor, focused on MAS’s role in the international regulatory framework, in the Managing Director’s office. Swee Lian previously served as a non-executive Director on the boards of AIA Group Limited and the Dubai Financial Services Authority. External appointments: – Non-executive Director of Singapore Telecommunications Limited and Chair of the Risk Committee – Non-executive Director of Avanda Investment Management Pte Ltd – Director of Clifford Capital Pte Ltd – Director of Clifford Capital Holdings Pte Ltd – Chair of CapitaLand Integrated Commercial Trust Management Limited. David Nish (63) A Ri N Independent non-executive Director Appointed to the Board: May 2016 Senior Independent non-executive Director since: February 2020 Skills and experience: David has international experience in financial services, corporate governance, strategy, financial reporting, and operational transformation. Career: David served as Group Chief Executive Officer of Standard Life plc between 2010 and 2015, having joined the company in 2006 as Group Finance Director. He is also a former Group Finance Director of Scottish Power plc and was a partner at Price Waterhouse. David has also previously served as a non-executive Director of HDFC Life (India), Northern Foods plc, Thus plc, London Stock Exchange Group plc, the UK Green Investment Bank plc and Zurich Insurance Group. External appointments: – Senior Independent non-executive Director of Vodafone Group plc and Chairman of the Audit and Risk Committee – Honorary Professor of University of Dundee Business School Former Directors who served during the year Jackson Tai Jackson Tai retired from the Board on 5 May 2023 For full biographical details of our Board members, see www.hsbc.com/who-we-are/leadership-and-governance. Brendan Nelson (74) A Ri N Independent non-executive Director Appointed to the Board: September 2023 Skills and experience: Brendan brings UK and international financial and auditing expertise, and significant experience in auditing and as audit committee chair of UK-listed companies. Career: Brendan spent over 25 years as a partner at KPMG LLP, served on the board from 2000 and as Vice Chairman from 2006, until his retirement in 2010. Internationally, he held various senior positions including Global Chairman of the financial services practice. Subsequently, Brendan joined the boards of bp plc and NatWest Group plc where he also served as Chairman of both companies’ audit committees. During his career, Brendan was President of the Institute of Chartered Accountants of Scotland, a member of the Financial Reporting Review Panel and a member of the Financial Services Authority’s Practitioner Panel. As current Chairman of the Board of BP Pension Fund Trustees Ltd, Brendan has received training in ESG considerations for investment decisions and helped set an ambition to be net zero in terms of greenhouse gas emissions from investments by 2050. External appointments: – Chairman of BP Pension Trustees Ltd Corporate governance HSBC Holdings plc Annual Report and Accounts 2023 243 Elaine Arden (55) Group Chief Human Resources Officer Elaine joined HSBC as Group Chief Human Resources Officer in June 2017. Prior to joining HSBC, she was Group Human Resources Director at the Royal Bank of Scotland Group for six years in the aftermath of the global financial crisis. She has held a number of human resources roles throughout her career in financial services, including Head of Human Resources for Direct Line Group. Elaine is a member of the Chartered Institute of Personnel and Development, and a Fellow of the Chartered Institute of Banking in Scotland. Colin Bell (56) Chief Executive Officer, HSBC Bank plc and HSBC Europe Colin joined HSBC in July 2016 and was appointed Chief Executive Officer, HSBC Bank plc and HSBC Europe in February 2021, having previously held the role of Group Chief Compliance Officer. He is also a Director of HSBC Bank (Singapore) Limited. Colin worked at UBS as Global Head of Compliance and Operational Risk Control. He served for 16 years in the British Army, where he held a variety of command and staff positions, including operational tours of Iraq and Northern Ireland, and roles in the Ministry of Defence and NATO. Jonathan Calvert-Davies (55) Group Head of Internal Audit Jonathan is a standing attendee of the Group Executive Committee, having joined HSBC as Group Head of Internal Audit in October 2019. He has over 30 years of experience providing assurance, audit and advisory services to the banking and securities industries in the UK, the US and Europe. Jonathan’s previous roles included leading KPMG UK’s financial services internal audit services practice and PwC’s UK internal audit services practice. He also previously served as interim Group Head of Internal Audit at the Royal Bank of Scotland Group. Senior management, which includes the Group Executive Committee, supports the Group Chief Executive in the day-to-day management of the business and the implementation of strategy. Senior management Greg Guyett (60) Chief Executive Officer, Global Banking and Markets Greg joined HSBC in October 2018 as Head of Global Banking and became co-Chief Executive Officer of Global Banking and Markets in March 2020, before assuming sole responsibility in October 2022. Before joining HSBC, he was President and Chief Operating Officer of East West Bank. Greg began his career as an investment banker at J.P. Morgan, where positions included: Chief Executive Officer for Greater China; Chief Executive Officer, Global Corporate Bank; Head of Investment Banking for Asia-Pacific; and Co-Head of Banking for Asia-Pacific. 244 HSBC Holdings plc Annual Report and Accounts 2023 Report of the Directors | Corporate governance report Pam Kaur (60) Group Chief Risk and Compliance Officer Pam was appointed Group Chief Risk and Compliance Officer in 2021, having been Group Chief Risk Officer since 2020. She is a Director of the Hongkong and Shanghai Banking Corporation Limited. Since joining HSBC in 2013, her roles included Group Head of Internal Audit and Head of Wholesale Market and Credit Risk. Since qualifying as a chartered accountant with Ernst & Young, Pam held various senior audit, compliance, finance and operations roles with Deutsche Bank, the Royal Bank of Scotland Group, Lloyds TSB and Citigroup. She serves as a non- executive Director of abrdn plc. Bob Hoyt (59) Group Chief Legal Officer Bob joined HSBC as Group Chief Legal Officer in January 2021. He was previously Group General Counsel at Barclays from 2013 to 2020. Prior to that, he was General Counsel and Chief Regulatory Affairs Officer for PNC Financial Services Group. Bob has served as General Counsel and Senior Policy Adviser to the US Department of the Treasury under Secretary Henry M. Paulson Jr, and as Special Assistant and Associate Counsel to the White House under President George W. Bush. Steve John (50) Group Chief Communications and Brand Officer Steve joined HSBC in December 2019 and was appointed to the Group Executive Committee in April 2021. He has a wealth of senior communications, public policy and leadership experience acquired across a number of multinational and charitable organisations. Steve was previously a partner and Global Director of Communications at McKinsey & Company from 2014 to 2019. He has also held roles with Bupa as Global Director of Corporate Affairs and PepsiCo as Director of Corporate Affairs for their UK and Ireland franchises. John Hinshaw (53) Group Chief Operating Officer John became Group Chief Operating Officer in February 2020, having joined HSBC in December 2019. He is Chairman of HSBC Global Services Limited and a Director of HSBC Innovation Bank Limited. John was previously Executive Vice President of Technology and Operations and Chief Customer Officer at Hewlett Packard and Hewlett Packard Enterprise, and has held senior executive positions at Verizon and Boeing. John serves on the boards of Sysco Corporation and Illumio, Inc., and has previously served on the boards of BNY Mellon, DocuSign and the National Academy Foundation. Dr Celine Herweijer (46) Group Chief Sustainability Officer Celine joined HSBC as Group Chief Sustainability Officer in July 2021, and is responsible for the Group’s execution of its sustainability strategy. She was previously a partner at PwC for over a decade, where she held global leadership roles including acting as its global innovation and sustainability leader. Before joining PwC in 2009, Celine worked as Director of Climate Change and Consulting for Risk Management Solutions. She is a World Economic Forum Young Global Leader, a co-chair of the We Mean Business Coalition, a PhD climate scientist and NASA Fellow. David Liao (51) Co-Chief Executive, The Hongkong and Shanghai Banking Corporation Limited David was appointed Co-Chief Executive of the Asia-Pacific region in 2021. He is also a Director of the Bank of Communications Co., Limited, and Hang Seng Bank Limited. David joined HSBC in 1997, with previous roles including: Head of Global Banking Coverage for Asia-Pacific; President and Chief Executive of HSBC China; Head of Global Banking and Markets, HSBC China; and Treasurer and Head of Global Markets, HSBC China. Corporate governance HSBC Holdings plc Annual Report and Accounts 2023 245 Surendra Rosha (55) Co-Chief Executive, The Hongkong and Shanghai Banking Corporation Limited Surendra was appointed Co-Chief Executive of the Asia-Pacific region in 2021. He is a Director of The Hongkong and Shanghai Banking Corporation Limited, HSBC Global Asset Management Limited and HSBC Bank Malaysia Berhad. Surendra joined HSBC in 1991 and has held several senior positions within Global Banking and Markets, including Head of Global Markets in Indonesia and Head of Institutional Sales, Asia- Pacific. He previously held the position of Chief Executive for HSBC India and Head of HSBC’s financial institutions group for Asia-Pacific. John David Stuart (known as Ian Stuart) (60) Chief Executive Officer, HSBC UK Bank plc Ian has been Chief Executive Officer of HSBC UK Bank plc since 2017, having joined HSBC as Head of Commercial Banking in the UK and Europe in 2014. He has worked in financial services for over 40 years, previously holding roles at the Royal Bank of Scotland Group and Barclays. Ian holds an Honorary Masters and Honorary Doctorate degree for his services to the banking sector. He is a member of the UK Finance Board, the UK Investment Council and a business ambassador for Meningitis Now. Barry O’Byrne (48) Chief Executive Officer, Global Commercial Banking Barry was appointed Chief Executive Officer of Global Commercial Banking in 2020, having served in the role on an interim basis since August 2019. He joined HSBC in 2017 as Chief Operating Officer for Commercial Banking. Before joining HSBC, Barry worked at GE Capital for 19 years where he held a number of senior leadership roles, including Chief Executive Officer and Chief Operating Officer for GE Capital International. Michael Roberts (63) Chief Executive Officer, HSBC USA and Americas Michael was appointed Chief Executive Officer of HSBC USA when he joined HSBC in 2019. He became Chief Executive Officer of the Americas with oversight responsibility for Canada and Latin America in 2021. He is a Director of HSBC Bank Canada; Director, President and Chief Executive Officer of HSBC North America Holdings Inc.; and Chairman of HSBC Bank USA, N.A., HSBC USA Inc and HSBC Latin America Holdings (UK) Limited. Previously, Michael spent over 30 years at Citigroup in a number of senior leadership roles, most recently as Global Head of Corporate Banking and Capital Management and Chief Lending Officer. Additional members of the Group Executive Committee Noel Quinn Georges Elhedery Aileen Taylor Biographies are provided on pages 239 and 243. Stephen Moss (57) Regional Chief Executive Officer, Middle East, North Africa and Türkiye Stephen was appointed Regional Chief Executive Officer for the Middle East, North Africa and Türkiye in 2021. He has held a series of roles in Asia, the UK and the Middle East since joining HSBC in 1992, including as Chief of Staff to the Group Chief Executive and overseeing the Group’s mergers and acquisitions, and strategy and planning activities. Stephen is a Director of HSBC Bank Middle East Limited, HSBC Middle East Holdings B.V, HSBC Bank Egypt S.A.E., HSBC Saudi Arabia and Saudi Awwal Bank. Nuno Matos (56) Chief Executive Officer, Wealth and Personal Banking Nuno was appointed Chief Executive Officer of Wealth and Personal Banking in 2021. Since joining HSBC in 2015 from Santander Group, he has held various roles, most recently as Chief Executive Officer of HSBC Bank plc and HSBC Europe. He has also held the positions of Chief Executive Officer of HSBC Mexico and Regional Head of Retail Banking and Wealth Management for Latin America. He is currently the Chairman of MP Payments Group Limited. 246 HSBC Holdings plc Annual Report and Accounts 2023 Report of the Directors | Corporate governance report Board and senior management diversity We value difference Diversity and inclusion are embedded within the culture of HSBC. The Board remains committed to having an inclusive culture that recognises the importance of gender, social and ethnic diversity, and the benefits gained from different perspectives. This section outlines the key diversity and inclusion metrics for Board members and executive management as at 31 December 2023. This includes tenure, age, skills and experience, as well as gender and ethnic representation. Tenure1 0–2 years 3–5 years 6+ years Age 45–49 50–54 55–59 60–64 65+ Gender and ethnic diversity The Financial Conduct Authority requires all listed companies to publish in their Annual Report and Accounts information on female and ethnic heritage representation on the Board and in senior management. The tables below outline the current gender and ethnic diversity of the HSBC Holdings Board and executive management reflecting data gathered through self-identification. Board members Number of senior positions1 Executive management2 Number % Number % Male 8 53 4 15 79 Female 7 47 0 4 21 Other – – – – – Not specified/prefer not to say – – – – – Board members Number of senior positions1 Executive management2 Number % Number % White British or other White (including minority-White groups) 10 67 4 13 69 Mixed/multiple ethnic groups – – – 1 5 Asian/Asian British 3 20 – 3 16 Black/African/Caribbean/ Black British – – – – – Other ethnic groups, including Arab 2 13 – 1 5 Not specified/prefer not to say – – – 1 5 White British or other White (including minority-White groups) Asian/Asian British Other ethnic groups, including Arab Board Male Female Board White British or other White (including minority-White groups) Mixed/multiple ethnic groups Asian/Asian British Other ethnic groups, including Arab Not specified/prefer not to say Executive management Male Female Executive management Board composition, tenure and age Skills and experience Gender Ethnic diversity 2 Executive Directors 13 Non-executive Directors 1 Senior positions on the Board comprise the Group Chairman, Group Chief Executive, Group Chief Financial Officer and Senior Independent non-executive Director. 2 Executive management comprises the Group Chief Executive, his direct reports, and the Group Company Secretary and Chief Governance Officer. The summary below provides an overview of the skills and experiences held by the non-executive Directors on the Board. This is based on the current skills matrix, which is reviewed annually by the Nomination & Corporate Governance Committee to ensure that the Board has the skills and experience required to effectively discharge its duties and to support succession planning discussions. The skills and experiences of the newly appointed non-executive Directors are also included in the below extract. 5 6 10 4 7 10 10 12 Male Corporate social responsibility/ESG Direct Asia market experience Global business experience Digital technology Customer Risk Finance Banking 1 Tenure of a non-executive Director is calculated by reference to the date of their election by shareholders following their appointment. Corporate governance HSBC Holdings plc Annual Report and Accounts 2023 247 How we are governed We are committed to high standards of corporate governance. The Group has a comprehensive range of policies and procedures in place designed to help ensure that it is well managed, with effective oversight and controls. Board and executive governance The Board, led by the Group Chairman, is responsible among other matters for: – promoting the Group’s long-term success and delivering sustainable value to shareholders; – establishing and approving the Group’s strategy and objectives, and monitoring the alignment of the Group’s purpose, strategy and values with the desired culture and standards; – setting the Group’s risk appetite and monitoring the Group’s risk profile; – approving and monitoring capital and financial resource plans for achieving strategic objectives, including material transactions; – considering and approving the Group’s technology and environmental, social and governance strategies; – ensuring effective engagement with, and encouraging participation from, shareholders and other key stakeholders; – approving the appointment and remuneration of Directors, including Board roles; – reviewing the Group’s overall corporate governance arrangements; and – providing entrepreneurial leadership of the Group within a framework of prudent and effective controls. The Board’s responsibilities are set out in a schedule of matters reserved within its terms of reference, which are available on our website at www.hsbc.com/who-we-are/leadership-and-governance/ board-responsibilities. The Board’s powers are subject to relevant laws, regulations and HSBC’s articles of association. The role of the independent non-executive Directors is to support the development of strategy, oversee risk, hold management to account and ensure the executive Directors are discharging their responsibilities properly, while creating the right culture to encourage constructive challenge. Further details on the independence of the Board can be found in the Nomination & Corporate Governance Committee report on page 262. Non-executive Directors also review the performance of management in meeting agreed goals and objectives. The Group Chairman meets with the non-executive Directors without the executive Directors in attendance after Board meetings and otherwise, as necessary. The roles of Group Chairman and Group Chief Executive are separate. There is a clear division of responsibilities between the leadership of the Board by the Group Chairman, and the executive responsibility for day-to-day management of HSBC’s business, which is undertaken by the Group Chief Executive. The majority of Board members are independent non-executive Directors. At 31 December 2023, the Board comprised the Group Chairman, 12 non-executive Directors, and two executive Directors who are the Group Chief Executive and the Group Chief Financial Officer. As previously announced, David Nish will not stand for re-election at the Annual General Meeting (’AGM’) on 3 May 2024. For further details of Board members' career backgrounds, skills, experience and external appointments, see their biographies on page 239, and for a breakdown of the diversity and skills of the Board and senior management, see page 247. Operation of the Board The Board is ordinarily scheduled to meet nine times a year. In 2023, the Board held 11 meetings. For further details on attendance at those meetings, see page 249. The Board agenda is agreed by the Group Chairman, working with both the Group Chief Executive and the Group Company Secretary and Chief Governance Officer. For further information, see ’Board matters considered and shareholder engagement’ on page 254. The Group Company Secretary and Chief Governance Officer, the Group Chief Risk and Compliance Officer and the Group Chief Legal Officer are regular attendees at Board meetings. The non-executive Chairman of The Hongkong and Shanghai Banking Corporation Limited is also a regular attendee at most Board meetings. The chief executive officers of the three global businesses attend Board strategy discussions, and other senior executives attend Board meetings for specific items as required. In addition, as agreed by the Board, the Board Oversight Sub-Group is called on an ad hoc basis where necessary. Such meetings are an informal mechanism for a smaller group of Board members and management to discuss emerging issues and upcoming Board matters. The Board Oversight Sub-Group was not convened in 2023. Report of the Directors | Corporate governance report 248 HSBC Holdings plc Annual Report and Accounts 2023 Board roles, responsibilities and meeting attendance The table below sets out the Board members’ respective roles, responsibilities and attendance at Board meetings and the AGM in 2023. For a full description of key Board members’ responsibilities, see www.hsbc.com/who-we-are/leadership-and-governance/board-responsibilities. Roles Board attendance in 20231 Responsibilities Group Chairman Mark E Tucker2,3 12/12 – Provides effective leadership of the Board and promotes the highest standards of corporate governance practices. – Leads the Board in providing strong strategic oversight and setting the Board’s agenda, culture and values. – Leads the Board in challenging management’s thinking and proposals, and fosters open and constructive debate among Directors. – Maintains internal and external relationships with key stakeholders, and communicates investors’ views to the Board. – Organises periodic monitoring and evaluation, including externally facilitated evaluation, of the performance of the Board, its committees and individual Directors. – Leads on succession planning for the Board and its committees, ensuring appointments reflect diverse cultures, skills and experiences. Executive Director Group Chief Executive Noel Quinn3 12/12 – Leads and directs the implementation of the Group’s business strategy, embedding the organisation’s culture and values. – Leads the Group Executive Committee with responsibility for the day-to-day operations of the Group, under authority delegated to him from the Board. – Maintains relationships with key internal and external stakeholders including the Group Chairman, the Board, customers, regulators, governments and investors. – Maintains responsibility and accountability for the Group’s and its employees’ compliance with applicable laws, codes, rules and regulations, good market practice and HSBC’s own standards. Executive Director Group Chief Financial Officer Georges Elhedery3,4 12/12 – Supports the Group Chief Executive in developing and implementing the Group strategy, and recommends the annual budget and long-term strategic and financial resource plan. – Leads the Finance function and is responsible for effective financial and regulatory reporting, including the effectiveness of the processes and controls, to ensure the financial control framework is robust and fit for purpose. – Maintains relationships with key stakeholders including shareholders. Non-executive Director Senior Independent Director David Nish3,5,6 10/12 – Supports the Group Chairman, acting as intermediary for non-executive Directors when necessary. – Leads the non-executive Directors in the oversight of the Group Chairman, supporting the clear division of responsibility between the Group Chairman and the Group Chief Executive. – Listens to shareholders’ views if they have concerns that cannot be resolved through the normal channels. Non-executive Directors – Develop and approve the Group strategy. – Challenge and oversee the performance of management in achieving agreed corporate goals and objectives. – Approve the Group’s risk appetite and review risk profile and performance. – Contribute to the assessment and monitoring of culture. – Maintain internal and external relationships with the Group’s key stakeholders. Geraldine Buckingham3,5 12/12 Rachel Duan3,5 12/12 Dame Carolyn Fairbairn3,5,6 10/12 James Forese3,5 12/12 Ann Godbehere4,5 3/3 Steven Guggenheimer3,5,6 11/12 Dr José Antonio Meade Kuribreña3,5,7 12/12 Kalpana Morparia3,4,5 10/10 Eileen Murray3,5,6 11/12 Brendan Nelson4,5 3/3 Jackson Tai3,5,6,8 6/7 Swee Lian Teo4,5 2/2 Group Company Secretary and Chief Governance Officer Aileen Taylor – Maintains strong and consistent governance practices at Board level and throughout the Group. – Supports the Group Chairman in ensuring effective functioning of the Board and its committees, and transparent engagement between senior management and non-executive Directors. – Facilitates induction and professional development of non-executive Directors. – Advises and supports the Board and management in ensuring effective end-to-end governance and decision making across the Group. 1 The total number of meetings comprised nine scheduled meetings, two ad hoc meetings and the AGM. 2 The non-executive Group Chairman was considered to be independent on appointment. 3 Attended the AGM on 5 May 2023. 4 Georges Elhedery joined the Board effective 1 January 2023. Kalpana Morparia joined the Board effective 1 March 2023. Ann Godbehere and Brendan Nelson joined the Board effective 1 September 2023. Swee Lian Teo joined the Board effective 1 October 2023. 5 Independent non-executive Director. All of the non-executive Directors are considered to be independent of HSBC. There are no relationships or circumstances that are likely to affect any individual non-executive Director’s judgement. All non-executive Directors have confirmed their independence during the year. 6 Meetings held on 9 March 2023, 16 March 2023 and 8 November 2023 were called at short notice. Due to prior commitments Dame Carolyn Fairbairn was unable to attend on 9 March 2023, David Nish, Jackson Tai and Dame Carolyn Fairbairn were unable to attend on 16 March 2023, and David Nish and Steven Guggenheimer were unable to attend on 8 November 2023. Due to prior commitments Eileen Murray was unable to attend the Board meeting in September 2023. 7 Dr José Antonio Meade Kuribreña was appointed as the independent non-executive Director with responsibility for workforce engagement on 1 June 2022. Further information can be found on page 257. 8 Jackson Tai retired from the Board on 5 May 2023. HSBC Holdings plc Annual Report and Accounts 2023 249 Corporate governance Relationship between the Board and senior management The Board delegates day-to-day management of the business and implementation of strategy to the Group Chief Executive. The Group Chief Executive is supported in his management of the Group by recommendations and advice from the Group Executive Committee (’GEC’), an executive forum comprising members of senior management that include chief executive officers of the global businesses and regions, as well as functional heads. For further details of the senior management team, see page 244. All Directors are encouraged to have contact with management at all levels, and have full access to all relevant information. Visits to local business operations and meetings with local management are arranged for the non-executive Directors when they attend Board meetings in different locations, and when travelling for other reasons. Senior management often attend alongside Directors’ stakeholder engagements (see ’Board decision making and engagement with stakeholders’ on page 20). The workforce engagement non-executive Director attends the GEC on occasion to provide senior management with updates on workforce engagements carried out by the Board, including relevant Board observations. For further details, see ’Board stakeholder and workforce engagement’ on page 257. Executive governance The GEC promotes the tone from the top, set by the Board, across the organisation. This helps to ensure that our colleagues follow our values, and foster a culture that delivers against our purpose of opening up a world of opportunity. At its meetings, the GEC dedicates time to reflect on our purpose and values and how they are demonstrated in the day-to-day course of business. During 2023, the GEC undertook an extensive review of the Group’s strategy with a view to building upon its unique strengths. For further details of our strategy, see page 11. The GEC has led and overseen the delivery of a number of strategic projects to simplify how we get things done, by identifying operating efficiencies, reducing complexity and optimising costs. The GEC will continue to focus on simplification throughout 2024. The GEC’s operating rhythm helps to facilitate end-to-end governance between senior leadership and the Board. The operating rhythm has the following three pillars: – regular check-in meetings to review and discuss current and emerging trends and issues; – a monthly meeting to review the performance of each of the global businesses in principal geographical areas and legal entities, supported by the development and introduction of a new key performance indicators architecture in 2023; and – a strategy- and governance-focused meeting, which is generally held two weeks in advance of each Board meeting. Separate committees have been established to provide specialist oversight for matters delegated to the Group Chief Executive and senior management. For further details of these committees, see page 252. To further support our senior management, we have dedicated corporate governance officers who support and advise legal entities, global businesses and global functions on our corporate governance practices. These corporate governance officers serve to strengthen the consistency and effectiveness of our end-to-end governance arrangements, and support connectivity and information sharing. Subsidiary governance We are committed to maintaining high standards of corporate governance throughout the Group. All subsidiary boards and their respective businesses are required to have in place effective governance arrangements with regard to the businesses’ nature, size, location and the sectors in which they operate. The subsidiary accountability framework The subsidiary accountability framework aims to balance appropriate governance oversight by the Group with each subsidiary’s local legal and regulatory duties. The framework supports the Group in promoting effective governance arrangements across its subsidiaries by: – setting out high level principles to enhance communications and connectivity; and – ensuring a shared and consistent understanding of the Group’s strategic objectives, culture and values. The subsidiary accountability framework also focuses on ensuring that each subsidiary is led by an effective board with an appropriate balance of skills, diversity, experience and knowledge, having regard to the nature of the subsidiary’s business and local legal and regulatory requirements. Board composition of the Group’s subsidiaries is kept under review as part of succession planning. The framework is subject to periodic review by the Board and/or the Nomination & Corporate Governance Committee and updated as required to ensure it is aligned to best practice. The role of principal subsidiaries Certain subsidiaries are designated formally by the Board as principal subsidiaries. In addition to their obligations under their respective local laws and regulations, principal subsidiaries, supported by regional company secretaries, perform a critical role in ensuring effective and high standards of governance across the Group and in overseeing the implementation of the subsidiary accountability framework in the regions for which they are responsible. Representatives from principal subsidiaries attend the Board and its committee meetings for relevant topics, including when the Board holds meetings outside of the UK. Chairs of the principal subsidiary risk and audit committees also regularly attend respective Group Risk Committee and Group Audit Committee meetings. Attendance and participation at these committees enhance the subsidiary directors' understanding of the challenges facing the Group and help to identify common challenges and share lessons learned. Such committee participation supplements the regular reports, certifications and escalations from principal subsidiaries' boards and their committees to the Board and relevant committee(s) of the Board. The Group Chairman also interacts regularly with the chairs of the principal subsidiaries, including through the Chairman’s Forum. The Chairman’s Forum comprises the chairs of the principal subsidiaries and the chairs of the Group’s audit, risk and remuneration committees, and where relevant, the Group Chief Executive, other non-executive Directors and relevant executive management, advisers and/or external experts. In 2023, the Chairman’s Forum covered topics such as strategic business considerations, geopolitical issues, resolvability assessment requirements and separability, shareholder engagements, Group-wide connectivity of non-executive Directors, key regulatory themes, ESG insights, employee engagement and financial performance. The Group Remuneration Committee Chair also hosted dedicated forums with chairs of principal subsidiaries to share key priorities for 2023 and the future. These sessions also provide an opportunity for review and input on proposed pay outcomes and allocation, before approval by the Group Remuneration Committee. Report of the Directors | Corporate governance report 250 HSBC Holdings plc Annual Report and Accounts 2023 The principal subsidiaries are: Principal subsidiary Oversight responsibility The Hongkong and Shanghai Banking Corporation Limited Asia-Pacific HSBC Bank plc Europe, Bermuda (excluding Switzerland and UK ring-fenced activities) HSBC UK Bank plc UK ring-fenced bank and its subsidiaries HSBC Middle East Holdings BV Middle East, North Africa and Türkiye HSBC North America Holdings Inc. US HSBC Latin America Holdings (UK) Limited Mexico and Latin America HSBC Bank Canada1 Canada 1 On 29 November 2022, HSBC announced the sale of HSBC Bank Canada to Royal Bank of Canada, subject to regulatory and governmental approvals. On 21 December 2023, the Canadian Federal Government’s Minister of Finance approved the sale, and the transaction is expected to close in the first quarter of 2024. Subsidiary director development The Group is dedicated to supporting the continuing professional development of its subsidiary directors. In May 2023, a two-day non- executive director summit was held in Hong Kong, which brought together over 100 non-executive directors from across the Group. Connectivity was a key theme and attendees were reminded of the importance of the subsidiary accountability framework in driving consistent governance standards and ensuring connectivity and engagement across our non-executive director community. The agenda included sessions on strategy and financial performance; Asia- Pacific; subsidiary governance; the macroeconomic environment; diversity and inclusion; sustainability; technology; finance; and risk. The Bank Director Programme, launched in 2022, continues to support subsidiaries with succession planning by developing and equipping internal talent to undertake internal non-executive director roles on subsidiary boards. Following the success of the Bank Director Programme, a Bank Chair Programme is being developed to ensure existing and prospective chairs of subsidiary boards and board committees have the requisite knowledge, skills and behaviours to be effective chairs. HSBC Holdings plc Annual Report and Accounts 2023 251 Corporate governance Board and Group Executive committees and working groups The Board delegates oversight of certain audit, risk, remuneration, nomination and governance matters to its committees. Each standing Board committee is chaired by a non-executive Director and has a remit to cover specific topics in accordance with their respective terms of reference. Only the Group Chairman and the independent non-executive Directors are members of Board committees. Details of the work carried out by each of the Board committees can be found in the respective committee reports from page 262. The Chairman’s Committee provides the Board with the opportunity to consider ad hoc and routine matters between scheduled Board meetings. All Board members are invited to attend Chairman’s Committee meetings. As part of its ongoing review of the effectiveness of the Group’s governance arrangements, and in response to the findings from the Board evaluation in 2023, the Board has decided to establish a new Group Technology Committee to oversee the Group’s technology strategy and alignment with the overall Group strategy. The committee, which will be in place from 1 March 2024, will have responsibility for areas where technology is fundamental to strategic delivery, including innovation, data and cyber risk frameworks. As a result, the Technology Governance Working Group, which was established to support oversight of technology strategy, governance and emerging risks, will be demised from the same date. The terms of reference and membership of the Board committees are available at www.hsbc.com/who-we-are/leadership-and-governance/board- committees. The GEC has established a number of committees to support the Group Chief Executive and senior management in their running of the business, and provide specialist oversight for matters delegated to them, including capital and liquidity, risk management, disclosure and financial reporting, restructuring and investment considerations, transformation oversight, ESG matters and talent and development. These committees also help fulfil their responsibilities under the Senior Managers and Certification Regime. During 2023, new committees were established including the Sustainability Execution Committee to provide greater oversight of ESG matters. In addition, the Transformation Oversight Executive Committee was demised and in its place the Change Prioritisation Oversight Committee was formed. The committee provides oversight of the Group's change portfolio, focusing on investment oversight and prioritisation, as well as delivery and execution of ongoing initiatives across the Group. Board Chair: Mark Tucker Chairman’s Committee Nomination & Corporate Governance Committee Group Audit Committee Group Risk Committee Group Remuneration Committee Informal governance Board Oversight Sub- Group Chair: Mark Tucker Chair: Mark Tucker Chair: David Nish1 Chair: James Forese Chair: Dame Carolyn Fairbairn Chair: Mark Tucker See page 262 See page 266 See page 274 See page 279 Technology Governance Working Group2 1 Brendan Nelson will be appointed as chair from 21 February 2024. 2 The Technology Governance Working Group will be demised on 1 March 2024. The Group Technology Committee will be established on the same date. Co-Chairs: Eileen Murray and Steven Guggenheimer Chairman’s Forum Chair: Mark Tucker Group Executive Committee Chair: Noel Quinn Acquisitions and Disposals Committee Group Disclosure and Controls Committee Group People Committee Group Risk Management Meeting Holdings Asset and Liabilities Committee Change Prioritisation and Oversight Committee Environmental, Social and Governance Committee Chair: Noel Quinn Chair: Georges Elhedery Chair: Elaine Arden Chair: Pam Kaur Chair: Georges Elhedery Chair: Georges Elhedery Co-Chairs: Celine Herweijer and Georges Elhedery Sustainability Execution Committee Co-Chairs: Celine Herweijer and Barry O’Byrne Report of the Directors | Corporate governance report 252 HSBC Holdings plc Annual Report and Accounts 2023 Board induction and training The Group Company Secretary and Chief Governance Officer works with the Group Chairman to ensure that all Board members receive appropriate training, both individually and collectively, throughout their time on the Board. On appointment, new Directors are provided with tailored and comprehensive induction programmes to fit with their individual experiences and needs, including the process for managing conflicts. During 2023, Kalpana Morparia, Ann Godbehere, Brendan Nelson and Swee Lian Teo were welcomed to the Board as non-executive Directors. Biographies for each can be found from page 239. The Group Company Secretary and Chief Governance Officer also helps to arrange and deliver the induction programme through formal briefings and introductory sessions with other Board members, senior management, legal counsel, auditors, tax advisers and regulators, as appropriate. Topics covered in the induction programme include, but are not limited to: purpose and values; culture and leadership; governance and stakeholder management; Directors’ legal and regulatory duties; recovery and resolution planning; anti-money laundering and anti-bribery; technical and business briefings; and strategy. The induction process is often initiated before appointment to allow each new Board member to contribute meaningfully from appointment, such as in February 2023 when Kalpana Morparia joined the Board meeting as an observer before she was appointed to the Board the following month. The structure of the induction supports good information flows within the Board and its committees, as well as between senior management and non-executive Directors, providing a clear understanding of our culture and way of operating. In January 2023, the Nomination & Corporate Governance Committee agreed the proposed approach to Board training for the year. It was agreed that the training programme would include key topics relevant to the Directors' respective roles and recent developments, in areas such as corporate governance, recovery and resolution, and technology. Where appropriate, the training sessions were facilitated by external presenters who were able to provide insights into geopolitical matters, macroeconomic issues and investor sentiment. The training sessions were held as part of scheduled Board meetings to allow for in-person interactions as much as possible. Directors were also issued routine training modules that all colleagues must complete annually. During 2023, this training covered topics including risk management, cybersecurity, sustainability, health, safety and well-being, financial crime, and data. Non-executive Directors also discussed individual development areas with the Group Chairman as part of their ongoing performance discussions with regard to their contributions on the Board. The Group Company Secretary and Chief Governance Officer makes appropriate arrangements for any additional training needs identified using internal resources, or otherwise, at HSBC’s expense. Members of Board committees receive relevant training as appropriate. Further details on any specific training commissioned by Board committees can be found in the respective committee reports. Directors may take independent professional advice at HSBC’s expense. Board Directors who serve on principal subsidiary boards receive training that is pertinent to circumstances and context relevant to those boards. Opportunities exist for the principal subsidiary committee chairs to share their understanding of specific areas with the Board Directors as part of the Chairman’s Forum. For further details, see ’The role of principal subsidiaries’ on page 250. Directors’ induction and ongoing development in 2023 Director Induction1 Strategy and business briefings2 Risk and control3 Corporate governance, ESG and other reporting matters4 Board global mandatory training5 Geraldine Buckingham ô l l l l Rachel Duan ô l l l l Georges Elhedery l l l l l Dame Carolyn Fairbairn ô l l l l James Forese ô l l l l Ann Godbehere6 l l l l l Steven Guggenheimer ô l l l l José Antonio Meade Kuribreña ô l l l l Kalpana Morparia l l l l l Eileen Murray ô l l l l Brendan Nelson6 l l l l l David Nish ô l l l l Swee Lian Teo6 l l l l l Noel Quinn ô l l l l Mark Tucker ô l l l l l Matter considered ô Matter not considered 1 The induction programme was delivered through formal briefings and introductory sessions including topic-specific deep dives, with Board members, senior management, legal counsel, auditors, tax advisers and regulators, as appropriate. Topics covered included, but were not limited to: purpose and values; culture and leadership; governance and stakeholder management; Directors’ legal and regulatory duties; recovery and resolution planning; anti- money laundering and anti-bribery; technical and business briefings; and strategy. 2 Directors participated in business strategy, market development and business briefings, which are global, regional and/or market-specific. Examples of specific sessions held in 2023 included: ’Technology and the future of artificial intelligence’, ’WPB customer-centricity improvement plan’, and ’Investor sentiments’. 3 Directors received risk and control training and briefings. Examples of specific sessions held in 2023 included: ’Recovery and resolution’ and ’Capital management’. 4 Directors received training in Board meetings on: ’Board stakeholder engagement and management’ and various ESG development updates. Directors received additional training through their attendance at forums such as the Chairman's Forum, Remuneration Committee Chairs' Forum and the Non- Executive Director Summit. 5 Global mandatory training, issued to all Directors, mirrored training undertaken by all employees, including senior management. This included: management of risk under the risk management framework; cybersecurity risk; health, safety and well-being; sustainability; financial crime, including understanding money laundering, terrorist financing, tax transparency, sanctions, fraud and bribery and corruption risks; our values, including workplace harassment; and data privacy and data literacy. 6 Ann Godbehere and Brendan Nelson, who joined the Board effective 1 September 2023, and Swee Lian Teo, who joined the Board effective 1 October 2023, only participated in training modules that were available to them since their respective joining dates. HSBC Holdings plc Annual Report and Accounts 2023 253 Corporate governance Board matters considered and shareholder engagement During 2023, the Board remained focused on HSBC’s strategic direction, overseeing performance, and risk. It considered performance against financial and other strategic objectives, key business challenges, emerging risks, business development, investor relations and the Group’s relationships with its stakeholders. The end- to-end governance framework facilitated discussion on strategy and performance by each of the global businesses and across the principal geographical areas, which enabled the Board to support executive management with its delivery of the Group’s strategy. Key areas of focus The Board’s key areas of focus in 2023 are set out by theme below. Strategy and business performance The Group remains focused on building a sustainable platform for growth by increasing returns for investors, enhancing customer service, and creating capacity for future investment. The Board reviewed progress within the Group’s global businesses and regions against its four strategic pillars: Focus, Digitise, Energise and Transition. At each Board meeting in 2023, the Board discussed the Group’s strategic performance and opportunities to track strategic execution and delivery. Environmental, social and governance In 2020, the Group announced a climate ambition to align its financed emissions to net zero by 2050, and to become net zero in its own operations and supply chain by 2030. The Group aims to achieve this by supporting clients’ transition to a net zero carbon economy and focusing on sustainable finance opportunities, as well as by reducing the carbon emissions in its own operations. The Board takes overall responsibility for ESG strategy, overseeing executive management in developing the approach, execution and associated reporting. The Board considered whether to establish a Board committee dedicated to ESG issues, but instead decided that the best way to support the oversight and delivery of the Group’s climate ambition and ESG strategy was to retain governance at Board level. The GEC further enhanced its governance model of ESG matters with the introduction of a new Sustainability Execution Committee and supporting forums. These support senior management in the operationalisation of the Group’s sustainability strategy, through the oversight of the sustainability execution programme. For further details of the Sustainability Execution Committee and the sustainability execution programme, see page 88. In 2023, the Board oversaw the implementation of ESG strategy through regular dashboard reports and detailed updates including: review and approval of the net zero transition plan, deep dives on the sustainability execution programme, reviews of net zero-aligned policies and climate-aligned financing initiatives. Financial decisions The Board and its dedicated committees approved key financial decisions throughout the year, including the Annual Report and Accounts 2022, the Interim Report 2023 and the first quarter and the third quarter Earnings Releases. At the end of 2022, the Board approved the 2023 financial resource plan. The Board monitored the Group’s performance against the approved plan, as well as the plans of each of the global businesses. The Board also approved the renewal of the various debt issuance programmes. In January 2024, the Board approved the financial resource plan for 2024. The Board adopted a dividend policy designed to provide sustainable cash dividends, while retaining the flexibility to invest and grow the business in the future, supplemented by additional shareholder distributions, if appropriate. For the financial year 2023, the Group reverted to paying quarterly dividends, and achieved a dividend payout ratio of 50% of reported earnings per ordinary share (’EPS’), in line with our published target for 2023 and 2024. EPS for this purpose excludes material notable items and related impacts, including the sale of our retail banking operations in France, the planned sale of the banking business in Canada and the acquisition of SVB UK. In addition to dividend payments, HSBC announced share buy-backs of up to $2bn each on 2 May 2023 and 1 August 2023, and a further share buy-back of up to $3bn on 30 October 2023, bringing the total announced for 2023 to $7bn. On 21 February 2023, an interim dividend of $0.23 per share for the 2022 full-year was announced, followed by interim dividends of $0.10 each on 2 May 2023, 1 August 2023 and 30 October 2023. For further details of dividend payments, see page 435. Risk, regulatory and legal considerations The Board, advised by the Group Risk Committee, promotes a strong risk governance culture that shapes the Group’s risk appetite and supports the maintenance of a strong risk management framework, giving consideration to the measurement, evaluation, acceptance and management of risks, including emerging risks. The Board considered the Group’s approach to risk including its regulatory obligations. A number of key frameworks, control documents, core processes and legal responsibilities were also reviewed and approved as required by the Board and/or its relevant committees. These included: – the Group’s risk appetite framework and risk appetite statement; – the individual liquidity adequacy assessment process; – the individual capital adequacy assessment process; – the Group’s obligations under the Modern Slavery Act and approval of the Modern Slavery and Human Trafficking Statement; – review and approval of the self-assessment to address the BoE's Resolvability Assessment Framework; – review and approval of the Group’s risk data aggregation and risk reporting framework aligned to the Basel Committee on Banking Supervision 239 Principles; – review of the latest PRA Operational Resilience self-assessment regulatory submission; – annual review and approval of the internal controls framework; and – the revised terms of reference for the Board and Board committees. The Board also reviewed and monitored the implications of geopolitical and macroeconomic developments during the year, both directly and by way of updates from the Group Risk Committee, and received regular updates on the Group's risk profile, including in relation to financial crime risk. Technology Throughout the year, the Board received detailed updates on technology and innovation from the Group Chief Operating Officer, including on the implementation of the technology strategy and key strategic business initiatives. Following a detailed update at the Board meeting in May 2023, at the Board’s request, management engaged a third party professional services firm to review the technology strategy and provide industry and peer insights. The Board received a number of updates on the review during the second half of 2023, and recommendations were presented at the December 2023 Board meeting. Members of the Board were also closely involved in the hiring process for the new Group Chief Information Officer, who will join the Group at the end of February 2024. Report of the Directors | Corporate governance report 254 HSBC Holdings plc Annual Report and Accounts 2023 In addition, the Technology Governance Working Group continued to oversee the Group's governance of technology, and supported connectivity with the principal subsidiaries on key technology initiatives. From 1 March 2024, the Technology Governance Working Group will be demised and the Group Technology Committee will be established on the same date. People and culture The Board continued to dedicate time in its meetings to discuss people-related and culture-related issues, with these topics remaining an important part of its focus. Each scheduled Board meeting begins with a ’culture moment’, which helps to ensure that the right cultural tone is set from the top, and sets the right cultural tone for Board discussion. To help raise its awareness of employee and other stakeholder perspectives, Board meetings and dedicated reports feature insights into behaviours within the Group, which demonstrate alignment to its purpose and values. Board papers highlight relevant stakeholder considerations, including in connection with employees. The Board also gains valuable cultural insights through its many personal interactions with the workforce and other stakeholders. For further details see ’Board decision making and engagement with stakeholders’ on page 20. The Board also learns of people and culture matters by way of presentations at the Chairman’s Forum. The principal subsidiary chairs report on their respective approaches to workforce engagement as well as what they have learned from such engagements and other cultural insights. The Board also receives cultural insights from the all- employee Snapshot survey and broader reporting, which provide key data indicators, including on people's behaviours, sentiment and business outcomes. Through the work of the committees, the Board is also able to monitor how the Group’s culture is working in practice by receiving people-related reports covering whistleblowing, conduct and investigations. Board engagement with management and the wider workforce continued to remain a strong area of attention, particularly with the ongoing activities carried out by the dedicated workforce engagement non-executive Director. For further details of the work carried out by the workforce engagement non-executive Director, see page 257. Governance The Board continued to oversee the governance, smooth operation and oversight of the Group and its principal and material subsidiaries, including monitoring compliance with the UK Corporate Governance Code, the Hong Kong Corporate Governance Code and the Companies Act 2006. Governance featured prominently in the Board agendas for the year and helped to shape strategic direction and decision taking on key issues. To see how the Board considered principal decisions in relation to our strategy, see ’Principal strategic decisions’ on pages 22 and 23. The Board and senior management continued to support further improvements to various governance initiatives to encourage simplification and promote effective decision making in the business. Guidance and training for Board and committee paper templates took place across global businesses and functions throughout the course of the year to ensure a consistent approach for writing papers. In addition, to drive our simplification agenda, the Group-wide delegations of authority framework was reviewed and standardised, allowing for more efficient signing and execution of contracts and other documentation by directors and senior management across all entities. In 2023, Jackson Tai retired as an independent non-executive Director. On 1 January 2023, Georges Elhedery joined the Board as Group Chief Financial Officer, and the following were appointed as independent non-executive Directors: Kalpana Morparia on 1 March 2023; Ann Godbehere and Brendan Nelson on 1 September 2023; and Swee Lian Teo on 1 October 2023. The Board, supported by the Nomination & Corporate Governance Committee, reviews the skills and experience of the Board on an ongoing basis. This ensures that the Board and its committees comprise the necessary skills, diversity, experience and competencies to discharge their responsibilities effectively. For further details of the review and changes to the Board, see the Nomination & Corporate Governance report on page 262. For further details of diversity of the Board, see page 247. HSBC Holdings plc Annual Report and Accounts 2023 255 Corporate governance Board engagements with shareholders In 2023, the Group Chairman and Group Chief Executive held a Q&A session with retail shareholders as part of the Informal Shareholders’ Meeting in Hong Kong, and the Board held a Q&A session with shareholders as part of the 2023 AGM in the UK. Board members remained responsive to shareholder requests, and were particularly active following the 2023 AGM poll vote result. They continued to engage in constructive dialogue with top investors, including Ping An Asset Management Co. Ltd. The Group Chairman and the Senior Independent Director, often with the Group Company Secretary and Chief Governance Officer, engaged with a number of our large institutional investors in 16 meetings, including a large group gathering held with the members of The Investor Forum. The Group Chief Executive and the Group Chief Financial Officer, together and separately, attended over 100 meetings with investors. Key topics included our financial performance, updates on strategy and market presence, geopolitical risks and the macroeconomic outlook in key geographies. For further details of the Group Remuneration Committee Chair’s engagements with key investors and proxy advisory firms, and how they were taken into account by the Group Remuneration Committee in its decision making, see the Directors’ remuneration report on page 279. For further details of how the Board engaged with shareholders during 2023, see ’Board decision making and engagement with stakeholders’ on page 20. Board matters considered in 2023 Main topic Sub-topic Meetings at which topics were discussed1 Jan Feb Mar May Jun Jul Sep Nov Dec Strategy Group strategy ô l l l l l l l l Regional strategy/global business strategy l l l l l l l l l Environmental, social, governance ô l l l l l l l l Business and financial performance Region/global business l l ô l l l l l l Financial performance l l l l l l l ô l Financial Results and accounts l l ô ô ô l ô ô ô Dividends l l ô ô ô l ô ô ô Group financial resource planning ô ô ô ô l ô l ô ô Risk Risk function l l ô l l l l ô l Risk appetite l ô ô ô ô l ô ô ô Capital and liquidity adequacy ô ô l l l ô ô ô ô Regulatory Regulatory and legal matters2 l l l l l l l ô l Regulatory matters with regulators in attendance3 ô ô ô ô l ô l ô ô External External insights ô ô ô ô l ô l ô ô Technology Strategic and operational l ô ô l ô ô l l l People and culture Purpose, values and engagement l l ô l l l l ô l Governance Policies and terms of reference ô ô ô ô ô l ô ô ô Board/committee effectiveness l ô ô ô ô l ô ô l Appointment and succession ô l l ô ô l l ô l Conflicts of interest ô l ô l ô l l ô l Stakeholder/workforce engagement ô l ô l l l l ô l Delegation of authority l l ô ô ô ô l ô ô AGM and resolutions l l l l ô ô l ô ô l Matter considered ô Matter not considered 1 No Board meetings were held during April, August and October 2023. 2 Includes recovery and resolution planning, modern slavery and human trafficking, UK regulatory activities, and listing authority renewals. 3 Meetings attended by members of the Prudential Regulation Authority and the Financial Conduct Authority. Report of the Directors | Corporate governance report 256 HSBC Holdings plc Annual Report and Accounts 2023 Board stakeholder and workforce engagement The Board is committed to engaging with colleagues, which takes place in a two-way dialogue in a variety of forums. This helps build the Board’s understanding of key themes and topics that are important to the workforce. Since his appointment as dedicated workforce engagement non- executive Director in 2022, and in line with the Board's expectation of the role, José Meade has helped deliver a progressive programme of engagements throughout 2023. Outcomes from these engagements have helped inform discussions and decision making in the Boardroom, by taking into account the employee voice on related key themes and topics. His dedicated role does not preclude other Board members from engaging with the workforce. It remains the responsibility of all Directors to consider diverse stakeholder views, including employees, across the Group. For more examples of how the Board has engaged with the workforce and other stakeholders, see ‘Board decision making and engagement with stakeholders’ on page 20. Workforce engagement programme A structured workforce engagement programme has been in place throughout 2023 with a focus on topics aligned to the Group’s four strategic pillars. The programme was structured around the Board’s priorities and agenda in 2023. These included in-person engagements when the Board travelled to different regions for Board meetings, which were highly valued by colleagues and Board members alike. The engagements formed the bases of José Meade’s reports to the Directors, aligned to key Board agenda items including those in the geographies in which the Board met. Further engagement events, town halls and meetings with the workforce were scheduled with Board members based on their locality or coincidental travel throughout the year. The engagement events were held both at scale and through more targeted dialogue in smaller groups, to accommodate the breadth of experience, geographical spread and range of seniority of our colleagues. These engagements were designed to promote open dialogue and two-way discussions between the Board and employees, allowing the Board to gain valuable insight on employee perspectives, and in turn inform its deliberations in decision making. February March May June July September November December Cost of living crisis support International Women’s Day Pay, reward and performance Strategy and performance Branch visit HSBC graduate insights Mexico town hall Hyderabad office event ↓ ↓ ↓ ↓ ↓ ↓ ↓ ↓ Audience London-based colleagues Group-wide colleagues Group-wide colleagues Managing Directors Local branch colleagues US-based graduates Mexico and Latin America- based colleagues Hyderabad and India-based colleagues Location London, UK Various global and local events Birmingham, UK, videoconference Videoconference Hong Kong New York, US, and videoconference Mexico City, Mexico, and videoconference In person visit to Hyderabad, India office and videoconference José Meade’s connectivity with the employee resource groups formed part of the workforce engagement programme. He took part in the annual employee resource group summit in September to discuss his observations since taking on the workforce engagement role, and to hear feedback on how the Board could enhance support for employee resource groups. José also participated in meetings with the employee resource group to which he is aligned, UK Nurture. This helped him better understand their successes, the value of the network and agree how often and through which means he would connect with his employee resource group in 2024. During the year, the Board acknowledged that relevant aspects of Board discussions on workforce engagement activities and matters, informed by the employee voice, needed to make their way back to management. In this way, relevant views could be taken into consideration when progressing workforce-related matters at the executive level. To facilitate this, José Meade committed to attending the GEC and the Chairman’s Forum to discuss the key themes and outcomes from the 2023 workforce engagements. Feedback gained from the GEC session attended in November 2023 re-emphasised the value colleagues put on the two-way dialogue with Board members. This feedback helped shape the 2024 workforce engagement programme. The Board also regularly considers other forms of employee engagement to help be informed of initiatives and sentiment, and to plan for future engagement activities. The Chairman’s Forum, held in December 2023, also discussed employee feedback gained through the Group’s principal subsidiaries. José Meade presented to the Chairman’s Forum an overview of workforce engagement over the course of 2023 and key themes arising. He will continue to discuss workforce engagement with the GEC and the Chairman’s Forum during 2024. HSBC Holdings plc Annual Report and Accounts 2023 257 Corporate governance Workforce engagement non-executive Director "The value of Board-employee engagement is rooted in the Board’s openness to challenge and ability to adopt new approaches in response." Q&A with José Meade Workforce engagement non-executive Director Q: Since being appointed as the workforce engagement non-executive Director in 2022, what insights have you gained? A: When I reflect on the Board’s engagement with the workforce over the year, I am proud of the evolution of our approach since I took on the role. Having a dedicated programme aligned to Board priorities over the course of the year has enabled me to report to the Board on the most pertinent matters depending on our location and agenda. The year 2023 was a very productive year with respect to engaging with our workforce. I met with a large number of our colleagues on a regular basis during the year, and each event has provided me with different and equally valuable insights. I have learnt the value colleagues place on having two-way dialogue with the Board. Linked to this is our non-executive Director engagement with our employee resource groups. Each non-executive Director is aligned to one of our employee resource groups, and we listened to feedback that a more structured approach to non- executive Director engagement would be valuable during 2024. As a result, we held dedicated meetings for non-executive Directors to meet with their employee resource groups to agree the cadence for engagement and priorities in 2024. Q: What are your reflections on the value of Board- employee engagement at HSBC? A: Firstly, at every employee engagement event I attended during the year, I was able to hear directly from our colleagues – that is an irreplaceable and extremely valuable insight to gain as a non-executive Director. Having the employee voice in the Boardroom is crucial in equipping Directors with important context to better understand successes and challenges felt throughout the Group. It then helps empower the Board to make better recommendations and feedback to executive management with employee sentiment front-of-mind. At one of our branch visits, I was able to experience first-hand the level of care put into every single one of our clients, which was extraordinary. Following the visit, we got great feedback from the branch team that they were grateful for our time in recognising how our colleagues put customers at the centre of their work, and they said that our front-line staff were highly motivated by our kind words and encouragement. The value of Board-employee engagement is rooted in the Board’s openness to challenge and ability to adopt new approaches in response. The key outcomes we get from all our engagement events are discussed not only in the Boardroom, but with executive management and between our principal subsidiaries as well. It is this circular communication that is so important to make sure not only is the employee voice heard, but it forms a backdrop for Board and executive discussions and decisions. For instance, it was interesting to hear from graduates the importance of our hybrid working strategy to them, which was seen as a differentiator compared with competitors. Our Chairman’s Forum discussed each of our regions’ respective workforce engagement programmes in December, which was an invaluable session to understand regional differences in sentiment and where subsidiary Directors were focusing their time for 2024 activities. Q: Where do you see opportunities for 2024? A: We plan to build on the successes of 2023 and engage with more colleagues over the course of 2024. Our workforce engagement plan will continue to be guided by our Board priorities for the year and tightly aligned to our four strategic pillars. The plan incorporates, where possible, participation at colleague events already scheduled, which we will supplement with targeted engagement events. We also plan to enhance the visibility of management colleagues in critical roles or on executive committee succession plans to boards across the Group. Lastly, we will align Board member scheduled travel plans to workforce engagement activities in various regions, as well as work to identify how to engage with the workforce in geographies where Board travel is not envisaged. Mexico Town Hall, Mexico City, November 2023 "The insight and reflections provided by the speakers was extremely useful as we had a mixture of local and global level input." Report of the Directors | Corporate governance report 258 HSBC Holdings plc Annual Report and Accounts 2023 Workforce engagement non-executive Director activities during 2023 In 2023, José Meade undertook a variety of engagements in his role including: Mexico – Attended the annual Leones event in Quintana Roo, Mexico. – Approximately 400 employees participated across businesses and functions. – This event recognised our top performers in HSBC Mexico. Hong Kong – Visited employees at the HSBC Hong Kong flagship branch and the K11 Atelier Wealth Centre (which opened in October 2021 to provide high net worth wealth management services) to understand their perspective on working life. UK – Participated in an in-person meeting with a small group of local managers in London to discuss the cost of living crisis in the UK. – The group discussed the support that HSBC had provided to its employees in response, and considered ideas for further support. US – Met with US-based graduates both in-person and virtually to hear the perceptions of the next generation of talent at HSBC. – Views were sought on topics such as expectation versus the reality of what it is like to work at HSBC, personal development opportunities and hybrid working successes and challenges. Türkiye – Participated in an in-person meeting with a diverse group of colleagues to share experiences and views on socio- economic challenges, career development, and pay and performance. Global employee resource group summit – Attended the virtual annual employee resource group summit and heard about the groups' leaders‘ successes, challenges and their respective look ahead for 2024. – Connected with employee resource group representatives across multiple regions in the Group. India – Spent a day at our Hyderabad office learning about the history of our presence in India and the impact of our global service centres, as well as discussing the future of the workforce and how to create a supportive environment for professional growth. – Also participated alongside nearly 5,000 colleagues in a ‘Digitise’ town hall, which discussed HSBC’s digital strategy and the role played by colleagues in India. Engagement highlights Global Service Centre office visit, Hyderabad, December 2023 68 9,571 Virtual/physical sessions attended by non-executive Directors Number of employees engaged virtually/physically 41 8,282 Virtual/physical sessions attended by workforce engagement non-executive Director Number of employees engaged virtually/physically by workforce engagement non-executive Director 8 69% Countries of engagement Highest employee engagement survey response HSBC Holdings plc Annual Report and Accounts 2023 259 Corporate governance Board and committee effectiveness, performance and accountability The Board and its committees are committed to regular, independent evaluation of their effectiveness. In 2023, the Board performance review comprised an externally facilitated evaluation in accordance with the UK Corporate Governance Code. During 2023, the Nomination & Corporate Governance Committee oversaw the process to appoint an independent service provider to evaluate the Board and its committees' effectiveness and performance. The Group Chairman led a formal tender process, with the support of the Group Company Secretary and Chief Governance Officer, which included a desktop review of proposals and a panel interview with prospective firms to discuss their approach to the evaluation. The panel interviews included the Group Chairman, three non-executive Directors, and the Group Company Secretary and Chief Governance Officer. Following this process, and based on the recommendation of the panel, the Nomination & Corporate Governance Committee appointed Independent Board Evaluation (‘IBE’) to conduct the Board review in 2023. IBE is an independent external service provider with no other connection with the Group or any individual Directors. Board effectiveness review format A comprehensive brief was provided to IBE by the Group Chairman and Company Secretary and Chief Governance Officer. The review took the form of detailed interviews with every Board member, regular attendees of the relevant meetings and key advisers. IBE also observed the Board and its committees at the September 2023 meetings and reviewed the meeting materials. A report was compiled by IBE based on the information and views supplied by those interviewed and IBE’s observations from the September 2023 Board and committee meetings. Board and committee evaluation process The Board made good progress against all of the action points identified during the 2022 evaluation. In particular: – Management developed a new key performance indicator architecture relating to performance, execution and risk management as well as other key value drivers. – The Sustainability Execution Committee, a management forum, was established to provide greater focus and accountability for progress against the Group’s ESG deliverables and milestones. – An independent review of the Group’s technology strategy was performed by a third party, with the outcomes, including lessons learned, and next steps discussed and agreed by the Board. – The Board held focused sessions on prioritisation and simplification. – Stakeholder engagement plans were structured around the Board’s visits to Paris, Hong Kong, New York and India during the year, and broader non-executive Director travel. These plans provided the Board with the opportunity to engage with the full spectrum of stakeholder groups, including employees. Further details of the Board’s engagement activities are detailed on page 21. – Continued training and guidance was provided to key paper authors and contributors to reinforce the importance of timely, balanced and accurate reporting to the Board. Report of the Directors | Corporate governance report 260 HSBC Holdings plc Annual Report and Accounts 2023 Evaluation brief provided to IBE Board and committee meetings observed by IBE One-to-one interviews conducted Reports presented to the Board and committees and actions for 2024 agreed Observations discussed with the Group Chairman, Board and committee chairs Appointed IBE following competitive tender process Findings and recommendations Overall, the review concluded that the Board was performing well as an engaged, global governance body. The Group Chairman is regarded as an excellent leader of the Board, fostering a culture of openness, with encouragement for Board members to speak freely on any issue. In particular, the effectiveness review highlighted that the Board performed well in various areas including: – Stakeholder accountability: The Board takes its responsibilities towards stakeholders seriously, positively and sincerely. – Board culture: The culture of the Board is regarded as a key strength. Preserving and sustaining this has been a key factor in considering candidates for appointment to the Board. Communication is open and transparent. – Relationship with senior management: Board members value the openness between, and access to, the senior management team. – Committee chairs: Chairs of committees are well supported by the respective functional teams, including Risk, Finance, HR and Corporate Governance and Secretariat. – Board resources and support: The Board appreciates the strategic advice and counsel it receives on governance issues from the Group Company Secretary and Chief Governance Officer and her team. IBE presented its report to the December 2023 Board meeting, and was present for the Board’s discussion, led by the Group Chairman, on the findings identified through IBE’s review. Among other recommendations for consideration that could strengthen the end-to- end governance of the Board and its committees, the Board focused on the following three specific themes: – Effecting change: A need for greater focus was identified in relation to the prioritisation of execution, with clearer and more timely progress reporting to the Board, in particular around challenges faced. – Board information: Reporting to the Board requires more succinct narrative and relevant key performance indicators. It was reiterated that the Board would continue to hold the Group Chief Executive and members of the GEC accountable for the quality of reporting to the Board. – Technology governance: Strengthened governance mechanisms were agreed to support the Board’s review and challenge of technology-related deliverables and monitoring of delivery against the Group-wide technology strategy. Further details of the findings and agreed actions to be taken can be found in the table below. Completion of these actions will be monitored by the Board throughout 2024. The additional areas of feedback gathered from members of the Board and regular attendees will be taken forward at the discretion of the Group Chairman based on his determination of their impact on the overall effectiveness of the Board and its committees. Similar discussions were led by each of the Board committee chairs in their respective January 2024 meetings. Progress against these actions will be included in the Annual Report and Accounts 2024. Summary of 2023 Board effectiveness findings and recommendations for action: Findings from the evaluation Agreed actions Effecting change – Although the Board is performing well, there are areas where, working with management, enhancements could be made to drive even greater value. – This would reinforce a clear understanding of priorities and enhanced clarity of management reporting, particularly in relation to areas of challenge in, or delay to, execution of those key deliverables. – Greater rigour was required in relation to the communication of, accountability for, and execution against the Board’s feedback. – Consideration will be given to the frequency and format of strategic updates to the Board. – The Group Company Secretary and Chief Governance Officer will support the Group Chairman and committee chairs to ensure that there is enhanced consolidation of related discussion and actions across Board and the committees, including clearer articulation of expected outcomes. – The Group Chief Executive will drive an increased focus in addressing the Board’s feedback within the wider management team. Board information – The volume of information provided to the Board and to committee meetings during the year was a common area of discussion during the review. Enhanced, dynamic and well-timed reporting of information to the Board is required. – Although the Board welcomed the thoroughness of management’s review of key performance indicators, these required to be refined for Board purposes to ensure better alignment with paper narrative to ensure a clear, consistent basis for Board reporting. – The Board has commissioned a training programme, to be developed and delivered by the Group Company Secretary and Chief Governance Officer, to further support senior leaders and other subject matter experts on reporting to, and interactions with, the Board. – A condensed key performance indicators framework was approved by the Board at its meeting in January 2024 and will be cascaded throughout the Group by the Group Chief Executive, the Group Chief Financial Officer and the Group Company Secretary and Chief Governance Officer. Technology governance – Although the Board welcomed the important and valuable role of the Technology Governance Working Group, there is still more to do to develop a holistic oversight of technology at Board-level. – It was agreed that the future approach to oversight of technology-related matters needed to complement the existing responsibilities of the Board, Group Risk Committee, Group Audit Committee and subsidiary boards. – A formal Board-level governance committee consisting of non- executive Directors – the Group Technology Committee – will be established to provide oversight of technology-related matters across the Group. This will be chaired by Eileen Murray and take effect from 1 March 2024. – The existing Technology Governance Working Group will be demised at that time. HSBC Holdings plc Annual Report and Accounts 2023 261 Corporate governance Nomination & Corporate Governance Committee "I am confident that the changes to the composition of the Board over the past year have further strengthened the Board’s collective knowledge and experience required to oversee, challenge and support management." Mark E Tucker Chair Nomination & Corporate Governance Committee Membership Key responsibilities Member since Meeting attendance in 2023 The Committee’s key responsibilities include: – overseeing and monitoring the corporate governance framework of the Group and ensuring that this is consistent with best practice; – overseeing succession planning and leading the process for identifying and nominating candidates for appointment to the Board and its committees; and – overseeing succession planning and development for the Group Executive Committee and other senior executives. Mark Tucker (Chair) Oct 2017 9/9 Geraldine Buckingham May 2022 9/9 Rachel Duan Sep 2021 9/9 Dame Carolyn Fairbairn1 Sep 2021 8/9 James Forese May 2020 9/9 Ann Godbehere2 Sep 2023 2/2 Steven Guggenheimer May 2020 9/9 José Antonio Meade Kuribreña Apr 2019 9/9 Kalpana Morparia3 Mar 2023 6/6 Eileen Murray4 Jul 2020 8/9 Brendan Nelson2 Sep 2023 2/2 David Nish Apr 2018 9/9 Jackson Tai5 Apr 2018 5/5 Swee Lian Teo6 Oct 2023 1/1 1 Dame Carolyn Fairbairn was unable to attend the January meeting due to a prior commitment. 2 Ann Godbehere and Brendan Nelson joined the Committee on their appointments to the Board on 1 September 2023. 3 Kalpana Morparia joined the Committee on her appointment to the Board on 31 March 2023. 4 Eileen Murray was unable to attend the September meeting due to a prior commitment. 5 Jackson Tai retired from the Board on 5 May 2023. 6 Swee Lian Teo joined the Committee on her appointment to the Board on 1 October 2023. I am pleased to present the Nomination & Corporate Governance Committee report, which provides an overview of the Committee’s activities during 2023. I signalled in last year’s report that succession for key roles on the Board would be a priority for the Committee through 2023, and we announced in early December the successors for the roles of Senior Independent Director and Chair of the Group Audit Committee. This represented the culmination of considerable work by the Committee over a number of months. As announced in December, David Nish confirmed his plans to retire from the Board at the conclusion of our AGM in May 2024. Brendan Nelson will succeed David as Chair of the Group Audit Committee with effect from 21 February 2024, and Ann Godbehere will succeed him as Senior Independent Director with effect from the conclusion of the 2024 AGM. On behalf of the Board, I want to take this opportunity to thank David for his significant commitment and contribution to HSBC, particularly in his role as Chair of the Group Audit Committee, and for the valuable counsel he has provided to the Board and to me personally. You can read more on the Committee’s work on these appointments later in this report. We also welcomed Kalpana Morparia and Swee Lian Teo and, together with Ann and Brendan’s appointments, I am confident that the changes to the composition of the Board over the past year have further strengthened its collective knowledge and experience required to oversee, challenge and support management. As a result of the changes to the Board during 2023, our year-end 2023 target of at least 40% female representation was achieved. We are committed to maintaining this at or above 40% going forward. More broadly, we remain committed to ensuring the compositions of the Board and senior management reflect the wider workforce and communities in which we operate, and you can read more on our efforts this year on page 313. The annual review of the performance of the Board and its committees is a critical part of ensuring that our governance practices are aligned with best practice and are working effectively. Independent Board Evaluation conducted the 2023 review for the Board and its committees, and its findings and agreed actions can be found on pages 260 to 261. Report of the Directors | Corporate governance report | Board committees 262 HSBC Holdings plc Annual Report and Accounts 2023 These actions included the decision to establish the Group Technology Committee, which was discussed by the Committee. Further information on this new Board-level committee is set out on page 252. In addition, the Committee reviewed the approach to the Group’s governance of developing areas such as ESG and AI, and will continue to focus on whether these remain appropriate and forward- looking as external standards and practices develop. There have been numerous consultations issued over 2023, aimed at improving the effectiveness of the UK audit, governance and regulatory regimes. Given their potential impact, the Committee received updates on these and their potential implications on governance arrangements. The Committee also reviewed and provided input to the Group’s responses to relevant consultations, including the Financial Reporting Council's ('FRC') consultation on proposed revisions to the UK Corporate Governance Code. The Committee continues to monitor potential future developments in the UK, Hong Kong and elsewhere to ensure that the impact of any proposed governance and regulatory changes on HSBC and its international operations is considered. As we look ahead to the remainder of 2024, the Committee will look to oversee and enhance the succession pipeline at Board and senior management level, as well as efforts to deliver consistent standards of governance best practice across the Group. Mark E Tucker Group Chairman Committee governance The Group Chief Executive, the Group Chief Human Resources Officer, and the Group Head of Talent routinely and selectively attended Committee meetings. The Group Company Secretary and Chief Governance Officer attends all Committee meetings and supports the Group Chairman in ensuring that the Committee fulfils its governance responsibilities. Russell Reynolds Associates supported the Committee and the management team in relation to Board succession planning and appointments. It also provides support to management in relation to senior management succession, development and recruitment. It regularly and selectively attended meetings during the year, and has no other connection with the Group or members of the Board. Appointment and re-election of Directors A rigorous selection process is followed for the appointment of Directors. Appointments are made on merit and candidates are considered against objective criteria, and with regard to the benefits of a diverse Board. Appointments are made in accordance with HSBC Holdings’ Articles of Association. The Board may at any time appoint any person as a Director or secretary, either to fill a vacancy or as an additional officer. The Board may appoint any Director or secretary to hold any employment or executive office and may revoke or terminate any such appointment. Non-executive Directors are appointed for an initial three-year term and, subject to continued satisfactory performance based upon an assessment by the Group Chairman and the Committee, are proposed for re-election by shareholders at each AGM. They typically serve two three-year terms, with any individual's appointment beyond six years to be for a rolling one-year term and subject to thorough review and challenge with reference to the needs of the Board. Where non-executive Directors are appointed beyond six years, an explanation will be provided in the Annual Report and Accounts. Shareholders vote at each AGM on whether to elect and re-elect individual Directors. All Directors that stood for election and re- election at the 2023 AGM were elected and re-elected by shareholders. Non-executive Director commitments The terms and conditions of the appointments of non-executive Directors are set out in a letter of appointment, which includes the expectations of them, and the estimated time required to perform their role. Letters of appointment of each non-executive Director are available for inspection at the registered office of HSBC Holdings. Non-executive Directors serving on the Board and as a member of any committees are expected to serve up to 75 days per annum. The Senior Independent Director is expected to serve an additional 30 days per annum. Those Directors who also chair a large committee are expected to commit up to 100 days per annum, with the Group Risk Committee Chair expected to commit up to 150 days per annum. Any additional time commitment required of non-executive Directors in connection with Board and committee activities is confirmed to them separately. Board approval is required for any non-executive Director’s external commitments, with consideration given to their total time commitments, potential conflicts of interest, and regulatory and investor expectations. HSBC Holdings plc Annual Report and Accounts 2023 263 Corporate governance Board composition and succession During 2023, the compositions of the Board and its committees were reviewed, with assessments focused on the skills, knowledge and experience necessary to oversee, challenge and support management in the achievement of the Group’s strategic and business objectives. The assessments were focused on the Board, both collectively and as individual members. The Committee discussed succession planning for key roles on the Board and committees, including the roles of Senior Independent Director and Chair of the Group Audit Committee. The recruitment process for the new Directors provided an opportunity to add significant executive experience in banking. It also provided an opportunity to add deep business and cultural expertise across Asia that the Board had previously identified as a priority, and to meet our target for a woman to hold at least one of the senior Board positions by the end of 2025. In line with these objectives, a list of potential candidates was identified and considered by the Committee. Members of the Board, including the Group Chief Executive and Group Chief Financial Officer, met with potential candidates and their feedback helped inform the Committee’s discussions and recommendations to the Board. The Board then approved the Committee’s recommendations to appoint Kalpana Morparia with effect from 1 March 2023, Ann Godbehere and Brendan Nelson with effect from 1 September 2023, and Swee Lian Teo with effect from 1 October 2023. Kalpana Morparia and Swee Lian Teo each bring significant banking, risk and regulatory experience in Asia. Ann’s deep financial acumen and extensive financial services experience gained over a 30-year career, as well as her extensive large, public-listed company board experience as a non-executive director, makes her the right successor for the role of Senior Independent Director. Brendan’s UK and international financial expertise and significant experience as statutory audit partner, and as audit committee chair at UK-listed companies, as well as previously being President of the Institute of Chartered Accountants of Scotland, will be particularly valuable in the leadership of the Group Audit Committee given the evolving audit, regulatory and disclosure environment in which the Group operates. Their biographies can be found on pages 239 to 243. Following the annual review of the Board skills matrix, the Committee remains focused on identifying candidates for future appointments with deep business and cultural expertise across Hong Kong and mainland China. The Committee will continue to monitor the market during 2024 for potential candidates for appointment to the Board in both the short and medium term, to ensure that the Board has a pipeline of credible successors. Neither Jackson Tai, who retired from the Board during the year, nor David Nish, who is not offering himself for re-election at the 2024 AGM, have raised concerns about the operation of the Board or the management of the company. Committee composition As part of the decision to establish the Group Technology Committee, when reviewing the Committee composition, it was agreed that Eileen Murray would be appointed as Chair, and Steven Guggenheimer, Kalpana Morparia, Swee Lian Teo and Brendan Nelson would be appointed as members of the Group Technology Committee with effect from 1 March 2024. The Committee also reviewed the composition of the Board committees more broadly to ensure that these remained appropriate and diverse, with consideration of the Board diversity and inclusion policy while utilising the respective skills and expertise of the Board members as set out in the Board skills matrix on page 247. As a result, and in addition to the appointments of members to the Group Technology Committee, it was agreed that Ann Godbehere would be appointed to the Group Audit Committee with effect from 21 February 2024. Board diversity The Board recognises the importance of gender, social and ethnic diversity, and the benefits diversity brings to Board effectiveness. Diversity is taken into account when considering succession plans and appointments at both Board and senior management level, as well as more broadly across the Group. The Committee also considered the diversity and representation on Board committees when reviewing their composition. At the end of 2023, the Board had 47% female representation, with seven female Board members out of 15, ahead of the year-end 2025 target set by the FTSE Women Leaders Review. Ann Godbehere’s appointment as Senior Independent Director will mean the Board achieves the FTSE Women Leaders Review target that at least one of the senior Board positions of Chair, Chief Executive Officer, Senior Independent Director or Chief Financial Officer is held by a woman. In accordance with the UK Listing Rules, the Board is on track to be compliant with these diversity targets and will be fully compliant with effect from the conclusion of the 2024 AGM. Beyond gender, the Board continues to exceed the Parker Review target of having at least one Director of ethnic heritage. However, given the international nature of our business, including our heritage in Asia, the Board has set a target to maintain or improve the current representation of Directors from a diverse ethnic heritage. The Board’s diversity and inclusion policy was updated in December 2023. The policy confirms our commitment to, and also details the approach to achieving, our diversity ambitions. Further details on activities to improve diversity across senior management and the wider workforce, together with representation statistics, can be found from page 76. The Board's diversity and inclusion policy is available on www.hsbc.com/who-we-are/leadership-and-governance/board- responsibilities Independence Independence is a critical component of good corporate governance, and a principle that is applied consistently at both HSBC Holdings and subsidiary level. The Committee has delegated authority from the Board in relation to the assessment of the independence of non- executive Directors. In accordance with the UK and Hong Kong Corporate Governance Codes, the Committee has reviewed and confirmed that all non-executive Directors who have submitted themselves for election and re-election at the AGM are considered to be independent. This conclusion was reached after consideration of all relevant circumstances that are likely to impair, or could appear to impair, independence. In line with the requirements of the Hong Kong Corporate Governance Code, the Committee also reviewed and considered the mechanisms in place to ensure independent views and input are available to the Board. These mechanisms include: – having the appropriate Board and committee structure in place, including rules on the appointment and tenure of non-executive Directors; – facilitating the option of having brokers and external industry experts in attendance at Board meetings during 2023, as well as having representatives from the Group’s key regulators attend Board meetings in relation to specific regulatory items; – ensuring non-executive Directors are entitled to obtain independent professional advice relating to their personal responsibilities as a Director at the Group’s expense; – having terms of reference for each committee and the Board provide authority to engage independent professional advisers; and – holding annual Board and committee effectiveness reviews, with feedback sought from members on the quality of, and access to, independent external advice. Report of the Directors | Corporate governance report | Board committees 264 HSBC Holdings plc Annual Report and Accounts 2023 Senior executive succession and development Following Georges Elhedery’s appointment as Group Chief Financial Officer from 1 January 2023, the Committee monitored and received updates on his induction plan. The succession plans for the Group Executive Committee members were approved by the Committee in December 2023. These reflect continued efforts to support the development and progression of diverse talent and promote the long-term success of the Group, with the gender diversity and proportion of Asian heritage successors improving year on year. The approval of succession plans included future internal and external succession options for the Group Chief Executive, to ensure that the Committee has a robust and actionable plan when required. The Committee also reviewed longer-term internal succession options for the Group Chief Executive to enable the Committee to interact more frequently with high potential and diverse talent in the Group. The Committee continued to receive updates on the development of our talent programme within the Asia-Pacific region. Since its launch in 2020, significant progress has been made towards ensuring that we have a deeper and more diverse leadership bench-strength. Succession plans are more robust, with greater diversity and good succession fulfilment outcomes. Committee evaluation The annual review of the effectiveness of the Board and Board committees, including the Committee, was conducted externally by Independent Board Evaluation for 2023. It determined that the Committee continued to operate effectively, with no specific actions identified for the Committee. Positive feedback was received on the effectiveness of the recruitment processes of new Board members and the succession planning for senior management. Further details of the annual review of the Board and committee effectiveness can be found on pages 260 to 261. Subsidiary governance In line with the subsidiary accountability framework, the Committee continued to oversee the corporate governance and succession arrangements across the principal and material subsidiary portfolio. The Committee also reviewed the succession plans for the principal subsidiary chairs to ensure future successors had the necessary skills and experience to effectively oversee and monitor delivery of the Group’s strategic and business priorities within their territory, in accordance with the Group’s governance expectations. Where a subsidiary was unable to fully comply with the subsidiary accountability framework, the Committee endorsed exceptions, where appropriate, subject to strong rationale, including consideration of local laws and regulations and market practice. Endorsement requests were also subject to thorough review and consideration by the Group Company Secretary and Chief Governance Officer in advance of consideration by the Committee. The Committee reviewed succession plans and oversaw compliance with the Group’s governance expectations of principal and material subsidiaries. The overall quality of succession plans has improved markedly over the past three years, with plans demonstrating a clear focus on strengthening boards’ overall diversity and experience, in line with strategic and business objectives. The Committee continued to support and seek opportunities to enhance subsidiary connectivity, including through the Chairman’s Forum and Remuneration Committee Chairs’ Forum, which regularly brought together the chairs of the principal subsidiaries to discuss common issues, and the Non-Executive Director Summit which brought over 100 non-executive Directors together in Hong Kong in May 2023. Subsidiaries also provided opportunities for internal talent to serve on their boards, following the training that they received through the HSBC Bank Director Programme. The Committee continues to support and look for opportunities to enhance subsidiary connectivity through Non-Executive Director Summits and other engagement forums. Matters considered during 2023 Jan Feb Mar Apr May Jun Jul Sep Dec Board composition and succession Board composition, including succession planning and skills matrices l l l l l l l l l Approval of diversity and inclusion policy ô ô ô ô ô ô ô ô l Executive talent and development Senior executive succession l l ô ô ô l l l l Approval of executive succession plans ô ô ô ô ô ô ô ô l Talent programmes ô ô ô ô ô ô l ô ô Governance Board and committee evaluation l ô l ô ô ô l ô ô Subsidiary governance ô ô ô ô l ô l l l Subsidiary and executive appointments l l ô ô l ô l ô l l Matter considered ô Matter not considered HSBC Holdings plc Annual Report and Accounts 2023 265 Corporate governance Group Audit Committee "Given the uncertain external environment, as well as HSBC's growth ambitions, the GAC will continue to play an important role in monitoring the effectiveness of the control environment." David Nish Chair Group Audit Committee Membership Key responsibilities Member since Meeting attendance in 20231 The Committee’s key responsibilities include: – monitoring and assessing the integrity of the financial statements, formal announcements and regulatory information in relation to the Group’s financial performance, as well as significant accounting judgements; – reviewing the effectiveness of, and ensuring that management has appropriate internal controls over, financial reporting; – reviewing management’s arrangements for compliance with prudential regulatory financial reporting; – reviewing and monitoring the relationship with the external auditor and overseeing its appointment, remuneration and independence; – overseeing the Group’s policies, procedures and arrangements for capturing and responding to whistleblower concerns and ensuring they are operating effectively; and – overseeing the work of Global Internal Audit and monitoring and assessing the effectiveness, performance, resourcing, independence and standing of the function. David Nish (Chair) May 2016 10/10 Rachel Duan2 Apr 2022 9/10 James Forese3 May 2020 7/7 Eileen Murray4 Jun 2022 8/10 Brendan Nelson5 Sep 2023 4/4 Jackson Tai6 Dec 2018 3/3 1 These included two joint meetings with the Group Risk Committee (‘GRC’) and the Technology Governance Working Group. 2 Rachel Duan was unable to join one meeting, a joint meeting with the GRC and Technology Governance Working Group, due to prior a commitment. 3 James Forese rejoined the GAC on 5 May 2023 following his appointment as GRC Chair. 4 Eileen Murray was unable to join two meetings due to prior commitments. 5 Brendan Nelson joined the GAC upon appointment to the Board with effect from 1 September 2023 and has been appointed GAC Chair with effect from 21 February 2024. 6 Jackson Tai retired from the GAC on 5 May 2023 upon his retirement from the Board. I am pleased to introduce the Group Audit Committee (‘GAC’) report setting out the key matters and issues considered in 2023. As well as the GAC’s usual obligations for financial reporting and the associated control environment, the GAC spent significant time on the oversight of the Group's ESG disclosures and improvement of the Group’s regulatory reporting, specifically assurance of the Group’s ESG disclosures for the Annual Report and Accounts 2023 and the net zero transition plan and related policies, which were published in January 2024. Internal financial control also remained a key area of focus for the GAC during 2023. This will continue to be a priority going ahead due to the need for a robust control environment given the ongoing the volume of regulatory- and strategy-driven change across the Group. This included oversight of regulatory and accounting deliverables, such as the enhancement of Finance systems and controls and the progress in the implementation of Basel III. Significant time was also spent at GAC meetings on the positioning and forward-looking financial guidance provided to the market as part of our financial reporting for both the current and prior year, notably in relation to returns, costs and expected credit losses (‘ECL’), including those associated with the Group’s exposure to the China corporate real estate market. Given the uncertain external environment, as well as HSBC’s growth ambitions, the GAC will continue to play an important role in monitoring the effectiveness of the control environment in supporting sustainability of these ambitions. The GAC continued to strengthen our relationships and understanding of issues at the local level through regular information sharing with the principal subsidiary audit committee chairs. This was supplemented with regular meetings with the chairs to discuss key issues, and through their periodic attendance at GAC meetings. I also joined a number of principal subsidiary audit committee meetings throughout the year, which supported connectivity and information flows across the Group. The Group’s whistleblowing arrangements continue to satisfy regulatory obligations. I regularly met the whistleblowing team to discuss material whistleblowing cases, and the progress made in enhancing the Group’s whistleblowing arrangements. The GAC’s performance and effectiveness were reviewed as part of the Board effectiveness review undertaken during the year. I was pleased that the review concluded that the GAC continued to operate effectively, with no material areas for improvement identified. Finally, as announced on 6 December, Brendan Nelson will succeed me as Chair of the GAC following the publication of HSBC’s Annual Report and Accounts 2023 on 21 February 2024. The Board has determined that Brendan’s previous experience, notably as audit chair at NatWest and bp, makes him ideally suited to chair the GAC. David Nish Chair of the Group Audit Committee Report of the Directors | Corporate governance report | Board committees 266 HSBC Holdings plc Annual Report and Accounts 2023 Committee governance The Committee operates under delegated authority from the Board, and advises the Board on matters concerning the Group’s financial reporting requirements. The Committee Chair reports on the key matters and discussions at the subsequent Board meeting, and the Board also receives copies of the Committee agendas and minutes. This supports the Board's oversight of the work carried out by management, Global Internal Audit and PricewaterhouseCoopers LLP (‘PwC‘), as the Group’s statutory auditor. The Nomination & Corporate Governance Committee has confirmed that each member of the Committee is independent according to the criteria from the US Securities and Exchange Commission; and the Committee and individual members continue to possess competence relevant to the banking and broader financial services sector in which the Group operates. The Board has determined that David Nish, Brendan Nelson and Eileen Murray are the audit committee ‘financial experts’ for the purposes of section 407 of the Sarbanes-Oxley Act and have recent and relevant financial experience for the purposes of the UK and Hong Kong Corporate Governance Codes. The Committee Chair continued to engage with various key stakeholders, including regulators such as the UK’s PRA and the Financial Reporting Council, to understand their views, key themes and areas of focus within the broader financial services sector. These included trilateral meetings involving the Group’s external auditor, PwC, and the PRA. The Group Chief Executive, Group Chief Financial Officer, Global Financial Controller, Group Head of Internal Audit, Group Chief Risk and Compliance Officer, Group Company Secretary and Chief Governance Officer and other members of senior management routinely attended meetings of the GAC. The external auditor attended all meetings. The Chair holds regular meetings with management, Global Internal Audit and PwC, as the external auditor, to discuss relevant items as they had arisen during the year outside the formal Committee process. The Committee also regularly meets with the internal and external auditors, without management present. Private discussions are also held with relevant members of senior management, including the Group Chief Financial Officer and Group Chief Risk and Compliance Officer. Matters considered during 2023 Jan Feb Apr Jun Jul Sep Oct Dec Reporting Financial reporting matters including: – review of financial statements, ensuring that disclosures are fair, balanced and understandable – significant accounting judgements – going concern assumptions and viability statement – supplementary regulatory information l l l l l l l l ESG and climate reporting l l l l l l l l Regulatory reporting-related matters including: – oversight of the Group's engagement with PRA-requested skilled person reviews – reports from the principal subsidiaries on progress and learnings in relation to their local remediation efforts – adequacy of resources across Finance and other SME teams to deliver the Group-wide remediation programme l l l l l l l l Certificates from principal subsidiary audit committees ô l ô ô l ô ô ô Control environment Control enhancement programmes l l l l l l l l Group transformation ô ô ô ô l l ô ô Review of deficiencies and effectiveness of internal financial controls l l l l l l l l Internal audit Reports from Global Internal Audit l l l ô l ô l l Audit plan updates, independence and effectiveness l l l ô l ô l l External audit Reports from external audit, including external audit plan l l l l l l l l Appointment, remuneration, non-audit services and effectiveness l l l l ô l l l Compliance Accounting standards and critical accounting policies ô l ô ô l ô l l Corporate governance codes and listing rules ô l ô ô l ô ô ô Whistleblowing Whistleblowing arrangements and effectiveness ô l ô ô ô l ô l l Matter considered ô Matter not considered How the Committee discharged its responsibilities Financial, ESG and climate reporting The GAC is responsible for reviewing the Group’s financial reporting during the year, including the Annual Report and Accounts, Interim Report, quarterly earnings releases, analyst presentations and Pillar 3 disclosures. Furthermore, as an area of expanded assurance, the GAC, supported by the executive-level ESG Committee, provided close oversight of the disclosure risks in relation to ESG and climate reporting, amid rising stakeholder expectations. As part of its review, the GAC: – reviewed the narrative commentary on our financial and non- financial performance to ensure it remained fair, balanced and understandable; – challenged and evaluated management’s application of critical accounting policies and material areas in which significant accounting judgements were applied; – gave particular regard to the analysis and measurement of IFRS 9 ECL, including the key judgements and management adjustments made in relation to the forward economic guidance, underlying economic scenarios and reasonableness of the weightings, as well as modelling and adjustments; – focused on preparation for disclosures to ensure these were consistent, appropriate and acceptable under the relevant financial and governance reporting requirements; HSBC Holdings plc Annual Report and Accounts 2023 267 Corporate governance – tracked and monitored developments relating to the strategy and scope of ESG and climate disclosures, in particular the assurance related to the Group’s net zero transition plan, which was published at the end of January 2024. The GAC also focused on internal and external assurance within ESG reporting in line with wider market developments to ensure ESG and climate disclosures were materially accurate and consistent; – tracked and monitored the delivery against the external audit plan; – provided advice to the Board on the form and basis underlying the long-term viability statement; and – considered the key performance metrics related to strategic priorities, and ensured that the performance and outlook statements reflected the risks and uncertainties appropriately. In addition to its work on the Group’s financial disclosures, PwC also provided limited standalone assurance on the Group’s climate reporting. Further details can be found in ’Assurance relating to ESG data’ on page 43. In conjunction with the GRC, the GAC considered the current position of the Group, along with the emerging and principal risks, and carried out a robust assessment of the Group’s prospects. This assessment informed the GAC’s recommendation to the Board on the Group’s long-term viability. The GAC also undertook a detailed review before recommending to the Board that the Group continues to adopt the going concern basis in preparing the annual and interim financial statements. Further details can be found on page 40. Fair, balanced and understandable Following review and challenge of the disclosures, the Committee recommended to the Board that the Annual Report and Accounts, taken as a whole, were fair, balanced and understandable. These provided the shareholders with the necessary information to assess the Group’s position and performance, business model, strategy and risks facing the business, including in relation to the increasingly important ESG considerations. The Committee reviewed the draft Annual Report and Accounts 2023 and results announcements to provide feedback and challenge to management. It was supported by the work of the Group Disclosure and Controls Committee, which also reviewed and assessed the Annual Report and Accounts 2023 and investor communications. This work enables the GAC to discharge its responsibilities and support the Board in making the statement required under the UK and Hong Kong Corporate Governance Codes. Internal controls Regular updates and confirmations are provided to the GAC on the action management takes to remediate any failings or weaknesses identified through the operation of the Group’s framework of internal financial controls. This is supplemented by reviews of these controls by the second line of defence and internal audit, and the external auditors, who provided additional comfort to the Committee on the effectiveness of these controls. These reviews confirmed that there were no material weaknesses as at the year-end. These updates included the Group’s work on compliance with section 404 of the Sarbanes-Oxley Act. Based on this work, the GAC recommended that the Board support its assessment of the internal controls over financial reporting. The GAC continues to focus on controls over the Group's insurance business following the implementation of the IFRS 17 ‘Insurance Contracts‘ accounting standards. This will remain a focus through 2024, with the GAC scheduled to receive further updates on the control environment for this business and in relation to the change programme more generally through the first half of 2024. For further details of how the Board reviewed the effectiveness of key aspects of internal control, see page 311. Regulatory reporting Regulatory reporting has been a key priority for the Committee over recent years, and will continue to be a priority for 2024. The Committee is focused on monitoring the programme of work to address the quality and reliability of regulatory reporting to meet regulatory expectations. The Committee approved the Integrity of Regulatory Reporting programme, management’s strategy for remediation of deficiencies in relation to the Group's regulatory reporting governance, process and controls. The Committee also provided oversight of the Group's engagement with PRA-requested skilled-persons reviews including the initiation of a review of the sustainability of the Group’s ongoing remediation efforts for regulatory reporting, which commenced in 2023 for an initial period to 31 December 2025. Regular updates will be provided to the Committee by the skilled person throughout the course of their review. Management provided updates on the status of ongoing HSBC- specific external reviews, and discussed the issues and themes identified from the increased assurance work and focus on regulatory reporting. The GAC also discussed root cause themes, remediation of known issues and new issues identified through the increased assurance work and focus on regulatory reporting. The Committee challenged management on remediation plans, to ensure there was a sustainable reduction in issues and that dependencies with other key programmes were well understood. The Committee Chair initiated a schedule under which certain principal subsidiary audit committee chairs, chief executive officers and chief financial officers attended GAC meetings to share progress and learnings in relation to their local remediation efforts. Further details can be found in the ‘Principal activities and significant issues considered during 2023’ table on page 271. Adequacy of resources The Committee is responsible, under the Hong Kong Listing Rules, to annually assess the adequacy of resources of the accounting, internal audit, financial reporting and ESG performance and reporting functions. It also monitored the legal and regulatory environment relevant to its responsibilities. The Committee determined that each of the functions provided thorough information with regards to people capacity and capability and endorsed the annual update to the Board. In recognition that the enhancement of the Group’s regulatory reporting processes and controls was a priority for both the Committee and the Group’s regulators, the GAC also considered the adequacy of regulatory reporting resources as part of the year-end activities. Connectivity with principal subsidiary audit committees The Committee recognises the importance of strong connectivity and alignment with principal subsidiary audit committees. The mechanisms to support this are well established and continued to operate effectively during the year. This included information sharing and targeted collaboration between audit committee chairs and management to ensure there was appropriate focus on the local implementation of programmes. During 2023 this included a particular focus on regulatory reporting, with the subsidiary audit committee chairs, chief executive officers and chief financial officers, attending Committee meetings to update on progress, share local challenges, and areas of focus with the Committee. In addition to the Chair's regular meetings with the audit chairs of the Group’s UK, European, US and Asian principal subsidiaries, and their attendance at Committee meetings for reference items, escalations were received by the Committee for its information and action. On a half-year basis, principal subsidiary audit committees provided certifications to the GAC that regarded the preparation of their financial statements, adherence to Group policies and escalation of any issues that required the attention of the GAC. These certifications also included information regarding the governance, review and assurance activities undertaken by principal subsidiary audit committees in relation to prudential regulatory reporting. External auditor The GAC has the primary responsibility for overseeing the relationship with the Group’s external auditor, PwC. The GAC undertook a formal competitive tender process for the Group’s statutory audit during 2022 following PwC’s appointment for the Annual Report and Report of the Directors | Corporate governance report | Board committees 268 HSBC Holdings plc Annual Report and Accounts 2023 Accounts 2015. This process concluded that PwC would remain as the statutory auditor, which was announced in January 2023. As part of the tender process, PwC committed to a number of initiatives to enhance the effectiveness and efficiency of the Group audit, and progress against these is reported to the Committee on a regular basis to allow these to be monitored. PwC completed its ninth audit, providing robust challenge to management and sound independent advice to the Committee on specific financial reporting judgements and the control environment. The senior audit partner is Scott Berryman who has been in the role since 2019. It was announced during 2023 that Matthew Falconer would become the senior audit partner from 2024 as part of the rotation of auditors. The Committee reviewed the external auditor’s approach and strategy for the annual audit and received regular updates on the audit, including observations on the control environment. Key audit matters discussed with PwC are set out in its report on page 318. Following the publication of the Financial Reporting Council's (‘FRC’) Audit Committee and the External Audit: Minimum Standard (’the Standard’) during 2023, the Committee confirmed that all requirements of the standard have been complied with. External audit plan The GAC reviewed the PwC external audit approach, including the materiality, risk assessment and scope of the audit. PwC highlighted the changes being made to its approach to enhance the quality and effectiveness of the audit. PwC’s plan supports its, and the GAC's, focus on audit quality through standardisation, centralisation and the use of technology. The GAC has questioned PwC on its plans to utilise more digital solutions on the HSBC audit, and updates on this will be provided through 2024. Effectiveness of external audit process The GAC assessed the effectiveness of PwC as the Group’s external auditor, using a questionnaire that focused on the overall audit process, its effectiveness and the quality of output. In addition, the GAC Chair, certain principal subsidiary audit chairs and members of the Group Executive Committee met with the Senior Audit Partner to discuss findings from the questionnaire and provide in-depth feedback on the interaction with the PwC audit team. PwC highlighted the actions being taken in response to the HSBC effectiveness review, including the development of audit quality indicators. These provide a balanced scorecard and transparent reporting to the GAC on the work of both HSBC teams and PwC during the course of the audit. These audit quality indicators focused on the following areas: – findings from inspections across the Group and regulators on PwC as a firm; – the hours of audit work delivered by senior PwC audit team members, the extent of specialist and expert involvement, delivery against agreed timetable and milestones and the use of technology; – any new control deficiencies in Sarbanes-Oxley locations, proportion of management identified deficiencies and delivery of audit deliverables to agreed timelines; and – matters occurring in PwC's global network that could be relevant to the audit of HSBC. Specifically in 2023, PwC reported to the GAC on the recommended actions taken in response to the independent review of governance, culture and accountability that was undertaken by Dr Ziggy Switkowski AO, as well as further detail on audit quality controls across PwC’s global operations. The GAC receives regular updates from PwC and management on performance across the audit quality indicators, which provides wider visibility of ongoing and emerging issues. The GAC requested that these indicators included metrics in relation to PwC's IT security, reflecting the significant volume of information that is shared between HSBC and PwC as part of the audit activity. There were no breaches of the policy on hiring employees or former employees of the external auditor during the year. The external auditor attended all Committee meetings and the GAC Chair maintains regular contact with the senior audit partner and his team throughout the year. The FRC’s Quality Review team routinely monitors the quality of the audit work of certain UK audit firms through inspections of sample audits and related quality processes. PwC was reviewed on the audit of our financial reporting for the 2022 financial year. The Chair had discussions with the FRC as part of the process, and also discussed the outcome of the inspection with the Senior Audit Partner and the other members of the Committee. The Committee was pleased with the outcome of the inspection, which reported no key findings as well as a number of specific examples of good audit practice. Independence and objectivity The Committee assessed any potential threats to independence that were self-identified or reported by PwC. The GAC considered PwC to be independent and PwC, in accordance with professional ethical standards and applicable rules and regulations, provided the GAC with written confirmation of its independence for the duration of 2023. The Committee confirms it has complied with the provisions of The Statutory Audit Services for Large Companies Market Investigation (Mandatory Use of Competitive Tender Processes and Audit Committee Responsibilities) Order 2014 for the financial statements. Following the recommendation to reappoint PwC as the auditor, the associated resolutions concerning the reappointment and the audit fee for 2023 were approved at the 2023 AGM by the shareholders of the Group. Non-audit services The Committee is responsible for setting, reviewing and monitoring the appropriateness of the provision of non-audit services by the external auditor. It also applies the Group’s policy on the award of non-audit services to the external auditor. The non-audit services are carried out in accordance with the external auditor independence policy to ensure that services do not create a conflict of interest. All non-audit services are either approved by the GAC, or by Group Finance when acting within delegated limits and criteria set by the GAC. The non-audit services carried out by PwC included 64 engagements approved during the year where the fees were over $100,000 but less than $1m. Global Finance, as a delegate of the GAC, considered that it was in the best interests of the Group to use PwC for these services because they were: – audit-related engagements that were largely carried out by members of the audit engagement team, with the work closely related to the work performed in the audit; – engagements covered under other assurance services that require obtaining appropriate audit evidence to express a conclusion designed to enhance the degree of confidence of the intended users other than the responsible party about the subject matter information; – other permitted services such as advisory attestation reports on internal controls of a service organisation primarily prepared for and used by third-party end users; or – required or permitted by local regulators to be performed by the external auditor. Eight engagements during the year were approved where the fees exceeded $1m. These were mainly engagements required by the regulator and incremental fees related to previously approved engagements, including the provision of independent assurance reports on global controls for 2023. 2023 2022 Auditors‘ remuneration $m $m Total fees payable 155.9 148.1 of which fees for non-audit services 46.1 50.5 Ratio of non-audit fees to audit fees1 42.0% 51.7% 1 The calculation is on a simple ratio and is not based on FRC guidance on non-audit fees ratio thresholds. HSBC Holdings plc Annual Report and Accounts 2023 269 Corporate governance Whistleblowing and speak-up culture An important part of HSBC’s values is speaking up when something does not feel right. HSBC remains committed to ensuring colleagues have confidence to speak up and acting when they do. A wide variety of channels are provided for colleagues to raise concerns, including the Group’s whistleblowing channel, HSBC Confidential (see page 94 for further information). The Board has delegated responsibility to the GAC to oversee the effectiveness of HSBC’s whistleblowing procedures. The Chair of the GAC is a Group Senior Manager (SMF7), and has a prescribed responsibility as the whistleblowers’ champion, to ensure integrity of HSBC’s policies on whistleblowing and protecting those who report concerns. As part of his responsibility, the GAC Chair reports to the Board on the GAC’s oversight of whistleblowing as part of his regular reporting updates. The Group Head of Regulatory Compliance regularly updates the GAC on whistleblowing effectiveness, including controls assessments and internal audit findings. The Committee is briefed on culture and conduct risks from whistleblowing cases and actions taken. In 2023, the GAC received updates on topics such as cultural insights from internal HR-led investigations relating to matters reported through HSBC Confidential. Reports were also provided on the actions taken to support different functional areas collaborate post- investigation. The Chair met with the Group Head of Conduct, Policy and Whistleblowing for briefings on significant whistleblowing matters. In 2024, the GAC will continue to receive briefings on these actions and the ongoing efficiency of the HSBC Confidential channel. Global Internal Audit The primary role of the Global Internal Audit function is to help the Board and management protect the assets, reputation and sustainability of the Group. Global Internal Audit does this by providing independent and objective assurance on the design and operating effectiveness of the Group’s governance, risk management and control framework and processes, prioritising the greatest areas of risk. The independence of Global Internal Audit from day-to-day line management responsibility is critical to its ability to deliver objective audit coverage by maintaining an independent and objective stance. Global Internal Audit is free from interference by any element in the organisation, including on matters of audit selection, scope, procedures, frequency, timing, or internal audit report content. The Group Head of Internal Audit reports to, and meets frequently with, the Chair of the GAC. In addition, in 2023, there was more interaction between Global Internal Audit senior management and the members of the GAC, aimed at increasing knowledge and awareness of the audit universe and existing and emerging risks identified by Global Internal Audit. Global Internal Audit adheres to The Institute of Internal Auditors’ mandatory guidance. Consistent with previous years, the 2024 audit planning process includes assessing the inherent risks and strength of the control environment across the audit entities representing the Group. Results of this assessment are combined with a top-down analysis of risk themes by risk category to ensure that themes identified are addressed in the annual plan. Audit coverage is achieved using a combination of business and functional audits of processes and controls, risk management frameworks and major change initiatives, as well as regulatory audits, investigations and special reviews. In addition to the ongoing importance of regulatory-focused work, key risk theme categories for 2024 audit coverage remain as: strategy, governance and culture; financial crime, conduct and compliance; financial resilience; and operational resilience. A quarterly continuous monitoring assessment of key risk themes will form the basis of thematic reporting and plan updates and will ultimately drive the 2025 planning process. In 2024, Global Internal Audit’s new or heightened areas of coverage are: transformation including regulatory change; people capacity and capability; ESG; material regulatory obligations; Consumer Duty implementation; retail and wholesale credit risk management; Basel III; regulatory reporting; treasury; operational resilience; enterprise-wide risk management; model risk management; machine learning and artificial intelligence; data management and technology. In addition, Global Internal Audit will continue its programme of culture audits to assess the extent that behaviours reflect HSBC’s purpose, ambition, values and strategy, and expand its coverage of franchise audits for locally significant countries. The annual audit plan and material plan updates made in response to changes in the Group’s structure and risk profile are approved by the GAC. The results of audit work, together with an assessment of the Group’s overall governance, risk management and control framework and processes are reported to the GAC, GRC and local audit and risk committees, as appropriate. This reporting highlights key themes identified through audit activity, and the output from continuous monitoring. This includes business and regulatory developments and an independent view of emerging and horizon risk, together with details of audit coverage and any required changes to the annual audit plan. Based on regular internal audit reporting to the GAC, private sessions with the Group Head of Internal Audit, the Global Professional Practices annual assessment and quarterly quality assurance updates, the GAC is satisfied with the effectiveness of the Global Internal Audit function and the appropriateness of its resources. Executive management is accountable for addressing the matters raised by Global Internal Audit, which must be addressed within an appropriate and agreed timetable. Confirmation to this effect must be provided to Global Internal Audit, which validates closure on a risk basis. Global Internal Audit maintains a close working relationship with HSBC’s external auditor, PwC. The external auditor is kept informed of Global Internal Audit’s activities and results, and is afforded free access to all internal audit reports and supporting records. Report of the Directors | Corporate governance report | Board committees 270 HSBC Holdings plc Annual Report and Accounts 2023 Financial and regulatory reporting Environmental, social and governance (‘ESG’) reporting The Committee considered management’s efforts to enhance ESG disclosures and associated verification and assurance activities, with a specific focus on the net zero transition plan and climate- related disclosures made in the Annual Report and Accounts 2023. The Committee considered ESG disclosures for the Annual Report and Accounts 2023 in detail, to ensure these were fair and balanced, and were also transparent on the challenges faced and aligned with the Group's progress in the embedding of sustainable and climate-related policies across the business. The Committee also focused on the evolution of the control environment for ESG disclosures, particularly data sourcing and policy adherence. Management provided updates on additional assurance performed over these disclosures while the control environment matures and the progress of the sustainability enhancement programme (to upgrade our capabilities in this growing area). Regulatory reporting The GAC monitored the progress of the regulatory reporting assurance programme to enhance the Group’s regulatory reporting, impact on the control environment and oversight of regulatory reviews and engagement. The Committee reflected on the continued focus on the quality and reliability of regulatory reporting by the PRA and other regulators globally. The GAC reviewed management’s proposals on remediation efforts, and endorsed the strategy for the remediation of the errors in the Group’s reporting submissions to regulators globally. The chief executive officers, chief financial officers and audit committee chair of the US, UK ring-fenced bank, European and Asian subsidiaries attended Committee meetings during the year to report on the remediation activities and priorities with regards to regulatory reporting in their respective markets. We continue to keep the PRA and other relevant regulators informed of our progress. Significant accounting judgements Expected credit losses The measurement of expected credit losses involves significant judgements, particularly under current economic conditions. There remains uncertainty over ECL estimation due to sustained high inflation, a high interest rate environment and weaker economic growth in the Group’s key operating markets. The Committee reviewed economic scenarios for the key countries and territories in which the Group operates and challenged management’s judgements on the weightings assigned to the scenarios. The Committee also challenged management’s judgemental adjustments to account for uncertainty in specific sectors and geographies, including the controls underpinning the adjustments process and conditions under which the adjustments would be reduced or removed. The Committee continued to monitor management’s updates on areas of particular focus, including downside risk on mainland China and Hong Kong commercial real estate. Tax-related judgements HSBC has recognised deferred tax assets to the extent that they are recoverable through expected future taxable profits. Significant judgement continues to be exercised in assessing the probability and sufficiency of future taxable profits, future reversals of existing taxable temporary differences and expected outcomes relating to uncertain tax treatments. The Committee considered the recoverability of deferred tax assets, in particular in the US, the UK and France. The Committee also considered management’s judgements relating to tax positions in respect of which the appropriate tax treatment is uncertain, open to interpretation or has been challenged by the tax authority. Valuation of defined benefit pension obligations The valuation of defined benefit pension obligations involves highly judgemental inputs and actuarial assumptions which includes rate, inflation rate, mortality rates and other demographic assumptions. Management considered these assumptions in consultation with actuarial experts to determine the valuation of the defined benefit obligations. The GAC has considered the effect of changes in key assumptions on the HSBC UK Bank plc section of the HSBC Bank (UK) Pensions Scheme, which is the principal plan of HSBC Group. Details of key assumptions can be found on pages 366 to 368 of the ’Notes on the financial statements’. Valuation of financial instruments During 2023, management continuously refined its methodology and approach to valuing the Group’s portfolio in relation to investments, trading assets and liabilities and derivatives. The Committee considered the key valuation metrics and judgements involved in the determination of the fair value of financial instruments, and agreed with the judgements applied by management, which were validated through appropriate governance and control forums. Investment in subsidiaries Management has reviewed investments in subsidiaries for indicators of impairment and conducted impairment reviews where relevant. These involve exercising significant judgement to assess the recoverable amounts of subsidiaries, by reference to projected future cash flows, discount rates and regulatory capital assumptions. The Committee reviewed the judgements in relation to the impairment review of HSBC Overseas Holdings (UK) Limited and the key inputs such as projected profits, underpinning the recoverable amounts of its subsidiaries. Principal activities and significant issues considered during 2023 Areas of focus Key issues Conclusions and actions HSBC Holdings plc Annual Report and Accounts 2023 271 Corporate governance Significant accounting judgements Investment in an associate – Bank of Communications Co., Limited During the year, management performed impairment reviews of HSBC’s investment in Bank of Communications Co., Ltd (‘BoCom’). This included consideration of the potential impact of BoCom’s designation as a globally systemically important bank in November 2023. The impairment reviews are complex and require significant judgements, such as the appropriateness of projected future cash flows, discount rate, and regulatory capital assumptions. The Committee reviewed and challenged management’s judgements in relation to impairment reviews of HSBC’s investment in BoCom, performed using a value-in-use methodology. The GAC reviewed the appropriateness of key assumptions such as projected future cash flows, with a particular focus on the loan growth and net interest margin outlook, and potential impacts of the recent designation of BoCom as a globally systemically important bank. The Committee held a dedicated meeting to challenge management on the impairment charge taken in the fourth quarter of 2023, considering sensitivity analysis of value-in-use to reasonably possible changes in key assumptions and consistency of judgements with prior impairment reviews, which we have disclosed previously. Interest rate management, including disposal of hold-to-collect-and-sell portfolio During 2023, management proposed a framework for the disposal of selected hold-to-collect-and-sell securities to improve risk management of hold-to- collect-and-sell positions and to stabilise and protect net interest income over the medium term. The GAC received regular management updates on hedging strategy, including the repositioning of structural interest rate hedges. The Committee reviewed controls on, and financial outcomes of, disposals of hold-to- collect-and-sell securities. Impairment of goodwill and non- financial assets During the year, management tested for impairment goodwill and non-financial assets. Key judgements in this area relate to long-term growth rates, discount rates and projected future cash flows to include for each cash-generating unit tested, both in terms of compliance with the accounting standards and reasonableness of the forecasts. The Committee reviewed and challenged management’s approach and methodology used for the impairment testing of goodwill and non-financial assets, with a key focus on the projected cash flows included in the forecasts and discount rates used. The GAC also challenged management’s key judgements and considered the reasonableness of the outcomes against business forecasts and strategic objectives of HSBC. Legal proceedings and regulatory matters Management has used judgement in relation to the recognition and measurement of provisions, as well as the existence of contingent liabilities for legal and regulatory matters. The Committee reviewed reports from management on legal proceedings and regulatory matters, and challenged related accounting judgements and disclosures. Long-term viability and going concern statement The GAC has considered a wide range of information relating to present and future projections of profitability, cash flows, capital requirements and capital resources. These considerations include stressed scenarios that reflect the implications of: (i) the ongoing Russia-Ukraine and Middle East conflicts, and the consequential impacts on the supply chains globally; (ii) macroeconomic risks including inflationary risks, which were expected to remain heightened in most markets; and (iii) climate risk, operational resilience, and other top and emerging risks, and the related impact on profitability, capital and liquidity. In accordance with the UK and Hong Kong Corporate Governance Codes, the Directors carried out a robust assessment of the principal risks of the Group and parent company. The GAC considered the statement to be made by the Directors and concluded that the Group and parent company will be able to continue in operation and meet liabilities as they fall due, and that it is appropriate that the long-term viability statement covers a period of three years. Impact of acquisitions and disposals HSBC engaged in a number of business acquisitions and disposals, notably in the UK, Canada, France, Greece, China, Oman and Russia. Significant judgement was involved in determining the timing of recognition of assets held-for-sale, gains or losses, and the measurement of assets and liabilities on acquisition or disposal. The Committee reviewed management’s judgements related to the planned sales of our banking business in Canada, our retail banking operations in France and our banking business in Russia, such as the timing of classification as held-for-sale and the remeasurement of assets. The Committee considered the financial and accounting impacts of the merger of HSBC Oman with Sohar International Bank of Oman, and the acquisitions of Silicon Valley Bank UK Limited, Silkroad Property Partners Pte Limited and Citi’s retail wealth management portfolio in China. Principal activities and significant issues considered during 2023 (continued) Areas of focus Key issues Conclusions and actions Report of the Directors | Corporate governance report | Board committees 272 HSBC Holdings plc Annual Report and Accounts 2023 Control environment Sustainable control environment The GAC will oversee the impact on the risk and control environment. The Committee received regular updates on the control environment, and broader change framework, to review the impact on financial reporting and tax risk within the Group, with particular focus on the implementation of IFRS 17 in the year. In these updates the Committee monitored the assessment of the financial reporting risk, tax risk and progress made on remediation of Sarbanes Oxley significant deficiencies. This oversight helped the Committee to understand the progress being made by management to set out strategic actions to remediate identified issues and uplift the control environment to enable a sustainable reduction in risk. Management’s updates were supplemented by further focus and assurance work from Global Internal Audit, including audits of significant programmes of activity during 2023. Regulatory change Basel III Reform The GAC considered the implementation of the Basel III Reform and the impact on the capital requirements and RWA assurance. This was considered in the context of the strategy and structure of the balance sheet. The Committee received updates on the progress and impact of the Basel III programme on the Group. Management discussed the delayed implementation dates due to ongoing uncertainty over the final definition of the rules by regulators, and the work undertaken to mitigate delivery risks given the concentration of delivery during 2024. The discussion highlighted the dependencies of the Basel III programme with data and management. Management focus was on ensuring that the data required and evolving internal standards were delivered by the end of 2023 to allow for integrated testing in the first quarter of 2024. The Committee reviewed the ongoing management of risks, issues and dependencies and challenged management to prioritise deliverables across each jurisdiction in line with regulatory timelines. The Committee discussed focus on ensuring, in each case, solutions were delivered to the minimum required standards. Committee connectivity Collaboration with GAC/GRC/ Technology Governance Working Group The GAC and GRC worked closely to ensure there were procedures to manage risk and oversee the internal control framework. The Chairs are members of both committees and engage on the agendas of each other’s committees to further enhance connectivity, coordination and flow of information. Given that all material remediation plans within the Group rely heavily on data, the committees held joint meetings to develop an understanding of the HSBC data strategy and execution plan. The joint meetings discussed: – the review undertaken of data within the Group and the associated baseline established as part of the review; – actions taken to prioritise execution to deliver key capabilities and remediate data quality, including pilots to provide clarity around scale, key milestones and expected execution timelines; and – the three-year Group data programme delivery roadmap including detailed plans to address data quality issues, improve the data control landscape, engage with colleagues to actively mature data culture, and build sustainable capabilities that meet a growing global trend towards localisation of data. Principal activities and significant issues considered during 2023 (continued) Areas of focus Key issues Conclusions and actions Committee evaluation and effectiveness The annual review of the effectiveness of the Board committees, including the GAC, was conducted by IBE, Independent Board Evaluation during 2023. The review determined that the GAC continued to operate effectively. Positive feedback was noted on the leadership of the Committee Chair, the composition of the Committee and the focus and balance of time dedicated to discussion at Committee meetings. The review highlighted the continued importance of strong interaction between the GAC, GRC, Technology Governance Working Group and the Board, on key issues including ESG. Further details of the annual review of the Board and Committee effectiveness can be found on pages 260 to 261. Committee priorities At its meeting in December 2023, the Committee agreed a number of priorities for 2024. These included: – Regulatory reporting: Given the criticality of accurate and timely regulatory reporting to the Group’s licence to operate, the Committee will have a key focus on delivery of the Integrity of Regulatory Reporting programme during 2024. – ESG: As competent authorities in the markets in which the Group operates launch market-specific disclosure requirements under new regulation, the Committee will continue to focus on the assurance of reporting and disclosure at both a Group and subsidiary level, as well as the effectiveness of the supporting control environment and governance. – Data: The Committee plans to monitor and provide input into the data strategy, remediation, and controls for the purposes of financial and regulatory reporting, including that data management strategies are embedded across the Group. HSBC Holdings plc Annual Report and Accounts 2023 273 Corporate governance Group Risk Committee "The Committee takes continuous and active steps to safeguard the Group's capital and liquidity positions, keeping it secure in the face of macroeconomic headwinds, enabling it to effectively deploy capital dynamically to take advantage of opportunities" James Forese Chair Group Risk Committee Membership Key responsibilities Member since Meeting attendance in 20231 The GRC has overall non-executive responsibility for the oversight of risk-related matters and the risks impacting the Group. The GRC’s key responsibilities include: – overseeing and advising the Board on all risk-related matters, including financial and non-financial risks; – advising the Board on risk appetite-related matters, and key regulatory submissions; – reviewing the effectiveness of the Group’s risk management framework and internal controls systems (other than internal financial controls overseen by the GAC); – reviewing and challenging the Group’s stress testing exercises; and – overseeing the Group’s approach to conduct, fairness and preventing financial crime. James Forese (Chair)2 Jun 2022 10/10 Geraldine Buckingham Jun 2022 10/10 Dame Carolyn Fairbairn3 Sep 2021 7/10 Steven Guggenheimer4 May 2020 9/10 Kalpana Morparia5 Jul 2020 7/8 Brendan Nelson6 Sep 2023 3/3 David Nish Feb 2020 10/10 Jackson Tai7 Sep 2016 4/4 Swee Lian Teo8 Oct 2023 2/2 1 These included six scheduled meetings, three ad hoc meetings and one joint meeting with the Group Audit Committee and the Technology Governance Working Group. 2 James Forese was appointed Chair of the Committee on 5 May 2023. 3 Dame Carolyn Fairbairn was unable to attend three meetings due to prior commitments. 4 Steven Guggenheimer was unable to attend one meeting due to a prior commitment. 5 Kalpana Morparia joined the GRC on 1 March 2023. She was unable to attend one meeting due to a prior commitment. 6 Brendan Nelson joined the GRC on 1 September 2023. 7 Jackson Tai stepped down from the GRC on 5 May 2023. 8 Swee Lian Teo joined the GRC on 1 October 2023. I am pleased to present my first Group Risk Committee (‘GRC’) report, having taken over the role of Chair of the Committee in May 2023. I would like to take this opportunity to express my sincere gratitude to Jackson Tai for his service to GRC, and the Group more broadly, prior to stepping down as Committee Chair. I am also pleased to welcome Kalpana Morparia, Brendan Nelson and Swee Lian Teo, all of whom joined as members of the GRC during 2023, and each of whom brings unique skills and experience to the business of the Committee. Geopolitical risks and the macroeconomic environment continued to dominate the landscape in 2023, with turmoil in the financial markets leading to the collapse of several banks in the US and Europe in the first half of the year. Commercial real estate in both the US and Asia also came under increasing pressure due to the high interest rate environment, inflationary trends and recessionary concerns. Central banks’ efforts to lower inflation by rapidly raising interest rates also had a wide-ranging impact on retail borrowers as the cost of living increased globally. The GRC has closely monitored the Group’s credit exposures, market risk and settlement limits in response to these events, and has endorsed management’s proactive execution in reducing high risk exposures and accelerating portfolio transformation. Oversight of financial risks has been critical against this external backdrop, and the GRC has paid close focus to the Group’s ongoing treasury, capital and liquidity risk management activities, including early warning indicators, delivery of the interest rate risk in the banking book strategy, prudential sensitivity analysis and capital and liquidity adequacy. Throughout the year, the GRC reviewed and challenged management on the Group’s regulatory submissions, including the Bank of England’s requirements for the Resolvability Assessment Framework, internal capital adequacy assessment process (‘ICAAP’) and internal liquidity adequacy assessment process (‘ILAAP’). The GRC had primary non-executive responsibility for reviewing the outcomes of regulatory stress tests, including the 2023 annual cyclical scenario hybrid mortgage models update and the post- wind-down business restructuring analysis. Non-financial risks were also a key focus of the GRC in 2023. The GRC carefully considered the Group’s regulatory remediation and change programmes, and worked closely with management to better prioritise and understand where there are key interdependencies. In particular, the Committee reviewed and challenged the Group’s data strategy and other key areas of regulatory focus, including oversight of the operational resilience enhancements, conduct and financial crime, technology and cyber risk. The GRC also provided oversight and support to risk transformation activities to develop stronger risk management capabilities and outcomes across the Group. Climate also continues to be a priority area of oversight with regular reports on areas of risk, such as greenwashing, compliance with regulatory requirements, and ESG policy changes. Further details on these and other areas of GRC oversight during the year are set out below. Report of the Directors | Corporate governance report | Board committees 274 HSBC Holdings plc Annual Report and Accounts 2023 Committee governance The Group Chief Risk and Compliance Officer, Group Chief Financial Officer, Group Chief Operating Officer, Group Company Secretary and Chief Governance Officer, Group Chief Legal Officer, and Group Head of Internal Audit are standing attendees at GRC meetings. The Chair and members of the GRC also hold private meetings with the Group Chief Risk and Compliance Officer, the Group Head of Internal Audit and the external auditor, PwC, following scheduled GRC meetings. The participation of our senior business leaders, including the Group Chief Executive who attended five scheduled GRC meetings in 2023, and the chief executive officers of the three global businesses reaffirmed the ownership and accountability of risks in the first line of defence. The Chair meets regularly with the Group Chief Risk and Compliance Officer, and, where appropriate, members of senior management, to discuss priorities and track progress on key actions. The Chair also meets regularly with the GRC Secretary to ensure the GRC addresses its governance responsibilities. A summary of coverage is set out in the ’Matters considered during 2023’ table. Matters considered during 2023 Jan Feb Mar May Jun Jul Sep Dec Holistic enterprise risk monitoring including Group risk profile1 l l l l l l l l Risk framework and policies l l ô ô ô l ô ô Treasury and traded risk l l l l l l l l Wholesale/retail credit risk l l ô l l l l ô Financial reporting risk ô l ô ô ô l ô ô Resilience risk (including IT and operational risk) ô ô ô l l ô l l Financial crime risk l l l l l l l l People and conduct risk ô ô ô l l ô l l Regulatory compliance risk ô ô l l ô l l l Legal risk ô l ô l l l l l Model risk ô ô ô ô ô l ô l Climate risk ô l ô l l ô l l l Matter considered ô Matter not considered 1 The GRC receives updates on all risk types through the Group risk profile, which is presented to the majority of meetings. The Committee also met with the Group Chief Risk and Compliance Officer and Risk and Compliance Executive Committee members in October 2023 to review matters relating to risk transformation, wholesale credit risk, treasury risk, model risk, operational risk, data and climate risk. How the Committee discharged its responsibilities Activities outside formal meetings The GRC held a number of meetings outside its regular schedule to facilitate deeper and more effective oversight of the risks impacting the Group. Areas covered included capital management, stress testing, ICAAP and ILAAP preparations, as well as briefings on the Resolvability Assessment Framework. Further details of these sessions are included in the ’Principal activities and significant issues considered during 2023’ table starting on page 276. Connectivity with principal subsidiary risk committees During 2023, the GRC continued to actively engage with principal subsidiary risk committees through the scheduled participation of principal subsidiary risk committee chairs at relevant GRC meetings, and through a quarterly connectivity meeting with the principal subsidiary risk committee chairs. This meeting is also attended by the Group Chief Risk and Compliance Officer. This participation and connectivity promoted the sharing of information and best practices between the GRC and principal subsidiary risk committees. The GRC also received reports at its regular meetings on the key risks facing principal subsidiaries including escalations and certifications from the principal subsidiary risk committees. The certifications confirmed that the principal subsidiary risk committees had challenged management on the quality of the information provided, reviewed the actions proposed by management to address any emerging issues and that risk management and internal control systems had been operating effectively. These interactions furthered the GRC’s understanding of the risk profile of the principal subsidiaries, leading to more comprehensive review and challenge by the GRC. Engagement with the Risk and Compliance Executive Committee During 2023, the GRC met with the Risk and Compliance Executive Committee to promote information sharing, meet and assess the Group Risk and Compliance function leadership team, and encourage active engagement with executive management. During the engagement meeting, the GRC developed a better understanding of the efforts to strengthen our capabilities across the Group Risk and Compliance function. There were also in-depth discussions on the progress and remediation of key regulatory concerns. The engagement promoted a healthy working relationship between GRC members and executive management. Collaborative oversight by the GRC, GAC and Technology Governance Working Group The GRC worked closely with the GAC and the Technology Governance Working Group to address any areas of significant overlap, and to oversee risk more comprehensively through inter- committee communications and joint meetings. The GRC, GAC and the Technology Governance Working Group Chairs convened on two occasions to consider the Group's data strategy and ambitions. Further details of these sessions can be found under ’Collaboration with GAC/GRC/Technology Governance Working Group’ in the GAC report on page 271. The committees and working group worked closely to ensure appropriate alignment in the review, discussion, challenge and conclusions on topics including risk and control issues relating to digital assets and currencies, and the transition of core Finance capabilities to the Cloud. This ensured that the committees benefited from each other’s expertise and challenge. Coordination between the GRC, GAC and the Technology Governance Working Group is supported by cross-membership. The GRC and GAC Chairs are members of both committees, and this strengthened connectivity and the flow of information between the committees. Each of the co-chairs of the Technology Governance Working Group are members of the GRC and GAC, respectively. HSBC Holdings plc Annual Report and Accounts 2023 275 Corporate governance Holistic enterprise risk monitoring, including Group risk profile Macroeconomic, geopolitical and other emerging risks have the potential to present significant challenges to revenue growth, operational resilience and our commitment to serve customers and local markets. The GRC closely monitored geopolitical and macroeconomic risks that could impact the Group’s strategy, business performance or operations. These risks were exacerbated by the ongoing Russia-Ukraine war and the developing Israel- Hamas war, as well as the expected 'higher for longer' interest rate environment, inflation and impacts on the commercial real estate portfolio. The GRC continued to track top and emerging risks, our risk appetite and other management information metrics, as well as other early warning measures to understand sensitivities and the likelihood of the potential impact to our operations, customers and stakeholders. The GRC provided oversight and challenge of a robust book of strategic management actions to respond to potential downside scenarios. Reflecting the Committee’s ability to travel to different jurisdictions and regions more frequently, the GRC requested reports on the risk profile of key business areas in local geographies and invited principal subsidiary chairs and relevant management to attend and participate in discussions. Risk framework and policies Effective risk management policies, frameworks and thresholds, and oversight of these, are essential for HSBC to safely, consistently and sustainably support customers and deliver strategic aims. The Group has a risk appetite statement to define risk appetite and tolerance thresholds, which forms the basis of the risk management procedures for the first and second lines of defence, the Group’s capacity and capabilities to support customers, and the achievement of strategic goals. The GRC maintained oversight of the Group’s risk management framework, reviewing changes to the Group’s risk appetite statements and recommending these to the Board for approval. The agreed risk appetite statement then provided the basis for the Committee’s interactive review of financial and non-financial risk management information at each scheduled GRC meeting. The GRC continued to promote the development of more dynamic and granular risk appetite statements that were both forward looking and dynamically responsive to emerging risk drivers, and linked to the Group's strategy, stress testing and financial resource plan. Changes were recommended by the GRC to the Group’s risk appetite statement, including in the areas of interest rate risk in the banking book, wholesale credit risk, climate risk, model risk, digital assets and currencies, resilience risk, reputational risk and regulatory reporting risk. Treasury risk Capital and liquidity risk must be effectively monitored. It presents key risks to banks globally, as demonstrated in the first half of 2023 when there were a number of bank failures in the US and Europe. Similarly, developing action plans and guardrails to cover scenarios of recovery or resolution at a subsidiary or Group level is an essential part of HSBC’s prudential management. The Group takes continuous and active steps to safeguard its capital and liquidity positions. It performs internal and regulatory stress tests to measure resilience and performance against stress, and to consider strategic management actions that could be applied against anticipated stress events and headwinds. The GRC conducted its annual review and challenge of the Group’s ICAAP and ILAAP, and provided recommendation to the Board for approval. The GRC continued to evaluate the Group’s IRRBB strategy and progress made against the multi-year liquidity improvement programme. The GRC reviewed the Group’s ongoing activities to identify, manage and mitigate treasury, capital and liquidity risks, including early warning indicators, sensitivity analysis, capital and liquidity reporting and adequacy. In relation to stress testing exercises, the GRC reviewed the Bank of England’s 2023 annual cyclical scenario hybrid mortgage models update. The results were approved by the Committee in March 2023. The GRC also considered the 2024 financial resource plan and Group-wide internal stress test overview, scenarios and outputs, which contribute to the Group’s commitment to regularly test the resilience of the balance sheet and profit and loss under multiple scenarios of varying severity. In addition to oversight of capital and liquidity risk, the GRC also reviewed and provided challenge to ongoing plans to improve balance sheet velocity across the Group through better distribution enabling further, targeted origination and ensuring effective use of capital to support revenue growth. As part of its regulatory obligations, the Group is required to show how its resolution strategy could be carried out in an orderly way and identify any risks to successful resolution. The GRC continued its oversight of the Group’s progress in developing its capabilities towards the Bank of England’s requirements for recovery and resolvability. In February 2023, the GRC reviewed the planned approach for 2023 post-wind-down business restructuring analysis, prior to submission to the PRA. The GRC reviewed and recommended the 2023 Resolvability Assessment Framework self-assessment to the Board for approval. The Chairs of the GRC and the GAC both received comprehensive briefings prior to the presentation of the framework. Principal activities and significant issues considered during 2023 Risk areas Key issues Conclusions and actions Report of the Directors | Corporate governance report | Board committees 276 HSBC Holdings plc Annual Report and Accounts 2023 Wholesale/ retail credit risk HSBC faces risk from the possibility of losses resulting from the failure of a counterparty to meet its agreed obligations to pay the Group. The GRC reviewed updates on the strategy and approach to managing credit risk and credit risk capabilities. The GRC received regular updates on the Group’s expected credit losses and provisions, and the credit risk arising from the wholesale portfolio and mortgage books. Throughout the year, the GRC focused on oversight of management’s enhancement objectives for wholesale credit risk management, in particular to improve the Group’s approach to country and industry concentration risks. The GRC continued its emphasis on building even stronger credit capabilities for specialty sectors, the development of stronger portfolio management capabilities and further improving the Group’s credit risk culture. A key focus area continued to be offering support to our retail customers experiencing financial difficulty, by maintaining appropriate tools and treatments and ensuring that conduct and good customer outcomes was a priority. Financial reporting risk HSBC is exposed to risks where controls supporting the reporting of its financial statements are not effective, resulting in material error or misstatement. While the GAC maintains primary responsibility in relation to internal financial control systems, with further detail on pages 266 to 271, the GRC receives reports on entity level control assessments to enable the oversight of the effectiveness of such controls in support of the Group’s financial reporting. The GRC also receives relevant audit reports that provide an assessment of control effectiveness for financial reporting risks. Resilience risk (and operational risk) Resilience risks could lead to a situation where we may be unable to provide our customers with critical business services due to significant disruption. Technology risks could cause unmanaged disruption to any IT system within HSBC, as a result of malicious acts, accidental actions or poor IT practice, or IT system failure. The GRC continued its oversight of the Group’s implementation of operational resilience capabilities in line with PRA and FCA policies. The GRC reviewed and challenged the operational resilience self-assessment against regulatory expectations, and worked with management to ensure that ownership and the delivery of resilience outcomes were embedded within the business and with function leaders. The GRC also received reports on system incidents and outages experienced across the Group, including reports on immediate actions being taken to enhance system continuity for, and communicate with customers, and measures being implemented to improve resilience-related controls to prevent reoccurrence. The GRC regularly reviewed reports on the Group’s technology risk profile, as well as receiving bi-annual updates in relation to the risk and control environment, as well as the current threat landscape and emerging risks. The GRC (working with the newly-created Group Technology Committee as appropriate) will consider further the risks and opportunities inherent in the use of AI (generative and advanced) in 2024. The GRC maintained a strong focus on understanding the Group’s data risk landscape, its data strategy and data management programme. The GRC collaborated with the GAC and the Technology Governance Working Group on data strategy, the execution plan and timeline for data remediation, the governance approach and the investment model. Further details on the joint meetings are included in the 'Collaboration with GAC/GRC/Technology Governance Working Group’ section on page 275. Financial crime risk There is a risk that HSBC’s products and services could be exploited for criminal activity, including fraud, bribery and corruption, tax evasion, sanctions and export control violations, money laundering, terrorist financing and proliferation financing. The GRC reviewed the Group’s approach to managing its financial crime risk across geographies and businesses. This included reviewing updates to the Group’s financial crime policy, enhancing the approach to insider risk, and monitoring the fraud landscape and strategies for managing fraud risk. The ongoing Russia-Ukraine war has necessitated continued oversight of the ever- changing and increasingly complex international sanctions landscape in which the Group and its customers operate, as well as the Group’s approach to managing its compliance with multiple and differing sanctions regimes globally. People and conduct risk People are central to everything HSBC does and it is essential to manage the risk of not having the right people with the right skills, and to ensure staff always have the customer’s interest at the forefront. The GRC monitored people risk and employee conduct, with support from the Group Chief Human Resources Officer and Group Chief Risk and Compliance Officer. The GRC considered people risk issues with a focus on the four 'c’s: capacity, capability, culture and conduct. It also considered remuneration risks, and strategies to retain talent and acquire new capabilities in key areas. Of key importance, the GRC placed strong emphasis on policies and practices relating to conduct and fairness to customers, especially vulnerable customers given heightened macroeconomic pressures and stress on customers across markets. The GRC met in November to review the Group’s risk and reward alignment framework to promote sound and effective risk management in meeting PRA and FCA remuneration rules and expectations. Regulatory compliance risk As a result of operating in multiple jurisdictions globally, HSBC is exposed to risks associated with inappropriate market conduct or breaching related financial services regulatory standards or expectations. The GRC and its members actively engage with regulators and act on feedback. The Committee closely monitors the progress of any regulatory remediation activities, with support from the Group Chief Risk and Compliance Officer as well as principal subsidiary risk committee chairs. Throughout the year, the GRC had oversight over reports providing feedback from regulators, including a summary of regulatory deliverables to ensure HSBC remains in line with regulatory standards and expectations. Principal activities and significant issues considered during 2023 (continued) Risk areas Key issues Conclusions and actions HSBC Holdings plc Annual Report and Accounts 2023 277 Corporate governance Legal risk HSBC is exposed to the risk of financial loss, legal or regulatory action resulting from contractual risk, dispute management risk, breach of competition law or intellectual property risk. The GRC oversees and receives regular updates on key legal developments and material legal issues from the Group Chief Legal Officer. The updates also cover material litigation and regulatory enforcement matters and an overview of the legal risk profile of HSBC. Model risk If models have been inadequately designed, implemented or used, or do not perform in line with expectations and predictions, then HSBC can face risks from inappropriate or incorrect business decisions arising from their use. The GRC continued to oversee the Group’s progress in managing model risk through the Group Chief Risk and Compliance Officer’s Group risk profile report. The GRC oversaw the progress in achieving our model risk vision, strengthening our model risk management capabilities and addressing regulatory requirements across global jurisdictions. In particular, the GRC reviewed the PRA Supervisory Statement 1/23 and the impact on the Group. The GRC reviewed the new guidance, potential resource implications and the planned programme of changes across all three lines of defence. It also noted the enhanced governance expectations in relation to model oversight. Climate risk Environmental, social and governance risks present significant risks to organisations both in terms of their own operations and how they engage with stakeholders and communities. The GRC remained focused on climate risk and greenwashing risk. The GRC received reports on climate risk management and energy policies, while maintaining oversight of delivery plans to ensure that the Group develops robust climate risk management capabilities. The GRC approved the 2023 internal climate scenario analysis and nature scenario analysis pilot in July 2023. The outcomes will be used to respond to multiple regional regulatory climate exercises as well as meeting regulatory expectations on incorporating climate change within the Group’s strategic plans and ICAAP. Principal activities and significant issues considered during 2023 (continued) Risk areas Key issues Conclusions and actions Committee evaluation 2022/2023 During 2023, the GRC implemented the recommendations of the 2022 committee evaluation conducted by Lintstock in consultation with the Group Company Secretary and Chief Governance Officer and Chief Risk and Compliance Officer. This included the need for continued focus on the quality of reporting, the importance of focusing limited agenda time to the most critical issues, and further clarity in roles and coordination between the GRC and other Board committees. The outcomes of the evaluation were reported to the Board, and progress was tracked by the GRC through the year. 2023/2024 During the year, the annual review of the effectiveness of the Board committees, including the GRC, was conducted externally by Independent Board Evaluation. The review determined that the GRC continued to operate effectively. Areas for enhancement were identified, including the need for: increased focus on the most significant enterprise risks recognising the breadth of the risk agenda; continued close engagement with subsidiaries; and enhancement of induction programmes for new members given the complexity of much of the subject matter under discussion. A review of escalation parameters and filters will also be undertaken by the GRC in 2024. The outcomes of the evaluation have been reported to the Board and the GRC will track progress in implementing recommendations during 2024. Further details of the annual review of effectiveness can be found on pages 260 to 261. The Committee will continue to monitor progress to deliver enhancements in response to feedback from the evaluations in 2024. Focus of future activities The GRC’s focus for 2024 will include the following activities: – oversee risk transformation activities to develop even stronger risk management capabilities, including the continued enhancement of the Group's risk appetite and risk management framework, especially in light of continued geopolitical and macroeconomic headwinds; – continue to assess the Group’s operational resilience capability and the implementation of enhancements to the operating model; – continue to oversee treasury risk to strengthen our capital and liquidity management capabilities; – monitor delivery against our climate ambitions and the development of appropriate data and model management tools and capabilities; – continue the oversight of recovery and resolution planning activities to assess our resolvability capabilities if such situation arises; – continue the oversight of the delivery of technology-related programmes including the data remediation programme, and enhancement of the Group’s IT systems/platform; – continue to oversee financial crime risk and the strengthening of the financial crime control framework, including proactive management by the business; and – assess our strategic opportunities and risks including exposures to digital currencies or assets and use of timely application of technology such as machine learning or artificial intelligence. Report of the Directors | Corporate governance report | Board committees 278 HSBC Holdings plc Annual Report and Accounts 2023 Directors’ remuneration report "The Group’s financial and strategic performance is reflected in the positive remuneration outcomes for our colleagues, and we remain committed to sharing the benefits of our performance with shareholders." Dame Carolyn Fairbairn Chair Group Remuneration Committee Membership 1 Key responsibilities Member since Meeting attendance in 2023 The Committee’s key responsibilities include: – making recommendations to the Board, for approval by shareholders, on the Group's remuneration policy; – setting the overarching principles, parameters and governance framework of the Group’s remuneration policy; – approving the remuneration of executive Directors and other senior Group employees; and – regularly reviewing the effectiveness of the remuneration policy of the Group and its subsidiaries in the context of consistent and effective risk management. Dame Carolyn Fairbairn (Chair) Sep 2021 7/7 Geraldine Buckingham May 2022 7/7 Rachel Duan Sep 2021 7/7 James Forese2 May 2020 3/3 Ann Godbehere3 Sep 2023 2/2 José Antonio Meade Kuribreña May 2021 7/7 Eileen Murray4 May 2023 4/4 1 All members of the Committee are independent non-executive Directors of HSBC Holdings plc. 2 James Forese stepped down from the Committee on 5 May 2023. 3 Ann Godbehere joined the Committee on 1 September 2023. 4 Eileen Murray joined the Committee on 5 May 2023. All disclosures in the Directors’ remuneration report are unaudited unless otherwise stated. Disclosures marked as audited should be considered audited in the context of financial statements taken as a whole. Dear Shareholder I am delighted to present our 2023 Directors’ remuneration report on behalf of the members of the Group Remuneration Committee. I would like to thank Jamie Forese for the counsel he provided to us all as a member of the Group Remuneration Committee. We welcomed Eileen Murray and Ann Godbehere as members. They have already made valuable contributions since their respective appointments in 2023. 2023 was a year of good performance and positive progress for the Group. Our colleagues were critical to delivering those outcomes, remaining committed to serving our customers and clients around the world. Against that backdrop, the Committee’s focus in 2023 was on ensuring we deliver an exceptional experience to colleagues. This is crucial to attract, retain and energise the people we need to sustain our performance and grow in markets that are highly competitive. We also spent considerable time in 2023 thinking about executive Director remuneration, in the context of our strategy, performance and the removal of the 2:1 UK regulatory cap between variable and fixed pay. We have started to consider policy options ahead of the renewal of the Directors' remuneration policy in 2025. The Committee reflected on feedback from investors following the vote on the implementation of our current policy at the Annual General Meeting (’AGM’) in 2023, which received 79.75% of votes cast in favour. We explained in our statements of 5 May 2023 and 3 November 2023 that our largest shareholder voted against the Board’s recommendations on a number of resolutions including the Directors’ remuneration report, which impacted the voting results on these resolutions. The Board was pleased that a large majority of shareholders voting at the AGM supported HSBC’s approach. I have met with several of our large institutional investors and proxy advisory firms since the AGM, and there remains strong support for our current Directors' remuneration policy. We will continue to engage with our major shareholders and listen to their views as we develop the Directors' remuneration policy next year. Performance in 2023 Financial performance Our financial performance in 2023 reflected the strength of our balance sheet in a higher interest rate environment and the good progress made executing our strategy over the last four years. We delivered a reported profit before tax of $30.3bn, which was up $13.3bn compared with 2022. This included a favourable year-on-year impact of $2.5bn relating to the sale of our retail banking operations in France and a provisional gain of $1.6bn recognised on the acquisition of Silicon Valley Bank UK Limited (’SVB UK’), which were partly offset by the recognition of a $3.0bn impairment charge relating to the investment in our associate, Bank of Communications Co., Limited (‘BoCom’). Reported revenue of $66.1bn grew by 30% or $15.4bn compared with 2022, due to good performance by all three businesses reflecting higher net interest income from interest rate rises. Reported costs fell by 2% to $32.1bn, primarily due to the non- recurrence of restructuring and other related costs. On our cost target basis, 2023 costs grew by 6% versus our target of approximately 3% compared with 2022. Our return on average tangible equity (‘RoTE‘) for 2023 was 14.6%, compared with 10.0% in 2022. Excluding strategic transactions and the BoCom impairment, our RoTE was 15.6%. This performance together with our 50% payout ratio commitment for 2023 (excluding material notable items and related impacts) enables us to approve a full year dividend of $0.61 per share. HSBC Holdings plc Annual Report and Accounts 2023 279 Corporate governance Strategic performance In 2023, there was further good progress in executing our strategy across the four strategic pillars aligned to our purpose, values and ambition. The completion of the sale of our retail banking operations in France on 1 January 2024 was an important milestone in the turnaround of our business. However, the strategic focus has shifted to investing for growth. The acquisition of SVB UK, and subsequent launch of HSBC Innovation Banking, is a good example of this. We continued to capitalise on our strengths, which are our two home markets of Hong Kong and the UK, as well as our international wholesale, transaction banking and wealth businesses. The digitisation of our services for personal and corporate customers helped to improve our net promoter scores in key markets and businesses. Meanwhile the growth of transaction banking revenue, fee income in Commercial Banking, and net new invested assets in Wealth all underlined our focus on improving our earnings sustainability, which remains a key priority. Our colleagues are the driving force behind our performance and progress, with our 2023 employee Snapshot survey demonstrating that they are more engaged than ever. Our employee focus index, which gauges how colleagues feel about their day-to-day work, was 76%, which was an increase of four percentage points on 2022. Our employee engagement index is at an all time high of 77%, which was also an increase of three percentage points and meant we matched or exceeded the global financial services benchmark in all eight of our indices. We also continued to support our customers in challenging economic times, particularly in the UK where we supported our personal and business customers by enhancing our range of digital resources and targeting those most in need. Rewarding our colleagues Our goal is to deliver a unique and exceptional experience to colleagues so that we sustain our performance in competitive markets. Our reward principles and commitments centre on rewarding colleagues responsibly, recognising their success and supporting them to grow. Pay is a critical part of our proposition. We were encouraged by a nine percentage point improvement to 52% in colleagues' perceptions they are paid fairly because of actions we took through 2022. The Committee remains very focused on the need to improve this further. For 2024, we are putting more structure in place to improve transparency and clarity about how we make pay decisions. Beyond pay we have a strong proposition of benefits, well-being support, flexible working options, and learning and career opportunities to support our colleagues. In 2023, we saw the maturity of the 2020 three-year Sharesave plan, which had the highest take-up rate and contribution level in recent years. The share price at maturity was more than double the option price, meaning colleagues benefited from our share price growth at a time when they needed it most. Over 90% of colleagues have access to share ownership plans globally with 25% of our global population taking part. For further details, see ‘Our approach to workforce reward‘ on page 289. Fixed pay For the majority of our colleagues, fixed pay is the biggest part of their reward, and many continue to be impacted by the economic environment including inflation and cost of living challenges. Our focus is on ensuring that we provide financial security through fixed pay. Fixed pay is primarily reviewed through our annual pay cycle. Fixed pay ranges were introduced for over 190,000 colleagues to improve clarity and transparency and simplify decision making for our people managers. Effective in 2024, we have awarded an overall fixed pay increase of 4.4%. The level of increases vary by market, depending on the economic situation and individual roles. The highest increases were made to lower paid colleagues, and then focused on middle management, so that we keep pace with wage inflation. We have also established Living Wage benchmarks for every market and were certified as a global Living Wage employer by the Fair Wage Network for 2024. This is critical to give us further confidence in meeting our commitments to reward colleagues responsibly. We continued to take tangible actions to address the most significant inflationary pressures for colleagues. For example, in Argentina and Türkiye, we adjusted fixed pay regularly through the year. In Egypt, we supported our colleagues with a one-off pay adjustment in response to high inflation. Variable pay In determining the 2023 variable pay pool, the Committee wanted to recognise our strong financial and strategic performance, and the contribution colleagues have made to that. The Committee determined an overall variable pay pool of $3,774m, 12% higher than $3,359m in 2022. This was determined based on a review of our performance against financial and non-financial metrics set out in the Group risk framework. The Committee considered the strength of our financial performance in 2023, and the ratio between variable pay and pre-variable pay profit before tax. The Committee considered the impact of margins on interest rates in our results, and lowered the total pool in line with our countercyclical funding approach. We also considered our total compensation position compared with the market, and the broader economic outlook. The Committee considered in respect of all its remuneration decisions for 2023 the Prudential Regulation Authority's ('PRA') 29 January 2024 Notice relating to HSBC Bank plc's and HSBC UK's compliance with the UK Financial Services Compensation Scheme ('FSCS') and related Depositor Protection rules. The PRA penalty was reflected in the calculation of profitability used to determine the pool. The Committee carefully considered input from the Group Risk Committee ('GRC') and determined that no further discretionary adjustment should be made to the overall variable pay pool. The circumstances leading to the penalty require a more detailed review internally to address potential responsibility of individuals, which will be completed by the Committee in 2024, with any remuneration adjustments applied once it is complete. Total compensation across all our businesses increased relative to 2022, rewarding our colleagues for their contribution to our performance. The distribution of the pool by business considered relative performance against revenue, reported profit before tax and cost targets. Strong differentiation has meant our highest performers received the largest increases in variable pay compared with the previous year. Key remuneration decisions for executive Directors Annual incentive for 2023 performance The Group’s financial and strategic performance is reflected in the executive Directors’ annual scorecards. The Committee believes this reflects their individual leadership and contribution to delivery of the Group‘s performance. At the start of the year, the Committee set the scorecards to align with our reported financial performance. The Committee considered carefully the impact of strategic transactions and one-offs on the Group's financial performance in 2023, including the favourable year- on-year impact of $4.1bn relating to the sale of our retail banking operations in France and the provisional gain on the acquisition of SVB UK, balanced with the $3.0bn impairment charge relating to the investment in BoCom. Consistent with the approach in prior years, the Committee judged that it was appropriate to assess financial performance for the purpose of the annual scorecard excluding these items, to ensure that out-turns were not impacted by one-offs. The assessment of RoTE and profit before tax measures therefore excluded strategic transactions and the BoCom impairment. The Committee also considered the impact of interest rates on performance and noted that macroeconomic fluctuations remain a frequent driver of the Group’s business outcomes for our executives to manage. In recent years these factors have not led to discretionary scorecard adjustments for our executive Directors, either positive or negative, which the Committee continues to believe is appropriate. Report of the Directors | Corporate governance report | Directors’ remuneration report 280 HSBC Holdings plc Annual Report and Accounts 2023 As part of its deliberations, the Committee reflected on the overall risk management in the year, and in respect of the PRA Notice: the nature of the failings identified; the regulator’s finding that the breaches identified were not deliberate or reckless; fines levied; and the tenure and specific responsibilities of the executive Directors in relation to the issues covered. Taking into account inputs from the GRC and the overall accountability of the Group Chief Executive for the performance and risk management of the Group in 2023, the Committee used its judgement and applied a downward adjustment of 7.50% to Noel Quinn’s scorecard outcome. This results in a final scorecard outcome of 70.24% of the maximum opportunity for Group Chief Executive Noel Quinn (2022: 75.35%) and an annual incentive of £2,018,000, which is 7% lower than £2,164,000 in 2022. The scorecard for Group Chief Financial Officer Georges Elhedery was 76.75%, resulting in an annual incentive of £1,287,000. The Committee considered that these final outcomes were a balanced and appropriate reflection of Group and individual performance delivered in 2023, and appropriate in the context of the pay decisions made for the wider workforce. 2021–2023 long-term incentive ('LTI') vesting Noel Quinn and Ewen Stevenson (the former Group Chief Financial Officer) participated in the 2021–2023 LTI that will vest in March 2024. As disclosed in our 2020 Directors’ remuneration report, the Committee considered windfall gains at the time of award and determined no adjustment was appropriate. The maximum RoTE and relative total shareholder return (‘TSR’) targets were exceeded. The capital reallocation to Asia measure was not met and the environment and sustainability measures were assessed to be 100% met. Overall, 75.00% of the original award will vest on a pro-rata basis over the next five years. Ewen Stevenson’s awards have been pro-rated for time in employment. As this is the first LTI vesting for Noel Quinn, his single figure of remuneration for 2023 is materially changed. The 2023 single figure of remuneration for Noel Quinn is £10,641,000 (compared with £5,562,000 for 2022). The value of the LTI award reflects the Group's improvement in performance, shareholder returns and share price over 2021 to 2023, and Noel Quinn's leadership in reshaping the Group to deliver more sustainable returns to shareholders. Noel Quinn's LTI vesting also means that the pay ratio measuring the total pay of the Group Chief Executive against the median pay of our UK employees has increased to 169:1 compared with 95:1 last year. Excluding the LTI vesting in respect of the year, the median ratio remained broadly in line with prior years at 86:1. This is consistent with the pay and progression policies for our UK workforce, considering the diverse mix of employees, the pay mix for various roles and the differences in pay structure compared with executive Directors. 2024–2026 LTI awards We have reviewed the performance measures for LTI awards considering the next phase of our strategy over 2024 to 2026. We will retain Group RoTE, relative TSR and environment targets, reflecting our strategic commitments, and to measure relative performance compared with peers. The capital reallocation to Asia measure was previously included to retain focus on repositioning the Group’s capital base through the transformation of the business. While our operations in Asia continue to be of significant strategic importance to the Group, it was the Committee’s view that this measure no longer appropriately incentivises the delivery of sustainable returns achievable across wider markets in which HSBC operates. We are simplifying the 2024–2026 LTI by removing this metric and increasing the weighting of RoTE and relative TSR. The relative TSR peer group was amended for 2023 to include more Asian peers to better reflect our growth and investment focus. We do not propose to make any changes for 2024 other than the removal of the Credit Suisse Group following its acquisition by UBS Group. Noel Quinn and Georges Elhedery will each receive a 2024–2026 LTI award of 320% of base salary in respect of their performance for 2023 (Noel Quinn: £4,275,000; Georges Elhedery: £2,496,000). Subject to performance over the next three years, awards will vest over a further five years with a one-year retention period on vesting shares. Further details on our targets can be found on page 286. Fixed pay for 2024 We have increased the base salary of our executive Directors by 3%, effective from 1 March 2024. The increase is lower than the overall fixed pay increase of 4.4% for our wider workforce. Remuneration in 2024 The Committee welcomes the change announced by the PRA and the Financial Conduct Authority ('FCA') to remove the existing limits on the ratio between fixed and variable pay. The announcement, together with the wider considerations on the overall competitiveness of the UK capital markets, provides us an opportunity to consider the competitiveness of our remuneration arrangements for our executive Directors and wider workforce. At the 2024 AGM, we will seek shareholder approval to provide the Committee with discretion, where regulations allow, to set an appropriate variable to fixed pay ratio considering all relevant factors, including our business activities and associated prudential and conduct risks. This will improve flexibility in the structure of remuneration to increase the amount of pay that is variable, subject to the delivery of performance. It will also strengthen our ability to recruit and retain people in competitive markets where many of our international competitors do not have similar restrictions. We remain very supportive of the use of deferral mechanisms and the requirements to deliver a substantial portion of variable remuneration in shares to ensure alignment between shareholders, good risk management and individual reward. For our executive Directors, we have started early engagement with institutional shareholders and proxy advisory bodies ahead of the renewal of our Directors' remuneration policy in 2025. Over several years, the Committee has expressed concerns around the competitiveness of the executive Director remuneration opportunity and indicated that our preference would be to operate a policy with a higher proportion of the package based on variable pay linked to performance. The Committee continues to believe in a more performance-based structure, and we will seek shareholder approval for a new Directors' remuneration policy at the 2025 AGM in line with the normal three-year cycle after engaging with shareholders through 2024. Conclusion On behalf of the Committee, I would like to thank our shareholders for the time taken to engage with us during the year. We welcome the feedback on our approach to remuneration and I look forward to engaging with you further in the year ahead as we continue our review of the Directors’ remuneration policy, in advance of the 2025 AGM. As Chair of the Committee, I hope you will support the 2023 Directors’ remuneration report and the resolution to remove the 2:1 cap on variable pay for our Material Risk Takers at this year's AGM. Dame Carolyn Fairbairn Chair Group Remuneration Committee 21 February 2024 HSBC Holdings plc Annual Report and Accounts 2023 281 Corporate governance Executive remuneration at a glance This section sets out an overview of our performance, 2023 remuneration outcomes for executive Directors and a summary of the policy approved by shareholders at our 2022 AGM, including how we will implement the policy in 2024. Our performance Reported profit before tax $30.3bn (2022: $17.1bn) Net new invested assets $84bn (2022: $80bn) Operating expenses $32.1bn (2022: $32.7bn) Return on average tangible equity 14.6% (2022: 10.0%) Employee engagement index1 77% (2022: 74%) Inclusion index 78% (2022: 76%) Percentage of colleagues of Asian heritage in senior leadership roles 37.8% (2022: 34.0%) Percentage of women in senior leadership roles2 34.1% (2022: 33.3%) 1 The 2022 employee engagement index score has been recalculated to reflect a change in the composition of questions in the 2023 index to ensure comparisons remain valid. In 2022 the employee engagement index was reported as 73%. 2 The percentage of women in senior leadership roles excluded the Canada business held for sale. Remuneration outcomes for executive Directors Summary remuneration outcomes for 2023 are set out below. Further details are set out in our annual report on Directors‘ remuneration on pages 284 to 286. Noel Quinn Georges Elhedery Annual incentive outcome (£000) £2,872 £2,018 70.24% Maximum opportunity 2023 annual incentive £1,677 £1,287 76.75% Maximum opportunity 2023 annual incentive Long-term incentive outcome (£000) £5,195 £4,275 £3,575 £1,619 Vesting long-term incentive Share price appreciation on long-term incentive Maximum opportunity 2021–2023 long-term incentive Georges Elhedery did not participate in the 2021–2023 long-term incentive Single figure of remuneration (£000) £5,562 £10,641 Base salary and fixed pay allowance Pension and benefits Annual incentive Long-term incentive Notional returns on deferred cash awarded in respect of prior role 2022 2023 £4,701 £3,292 Base salary and fixed pay allowance Pension and benefits Annual incentive Long-term incentive Notional returns on deferred cash awarded in respect of prior role Replacement award for forfeiture upon hire 2022 (Ewen Stevenson) 2023 Shareholding (% of base salary) 400% 797% Shareholding requirement Current shareholding 300% 598% Shareholding requirement Current shareholding Report of the Directors | Corporate governance report | Directors’ remuneration report 282 HSBC Holdings plc Annual Report and Accounts 2023 Remuneration policy summary – executive Directors Our Directors' remuneration policy was approved at the AGM on 29 April 2022. The full policy can be found on pages 257 to 265 of our Annual Report and Accounts 2021 and in the Directors’ Remuneration Policy Supplement, which is available under Group results and reporting in the ‘Investors‘ section of www.hsbc.com. Elements and objectives Operation Implementation in 2024 Base salary – Base salary is paid in cash on a monthly basis. – Other than in exceptional circumstances, the base salary for the current executive Directors will not increase by more than 15% above the level at the start of the policy period in total for the duration of the policy. Base salary will increase by 3% for 2024 and will be: – Noel Quinn: £1,376,000 – Georges Elhedery: £803,000 Fixed pay allowance (‘FPA’) – The FPA is granted in instalments of immediately vested shares. – On vesting, the net number of shares delivered (after those withheld to cover any income tax and social security) are subject to a retention period and released annually on a pro-rata basis over five years, starting from the March immediately following the end of the financial year for which the shares are granted. – Dividends are paid on the vested shares held during the retention period. FPA will not be increased for 2024 and will remain: – Noel Quinn: £1,700,000 – Georges Elhedery: £1,085,000 Cash in lieu of pension – 10% of base salary is paid on a monthly basis. – This allowance, as a percentage of salary, is aligned with the maximum contribution rate that HSBC could make for a majority of employees who are defined contribution members of the HSBC Bank (UK) Pension Scheme. – No change to percentage of base salary. Annual incentive – The maximum opportunity is up to 215% of base salary. – Performance is measured against an individual scorecard. – At least 50% of any award is delivered in shares, which are normally immediately vested. – On vesting, the net number of shares that have vested (after those sold to cover any income tax and social security payable) will be held for a retention period of up to one year, or such period as required by regulators. – Awards will be subject to clawback (i.e. repayment or recoupment of paid vested awards) for a period of seven years from the date of award, extending to 10 years in the event of an ongoing internal/regulatory investigation at the end of the seven-year period. Any unvested awards will be subject to malus (i.e. reduction and/or cancellation) during any applicable deferral period. – No change to opportunity. – See page 288 for 2024 measures. Long-term incentive (‘LTI’) – The maximum opportunity is up to 320% of base salary. – The LTI award is granted if the Committee considers that there has been satisfactory performance over the prior year, and is subject to a forward-looking three-year performance period from the start of the financial year in which the awards are granted. – At the end of the performance period, awards will vest in five equal instalments, with the first vesting on or around the third anniversary of the grant date and the last instalment vesting on or around the seventh anniversary of the grant date. – On vesting, the net number of shares that have vested (after those sold to cover any income tax and social security payable) will be held for a retention period of up to one year, or such period as required by regulators. – Awards are subject to malus provisions prior to vesting. Vested shares are subject to clawback on the same terms as the annual incentive. – Awards may be entitled to dividend equivalents during the vesting period, paid on vesting. Where awards do not receive dividend equivalents, the number of shares awarded can be determined using the share price discounted for the expected dividend yield. – No change to opportunity. – See page 287 for details of the 2024–2026 LTI awards. Benefits – Benefits include the provision of medical insurance, accommodation, car, club membership, independent legal advice in relation to a matter arising out of the performance of employment duties for HSBC, tax return assistance or preparation, and travel assistance (including any associated tax due, where applicable). – Additional benefits may also be provided when an executive is relocated or spends a substantial proportion of his/her time in more than one jurisdiction for business needs. – Benefits to be provided as per policy and details disclosed in the Annual Report and Accounts 2024 single figure of remuneration table. Shareholding guidelines Executive Directors are expected to satisfy the following shareholding requirement as a percentage of base salary within five years from the date of their appointment: – Group Chief Executive: 400% – Group Chief Financial Officer: 300% – No change to percentage of base salary. All-employee share plans Executive Directors are eligible to participate in all-employee share plans, such as HSBC Sharesave, on the same basis as all other employees. – Participation will be disclosed in the respective Annual Report and Accounts, as required. HSBC Holdings plc Annual Report and Accounts 2023 283 Corporate governance Annual report on Directors’ remuneration This section sets out how our approved Directors’ remuneration policy was implemented during 2023. Determining executive Directors’ incentive outcomes (Audited) For any annual incentive award to be made, each executive Director must achieve a minimum standard of conduct and values-aligned behaviour. Both executive Directors met this requirement for 2023. The award is determined by applying the outcome of their annual scorecard to the maximum opportunity, set at 215% of base salary. The financial measures, weightings and targets were set at the start of the financial year to align with our reported financial performance and before significant changes in the interest rate environment. They considered the 2023 financial plan, data from 2022, external commitments, scenario testing of upside and downside risks in the plan, and analyst consensus where relevant. The Committee considered carefully the wider context in which performance was delivered and the impact of strategic transactions and one-offs on the Group's financial performance in 2023, including the favourable year-on-year impact of $4.1bn relating to the sale of our retail banking operations in France and the provisional gain on the acquisition of SVB UK, balanced with the $3.0bn impairment charge relating to the investment in BoCom. Consistent with the approach in prior years, the Committee judged that it was appropriate to assess financial performance for the purpose of the annual scorecard excluding these items, to ensure that out-turns were not impacted by one-offs. The assessment of RoTE and profit before tax measures therefore excluded strategic transactions and the BoCom impairment. The Committee also considered the impact of interest rates on performance and noted that macroeconomic fluctuations remain a frequent driver of the Group’s business outcomes for our executives to manage. In recent years these factors have not led to discretionary scorecard adjustments for our executive Directors, either positive or negative, which the Committee continues to believe is appropriate. Performance was above the maximum targets for Group profit before tax, Group RoTE and Asia RoTE. On our cost target basis, growth was 6% versus our target of approximately 3% compared with 2022 and below the performance range. For strategic measures, diversity representation targets were set based on a trajectory to meet our external commitments. Other measures were set based on maintaining or improving when compared with 2022 performance and/or market benchmarks. The Inclusion index in our employee Snapshot survey exceeded target, and was significantly above the financial services benchmark. We met or exceeded our senior leadership diversity representation targets. Our customer net promoter score ('NPS') performance was largely positive relative to our competitors in most areas of our business. The Committee considered that the scorecard outcome for personal measures for both Noel Quinn and Georges Elhedery was appropriate against the targets set at the start of the year. Overall, this resulted in a formulaic scorecard outcome of 75.93% of the maximum for Noel Quinn and 76.75% for Georges Elhedery. The Committee discussed at length whether the risk and compliance modifier should be applied for 2023 for the Group’s performance against key risk metrics, including the historical failings identified by the PRA in its Notice of 29 January 2024. As part of its deliberations, the Committee reflected on the overall risk management in the year, and in respect of the PRA Notice: the nature of the failings identified; the regulator’s finding that the breaches identified were not deliberate or reckless; fines levied; and the tenure and specific responsibilities of the executive Directors in relation to the issues covered. Taking into account inputs from the Group Risk Committee and Noel Quinn's overall accountability for the performance and risk management of the Group in 2023, the Committee used its judgement and applied a downward adjustment of 7.50% to his scorecard outcome. This results in a final outcome of 70.24% of the maximum opportunity for Noel Quinn (2022: 75.35%) and an annual incentive of £2,018,000, which is 7% lower than £2,164,000 in 2022. No risk and compliance modifier was applied for Georges Elhedery who was appointed as Group Chief Financial Officer on 1 January 2023, after all underlying issues identified by the PRA had been fully remediated. Georges Elhedery's scorecard outcome of 76.75% results in an annual incentive of £1,287,000. Annual incentive scorecard assessment (Audited) Summary assessment Minimum (25.0% payout) Maximum (100.0% payout) Noel Quinn Georges Elhedery Performance2 Weighting (%) Assessment (%) Outcome (%) Weighting (%) Assessment (%) Outcome (%) Profit before tax1 ($bn) 25.8 30.3 31.6 15.0 100.00 15.00 15.0 100.00 15.00 Target basis operating expenses ($bn) 31.0 30.5 31.6 15.0 — — 15.0 — — Group RoTE1 12.0% 14.5% 15.6% 15.0 100.00 15.00 15.0 100.00 15.00 Asia RoTE1 12.8% 15.0% 16.8% 5.0 100.00 5.00 5.0 100.00 5.00 Fee income ($bn) 11.8 13.1 11.84 5.0 25.55 1.28 5.0 25.55 1.28 Growth in net new invested assets ($bn) Total (ex Hong Kong) 36.6 56.8 55.1 2.5 93.73 2.34 2.5 93.73 2.34 Total 58.8 79.0 84.3 2.5 100.00 2.50 2.5 100.00 2.50 Customer satisfaction See following tables for commentary 15.0 91.67 13.75 15.0 91.67 13.75 Employee experience 15.0 93.75 14.06 15.0 93.75 14.06 Personal objectives 10.0 7.00 10.0 7.81 Total 100.0 75.93 100.0 76.75 Scorecard outcome (000) £2,181 £1,287 7.50% risk adjustment per Committee judgement (000) £(163) £0 Annual incentive (000) £2,018 £1,287 1 Assessed excluding strategic transactions and BoCom impairment. 2 The CET1 capital ratio underpin was met. Report of the Directors | Corporate governance report | Directors’ remuneration report 284 HSBC Holdings plc Annual Report and Accounts 2023 Stakeholder measures for Noel Quinn and Georges Elhedery Measures Weighting (%) Assessment considerations by the Committee Assessment (%) Outcome (%) Customer satisfaction Maintain and improve NPS in the UK and Hong Kong, in digital markets, and in key growth markets 15.0% – NPS is sourced from our strategic NPS surveys with results gathered through independent third-party research agencies. The assessment is against quantitative targets set based on the level of improvement from the prior year and in rank position. – In the UK and Hong Kong, we met our maximum NPS target and largely met the target in digital markets. Across other growth markets we met our maximum NPS target. – In WPB, our NPS increased in five of our six key markets (Hong Kong, mainland China, Mexico, India and Singapore). In the UK, the slight decline of our NPS was driven by mass affluent customers. We ranked among the top three banks in three of our six key markets. In Hong Kong, we remained in first place overall, leading the market with our mobile app performance. Our rank remained in the top three in mainland China, and rose to the top in India. – In CMB, we ranked among the top three banks in four of our six key markets. We were first place in Hong Kong and within the top three in mainland China, Singapore and Mexico. – In GBM, we ranked in first place globally for NPS and digital satisfaction. 91.67% 13.75% Employee experience Improve diversity and inclusion 15.0% – The Inclusion index in our employee Snapshot survey increased by two percentage points and exceeded the maximum target of 77%. The score is seven points above the external financial services benchmark. – The percentage of Black heritage colleagues in senior leadership roles increased by 0.5 percentage points to 3.0%, meeting the maximum target and on track to meet our external commitment of 3.4% by 2025. – We made a 3.8 percentage point year-on-year net gain in senior leadership representation of colleagues with Asian heritage, against a 2022 year-end baseline of 34.0% – The percentage of women in senior leadership roles increased by 0.8 percentage points to 34.1%, meeting the target, and below the maximum. The targets excluded the Canada business held for sale. Including colleagues in HSBC Canada, gender representation in senior leadership is 34.2%. 93.75% 14.06% For each executive Director, personal objectives were set at the start of the year and measured by the Committee against agreed targets and key performance indicators. Noel Quinn Weighting Assessment Performance achievement Technology transformation 4.0% 50.00% – Our Cloud adoption rate, which is the percentage of our technology services on the private or public Cloud, increased to 43% (2022: 35%). At the end of 2023, about 54% of our WPB customers were 'mobile active' users (2022: 49%) and the proportion of WPB sales completed digitally increased to 49% (2022: 43%). – The Committee's assessment balanced strong progress automating our organisation at scale against the targets set, and progress to deliver our wider multi-year technology strategy. Progress on innovation programmes 4.0% 100.00% – Several strategic investments were made in Asia including Meditrust, a unicorn start-up, which will support HSBC Life’s Pinnacle proposition in mainland China. Investments were made in a joint venture with Tradeshift, an existing Ventures investment, which will support the trade finance business to deploy a range of technology solutions. – In 2023, Zing, our new international payments business aimed at non-HSBC customers, was launched, and a digital currency capability with eHKD was piloted in Hong Kong. We became the first bank to pioneer quantum protection for foreign exchange trading, and were one of the first international banks to participate in China’s eCNY programme. – Progress was made on several generative AI use cases including developer productivity, knowledge management and content generation. Our first AI patent to be used to detect cyber threats, was filed. Simplification of processes and organisation 2.0% 50.00% – Strong progress was made with the completion of the exit from Greece, merger in Oman, and sale of the New Zealand WPB mortgage portfolio. – The sale of our retail banking portfolio in France was completed on 1 January 2024 and we remain on track to sell our retail banking operations in Canada in the first quarter of 2024. – The timing of our planned exit from our business in Russia was impacted by dependency on the regulatory and government approval process, which is outside of HSBC’s control. – Exits from our WPB business in Mauritius and our hedge fund administration business were announced. Total 7.00% out of 10.00% Georges Elhedery Weighting Assessment Performance achievement Deliver activities relating to regulatory priorities 2.5% 58.33% – The Integrity of Regulatory Reporting programme continues to remediate against known gaps to deliver improvements in quality of regulatory returns. – The Bank of England Resolvability Assessment Framework self-assessment was submitted, demonstrating an uplift in the Group’s capabilities. – Certain climate considerations have been assessed and incorporated into the annual financial planning cycle. We also enhanced our climate scenario analysis capabilities in line with plan. Deliver Finance change transformation and digitisation 2.5% 62.50% – For the remediation of interest rate risk in the banking book, all 2023 targeted actions were completed from a first line of defence perspective, subject to second and third line of defence review and confirmation in early 2024 as planned. – Identified Finance change transformation activities have been deployed in line with plans. More energised Finance workforce 2.5% 100.00% – Global Finance employee engagement index increased to 79% (2022: 74%), exceeding the target set. – Global Finance career index increased to 69% (2022: 65%), exceeding the target set. Drive liquidity and capital management across the Group 2.5% 91.67% – The Group’s CET1 capital ratio was delivered above our target operating range. – Planned liquidity optimisation outcomes were successfully met. – Targets relating to earnings stabilisation were assessed as met. Total 7.81% out of 10.00% Personal objectives for Noel Quinn and Georges Elhedery HSBC Holdings plc Annual Report and Accounts 2023 285 Corporate governance Single figure of remuneration (Audited) The following table shows the single figure of remuneration of each executive Director for 2023, together with comparative figures. This is the first vesting LTI for Noel Quinn since his appointment as Group Chief Executive in 2020 and so materially changes the composition of his single figure of remuneration for 2023. Single figure of remuneration Noel Quinn Georges Elhedery1 (£000) 2023 2022 2023 2022 Base salary 1,336 1,329 780 — Fixed pay allowance (’FPA’) 1,700 1,700 1,085 — Cash in lieu of pension 134 133 78 — Taxable benefits2 127 119 4 — Non-taxable benefits 89 86 52 — Total fixed 3,386 3,367 1,999 — Annual incentive3 2,018 2,164 1,287 — Notional returns4 43 31 6 — Replacement award — — — — Long-term incentive5 5,195 — — — Total variable 7,256 2,195 1,293 — Total fixed and variable 10,641 5,562 3,292 — 1 Georges Elhedery was appointed Group Chief Financial Officer from 1 January 2023. 2 Taxable benefits include the provision of medical insurance, car benefit, accommodation and tax return assistance (including any associated tax due, where applicable). Non-taxable benefits include the provision of life assurance and other insurance cover. 3 Annual incentive awards to the executive Directors are awarded 50% in cash and 50% in shares. The shares portion of the award vests immediately at grant and is subject to a retention period of one year and clawback provisions. 4 Deferred cash awards granted in prior years include a right to receive notional returns for the period between the grant and vesting date. This is determined by reference to a rate of return specified at the time of grant and paid annually, with the amount disclosed on a paid basis. 5 An LTI award over 1,118,554 shares was made in February 2021 (in respect of 2020) at a share price of £4.262 for which the performance period ended on 31 December 2023. The value has been computed based on a share price of £6.192, the average share price during the three-month period to 31 December 2023. The value attributable to share price appreciation is £1,619,106. See the following section for details of the assessment outcomes, which resulted in 75.00% vesting due to performance. Benefits The values of the significant benefits in the single figure table are set out in the following table. The insurance benefit for Noel Quinn has increased year on year because of the increase in premium at annual renewal. The car benefits for Georges Elhedery are not included in the table below as they were not deemed significant. Noel Quinn Georges Elhedery (£000) 2023 2022 2023 2022 Insurance benefit (non-taxable) 84 82 49 — Accommodation in Hong Kong (taxable) 67 39 — — Car and driver in UK and Hong Kong (taxable) 47 69 — — Long-term incentive (’LTI’) awards (Audited) LTI awards over 2021 to 2023 performance period The 2021–2023 LTI award was granted to Noel Quinn and Ewen Stevenson in February 2021. Georges Elhedery was in a different role at the time and did not receive the 2021–2023 LTI award. The scorecard delivered an outcome of 75.00%, reflecting a significant improvement in shareholder returns across the performance period. In line with the terms of his departure, Ewen Stevenson is a good leaver and his award has been pro-rated for time in employment. Based on the performance outcome, 838,915 shares will vest for Noel Quinn and 371,697 shares will vest for Ewen Stevenson. The awards will vest in five equal annual instalments commencing in March 2024. The Committee is mindful of executives not experiencing ’windfall gains’ through the granting of LTI awards when a share price is particularly low. We introduced an upfront windfall gains check for the 2021–2023 LTI award such that if the LTI grant share price experienced a greater than 30% decline since the previous grant, then a downward adjustment would be made. The Committee determined that there were no windfall gains to consider for this award given the share price at grant (£4.26) was 24% below the share price at the previous LTI grant (£5.62). The 2021–2023 LTI award is subject to a risk and compliance modifier. The Committee received input from the GRC who assessed that the performance targets were delivered with appropriate risk management. On this basis, the Committee considered that no adjustment for risk should be made to the 2021–2023 LTI award. The CET1 capital ratio underpin for the 2021–2023 LTI award was also met. Report of the Directors | Corporate governance report | Directors’ remuneration report 286 HSBC Holdings plc Annual Report and Accounts 2023 Measures (weighting)1 Minimum (25.0% payout) Target (50.0% payout) Maximum (100.0% payout) Actual Assessment Outcome RoTE with CET1 capital ratio underpin2 (25.0%) 8.0% 9.0% 10.0% 14.6% 100.0% 25.00% Capital reallocation to Asia with CET1 capital ratio underpin3 (25.0%) 45.0% 47.0% 50.0% 43.4% 0.0% 0.00% Transition to net zero4 (25.0%) Carbon reduction (own emissions) 42.0% 48.0% 51.0% 57.3% 100.0% 12.50% Sustainable finance and investment $200.0bn $240.0bn $260.0bn $294.0bn 100.0% 12.50% Relative TSR5 (25.0%) At median of the peer group Straight-line vesting between minimum and maximum At upper quartile of the peer group Above upper quartile 100.0% 25.00% Total 75.00% Assessment of the 2021–2023 LTI awards 1 Awards vest on a straight-line basis for performance between the minimum, target and maximum levels of performance set out in this table. 2 Assessed based on RoTE in the 2023 financial year. The CET1 capital ratio underpin was met. 3 Assessed based on share of Group tangible equity (on a constant currency basis and excluding associates) allocated to Asia by 31 December 2023, which was not met. 4 Carbon reduction assessed on percentage reduction in total energy and travel emissions achieved by 31 December 2023 using 2019 as the baseline. Sustainable finance and investment assessed on cumulative financing provided over the performance period. 5 The peer group was: Bank of America, Barclays, BNP Paribas, Citigroup, DBS Group Holdings, Deutsche Bank, J.P. Morgan Chase & Co., Lloyds Banking Group, Morgan Stanley, Standard Chartered and UBS Group. Credit Suisse Group was removed from the peer group following its acquisition by UBS Group in June 2023. LTI awards over 2024 to 2026 performance period After taking into account performance for 2023, the Committee decided to grant Noel Quinn an LTI award of £4,275,000 and Georges Elhedery an LTI award of £2,496,000 (both 320% of base salary). The awards will have a three-year performance period starting on 1 January 2024. The Committee has reviewed the performance measures considering feedback from shareholders and the next phase of our strategy. We are simplifying and improving the focus on shareholder returns by assessing performance on three measures, including RoTE and relative TSR which are equally-weighted financial measures, and a third measure linked to our climate ambitions. The capital reallocation to Asia measure was previously included to retain focus on repositioning the Group’s capital base through the transformation of the business. While our operations in Asia continue to be of significant strategic importance to the Group, it was the Committee’s view that this measure no longer appropriately incentivised the delivery of sustainable returns achievable across wider markets in which HSBC operates. Targets have been set to balance stretch and achievability so that awards act as an effective incentive for management, and incentivise outperformance, aligned to our external strategic commitments. – The minimum threshold for the RoTE measure is aligned to our external commitment of mid-teens RoTE over the medium term. – The relative TSR peer group was amended for 2023 to include more Asian peers to better reflect our growth and investment focus. No changes have been made for 2024 other than the removal of the Credit Suisse Group following its acquisition by UBS Group. – Our emissions reduction targets have been set based on meeting our commitments to procure 90% renewable energy by 2025 and halve energy consumption and travel emissions by 2030. – Our sustainable finance and investments measure is based on our ambition announced in 2020 to provide $750bn to $1tn of financing and investment by 2030. Although the target range is lower than for the 2023–2025 LTI awards, we are on track to meet our 2030 ambition, with changing market conditions slightly impacting our year-on-year trajectory. The LTI is subject to a risk and compliance modifier, which gives the Committee the discretion to ensure performance targets are delivered with appropriate risk management. The RoTE measure is subject to a CET1 capital ratio underpin. If the CET1 capital ratio at the end of the performance period is below the CET1 risk tolerance level set in the risk appetite statement, then the assessment for this measure will be reduced to nil. The number of shares to be awarded will be adjusted to reflect the expected dividend yield of the shares over the vesting period, as awards are not entitled to dividend equivalents in accordance with regulatory requirements. To the extent performance conditions are satisfied at the end of the three-year performance period, the awards will vest in five equal annual instalments commencing from around the third anniversary of the grant date. On vesting, shares equivalent to the net number of shares that have vested (after those sold to cover any income tax and social security payable) will be held for a retention period of up to one year, or such period as required by regulators. HSBC Holdings plc Annual Report and Accounts 2023 287 Corporate governance Measures (weighting)1 Minimum (25.0% payout) Target (50.0% payout) Maximum (100.0% payout) RoTE with CET1 capital ratio underpin2 (37.5%) 14.0% 16.0% 17.0% Environment3 (25.0%) Carbon reduction (own emissions) 66.0% 70.0% 74.0% Sustainable finance and investment $539.0bn $641.0bn $693.0bn Relative TSR4 (37.5%) At the median of the peer group Straight-line vesting between minimum and maximum At the upper quartile of the peer group Subject to risk and compliance modifier The Group Remuneration Committee retains the discretion to revise down the formulaic outcome taking into account performance against risk and compliance factors during the performance period. Performance conditions for the 2024–2026 LTI awards 1 Awards will vest on a straight-line basis for performance between the minimum, target and maximum levels of performance set in this table. 2 To be assessed based on RoTE at the end of the performance period, subject to the CET1 capital ratio underpin. 3 Carbon reduction will be measured based on percentage reduction in total energy and travel emissions achieved by 31 December 2026 using 2019 as the baseline. The sustainable finance and investment metric will assess the cumulative amount provided and facilitated over the period ending 31 December 2026. 4 The peer group for the 2023 award is: Bank of China (Hong Kong), Barclays, BNP Paribas, China Merchants Bank, Citigroup, DBS Group Holdings, J.P. Morgan Chase & Co., Lloyds Banking Group, OCBC Bank, Standard Chartered and UBS Group. Annual incentive measures for 2024 The 2024 annual incentive scorecard measures for our executive Directors have been set to incentivise the delivery of the next phase of our strategy. We have reduced the number of financial measures, reflecting feedback from shareholders to simplify our approach and ensure focus on our key strategic commitments. The weighting of Group RoTE has increased to 25% (from 15% in 2023). The overall weighting of financial measures remains at 60%. Financial measures will be assessed on a reported basis excluding notable items so that the outcome reflects performance excluding the impact of one-off and items not controlled by management. Our first net zero transition plan was launched in January 2024 setting out our approach to net zero and the actions we are taking. To support our ambition, a sustainability measure has been added to the annual scorecard, which will be assessed based on the execution of our sustainability commitments against Board approved plans. Personal measures have been set to ensure meaningful weighting for the most critical objectives for each executive Director. The Committee will continue to retain discretion to adjust the formulaic outcomes of scorecards, taking into account factors such as Group profits, wider business performance and stakeholder experience, to ensure executive reward is aligned with underlying Group performance and the broader stakeholder experience. The weightings and performance measures for the 2024 annual incentive scorecard for executive Directors are in the adjacent table. The targets have been set to reflect the Group’s 2024 plan, while considering macroeconomic uncertainty, including the interest rate environment and inflation. The performance targets are commercially sensitive and it would be detrimental to the Group’s interests to disclose them at the start of the financial year. Subject to commercial sensitivity, we will disclose the targets in the 2024 Directors’ remuneration report. 2024 annual incentive performance measures Weighting Financial (all measures subject to CET1 capital ratio underpin, and excluding notable items) 60.0% Profit before tax 15.0% Operating expenses 15.0% Group RoTE 25.0% Asia RoTE 5.0% Stakeholders 30.0% Customer satisfaction Improvement in NPS scores/rank 15.0% Employee experience Gender and ethnicity representation and Inclusion index score 10.0% Execution of our sustainability commitments against Board approved plans 5.0% Personal measures – Group Chief Executive: Technology transformation and enhanced Board information – Group Chief Financial Officer: Delivery of regulatory change programmes (including regulatory reporting), enhancement of external disclosures and robust liquidity and capital management 10.0% Subject to risk and compliance modifier The Group Remuneration Committee retains the discretion to revise down the formulaic outcome taking into account performance against risk and compliance factors during the performance period. Report of the Directors | Corporate governance report | Directors’ remuneration report 288 HSBC Holdings plc Annual Report and Accounts 2023 Our approach to workforce reward Our goal is to deliver a unique and exceptional experience to energise colleagues to perform at their best. This is critical to strengthening our ability to attract, retain and motivate the people we need, in competitive markets where employee expectations continue to evolve. Our approach is centred on our purpose and values, and our reward principles and commitments are: – We will reward our colleagues responsibly through fixed pay security and protection through core benefits, a competitive total compensation opportunity, pay equity, and a more inclusive and sustainable benefits proposition over time. – We will recognise colleagues' success through our performance culture and routines, including feedback and recognition, pay for performance, and all employee share ownership opportunities. – We will support our colleagues to grow through our proposition beyond pay, with a focus on future skills and development, support for well-being, and flexibility. Pay is an important part of our overall proposition. Our focus is improving transparency and clarity for colleagues so they understand better how we make pay decisions. For 2024, we will introduce a new variable pay structure for over 150,000 junior and middle management colleagues, providing more clarity around the variable pay levels for on-target performance, while retaining flexibility to differentiate outcomes for performance. We have been certified by the Fair Wage Network as a global Living Wage employer for 2024. This is an important commitment to give colleagues confidence that our fixed pay levels are sufficient to provide financial security. The section below highlights some of our achievements in 2023. We will reward you responsibly 78% ▲ up 5% from 2022 of colleagues say pay recommendations determined regardless of personal characteristics Many of our colleagues found 2023 to be a challenging year. While inflation has fallen from levels seen in 2022, it remains high across many of our markets, which has resulted in continued pressures on the cost of living. Fixed pay increases for 2024 were determined based on consistent principles to help address wage inflation in the markets where we operate. Across the Group, there was an overall increase in fixed pay of 4.4%. The level of increases varied by market, depending on the economic situation and individual roles. Increases were targeted towards more junior and middle management colleagues where fixed pay is a larger proportion of overall pay. We continued to take action outside of our annual cycle to address inflation pressures for colleagues, where the local context required this. In Argentina and Türkiye, we gave our colleagues fixed pay increases throughout the year. In Egypt, we supported our colleagues with a one-off pay adjustment in response to high inflation. 52% ▲ up 9% from 2022 of colleagues say they are paid fairly for what they do 59% same as 2022 of colleagues say my benefits meet my (and my family's) needs well We will recognise your success 81% ▲ up 7% from 2022 of colleagues say they receive feedback helping them improve performance Over 90% of colleagues have access to share ownership plans globally, with 25% of our global employee population taking part. In the UK, following the maturity of the three-year 2020 Sharesave plan with an option price of £2.627, colleagues benefited from significant share price growth at a time when they needed it most. The 2020 plan had the highest take up rate and contribution level in recent years. 1.4 million recognitions the highest since the At Our Best recognition platform was launched in 2015 We will support you to grow 78% ▲ up 20% from 2022 of colleagues work flexibly and split their time between home and the workplace Our approach to benefits and well-being balances local market practice with global minimum standards. More than 95% of colleagues have private medical insurance, a retirement plan and life insurance. Our well-being programme focuses on mental, physical, financial and social well- being. In our employee Snapshot survey, 83% of colleagues said their mental health was positive. HSBC has been ranked top tier for mental health in the global CCLA Corporate Mental Health Benchmark. We have prioritised supporting colleagues to work flexibly, balancing customer needs, social connection and individual flexibility. Flexible working remains one of the most cited reasons why colleagues would recommend HSBC as a place to work, and a third of new joiners say it is what attracted them to HSBC. We have delivered a world-class talent marketplace and learning experience platform, providing learning pathways, projects and networking opportunities to more than 200,000 colleagues. An average of 23.9 hours of training was delivered per FTE in 2023. 71% ▲ up 3% from 2022 our career index is higher than the financial services benchmark by 6% HSBC Holdings plc Annual Report and Accounts 2023 289 Corporate governance Remuneration structure for employees We set out below the key features of our remuneration framework, which applies on a Group-wide basis, subject to compliance with local laws: Fixed pay Attract and retain employees with market competitive pay for the role, skills and experience required. – Fixed pay may include base salary, fixed pay allowance, cash in lieu of pension and other cash allowances in accordance with local market practice. – It is based on predetermined criteria, non-discretionary, transparent and not reduced based on performance. – It represents a higher proportion of total compensation for more junior colleagues. – Fixed pay may change to reflect an individual’s position, role or grade, cost of living in the country, individual skills, capabilities and experience. – Fixed pay is generally delivered in cash on a monthly basis. – Consistent with approach for Group colleagues except fixed pay allowance paid in shares. Benefits Support the physical, mental and financial health of a diverse workforce in accordance with local market practice. – Benefits may include, but are not limited to, the provision of a pension, medical insurance, life insurance, health assessment and relocation support. – Provision of medical insurance, life insurance, car and tax return assistance. Group Chief Executive is eligible to receive accommodation and a car benefit in Hong Kong. Annual incentive Incentivise and reward performance based on annual financial and non-financial measures consistent with the medium- to long-term strategy, stakeholder interests and values- aligned behaviours. – All employees are eligible to be considered for a discretionary variable pay award. Individual awards are determined against objectives for performance set at the start of the year. – Variable pay represent a higher proportion of total compensation for more senior colleagues and will be more closely aligned to Group and business performance as seniority increases. – Variable pay for Group employees identified as Material Risk Takers (’MRTs’) under European Union Regulatory Technical Standard (’RTS’) 2021/923 is limited to 200% of fixed pay, as approved by shareholders at the 2014 AGM held on 23 May 2014 (98% in favour). – Awards are generally paid in cash and shares. For MRTs, at least 50% of the awards are in shares and/or where required by regulations, in units linked to asset management funds. – Annual incentive is determined based on the outcomes of annual scorecard of financial and non-financial measures. – Executive Directors and Group Executives are also eligible to be considered for a long-term incentive award, which is subject to three-year forward-looking performance measures. Buy-out awards Support recruitment of key individuals. – Buy-out awards may be offered if an individual holds any outstanding unvested awards that are forfeited on resignation from the previous employer. – The terms of the buy-out awards will not be more generous than the terms attached to the awards forfeited on cessation of employment with the previous employer. – For new hires, the approach is consistent with the approach taken for employees and policy approved by shareholders. New hire indicative variable pay Support recruitment of key individuals. – New hire indicative variable pay is awarded in exceptional circumstances, and is limited to an individual's first year of employment only, and is subject to a number of factors (such as the respective performance of the Group, business unit and individual), and the final value paid remains at the full discretion of HSBC. – The exceptional circumstances would typically involve a critical new hire and depend on factors such as the seniority of the individual, whether the new hire candidate is forfeiting any awards and the timing of the hire during the performance year. – For new hires, the approach is consistent with the approach taken for employees and policy approved by shareholders. Remuneration components and objectives Application for Group employees Approach for executive Directors Report of the Directors | Corporate governance report | Directors’ remuneration report 290 HSBC Holdings plc Annual Report and Accounts 2023 Deferral Align employee interests with the medium- to long-term strategy, stakeholder interests and values- aligned behaviours. – A Group-wide deferral approach is applicable to all employees. A portion of annual incentive awards above a specified threshold is deferred in shares vesting annually over a three-year period (33% vesting on the first and second anniversaries of grant and 34% on the third). – For MRTs, awards are generally subject to a minimum 40% deferral (60% for awards of £500,000 or more) over a minimum period of four years. – A deferral period of five years is applied for senior management and individuals in specified roles with managerial responsibilities as prescribed under the PRA and FCA remuneration rules and seven years for individuals in PRA-designated senior management functions. – In line with the PRA and FCA remuneration rules, and in compliance with local regulations, the deferral requirement for MRTs is not applied to individuals where their total variable pay is £44,000 or less and variable pay is not more than one-third of total compensation. For these individuals, the Group standard deferral applies. – Individuals based outside the UK and identified as MRTs under local regulations, would be subject to local requirements where necessary. – All deferred awards are subject to malus provisions, subject to compliance with local laws. Awards granted to MRTs on or after 1 January 2015 and awards granted to non- MRTs on or after 1 January 2022 are subject to clawback. – HSBC operates an anti-hedging policy for all employees, which prohibits employees from entering into any personal hedging strategies in respect of HSBC securities. – For all Group MRTs and the majority of local MRTs, excluding executive Directors, a minimum 50% of the deferred awards is in HSBC shares and the rest into deferred cash. Local regulatory requirements would also apply where necessary. – For some employees in our asset management business, where required by the relevant regulations, at least 50% of the deferred award is linked to fund units reflective of funds managed by those entities, with the remaining portion in deferred cash awards. – Variable pay awards made in HSBC shares or linked to relevant fund units granted to MRTs are generally subject to a one-year retention period post-vesting. – MRTs who are subject to a five-year deferral period, except senior management or individuals in PRA- and FCA-designated senior management functions, have a six-month retention period applied to their awards. – Where an employee is subject to more than one regulation, the requirement specific to the sector and/or country in which the individual is working is applied. – All of the LTI award, or at least 60% of the total variable award (including LTI), is deferred. The deferred awards will vest in five equal annual instalments, with the first vesting on or around the third anniversary of the grant date and the last instalment vesting on or around the seventh anniversary of the grant date. – All deferred awards are in HSBC shares and subject to a post-vesting retention period of one year. Severance payments Adhere to contractual agreements with involuntary leavers. – Where an individual’s employment is terminated involuntarily for gross misconduct then, subject to compliance with local laws, the Group’s policy is not to make any severance payment and all outstanding unvested awards are forfeited. – For other cases of involuntary termination of employment, the determination of any severance will take into consideration the performance of the individual, contractual notice period, applicable local laws and circumstances of the case. – Generally, for good leavers, all outstanding unvested awards will normally continue to vest in line with the applicable vesting dates. Where relevant, any performance conditions attached to the awards, and malus and clawback provisions, will remain applicable to those awards. – Severance amounts awarded to MRTs are not considered as variable pay for the purpose of application of the deferral and variable pay cap rules under the PRA and FCA remuneration rules where such amounts include: (i) payments of fixed remuneration that would have been payable during the notice and/or consultation period; (ii) statutory severance payments; (iii) payments determined in accordance with any approach applicable in the relevant jurisdictions; and (iv) payments made to settle a potential or actual dispute. – Any payments will be in line with the policy on loss of office. Remuneration components and objectives (continued) Application for Group employees Approach for executive Directors HSBC Holdings plc Annual Report and Accounts 2023 291 Corporate governance Committee governance The Group Chief Executive, the Group Chief Risk and Compliance Officer, the Group Company Secretary and Chief Governance Officer, the Group Chief Human Resources Officer, and the Group Head of Performance, Reward and Employee Relations routinely and selectively attend Committee meetings. As detailed below, the Chair of the Group Remuneration Committee held regular meetings with management, and Committee advisers to discuss specific issues as they arose during the year outside the formal Committee process. The Committee Secretary regularly met with the Chair to ensure the Committee fulfilled its governance responsibilities, to consider input from stakeholders when finalising meeting agendas and track progress on actions and Committee priorities. The Committee Secretary will continue to support the Chair in ensuring that the Committee has fulfilled its governance responsibilities. A copy of the Committee’s terms of reference can be found on our website at www.hsbc.com/who-we-are/leadership-and-governance/ board-committees. Matters considered during 2023 Jan Feb May Jun Jul Sep Dec Remuneration framework and governance Group variable pay pool, workforce performance and pay matters, pay gap report, and employee insights l l l l l l l Directors’ remuneration policy design ô ô ô l l l l Executive Director remuneration policy implementation, scorecards and pay proposals l l l ô l l l Remuneration for other senior executives of the Group l l l ô l ô l Directors’ remuneration report l l ô ô ô ô l Regulatory, risk and governance Material risk and audit events, and performance and remuneration impacts for individuals involved l l l ô l l l Regulatory updates, including approach and outcomes for the identification of Material Risk Takers l l l l l l l Governance matters l l l l l l l Principal subsidiaries Matters from subsidiary committees l ô l l ô l l l Matter considered ô Matter not considered Advisers The Committee received input and advice from different advisers on specific topics during 2023. Deloitte provided independent advice to the Committee. Deloitte also provided tax compliance and other advisory services to the Group in 2023. Deloitte is a founding member of the Remuneration Consultants Group and voluntarily operates under the code of conduct in relation to executive remuneration consulting in the UK. The Committee also received advice from Willis Towers Watson on market data and remuneration trends. Willis Towers Watson also provides actuarial support to Global Finance, benchmarking data for the wider workforce and services related to benefits administration for our Group employees. The Committee was satisfied the advice provided by Deloitte and Willis Towers Watson was objective and independent in 2023. For 2023, total fees of £292,800 and £51,492 were incurred in relation to remuneration advice provided by Deloitte and Willis Towers Watson, respectively. This was based on pre-agreed fees and a time- and-materials basis. Attendees and interaction with other Board committees During the year, Noel Quinn as the Group Chief Executive provided regular briefings to the Committee. In addition, the Committee engaged with, and received updates from, the following: – Mark Tucker, Group Chairman; – Elaine Arden, Group Chief Human Resources Officer; – Georges Elhedery, Group Chief Financial Officer; – Jenny Craik, Group Head of Performance, Reward and Employee Relations; – Pam Kaur, Group Chief Risk and Compliance Officer; – Bob Hoyt, Group Chief Legal Officer; and – Aileen Taylor, Group Company Secretary and Chief Governance Officer. The Committee also received feedback and input from the Group Risk Committee and Group Audit Committee on risk, conduct and compliance-related matters relevant to remuneration. No Director is present at Committee meetings when their own remuneration is discussed. In addition to the meetings above, the Chair took the opportunity to meet with the Chair of the Group Risk Committee and Group Audit Committee to consider the Group’s risk and reward alignment framework, which is designed to promote sound and effective risk management in meeting PRA and FCA remuneration rules and expectations. Committee effectiveness In 2023, the annual review of the effectiveness of the Board committees, including the Group Remuneration Committee, was conducted externally by Ffion Hague, Independent Board Evaluation. The review determined that the Committee continued to operate effectively. Areas for enhancement were identified, including continued focus on the relationship between the Group and its subsidiary entities, building on the efforts taken under the direction of the Committee Chair, which will be kept under review in 2024. The outcomes of the evaluation have been reported to the Board, and the Committee will track the progress in implementing recommendations during 2024. As highlighted in the Board effectiveness review disclosure on page 261, the Board considered that further improvement is required to ensure reporting is succinct and supported by relevant key performance indicators. Further details of the annual review of the Board effectiveness review can be found on pages 260 to 261. Report of the Directors | Corporate governance report | Directors’ remuneration report 292 HSBC Holdings plc Annual Report and Accounts 2023 Additional remuneration disclosures This section provides further information and disclosure in relation to executive Director and wider workforce remuneration as required under the Directors' Remuneration Report Regulations, the UK Corporate Governance Code, Hong Kong Ordinances, Hong Kong Listing Rules and the Pillar 3 remuneration disclosures. For the purpose of the Pillar 3 remuneration disclosures, executive Directors and non-executive Directors are considered to be members of the management body. Members of the Group Executive Committee other than the executive Directors are considered as senior management. Policy alignment with UK Corporate Governance Code The table below details how the Group Remuneration Committee addresses the principles set out in the UK Corporate Governance Code in respect of the Directors' remuneration policy: Provision Approach Clarity – The Committee regularly engages and consults with major shareholders to take into account shareholder feedback and to ensure there is transparency on our policy and its implementation. – Details of our remuneration practices and our remuneration policy for Directors are published and available to all our employees. Remuneration arrangements should be transparent and promote effective engagement with shareholders and the workforce. Simplicity – Our Directors' remuneration policy has been designed so that it is easy to understand and transparent, while complying with the provisions set out in the UK Corporate Governance Code and the remuneration rules of the UK's PRA and FCA, as well as meeting the expectations of our shareholders. The objective of each remuneration element is explained and the amount paid in respect of each element is clearly set out. Remuneration structures should avoid complexity and their rationale and operation should be easy to understand. Risk – In line with regulatory requirements, our remuneration practices promote sound and effective risk management while supporting our business objectives. – The Group Chief Risk and Compliance Officer attends Committee meetings and updates the Committee on the overall risk profile of the Group. The Committee also seeks inputs from the Group Risk Committee when making remuneration decisions. – Risk and conduct considerations are taken into account in setting the variable pay pool, from which any executive Director variable pay is funded. – Executive Directors' annual incentive and LTI scorecards include a mix of financial and non- financial measures. Financial measures are subject to a CET1 underpin to ensure CET1 remains within risk tolerance levels while achieving financial targets. In addition, the overall scorecard outcome is subject to a risk and compliance modifier. – The deferred portion of any awards granted to executive Directors is subject to a seven-year deferral period during which our malus policy can be applied. All variable pay awards that have vested are subject to our clawback policy for a period of up to seven years from the award date (extending to 10 years where an investigation is ongoing). Remuneration structures should identify and mitigate against reputational and other risks from excessive rewards, as well as behavioural risks that can arise from target-based incentive plans. Predictability – The charts set out in our shareholder approved policy report (available in our Annual Report and Accounts 2021) show how the total value of remuneration and its composition vary under different performance scenarios for executive Directors. The range of possible values of rewards to individual Directors and any other limits or discretions should be identified and explained at the time of approving the policy. Proportionality – The annual incentive and LTI scorecards reward achievement of our financial and resource plan targets, as well as long-term financial and shareholder value creation targets. – The Committee retains the discretion to adjust the annual incentive and LTI payout based on the outcome of the relevant scorecards, if it considers that the payout determined does not appropriately reflect the overall position and performance of the Group during the performance period. The link between individual awards, the delivery of strategy and the long-term performance of the Group should be clear and outcomes should not reward poor performance. Alignment with culture – In order for any annual incentive award to be made, each executive Director must achieve a required behaviour rating, which is assessed by reference to the HSBC Values. – Annual incentive and LTI scorecards contain non-financial measures linked to our wider social strategy. These include measures related to reducing the environmental impact of our operations, improving customer satisfaction, diversity and inclusion. – Each year senior employees participate in a 360 survey, which gathers feedback on values-aligned behaviours from peers, direct reports, skip level reports and managers. Incentive schemes should drive behaviours consistent with the Group's purpose, values and strategy. HSBC Holdings plc Annual Report and Accounts 2023 293 Corporate governance Link between risk, performance and reward Our remuneration practices promote sound and effective risk management to support our business objectives and the delivery of our strategy. We set out below the key features of our framework, which enable us to align between risk, performance and reward, subject to compliance with local laws and regulations: Variable pay pool – The Group variable pay pool is expected to reflect Group performance, based on a range of financial and non-financial factors. We use a countercyclical funding methodology, with both a floor and a ceiling, with the payout ratio generally reducing as performance increases to avoid pro-cyclicality. The floor recognises that even in challenging times, remaining competitive is important. The ceiling recognises that at higher levels of performance it is not always necessary to continue to increase the variable pay pool, thereby limiting the risk of inappropriate behaviour to drive financial performance. – The main quantitative and qualitative performance and risk metrics used for assessment of performance include: – Group and business unit financial performance, considering contextual factors driving performance, and capital requirements; – current and future risks, taking into consideration performance against the risk appetite, financial and resourcing plan and global conduct outcomes; and – fines, penalties and provisions for customer redress, which are automatically included in the Committee’s definition of profit for determining the pool. – In the event that the Group was unable to distribute dividends to shareholders for reasons such as capital adequacy, then the Group may determine that as a year of weak performance. In such a year, the Group may withhold some, or all, variable pay for employees including unvested share awards, using the metrics outlined above as a basis for that determination. Individual performance – Assessment of individual performance is made with reference to clear and relevant financial and non-financial objectives. Objectives for senior management take into account appropriate measures linked to sustainability risks, such as: reduction in carbon footprint; facilitating financing to help clients with their transition to net zero; employee diversity; and risk and compliance measures. – A mandatory global risk and compliance objective is included for all other employees. Employees receive a behaviour rating as well as a performance rating, which ensures performance is assessed not only on what is achieved but also on how it is achieved. Control function staff – Group policy is for control functions staff to report into their respective function. Remuneration decisions for senior functional roles are made by the global function head. – The performance and reward of individuals in control functions, including risk and compliance colleagues, are assessed according to a balanced scorecard of objectives specific to the functional role they undertake. – Their remuneration is determined independent of the performance of the business areas they oversee. – Remuneration is carefully benchmarked with the market and internally to ensure it is set at an appropriate level. – The Committee is responsible for approving the remuneration for the Group Chief Risk and Compliance Officer and Group Head of Internal Audit. Variable pay adjustments and conduct recognition – Variable pay awards may be adjusted downwards in circumstances including: – detrimental conduct, including conduct that brings HSBC into disrepute; – involvement in events resulting in significant operational losses, or events that have caused or have the potential to cause significant harm to HSBC; and – non-compliance with the values-aligned behaviours and other mandatory requirements or policies. – Rewarding positive conduct may take the form of use of our global recognition programme, At Our Best, or positive adjustments to variable pay awards. Malus – Malus can be applied to unvested deferred awards (up to 100% of awards) granted in prior years in circumstances including: – detrimental conduct, including conduct that brings the business into disrepute; – past performance being materially worse than originally reported; – restatement, correction or amendment of any financial statements; and – improper or inadequate risk management. Clawback – Clawback can be applied to vested or paid awards granted to MRTs on or after 1 January 2015 (and awards granted to non-MRTs on or after 1 January 2022) for a period of seven years, extended to 10 years for employees in PRA and FCA designated senior management functions in the event of ongoing internal/regulatory investigation at the end of the seven-year period. Clawback may be applied in circumstances including: – participation in, or responsibility for, conduct that results in significant losses; – failing to meet appropriate standards and propriety; – reasonable evidence of misconduct or material error that would justify, or would have justified, summary termination of a contract of employment; and – a material failure of risk management suffered by HSBC or a business unit in the context of Group risk-management standards, policies and procedures. – Clawback can also be applied to vested or paid awards granted to designated Executive Officers as defined by the US Securities and Exchange Commission ('SEC') for a period of three years in the event of an accounting restatement due to material non- compliance with any financial reporting requirement under the US securities laws. Sales incentives – We generally do not operate commission-based sales plans, unless aligned with local market practice and with appropriate safeguards to avoid incentivising inappropriate sales behaviours. Identification of MRTs – We identify individuals as MRTs based on qualitative and quantitative criteria set out in the PRA's and FCA's Remuneration Rules. Our identification process is underpinned by the following key principles: – MRTs are identified at Group, HSBC Bank (consolidated) and HSBC UK Bank level. – MRTs are also identified at other solo regulated entity level as required by the regulations. – When identifying an MRT, HSBC considers a colleague’s role within its matrix management structure. The global business and function that an individual works within takes precedence, followed by the geographical location in which they work. – We also identify additional MRTs based on our own internal criteria, which include compensation thresholds and individuals in certain roles and grades who otherwise would not be identified as MRTs under the Remuneration Rules. Framework elements Application Report of the Directors | Corporate governance report | Directors’ remuneration report 294 HSBC Holdings plc Annual Report and Accounts 2023 Summary of shareholder return and Group Chief Executive remuneration The graph shows HSBC TSR performance (based on the daily spot Return Index in sterling) against the FTSE 100 Total Return Index for the 10-year period ended 31 December 2023. The FTSE 100 Total Return Index has been chosen as a recognised broad equity market index of which HSBC Holdings is a member. The single figure remuneration for the Group Chief Executive over the past 10 years, together with the outcomes of the respective annual incentive and LTI awards, are presented in the following table. HSBC TSR and FTSE 100 Total Return Index HSBC TSR FTSE 100 Total Return Index Dec 2013 Dec 2014 Dec 2015 Dec 2016 Dec 2017 Dec 2018 Dec 2019 Dec 2020 Dec 2021 Dec 2022 Dec 2023 100% 200% 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Group Chief Executive Stuart Gulliver Stuart Gulliver Stuart Gulliver Stuart Gulliver Stuart Gulliver John Flint John Flint Noel Quinn Noel Quinn Noel Quinn Noel Quinn Noel Quinn Total single figure £000 7,619 7,340 5,675 6,086 2,387 4,582 2,922 1,977 4,154 4,895 5,562 10,641 Annual incentive1 (% of maximum) 54% 45% 64% 80% 76% 76% 61% 66% 32% 57% 75% 70% Long-term incentive1,2,3 (% of maximum) 44% 41% –% –% 100% –% –% –% –% –% –% 75% 1 The 2012 annual incentive figure for Stuart Gulliver included 60% of the annual incentive disclosed in the 2012 Directors’ remuneration report, which was deferred for five years and subject to service conditions and satisfactory completion of the five-year deferred prosecution agreement with the US Department of Justice, entered into in December 2012 (’AML DPA’) as determined by the Committee. The AML DPA performance condition was met and the award vested in 2018. The value of the award at vesting was in the 2018 single figure of remuneration and included as long-term incentive for 2018. 2 Long-term incentive awards are included in the single figure of remuneration for the year in which the performance period is deemed to be substantially completed. For Group Performance Share Plan (’GPSP’) awards, this is the end of the financial year preceding the date of grant. GPSP awards shown in 2014 to 2015 are therefore related to awards granted in 2015 to 2016. 3 The GPSP was replaced by the LTI in 2016 and the value for GPSP is nil for 2016 as no GPSP award was made. LTI awards have a three-year performance period and the first LTI award was made in February 2017. The value of the LTI awards expected to vest will be included in the total single figure of remuneration of the year in which the performance period ends. Noel Quinn received the 2021–2023 LTI award that had a performance period which ended on 31 December 2023. This was the first LTI award granted to him as Group Chief Executive. Voting results from Annual General Meeting 2023 Annual General Meeting voting results For Against Withheld Remuneration report (votes cast) 79.75% 20.25% –– 8,251,001,243 2,094,952,768 32,990,533 Remuneration policy (votes cast from 2022 Annual General Meeting) 95.73 % 4.27 % –– 7,666,488,029 342,320,697 7,773,468 As set out in the Committee Chair's letter, the Committee reflected on feedback from investors following the vote on the implementation of our current policy at last year’s AGM. We explained in our statements of 5 May 2023 and 3 November 2023 that our largest shareholder voted against the Board’s recommendations on a number of resolutions including the Directors’ remuneration report, which impacted the results of these resolutions. The Board was pleased that a large majority of shareholders voting at the AGM supported HSBC’s strategy. The Committee Chair has met with several of our large institutional investors and proxy advisory firms since the AGM, and there remains strong support for the current remuneration policy. HSBC Holdings plc Annual Report and Accounts 2023 295 Corporate governance Pay ratio The following table shows the ratio between the total pay of the Group Chief Executive and the lower quartile, median and upper quartile pay of our UK employees. Total pay and benefits for the Group Chief Executive is the single figure of remuneration for Noel Quinn. The increase in median ratio is primarily driven by the vesting of the 2021–2023 long-term incentive ('LTI'), which is the first he has received as Group Chief Executive. Excluding the LTI vesting in respect of the year, the ratio remained broadly in line with prior years at 86:1 at median. Total pay ratio Method Lower quartile Median Upper quartile 2023 A 291:1 169:1 88:1 2022 A 167:1 95:1 49:1 2021 A 154:1 90:1 46:1 2020 A 139:1 85:1 43:1 2019 A 169:1 105:1 52:1 Total pay and benefits amounts used to calculate the ratio (£) Method Lower quartile Median Upper quartile Total pay and benefits Total salary Total pay and benefits Total salary Total pay and benefits Total salary 2023 A 36,528 27,680 63,000 45,536 121,223 89,506 2022 A 33,284 24,615 58,257 41,000 113,778 95,000 2021 A 31,727 27,666 54,678 41,500 106,951 84,000 2020 A 29,833 23,264 48,703 36,972 96,386 75,000 2019 A 28,920 24,235 46,593 41,905 93,365 72,840 The total pay and benefits for the median employee for 2023 was £63,000, an 8.1% increase compared with 2022. Our UK workforce comprises a diverse mix of colleagues across different businesses and levels of seniority, from junior cashiers in our retail branches to senior executives managing our global business units. We aim to deliver market-competitive pay for each role, taking into consideration the skills and experience required for the business. Pay structure varies across roles in order to deliver an appropriate mix of fixed and variable pay. Junior colleagues have a greater portion of their pay delivered in a fixed component, which does not vary with performance and allows them to predictably meet their day-to-day needs. Our senior management, including executive Directors, generally have a higher portion of their total remuneration opportunity structured as variable pay and linked to the performance of the Group, given their role and ability to influence the strategy and performance of the Group. Executive Directors also have a higher proportion of their variable pay delivered in shares, which vest over a period of seven years with a post-vesting retention period of one year. During this deferral and retention period, the awards are linked to the share price so the value of award realised by them after the vesting and retention period will be aligned to the performance of the Group. We are satisfied that the median pay ratio is consistent with the pay and progression policies for our UK workforce, taking into account the diverse mix of our UK employees, the pay mix applicable to each role and our objective of delivering market competitive pay for each role subject to Group, business and individual performance. Our ratios have been calculated using the option ‘A’ methodology prescribed under the UK Companies (Miscellaneous Reporting) Regulations 2018. Under this option, the ratios are calculated using full-time equivalent pay and benefits of all employees providing services in the UK at 31 December 2023. We believe this approach provides accurate information and representation of the ratios. The ratio has been computed taking into account the pay and benefits of nearly 33,000 UK employees, other than the Group Chief Executive. We calculated our pay quartiles and benefits information for our UK employees using: – full-time equivalent annualised fixed pay, which includes base salary and allowances, at 31 December 2023; – variable pay awards for 2023; – return on deferred cash awards granted in prior years. The deferred cash portion of the annual incentive granted in prior years includes a right to receive notional returns for the period between the grant date and vesting date, which is determined by reference to a rate of return specified at the time of grant. A payment of notional return is made annually and the amount is disclosed on a paid basis in the year in which the payment is made; – gains realised from exercising awards from taxable employee share plans; and – full-time equivalent value of taxable benefits and pension contributions. Full-time equivalent fixed pay and benefits for each employee have been calculated by using each employee’s data as at 31 December 2023. Where an employee works part-time, fixed pay and benefits are grossed up, where appropriate, to full-time equivalent. One-off benefits have not been included in calculating the ratios as these are not permanent in nature and in some cases, depending on individual circumstances, may not truly reflect a benefit to the employee. The reported ratios may not be comparable to our international and listed peers on the FTSE 100, given differences in business mix and size; employment and compensation practices; methodologies for computing pay ratios; and assumptions used by companies. Relative importance of spend on pay The following chart shows the change in: – total employee pay between 2022 and 2023; and – dividends and share buy-backs in respect of 2022 and 2023. In 2023, total spend on pay was slightly higher than in 2022. The total return to shareholders increased by 156% compared with 2022, reflecting a higher dividend and $7bn of capital return to shareholders through share buy-backs, which included the up to $3bn buy-back announced at our third quarter of 2023 results. In addition, the Group has announced the intention to initiate a further up to $2bn buy-back. Dividends include an approximation of the amount payable in April 2024 in relation to the fourth interim dividend of $0.31 per ordinary share. Relative importance of spend on pay Total return to shareholder 2023 — $11,816m $7,000m $18,816m ↑ 156% 2022 — $6,343m $1,000m $7,343m1 Employee pay 2023 — $18,220m ↑ 1% 2022 — $18,003m Employee pay Dividends Share buy-back 1 In our Annual Report and Accounts 2022, we disclosed that the total return to shareholders was $9,144m, of which $8,144m related to dividends in 2022. This was an error and has been corrected in the chart above. Report of the Directors | Corporate governance report | Directors’ remuneration report 296 HSBC Holdings plc Annual Report and Accounts 2023 Comparison of Directors’ and employees’ pay The following table compares the changes in each Director’s base salary, taxable benefits and annual incentive between 2020 and 2023 with the percentage change in each of those elements of pay for UK- based employees of HSBC Group Management Services Limited, the employing entity of the executive Directors. There were no changes to the fees or benefits of the non-executive Directors between 2020 and 2023. The year-on-year percentage change in fees noted in the table below is primarily driven by any pro- rated fees received by the non-executive Director for 2020, 2021, 2022 and 2023 based on time served by them on the Board and the relevant Board committees and any additional responsibilities taken on by the non-executive Director during each year. The value of benefits received by the non-executive Directors reflect the taxable expense reimbursements claimed, and the associated gross-up tax, in relation to attending the Board meetings in each year. Page 301 provides the underlying single figure of remuneration for non- executive Directors used to calculate the figures above. Non-executive Directors who joined after 1 January 2023 are not included, which includes Ann Godbehere, Kalpana Morparia, Brendan Nelson and Swee Lian Teo. Annual percentage change in remuneration Base salary/fees Benefits Annual incentive Director/employees 2023 2022 2021 2020 2023 2022 2021 2020 2023 2022 2021 2020 Executive Directors Noel Quinn1,2 0.5 3.2 1.7 151.7 6.7 25.3 (48.9) 353.7 (6.7) 36.1 99.0 20.2 Georges Elhedery3 — — — — — — — — — — — — Non-executive Directors Geraldine Buckingham4 57.4 — — — — — — — — — — — Rachel Duan5,6 8.4 235.8 — — (100.0) — — — — — — — Dame Carolyn Fairbairn6,7 5.3 231.1 — — (100.0) — — — — — — — James Forese8 10.2 20.5 257.5 — — — — — — — — — Steven Guggenheimer9 0.8 4.8 86.6 — (90.0) — — — — — — — José Antonio Meade Kuribreña10 0.8 8.5 10.4 28.7 (71.4) — (100.0) 100.0 — — — — Eileen Murray5 10.7 (1.5) 121.7 — — — — — — — — — David Nish 0.4 (1.0) 0.4 108.7 (13.6) 120.0 25.0 (50.0) — — — — Jackson Tai10,11 (65.0) 7.7 (1.4) (10.8) (24.0) — (100.0) (78.9) — — — — Mark Tucker — — — — (54.9) 242.4 (36.5) (77.5) — — — — Employee group12 5.0 3.1 1.0 2.0 5.7 7.0 1.3 2.3 11.7 3.7 25.2 (20.0) 1 Noel Quinn succeeded John Flint as interim Group Chief Executive with effect from 5 August 2019 and was appointed permanently into the role on 17 March 2020. The annual percentage change in 2020 for Noel Quinn is based on remuneration reported in his 2019 single figure of remuneration (for the period 5 August 2019 to 31 December 2019) and his 2020 single figure of remuneration (for the period 1 January 2020 to 31 December 2020). Based on his annualised 2019 compensation as an executive Director, his percentage change in salary, benefits and annual incentive was 2.1%, 85.2% and -50.9%, respectively for 2020. 2 Noel Quinn voluntarily waived the cash portion of his 2020 annual incentive. The year-on-year percentage change between 2020 and 2021 would be -1% without this cash waiver. 3 Georges Elhedery succeeded Ewen Stevenson as Group Chief Financial Officer with effect from 1 January 2023. Year-on-year comparison for Georges Elhedery will be available from 2024 onwards. 4 Geraldine Buckingham joined the Board on 1 May 2022. 5 Rachel Duan and Eileen Murray were appointed members of the Group Audit Committee on 1 June 2022. 6 Rachel Duan and Dame Carolyn Fairbairn did not receive taxable benefits in 2023, resulting in a 100% reduction in benefits from the prior year. 7 Dame Carolyn Fairbairn was appointed as Chair of the Group Remuneration Committee effective 29 April 2022. 8 James Forese was appointed as non-executive Chair of HSBC North America Holdings, Inc in 2021. Fees for 2021 included fees in relation to this role. 9 Steven Guggenheimer joined the Board on 1 May 2020 and therefore received fees for only part of 2020. 10 José Antonio Meade Kuribreña and Jackson Tai did not receive taxable benefits in 2021, resulting in a 100% reduction in benefits from the prior year. 11 Jackson Tai retired from the Board on 5 May 2023. 12 Employee group consists of individuals employed by HSBC Group Management Services Ltd, the employing entity of the executive Directors, as no individuals are employed directly by HSBC Holdings. HSBC Holdings plc Annual Report and Accounts 2023 297 Corporate governance Scheme interests awarded during 2023 (Audited) The table below sets out the scheme interests granted to executive Directors during 2023 in respect of the 2022 performance year, as disclosed in the 2022 Directors’ remuneration report. No non-executive Directors received scheme interests during the financial year. The below table includes details of immediate shares and fixed pay allowances in compliance with Chapter 17 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited. Scheme awards in 2023 (Audited) Type of interest awarded Basis on which award made Date of award Face value awarded £000 Percentage receivable for minimum performance Number of shares awarded End of performance period Noel Quinn LTI deferred shares1 % of base salary 27 February 2023 5,476 25 861,422 31 December 2025 Immediate shares2 % of base salary 27 February 2023 1,082 N/A 170,206 31 December 2022 Fixed pay allowance3 N/A 15 May 2023 300 N/A 50,080 N/A 21 August 2023 300 N/A 51,435 N/A 7 November 2023 300 N/A 49,291 N/A Georges Elhedery LTI deferred shares1 % of base salary 27 February 2023 1,599 25 251,474 31 December 2025 Immediate shares2 % of base salary 27 February 2023 716 N/A 112,568 31 December 2022 Fixed pay allowance3 N/A 15 May 2023 192 N/A 31,962 N/A 21 August 2023 192 N/A 32,827 N/A 7 November 2023 192 N/A 31,459 N/A 1 In accordance with the remuneration policy approved by shareholders at the 2022 AGM, the LTI award was determined at 320% of base salary for Noel Quinn and 160% of base salary for Georges Elhedery. The number of shares to be granted was determined by taking HSBC’s closing share price of £6.357 taken on 24 February 2023, and applying a discount based on HSBC’s expected dividend yield of 5% per annum for the vesting period (£4.963). LTI awards are conditional share awards subject to a three-year forward-looking performance period and vest in five equal annual instalments, between the third and seventh anniversary of the award date, subject to performance achieved. Awards are subject to malus and clawback for a maximum period of 10 years from the date of the award and are not eligible for dividend equivalents. 2 Immediate share awards are granted based on the previous years' performance as part of the annual incentive and are not subject to forward-looking performance conditions. On vesting, awards will be subject to a one-year retention period. The face value of the immediate share awards have been computed using HSBC’s closing share price of £6.357 taken on 24 February 2023. Awards are subject to clawback for a maximum period of 10 years from the date of the award. 3 Fixed pay allowance awards are granted in instalments in accordance with the remuneration policy approved by shareholders at the 2022 AGM, and are not subject to forward-looking performance conditions. Individual tax liabilities were satisfied in cash, therefore the face value awarded represents the net of tax value of the shares and the number of shares awarded reflects the net of tax number of shares. The fixed pay allowance awards have been computed using HSBC's closing share price of £5.997 taken on 12 May 2023, £5.839 taken on 18 August 2023 and £6.093 taken on 6 November 2023. These awards vest immediately and are subject to a retention period and released annually on pro-rata basis over five years, starting in March 2024. Measures (weighting)1 Minimum (25% payout) Target (50% payout) Maximum (100% payout) RoTE (with CET1 capital ratio underpin)2 (25.0%) 13.0% 14.3% 15.5% Capital reallocation to Asia (with CET1 capital ratio underpin)3 (25.0%) 49.0% 50.5% 52.0% Environment and sustainability4 (25.0%) Carbon reduction 64.0% 68.0% 72.0% Sustainable finance and investment $588.0bn $700.0bn $756.0bn Relative TSR5 (25.0%) At median of the peer group Straight-line vesting between minimum and maximum At upper quartile of peer group Performance conditions for the 2023–2025 LTI awards (Audited) 1 Awards will vest on a straight-line basis for performance between the minimum, target and maximum levels of performance set in this table. 2 To be assessed based on RoTE at the end of the performance period. 3 To be assessed based on share of Group tangible equity (on a constant currency basis and excluding associates) allocated to Asia by 31 December 2025. 4 Carbon reduction will be measured based on percentage reduction in total energy and travel emissions achieved by 31 December 2025 using 2019 as the baseline. The sustainable finance and investment metric will assess the cumulative amount provided and facilitated over the period ending 31 December 2025. 5 The peer group for the 2022 award is: Bank of China (Hong Kong), Barclays, BNP Paribas, China Merchants Bank, Citigroup, DBS Group Holdings, J.P. Morgan Chase & Co., Lloyds Banking Group, OCBC Bank, Standard Chartered and UBS Group. Report of the Directors | Corporate governance report | Directors’ remuneration report 298 HSBC Holdings plc Annual Report and Accounts 2023 Executive Directors’ interests in shares (Audited) The shareholdings of executive Directors in 2023, including the shareholdings of their connected persons, at 31 December 2023 (or the date they stepped down from the Board, if earlier) are set out below. The following table shows the comparison of shareholdings with the company shareholding guidelines. There have been no changes in the shareholdings of the executive Directors from 31 December 2023 to the date of this report. Individuals have five years from their appointment date to build up the recommended levels of shareholding. In line with investor guidance, for executive Directors, unvested shares that are not subject to forward-looking performance conditions (on a net of tax basis) can count towards their shareholding requirement under the shareholder- approved policy. The Committee reviews compliance with the shareholding requirement, taking into account shareholder expectations and guidelines. The Committee also has full discretion in determining any penalties for non-compliance. With regard to post-employment shareholding arrangements, we believe that our remuneration structure achieves the objective of ensuring there is ongoing alignment of executive Directors’ interests with shareholder experience post-cessation of their employment due to the following features of the policy: – Shares delivered to executive Directors as part of the fixed pay allowance have a five-year retention period, which continues to apply following a departure of an executive Director. – Shares delivered as part of an annual incentive award are subject to a one-year retention period, which continues to apply following a departure of an executive Director. – LTI awards have a seven-year vesting period with a one-year post- vesting retention period, which is not accelerated on departure. The weighted average holding period of an LTI award within HSBC is therefore six years, in excess of the five-year holding period typically implemented by FTSE-listed companies. HSBC operates a policy under which individuals are not permitted to enter into any personal hedging strategies in relation to HSBC shares subject to a vesting and/or retention period. Shares (Audited) Shareholding guidelines (% of salary) Shareholding at 31 Dec 20232 (% of salary) At 31 December 2023 Scheme interests Share interests (number of shares) Share options3 Shares awarded subject to deferral1 without performance conditions with performance conditions4 Executive Directors Noel Quinn5 400% 797% 1,721,465 — 308,610 2,963,315 Georges Elhedery5 300% 598% 753,467 — 714,008 475,463 1 The gross number of shares is disclosed. A portion will be sold at vesting to cover any income tax and social security that falls due at the time of vesting. 2 The value of the shareholding is calculated using an average of the daily closing share prices in the three months to 31 December 2023 (£6.192), and does not include any unvested interests. 3 At 31 December 2023, Noel Quinn and Georges Elhedery did not hold any options under the HSBC Holdings Savings-Related Share Option Plan (UK). 4 LTI awards granted in February 2022 and 2023 are subject to the performance conditions as set out in the preceding sections. 5 Executive Directors are expected to meet their shareholding guidelines within five years of the date of their appointment. Noel Quinn and Georges Elhedery were appointed on 5 August 2019 and 1 January 2023, respectively. Service contracts The service contracts of executive Directors do not have a fixed term. The notice periods of executive Directors are set at the discretion of the Committee, taking into account market practice, governance considerations, and the skills and experience of the particular candidate at that time. Service agreements for each executive Director are available for inspection at HSBC Holdings’ registered office. Consistent with the best interests of the Group, the Committee will seek to minimise termination payments. Directors may be eligible for a payment in relation to statutory rights. Contract date (rolling) Notice period (Director and HSBC) Noel Quinn 18 March 2020 12 months Georges Elhedery 1 January 2023 12 months Total pension entitlements (Audited) No employees who served as executive Directors during the year have a right to amounts under any HSBC final salary pension scheme for their services as executive Directors or are entitled to additional benefits in the event of early retirement. There is no retirement age set for Directors, but the normal retirement age for colleagues is 65. Payments to past Directors (Audited) HSBC has received a formal request from the former employer of Ewen Stevenson to reduce the buy-out award granted to him in 2019 by £82,980, which will be offset against the next available vesting for this award. The reduction will be made in line with PRA regulations, acting on the decision made by Ewen Stevenson’s former employer. We understand the reduction was part of a collective adjustment and there are no concerns over Ewen Stevenson's conduct or the discharge of his individual accountabilities. Payments Ewen Stevenson received after he stepped down as an executive Director are set out in the following section. In line with the terms of his departure disclosed in our Annual Report and Accounts 2022, Ewen Stevenson was granted good leaver status and is therefore eligible to receive vesting of the 2021–2023 LTI award, which was pro-rated for time in employment. Ewen’s good leaver status is conditional upon satisfaction of non-compete provisions under which he cannot undertake a role with a defined list of competitor financial services firms for 12 months after his employment ceases with HSBC. Details of the 2021–2023 LTI outcome are outlined on page 286. No other payments were made to, or in respect of, former Directors in the year in excess of the minimum threshold of £50,000 set for this purpose. HSBC Holdings plc Annual Report and Accounts 2023 299 Corporate governance Payments for loss of office (Audited) Departure terms for Ewen Stevenson Ewen Stevenson left the Group on 30 April 2023. In accordance with the approved Directors' remuneration policy and contractual terms agreed for the period between 1 January 2023 and 25 October 2023, Ewen received payments totalling £703,519 in lieu of his base salary and pension allowance. Ewen also received his fixed pay allowance in respect of the same period, which totalled £885,836 and was awarded in immediately vested shares, which are subject to a retention period. In accordance with the approved Directors' remuneration policy, Ewen received cash in lieu of unused holiday totalling £73,621 on expiry of his notice period. External appointments During 2023, executive Directors did not receive any fees from external appointments. Directors’ emoluments The details of compensation paid to executive and non-executive Directors for the year ended 31 December 2023 are set out below: Emoluments Noel Quinn Georges Elhedery Non-executive Directors1 2023 2022 2023 2022 2023 2022 £000 £000 £000 £000 £000 £000 Directors' base salary, allowances and benefits in kind 3,386 3,367 1,999 — Non-executive Directors' fees and benefits in kind 4,920 4,644 Pension contributions — — — — — — Performance-related pay paid or receivable2 6,293 6,439 3,783 — — — Inducements to join paid or receivable — — — — — — Compensation for loss of office — — — — — — Notional return on deferred cash 43 31 6 — — — Total 9,722 9,837 5,788 — 4,920 4,644 Total ($000) 12,083 12,226 7,194 — 6,115 5,772 1 Fees and benefits in kind for 2022 reflects the population as per the single figure table for non-executive Directors, which excludes individuals who have stepped down from the Board during 2022. 2 Includes the value of the deferred and LTI awards at grant. The aggregate amount of Directors’ emoluments (including both executive Directors and non-executive Directors) for the year ended 31 December 2023 was $25,391,977. As per our policy, benefits in kind may include, but are not limited to, the provision of medical insurance, income protection insurance, health assessment, life assurance, club membership, tax assistance, car benefit, travel assistance, provision of company owned-accommodation and relocation costs (including any tax due, where applicable). Total benefits in kind of £25,304 ($31,450) were provided to Ewen Stevenson until he left the Group. This included income protection benefits valued at £16,414 ($20,401), life assurance benefits of £935 ($1,162) and other non-taxable expenses of £7,955 ($9,887). Post-employment medical insurance benefits were provided to former Directors, including Douglas Flint valued at £6,721 ($8,354), Stuart Gulliver valued at £6,721 ($8,354), John Flint valued at £9,706 ($12,064), Marc Moses valued at £15,886 ($19,745) and Ewen Stevenson valued at £377 ($469). Tax return support was also provided to John Flint valued at £5,441 ($6,763), Marc Moses valued at £2,500 ($3,107) and Ewen Stevenson valued at £1,320 ($1,641). The total aggregate value of benefits provided to former executive Directors was £73,976 ($91,945). The aggregate value of Director retirement benefits for current Directors is nil. Amounts are converted into US dollars based on the average exchange rates for the year. There were payments under retirement benefit arrangements with three former Directors of £1,381,674. The provision at 31 December 2023 in respect of unfunded pension obligations to two former Directors amounted to £340,208. This relates to unfunded unapproved retirement benefits schemes. Emoluments of senior management and five highest paid employees The following tables set out the emoluments paid to senior management, which in this case comprises executive Directors and members of the Group Executive Committee, for the year ended 31 December 2023, or for the period of appointment in 2023 as a Director or member of the Group Executive Committee. Details of the remuneration paid and share awards granted to the five highest paid employees, comprising one executive Director and four Group Executives for the year ended 31 December 2023, are also presented. Five highest paid employees – share awards (HSBC Share Plan 2011) Dates of award Purchase price (£) HSBC Holdings ordinary share awards Usually vesting At 1 Jan 2023 Granted in period Vested in period1 Lapsed in period Cancelled in period At 31 Dec 2023 from to 2013 to 2022 0 1 Mar 2023 30 Mar 2029 5,603,050 — 445,705 — — 5,157,345 27 Feb 20232 0 27 Feb 2023 30 Mar 2030 — 2,533,801 687,935 — — 1,845,866 15 May 20233 0 15 May 2023 15 May 2023 — 50,080 50,080 — — — 21 Aug 20234 0 21 Aug 2023 21 Aug 2023 — 51,435 51,435 — — — 7 Nov 20235 0 7 Nov 2023 7 Nov 2023 — 49,291 49,291 — — — 1 Jan to 31 Dec 20236 0 1 Mar 2023 30 Mar 2024 — 3,345 982 — — 2,363 5,603,050 2,687,952 1,285,428 — — 7,005,574 1 The weighted average closing price of the shares immediately before the dates on which the awards were vested was £5.9681. 2 The closing price on the day before the grant date was £6.3570. The fair values of the awards were calculated according to the IFRS 2 accounting standard. The fair values, which vary based on the length of the vesting period, range between £2.8390 and £6.3180. These awards include LTI awards and other awards which are subject to satisfaction of performance conditions. LTI awards are subject to a combination of financial and non- financial metrics that are detailed in the Directors’ remuneration report in the Annual Report and Accounts. 3 The closing price on the day before the grant date was £5.9970. The fair values of the awards were calculated according to the IFRS 2 accounting standard. The fair value of the award was £6.1100. 4 The closing price on the day before the grant date was £5.8390. The fair values of the awards were calculated according to the IFRS 2 accounting standard. The fair value of the award was £5.8330. 5 The closing price on the day before the grant date was £6.093. The fair values of the awards were calculated according to the IFRS 2 accounting standard. The fair value of the award was £6.0830. Report of the Directors | Corporate governance report | Directors’ remuneration report 300 HSBC Holdings plc Annual Report and Accounts 2023 6 Relates to the allocation of dividend equivalent shares in relation to eligible awards. Emoluments £000s Five highest paid employees Senior management Basic salaries, allowances and benefits in kind 13,357 38,960 Pension contributions 100 640 Performance-related pay paid or receivable1 24,259 59,286 Inducements to join paid or receivable — — Compensation for loss of office — — Total 37,716 98,886 Total ($000) 46,877 122,906 1 Includes the value of deferred share awards at grant. Emoluments by bands Hong Kong dollars US dollars Number of highest paid employees Number of senior management $19,000,001 – $19,500,000 $2,426,967 – $2,490,834 — 1 $22,500,001 – $23,000,000 $2,874,040 – $2,937,907 — 1 $25,000,001 – $25,500,000 $3,193,377 – $3,257,245 — 1 $38,000,001 – $38,500,000 $4,853,933 – $4,917,801 — 1 $41,000,001 – $41,500,000 $5,237,139 – $5,301,006 — 1 $42,000,001 – $42,500,000 $5,364,874 – $5,428,741 — 1 $42,500,001 – $43,000,000 $5,428,741 – $5,492,609 — 2 $48,000,001 – $48,500,000 $6,131,284 – $6,195,152 — 1 $49,000,001 – $49,500,000 $6,259,019 – $6,322,887 — 1 $51,500,001 – $52,000,000 $6,578,357 – $6,642,224 — 1 $56,000,001 – $56,500,000 $7,153,165 – $7,217,032 — 2 $59,000,001 – $59,500,000 $7,536,370 – $7,600,238 — 1 $61,000,001 – $61,500,000 $7,791,840 – $7,855,708 1 1 $63,500,001 – $64,000,000 $8,111,178 – $8,175,046 1 1 $72,500,001 – $73,000,000 $9,260,794 – $9,324,661 1 1 $75,000,001 – $75,500,000 $9,580,132 – $9,643,999 1 1 $94,000,001 – $94,500,000 $12,007,098 – $12,070,966 1 1 Non-executive Directors (Audited) The following table shows the total fees and benefits of non-executive Directors for 2023, together with comparative figures for 2022. Fees and benefits (Audited) Fees1 Benefits2 Total (£000) 2023 2022 2023 2022 2023 2022 Geraldine Buckingham 244 155 5 — 249 155 Rachel Duan 244 225 — 5 244 230 Dame Carolyn Fairbairn 279 265 — 1 279 266 James Forese3 759 689 1 — 760 689 Ann Godbehere4 68 — — — 68 — Steven Guggenheimer 264 262 1 10 265 272 José Antonio Meade Kuribreña 244 242 4 14 248 256 Kalpana Morparia5 170 — — — 170 — Eileen Murray6 290 262 3 — 293 262 Brendan Nelson7 81 — 12 — 93 — David Nish 479 477 19 22 498 499 Jackson Tai8 132 377 19 25 151 402 Swee Lian Teo9 51 — — — 51 — Mark Tucker 1,500 1,500 51 113 1,551 1,613 Total (£000) 4,805 4,454 115 190 4,920 4,644 Total ($000) 5,972 5,536 143 236 6,115 5,772 1 Fees are in line with the Directors’ remuneration policy that was approved at the 2022 AGM. Non-executive Directors receive a pro-rata payment of £4,000 travel allowance per annum. 2 Benefits include taxable expenses such as accommodation, travel and subsistence relating to attendance at Board and other meetings at HSBC Holdings' registered offices. Tax for non-executive Director benefits is met by HSBC, therefore amounts disclosed have been grossed up using a tax rate of 47%, where relevant. 3 Appointed as Chair of the Group Risk Committee on 5 May 2023. Stepped down as a member of the Group Remuneration Committee and joined the Group Audit Committee as a member on 5 May 2023. Includes fee of £443,000 (2022: £447,000) in relation to his role as Chair of HSBC North America Holdings, Inc. 4 Appointed to the Board, Nomination & Corporate Governance Committee and Group Remuneration Committee on 1 September 2023. 5 Appointed to the Board, Nomination & Corporate Governance Committee and Group Risk Committee on 1 March 2023. 6 Appointed as a member of the Group Remuneration Committee on 5 May 2023. 7 Appointed to the Board, Nomination & Corporate Governance Committee, Group Audit Committee and Group Risk Committee on 1 September 2023. 8 Retired from the Board and retired as Chair of the Group Risk Committee and member of the Group Audit Committee and member of the Nomination & Corporate Governance Committee on 5 May 2023. 9 Appointed to the Board, Nomination & Corporate Governance Committee and Group Risk Committee on 1 October 2023. HSBC Holdings plc Annual Report and Accounts 2023 301 Corporate governance Non-executive Directors’ interests in shares (Audited) The shareholdings of persons who were non-executive Directors in 2023, including the shareholdings of their connected persons, at 31 December 2023, or date of cessation as a Director if earlier, are set out below. There have been no changes in the shareholdings of the non-executive Directors from 31 December 2023 to the date of this report. Non-executive Directors are expected to meet the shareholding guidelines of 15,000 shares within five years of the date of their appointment. All non-executive Directors who had been appointed for five years or more at 31 December 2023 met the guidelines. Shares Shareholding guidelines (number of shares) Share interests (number of shares) Geraldine Buckingham 15,000 15,000 Rachel Duan 15,000 15,000 Dame Carolyn Fairbairn 15,000 15,000 James Forese 15,000 115,000 Ann Godbehere (appointed to the Board on 1 September 2023) 15,000 15,000 Steven Guggenheimer 15,000 15,000 José Antonio Meade Kuribreña 15,000 15,000 Kalpana Morparia (appointed to the Board on 1 March 2023) 15,000 15,000 Eileen Murray 15,000 75,000 Brendan Nelson (appointed to the Board on 1 September 2023) 15,000 — David Nish 15,000 50,000 Jackson Tai (retired on 5 May 2023) 15,000 66,515 Swee Lian Teo (appointed to the Board on 1 October 2023) 15,000 15,200 Mark Tucker 15,000 307,352 2024 fees for non-executive Directors Following a review of fees during 2023, and in accordance with the shareholder approved Directors’ Remuneration Policy at the Company’s 2022 Annual General Meeting, the Board approved increases to certain of the fees payable to the non-executive Directors and for roles on the Board Committees with effect from 1 January 2024. As a result, each non-executive Director receives a fee of £136,500 per annum. The separate travel allowance of £4,000 per annum has been incorporated within this fee – a separate travel allowance is no longer paid. The fees paid to non-executive Directors who are standing for election or re-election as members of Board Committees are set out in the table below (these Board Committees’ fees and Board fees are pro-rated for part year service where relevant). 2024 fees Position £ Non-executive Group Chairman1 1,500,000 Non-executive Director (base fee) 136,500 Senior Independent Director 200,000 Group Risk Committee Chair 150,000 Member 42,000 Group Audit Committee, Group Remuneration Committee and Group Technology Committee Chair 78,750 Member 42,000 Nomination & Corporate Governance Committee Chair –– Member 34,650 Designated workforce engagement non-executive Director 40,000 1 The Group Chairman does not receive a base fee or any other fee in respect of chairing of the Nomination & Corporate Governance Committee. Non-executive Director appointment and re-election Non-executive Directors and the Chair are appointed for fixed terms not exceeding three years, which may be renewed subject to their re- election by shareholders at AGMs. Non-executive Directors and the Chair do not have service contracts, but are bound by letters of appointment issued for and on behalf of HSBC Holdings, which are available for inspection at HSBC Holdings’ registered office. There are no obligations in the non- executive Directors’ or Chair's letters of appointment that could give rise to remuneration payments or payments for loss of office. 2024 AGM 2025 AGM 2026 AGM James Forese Rachel Duan Geraldine Buckingham Ann Godbehere1 Dame Carolyn Fairbairn Kalpana Morparia Steven Guggenheimer José Antonio Meade Kuribreña Eileen Murray Brendan Nelson1 Swee Lian Teo1 1 Ann Godbehere, Brendan Nelson and Swee Lian Teo were appointed following the 2023 AGM and therefore their initial three-year appointment terms are subject to approval of their election by shareholders at the 2024 AGM. Their initial three-year term of appointment will end at the conclusion of the 2027 AGM, subject to annual re-election by shareholders at the relevant AGMs. Report of the Directors | Corporate governance report | Directors’ remuneration report 302 HSBC Holdings plc Annual Report and Accounts 2023 MRT remuneration disclosures The following tables set out the remuneration disclosures for individuals identified as MRTs for HSBC Holdings. Remuneration information for individuals who are only identified as MRTs at HSBC Bank plc, HSBC UK Bank plc or other solo-regulated entity levels is included, where relevant, in those entities’ disclosures. The 2023 variable pay information included in the following tables is based on the market value of awards. For share awards, the market value is based on HSBC Holdings’ share price at the date of grant (unless indicated otherwise). For cash awards, it is the value of awards expected to be paid to the individual over the deferral period. Remuneration awarded for the financial year (REM1) Supervisory function Management function Other senior management Other identified staff Fixed remuneration Number of identified staff 13.0 2.0 16.9 1,238.0 Total fixed pay ($m) 5.9 6.7 39.8 690.3 – of which: cash-based ($m)1 5.9 3.2 39.8 690.3 – of which: shares or equivalent ownership interests ($m)2 — 3.5 — — – of which: share-linked instruments or equivalent non-cash instruments ($m) — — — — – of which: other instruments ($m) — — — — – of which: other forms ($m) — — — — Variable remuneration3 Number of identified staff 13.0 2.0 16.9 1,238.0 Total variable remuneration ($m)4 — 15.6 67.4 740.2 – of which: cash-based ($m) — 2.1 30.5 371.2 – of which: deferred ($m) — — 18.3 174.5 – of which: shares or equivalent ownership interests ($m)2 — 13.5 36.9 354.6 – of which: deferred ($m) — 11.5 24.7 201.6 – of which: share-linked instruments or equivalent non-cash instruments ($m) — — — 10.1 – of which: deferred ($m) — — — 5.6 – of which: other instruments ($m) — — — — – of which: deferred ($m) — — — — – of which: other forms ($m) — — — 4.3 – of which: deferred ($m) — — — 2.7 Total remuneration ($m) 5.9 22.3 107.2 1,430.5 1 Cash-based fixed remuneration is paid immediately. 2 Paid in HSBC shares. Vested shares are subject to a retention period of up to one year. 3 Variable pay awarded in respect of 2023. In accordance with shareholder approval received on 23 May 2014 (98% in favour), for each MRT the variable component of remuneration for any one year is limited to 200% of fixed component of the total remuneration. HSBC has continued to use the discount rate previously published as PRA remuneration rule 15.13 for 17 individuals for the purpose of calculating the ratio between fixed and variable components of 2023 total remuneration. 4 26 identified staff members were exempt from the application of the remuneration structure requirements for MRTs under the PRA and FCA remuneration rules. Their total remuneration is $6.2m, of which $5.1m is fixed pay and $1.1m is variable remuneration. Special payments to staff whose professional activities have a material impact on institutions’ risk profile (REM2) Supervisory function Management function Other senior management Other identified staff Guaranteed variable remuneration awards1 Number of identified staff — — — — Total amount ($m) — — — — – of which guaranteed variable remuneration awards paid during the financial year, that are not taken into account in the bonus cap ($m) — — — — Severance payments awarded in previous periods, that have been paid out during the financial year2 Number of identified staff — — — — Total amount ($m) — — — — Severance payments awarded during the financial year2 Number of identified staff — — — 59.8 Total amount ($m) — — — 37.0 – of which paid during the financial year ($m) — — — 32.8 – of which deferred ($m) — — — — – of which severance payments paid during the financial year, that are not taken into account in the bonus cap ($m) — — — 37.0 – of which highest payment that has been awarded to a single person ($m) — — — 3.4 1 No guaranteed variable remuneration was awarded in 2023. HSBC would offer a guaranteed variable remuneration award in exceptional circumstances for new hires, and for the first year of employment only. It would typically involve a critical new hire, and would also depend on factors such as the seniority of the individual, whether the new hire candidate has any competing offers and the timing of the hire during the performance year. 2 Includes payments such as payment in lieu of notice, statutory severance, outplacement service, legal fees, ex-gratia payments and settlements (excludes pre-existing benefit entitlements triggered on terminations). HSBC Holdings plc Annual Report and Accounts 2023 303 Corporate governance Deferred remuneration at 31 December1 (REM3) $m Total amount of deferred remuneration awarded for previous performance periods of which: due to vest in the financial year of which: vesting in subsequent financial years Amount of performance adjustment made in the financial year to deferred remuneration that was due to vest in the financial year Amount of performance adjustment made in the financial year to deferred remuneration that was due to vest in future performance years Total amount of adjustment during the financial year due to ex post implicit adjustments Total amount of deferred remuneration awarded before the financial year actually paid out in the financial year Total amount of deferred remuneration awarded for previous performance period that has vested but is subject to retention periods Supervisory function — — — — — — — — Cash-based — — — — — — — — Shares — — — — — — — — Share-linked instruments — — — — — — — — Other instruments — — — — — — — — Other forms — — — — — — — — Management function 52.4 12.0 40.4 -2.3 — 3.7 6.3 4.2 Cash-based 7.5 1.0 6.5 — — — 1.0 — Shares 44.9 11.0 33.9 -2.3 — 3.7 5.3 4.2 Share-linked instruments — — — — — — — — Other instruments — — — — — — — — Other forms — — — — — — — — Other senior management 149.0 20.1 128.9 — — 12.3 19.7 5.1 Cash-based 51.4 6.6 44.8 — — — 6.5 — Shares 97.2 13.1 84.1 — — 12.3 12.8 4.9 Share-linked instruments 0.4 0.4 — — — — 0.4 0.2 Other instruments — — — — — — — — Other forms — — — — — — — — Other identified staff 1,097.3 301.4 795.9 — — 63.7 290.5 54.9 Cash-based 408.0 89.0 319.0 — — — 87.7 — Shares 663.6 200.2 463.4 — — 60.7 192.9 50.2 Share-linked instruments 15.3 7.9 7.4 — — 2.0 7.7 3.5 Other instruments — — — — — — — — Other forms 10.4 4.3 6.1 — — 1.0 2.2 1.2 Total amount 1,298.7 333.5 965.2 -2.3 — 79.7 316.5 64.2 1 This table provides details of balances and movements during performance year 2023. For details of variable pay awards granted for 2023, refer to the ’Remuneration awarded for the financial year’ table. Deferred remuneration is made in cash and/or shares. Share-based awards are made in HSBC shares. Identified staff - remuneration by band1 (REM4) Identified staff that are high earners as set out in Article 450(i) CRR €1,000,000 – 1,500,000 260 €1,500,000 – 2,000,000 125 €2,000,000 – 2,500,000 54 €2,500,000 – 3,000,000 20 €3,000,000 – 3,500,000 14 €3,500,000 – 4,000,000 6 €4,000,000 – 4,500,000 8 €4,500,000 – 5,000,000 7 €5,000,000 – 6,000,000 8 €6,000,000 – 7,000,000 3 €7,000,000 – 8,000,000 4 €8,000,000 – 9,000,000 — €9,000,000 – 10,000,000 2 €10,000,000 – 11,000,000 — €11,000,000 – 12,000,000 — €12,000,000 – 13,000,000 1 1 Table prepared in euros in accordance with Article 450 of the European Union Capital Requirements Regulation, using the exchange rates published by the European Commission for financial programming and budget for December of the reported year as published on its website. Report of the Directors | Corporate governance report | Directors’ remuneration report 304 HSBC Holdings plc Annual Report and Accounts 2023 Information on remuneration of staff whose professional activities have a material impact on institutions’ risk profile (REM5) Management body Business areas Total Supervisory function Management function Total Investment banking Retail banking Asset management Corporate function Independent internal control function All other Total number of identified staff 1,269.9 – of which members of the Board 13.0 2.0 15.0 – of which senior management 1.0 2.0 — 5.9 2.0 6.0 – of which other identified staff 506.5 298.0 31.0 153.0 180.9 68.6 Total remuneration of identified staff ($m) 5.9 22.3 28.2 712.7 305.9 40.9 200.7 141.2 136.3 – of which variable remuneration ($m)1 — 15.6 15.6 392.0 155.6 21.6 100.5 63.8 74.1 – of which fixed remuneration ($m) 5.9 6.7 12.6 320.7 150.3 19.3 100.2 77.4 62.2 1 Variable pay awarded in respect of 2023. In accordance with shareholder approval received on 23 May 2014 (98% in favour), for each MRT the variable component of remuneration for any one year is limited to 200% of fixed component of the total remuneration. Share plan matters considered by the Group Remuneration Committee The Group Remuneration Committee and its delegates considered various matters relating to the HSBC share plans during the financial year. The HSBC International Employee Share Purchase Plan (‘ShareMatch’) and The HSBC Holdings Savings-Related Share Option Plan (UK) (‘Sharesave’) were offered in 2023. ShareMatch was offered in the Philippines for the first time. The HSBC variable pay deferral approach for the 2023 performance year was approved, for which certain minor updates were made to comply with legal and regulatory requirements. The structure and quantum of LTI awards for the executive Directors and members of the Group Executive Committee were approved for the 2023 performance year. Other awards with performance conditions were approved for certain strategically important projects during 2023. Certain awards were granted to executive Directors or senior managers with vesting periods of less than 12 months: – Fixed pay allowance awards were granted to executive Directors in accordance with the approved Directors’ remuneration policy, which vest immediately and are subject to a retention period. These awards are not subject to clawback on the basis that they form part of the executive Directors’ fixed pay. The awards were granted under the HSBC Share Plan 2011. – Immediate share awards were granted to executive Directors and senior managers in compliance with our regulatory requirements to deliver a portion of non-deferred variable pay in instruments. These awards vest immediately, and are subject to a retention period and clawback provisions. HSBC Holdings plc Annual Report and Accounts 2023 305 Corporate governance Share capital and other related governance disclosures Share buy-back programme On 10 May 2023, HSBC Holdings commenced a share buy-back programme of its ordinary shares of $0.50 each up to a maximum consideration of $2.0bn. This programme concluded on 27 July 2023, with 129,000,963 ordinary shares repurchased for cancellation on UK trading venues and 128,774,800 ordinary shares repurchased for cancellation on The Stock Exchange of Hong Kong Limited (’HKEx’). On 3 August 2023, HSBC Holdings commenced a further share buy- back programme of its ordinary shares of $0.50 each up to a maximum consideration of $2.0bn. This programme concluded on 26 October 2023, with 129,814,790 ordinary shares repurchased for cancellation on UK trading venues and 129,109,200 ordinary shares repurchased for cancellation on HKEx. On 1 November 2023, HSBC Holdings commenced a further share buy-back programme of its ordinary shares of $0.50 each up to a maximum consideration of $3.0bn. As at 31 December 2023, 143,374,864 ordinary shares had been repurchased on UK trading venues and 100,547,200 ordinary shares were repurchased on HKEx. The purpose of the buy-back programmes was to reduce HSBC’s number of outstanding ordinary shares. As at 31 December 2023, the total number of ordinary shares repurchased during the year was 760,621,817, representing a nominal value of $380,310,908.50 and an aggregate consideration paid by HSBC of £2,470,004,997 on UK trading venues and HK$21,646,177,512 on HKEx. The shares repurchased represent 3.95% of the shares in issue. Of the repurchased shares, 44,237,528 were awaiting cancellation as at 31 December 2023. The table that follows outlines details of the shares repurchased and cancelled on a monthly basis during 2023. Number of shares repurchased and cancelled Highest price paid per share Lowest price paid per share Average price paid per share Aggregate price paid First share buy-back on UK trading venues in 2023 £ £ £ £ Month shares cancelled May 2023 31,169,005 6.2000 5.8710 6.0716 189,244,725 Jun 2023 52,376,598 6.1900 5.8810 6.0754 318,208,161 Jul 2023 45,455,360 6.4570 5.9840 6.2246 282,943,198 Total 129,000,963 790,396,084 Number of shares repurchased Highest price paid per share Lowest price paid per share Average price paid per share Aggregate price paid First share buy-back on HKEx in 2023 (HK$) (HK$) (HK$) (HK$) Month shares repurchased May 2023 37,500,000 59.9500 57.2000 59.0377 2,213,913,666 Jun 2023 50,900,000 61.4500 57.1000 60.0303 3,055,542,282 Jul 2023 40,374,800 65.0000 60.3000 62.6018 2,527,536,243 Total 128,774,800 7,796,992,191 Number of shares repurchased and cancelled Highest price paid per share Lowest price paid per share Average price paid per share Aggregate price paid Second share buy-back on UK trading venues in 2023 £ £ £ £ Month shares cancelled Aug 2023 41,102,164 6.4470 5.7940 6.0941 250,481,897 Sep 2023 48,597,672 6.4950 5.7690 6.1120 297,030,003 Oct 2023 40,114,954 6.5750 5.9550 6.3949 256,532,508 Total 129,814,790 804,044,408 Number of shares repurchased Highest price paid per share Lowest price paid per share Average price paid per share Aggregate price paid Second share buy-back on HKEx in 2023 (HK$) (HK$) (HK$) (HK$) Month shares repurchased Aug 2023 46,350,400 64.6000 57.9500 60.7539 2,815,966,340 Sep 2023 51,388,400 62.2000 56.8500 59.7717 3,071,570,280 Oct 2023 31,370,400 63.6500 56.6500 61.7430 1,936,902,040 Total 129,109,200 7,824,438,660 Number of shares repurchased and cancelled Highest price paid per share Lowest price paid per share Average price paid per share Aggregate price paid Third share buy-back on UK trading venues in 2023 £ £ £ £ Month shares repurchased/cancelled Nov 2023 70,595,556 6.2070 5.8910 6.0717 428,636,659 Dec 2023 72,779,308 6.3640 5.9000 6.1409 446,927,846 Total 143,374,864 875,564,505 Report of the Directors | Corporate governance report 306 HSBC Holdings plc Annual Report and Accounts 2023 Number of shares repurchased Highest price paid per share Lowest price paid per share Average price paid per share Aggregate price paid Third share buy-back on HKEx in 2023 (HK$) (HK$) (HK$) (HK$) Month shares repurchased Nov 2023 51,083,600 60.5500 56.4500 59.0032 3,014,094,399 Dec 2023 49,463,600 63.2500 59.1500 60.8660 3,010,652,262 Total 100,547,200 6,024,746,661 Dividends Dividends for 2023 First, second and third interim dividends for 2023, each of $0.10 per ordinary share, were paid on 23 June 2023, 21 September 2023 and 21 December 2023. For further details of the dividends approved in 2023, see Note 8 on the financial statements. On 21 February 2024, the Directors approved a fourth interim dividend for 2023 of $0.31 per ordinary share, making a total of $0.61 for the 2023 full-year. The fourth interim dividend for 2023 will be payable on 25 April 2024 in cash in US dollars, or in sterling or Hong Kong dollars at exchange rates to be determined on 15 April 2024. The fourth interim dividend for 2023 of $1.55 per American Depositary Share, each of which represents five ordinary shares, will be payable by the depositary in US dollars. As the fourth interim dividend for 2023 was approved after 31 December 2023, it has not been included in the balance sheet of HSBC as a liability. The distributable reserves of HSBC Holdings at 31 December 2023 were $30.9bn. A quarterly dividend of £0.01 per Series A sterling preference share was paid on 15 March, 15 June, 15 September and 15 December 2023. Dividends for 2024 The Group intends to pay quarterly dividends on its ordinary shares during 2024. A quarterly dividend of £0.01 per Series A sterling preference share is payable on 15 March, 17 June, 16 September and 16 December 2024 for the quarter then ended at the sole and absolute discretion of the Board of HSBC Holdings plc. Accordingly, the Board of HSBC Holdings plc has approved a quarterly dividend to be payable on 15 March 2024 to holders of record on 29 February 2024. Share capital Issued share capital The nominal value of HSBC Holdings’ issued share capital paid up at 31 December 2023 was $9,631,364,096.50 divided into 19,262,728,193 ordinary shares of $0.50 each and one non- cumulative preference share of £0.01, representing approximately 100.00% and 0.00% respectively of the nominal value of HSBC Holdings’ total issued share capital paid up at 31 December 2023. Rights, obligations and restrictions attaching to shares The rights and obligations attaching to each class of ordinary and non- cumulative preference shares in our share capital are set out in full in our Articles of Association. The Articles of Association may be amended by special resolution of the shareholders and can be found on our website at www.hsbc.com/who-we-are/leadership-and- governance/board-responsibilities. Ordinary shares HSBC Holdings has one class of ordinary share, which carries no right to fixed income. There are no voting restrictions on the issued ordinary shares, all of which are fully paid. On a show of hands, each member present has the right to one vote at general meetings. On a poll, each member present or voting by proxy is entitled to one vote for every $0.50 nominal value of share capital held. There are no specific restrictions on transfers of ordinary shares, which are governed by the general provisions of the Articles of Association and prevailing legislation. Information on the policy adopted by the Board for paying interim dividends on the ordinary shares may be found in the ’Shareholder information’ section on page 435. Dividend waivers The Group’s employee benefit trusts, which hold shares in HSBC Holdings in connection with the operation of its share plans, have lodged standing instructions to waive dividends on shares held by them that have not been allocated to employees. Shares held by custodians in connection with the vesting of employee share awards also lodged instructions to waive dividends. The total amount of dividends waived during 2023 was $27.16m. Preference shares The preference shares, which have preferential rights to income and capital, do not, in general, confer a right to attend and vote at general meetings. There are three classes of preference shares in the share capital of HSBC Holdings: non-cumulative US dollar preference shares of $0.01 each (‘dollar preference shares’); non-cumulative preference shares of £0.01 each (‘sterling preference shares’); and non-cumulative preference shares of €0.01 (‘euro preference shares’). The sterling preference share in issue is a Series A sterling preference share. There are no dollar preference shares or euro preference shares in issue. Information on dividends approved for 2022 and 2023 may be found in Note 8 on the financial statements on page 371. Further details of the rights and obligations attaching to the HSBC Holdings’ issued share capital may be found in Note 33 on the financial statements. Compliance with Hong Kong Listing Rule 13.25A(2) HSBC Holdings has been granted a waiver from strict compliance with Rule 13.25A(2) of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited. Under this waiver, HSBC’s obligation to file a Next Day Return following the issue of new shares, pursuant to the vesting of share awards granted under its share plans to persons who are not Directors, would only be triggered where it falls within one of the circumstances set out under Rule 13.25A(3). Share capital changes in 2023 In addition to the share buy-back programme, the following events occurred during the year in relation to the ordinary share capital of HSBC Holdings: Scrip dividends There were no scrip dividends issued during the year. Treasury shares On 30 October 2023, HSBC Holdings cancelled 325,273,407 ordinary shares which were held in treasury, and no longer holds any ordinary shares in treasury. HSBC Holdings plc Annual Report and Accounts 2023 307 Corporate governance All-employee share plans1 HSBC Holdings ordinary shares issued Aggregate nominal value Market value per share from to $ £ £ HSBC International Employee Share Purchase Plan 179,676 89,838 6.386 6.386 1 In respect of the HSBC Holdings Savings Related Share Option Plan (UK), no new shares were issued under this plan. All exercises were satisfied by market purchased shares. See page 314 for details of options granted, exercised and lapsed. HSBC share plans HSBC Holdings ordinary shares issued Aggregate nominal value Market value per share from to $ £ £ Vesting of awards under the HSBC Share Plan 2011 10,598,803 5,299,401.50 5.421 6.357 Authorities to allot and to purchase shares and pre-emption rights At the AGM in 2023, shareholders renewed the general authority for the Directors to allot new shares up to 13,314,186,248 ordinary shares, 15,000,000 non-cumulative preference shares of £0.01 each, 15,000,000 non-cumulative preference shares of $0.01 each and 15,000,000 non-cumulative preference shares of €0.01 each. Shareholders also renewed the authority for the Directors to make market/off-market purchases of up to 1,997,127,937 ordinary shares. The Directors exercised their market/off-market purchase authority from the 2023 AGM and repurchased 760,621,817 ordinary shares during the year. In addition, shareholders gave authority for the Directors to grant rights to subscribe for, or to convert any security into, no more than 3,994,255,874 ordinary shares in relation to any issue by HSBC Holdings or any member of the Group of contingent convertible securities that automatically convert into or are exchanged for ordinary shares in HSBC Holdings in prescribed circumstances. For further details on the issue of contingent convertible securities, see Note 33 on the financial statements. Other than as disclosed in the tables above headed ‘Share capital changes in 2023’, the Directors did not allot any shares during 2023. Debt securities In 2023, HSBC Holdings issued the equivalent of $24.5bn of debt securities in the public capital markets in a range of currencies and maturities, of which $17.2bn were in the form of senior securities to ensure it meets the current and proposed regulatory rules, including those relating to the availability of adequate total loss-absorbing capacity. For details of capital instruments and subordinated bail- inable debt, see Notes 29 and 33 on pages 406 and 414. Treasury shares In accordance with the terms of a waiver granted by The Stock Exchange of Hong Kong Limited on 19 December 2005, HSBC Holdings will comply with the applicable law and regulation in the UK in relation to the holding of any shares in treasury and with the conditions of the waiver in connection with any shares it may hold in treasury. HSBC Holdings does not hold any ordinary shares in treasury. Notifiable interests in share capital During 2023, HSBC Holdings did not receive any notification of major holdings of voting rights pursuant to the requirements of Rule 5 of the Disclosure Guidance and Transparency Rules (’Rule 5 of the DTRs’). No notifications had been received between 31 December 2023 and 15 February 2024. Previous notifications received are as follows: – BlackRock, Inc. gave notice on 3 March 2020 that on 2 March 2020 it had the following: an indirect interest in HSBC Holdings ordinary shares of 1,235,558,490; qualifying financial instruments with 7,294,459 voting rights that may be acquired if the instruments are exercised or converted; and financial instruments with a similar economic effect to qualifying financial instruments, which refer to 2,441,397 voting rights, representing 6.07%, 0.03% and 0.01%, respectively, of the total voting rights at 2 March 2020. – Ping An Asset Management Co., Ltd. gave notice on 6 December 2017 that on 4 December 2017 it had an indirect interest in HSBC Holdings ordinary shares of 1,007,946,172, representing 5.04% of the total voting rights at that date. At 31 December 2023, according to the register maintained by HSBC Holdings pursuant to section 336 of the Securities and Futures Ordinance of Hong Kong: – BlackRock, Inc. gave notice on 9 March 2022 that on 4 March 2022 it had the following interests in HSBC Holdings ordinary shares: a long position of 1,701,656,169 shares and a short position of 19,262,061 shares, representing 8.27% and 0.09%, respectively, of the ordinary shares in issue at that date. – Ping An Asset Management Co., Ltd. gave notice on 25 September 2020 that on 23 September 2020 it had a long position of 1,655,479,531 in HSBC Holdings ordinary shares, representing 8.00% of the ordinary shares in issue at that date. Sufficiency of float In compliance with the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited, at least 25% of the total issued share capital has been held by the public at all times during 2023 and up to the date of this report. Dealings in HSBC Holdings listed securities The Group has policies and procedures that, except where permitted by statute and regulation, prohibit specified transactions in respect of its securities listed on The Stock Exchange of Hong Kong Limited. Except for dealings as intermediaries or as trustees by subsidiaries of HSBC Holdings, and purchases by HSBC Holdings under the share buy-back programme, neither HSBC Holdings nor any of its subsidiaries has purchased, sold or redeemed any of its securities listed on The Stock Exchange of Hong Kong Limited during the year ended 31 December 2023. Directors’ interests Pursuant to the requirements of the UK Listing Rules and according to the register of Directors’ interests maintained by HSBC Holdings pursuant to section 352 of the Securities and Futures Ordinance of Hong Kong, the Directors of HSBC Holdings at 31 December 2023 had certain interests, all beneficial unless otherwise stated, in the shares or debentures of HSBC Holdings and its associated corporations. Save as stated in the following table, no further interests were held by Directors, and no Directors or their connected persons were awarded or exercised any right to subscribe for any shares or debentures in any HSBC corporation during the year. No Directors held any short position as defined in the Securities and Futures Ordinance of Hong Kong in the shares or debentures of HSBC Holdings and its associated corporations. Report of the Directors | Corporate governance report 308 HSBC Holdings plc Annual Report and Accounts 2023 Directors’ interests – shares and debentures At 31 Dec 2023 or date of cessation, if earlier At 1 Jan 2023, or date of appointment, if later Beneficial owner Child under 18 or spouse Jointly with another person Trustee Total interests HSBC Holdings ordinary shares Geraldine Buckingham1 15,000 15,000 — — — 15,000 Rachel Duan1 15,000 15,000 — — — 15,000 Georges Elhedery2 (appointed to the Board on 1 Jan 2023) 572,575 753,467 — — — 753,467 Dame Carolyn Fairbairn 15,000 15,000 — — — 15,000 James Forese1 115,000 115,000 — — — 115,000 Ann Godbehere1 (appointed to the Board on 1 Sep 2023) 15,000 — 15,000 — — 15,000 Steven Guggenheimer1 15,000 — 15,000 — — 15,000 José Antonio Meade Kuribreña1 15,000 15,000 — — — 15,000 Kalpana Morparia1 (appointed to the Board on 1 Mar 2023) — 15,000 — — — 15,000 Eileen Murray1 75,000 75,000 — — — 75,000 Brendan Nelson (appointed to the Board on 1 Sep 2023) — — — — — — David Nish 50,000 — 50,000 — — 50,000 Noel Quinn2 1,422,650 1,721,465 — — — 1,721,465 Jackson Tai1,3(retired on 5 May 2023) 66,515 32,800 11,965 21,750 — 66,515 Swee Lian Teo (appointed to the Board on 1 Oct 2023) — 15,200 — — — 15,200 Mark Tucker 307,352 307,352 — — — 307,352 1 Geraldine Buckingham has an interest in 3,000, Rachel Duan has an interest in 3,000, James Forese has an interest in 23,000, Ann Godbehere has an interest in 3,000, Steven Guggenheimer has an interest in 3,000, José Antonio Meade Kuribreña has an interest in 3,000, Kalpana Morparia has an interest in 3,000, Eileen Murray has an interest in 15,000 and Jackson Tai has an interest in 13,303 listed American Depositary Shares (’ADS’), which are categorised as equity derivatives under Part XV of the Securities and Futures Ordinance of Hong Kong. Each ADS represents five HSBC Holdings ordinary shares. 2 Executive Directors’ other interests in HSBC Holdings ordinary shares arising from the HSBC Holdings Savings-Related Share Option Plan (UK) and the HSBC Share Plan 2011 are set out in the Scheme interests in the Directors’ remuneration report on page 279. At 31 December 2023, the aggregate interests under the Securities and Futures Ordinance of Hong Kong in HSBC Holdings ordinary shares, including interests arising through employee share plans and the interests above were: Noel Quinn – 4,993,390; and Georges Elhedery – 1,942,938, representing approximately 0.03% and 0.01% of the shares in issue respectively. 3 Jackson Tai has a non-beneficial interest in 11,965 shares of which he is custodian. There have been no changes in the shares or debentures of the current Directors from 31 December 2023 to the date of this report. Listing Rule 9.8.4 and other disclosures This section of the Annual Report and Accounts 2023 forms part of – and includes certain disclosures required – in the Report of the Directors incorporated by cross-reference, including under Listing Rule 9.8.4 and otherwise as applicable by law. Content Page references Long-term incentives 286 Dividend waivers 307 Dividends 307 Share buy-back 306 Emissions 45 Energy efficiency 45, 49, 51 Principal activities of HSBC 11, 30, 110, 395 Business review and future developments 11–40, 42, 137, 145, 426 Board governance Appointment and re-election of Directors For details on the processes governing the appointment and re- election of Directors, see the Nomination & Corporate Governance Committee report from page 262. Commitments For details on the processes governing Director commitments, see the Nomination & Corporate Governance Committee report from page 262. Conflicts of interest The Board has an established policy and set of procedures to ensure that the Board’s management of Directors’ conflicts of interest is effective. The Board has the power to authorise conflicts where they arise, in accordance with the Companies Act 2006 and HSBC Holdings’ Articles of Association. Details of all Directors’ conflicts of interest are recorded in the register of conflicts. Upon appointment, new Directors are advised of the policy and procedures for managing conflicts. Directors are required to notify the Board of any actual or potential conflicts of interest and to update the Board with any changes to the facts and circumstances surrounding such conflicts. Directors are requested to review and confirm their own and their respective closely associated persons’ outside interests and appointments twice each year. The Board has considered, and authorised (with or without conditions) where appropriate, potential conflicts as they have arisen during the year in accordance with its conflicts policy and procedures. All non-executive Directors are subject to re-vetting by the Group's compliance team on a triennial basis following appointment. As part of this re-vetting process, all conflicts checks are refreshed. Joint Company Secretary Aileen Taylor is the Group Company Secretary and Chief Governance Officer. Hannah Ashdown (47) was appointed as Deputy Group Secretary in December 2021 and for administrative purposes, in October 2022, was appointed as Joint Company Secretary. She is a Fellow of the Chartered Governance Institute UK and Ireland. Hannah has over 20 years’ governance and regulatory experience across multiple sectors including financial services, asset management, energy, leisure and retail. HSBC Holdings plc Annual Report and Accounts 2023 309 Corporate governance Directors’ indemnity The Articles of Association of HSBC Holdings contain a qualifying third-party indemnity provision, which entitles Directors and other officers to be indemnified out of the assets of HSBC Holdings against claims from third parties in respect of certain liabilities. HSBC Holdings has granted, by way of deed poll, indemnities to the Directors, including former Directors, against certain liabilities arising in connection with their position as a Director of HSBC Holdings or of any Group company. Directors are indemnified to the maximum extent permitted by law. The indemnities that constitute a ’qualifying third-party indemnity provision’, as defined by section 234 of the Companies Act 2006, remained in force for the whole of the financial year (or, in the case of Directors appointed during 2023, from the date of their appointment). The deed poll is available for inspection at the registered office of HSBC Holdings. Additionally, Directors and pension trustees have the benefit of both Directors’ and officers’ liability insurance and pension trustees’ liability insurance. Qualifying pension scheme indemnities have also been granted to the trustees of the Group’s pension schemes, which were in force for the whole of the financial year and remain in force as at the date of this report. Contracts of significance During 2023, none of the Directors had a material interest, directly or indirectly, in any contract of significance with any HSBC company. During the year, all Directors were reminded of their obligations in respect of transacting in HSBC securities and following specific enquiry all Directors have confirmed that they have complied with their obligations. Shareholder engagement and communication The Board is directly accountable to, and gives high priority to communicating with, HSBC’s shareholders. Information about HSBC and its activities is provided to shareholders in its Interim Reports and the Annual Report and Accounts as well as on www.hsbc.com. The Board seeks to understand investor needs through ongoing dialogue between members of the Board and institutional investors throughout the year. For examples of such engagement, see 'Board engagement with shareholders' on page 256 and the Group Remuneration Committee Chair’s letter on page 279. During 2023, approximately 643 meetings were held with institutional investors and analysts globally. Our shareholder communications policy summarises how we communicate with our shareholders, including through financial reporting, general shareholder meetings, investor and analyst meetings and our website. The policy is reviewed annually by the Board, and in 2023 the Board confirmed that it was satisfied with its implementation and effectiveness. The policy can be found at www.hsbc.com/who-we-are/leadership-and-governance/board- responsibilities. We also publish our current and past financial results, investor presentations and shareholder information such as dividend payments and shareholder meeting details. Stock exchange announcements are also accessible on our website along with information for fixed income investors. For further details, see www.hsbc.com/investors. Directors are encouraged to develop an understanding of the views of shareholders. Enquiries from individuals on matters relating to their shareholdings and HSBC’s business are welcomed. Any individual or institutional investor can make an enquiry by contacting the investor relations team, Group Chairman, Group Chief Executive, Group Chief Financial Officer and Group Company Secretary and Chief Governance Officer. Our Senior Independent Director is also available to shareholders if they have concerns that cannot be resolved or for which the normal channels would not be appropriate. They can be contacted via the Group Company Secretary and Chief Governance Officer at 8 Canada Square, London E14 5HQ. The results of the poll vote at the 2023 AGM were published on 5 May 2023 and showed that on resolutions 2, 3(l), 6, 7, 14 and 15 we received votes of between 20.04% to 23.30% against the Board’s recommendations. In our statement of 5 May 2023, it was noted that our largest shareholder, Ping An, voted against the Board’s recommendations on the above resolutions and a number of others. Ping An’s votes accounted for approximately 18% to 19% of all votes cast at the 2023 AGM based on a turnout of around 50%. The Board was pleased that a large majority of shareholders voting at the 2023 AGM supported HSBC’s strategy and since the AGM there have been no concerns expressed by shareholders regarding the above resolutions. As referenced in the announcement released on 3 November 2023, we continue to have constructive dialogue and provide corporate access to all our institutional shareholders, including Ping An and respect and listen to their views. Annual General Meeting The AGM in 2024 is planned to be held in London, UK at 11:00am on Friday, 3 May 2024. Information on how to vote and participate, both in advance and on the day, can be found in the Notice of the 2024 AGM, which will be sent to shareholders on 22 March 2024 and be available on www.hsbc.com/agm. A live webcast will be available on www.hsbc.com. A recording of the proceedings will be available on www.hsbc.com shortly after the conclusion of the AGM. Shareholders should monitor our website and announcements for any changes to these arrangements. Shareholders may send enquiries to the Board in writing via the Group Company Secretary and Chief Governance Officer, HSBC Holdings plc, 8 Canada Square, London E14 5HQ or by sending an email to shareholderquestions@hsbc.com. General meetings and resolutions Shareholders may require the Directors to call a general meeting other than an AGM, as provided by the UK Companies Act 2006. A valid request to call a general meeting may be made by members representing at least 5% of the paid-up capital of HSBC Holdings as carries the right of voting at its general meetings (excluding any paid- up capital held as treasury shares). A request must state the general nature of the business to be dealt with at the meeting and may include the text of a resolution that may properly be moved and is intended to be moved at the meeting. At any general meeting convened on such request, no business may be transacted except that stated by the requisition or proposed by the Board. Shareholders may request the Directors to send a resolution to shareholders for consideration at an AGM, as provided by the UK Companies Act 2006. A valid request must be made by (i) members representing at least 5% of the paid-up capital of HSBC Holdings as carries the right of voting at its general meetings (excluding any paid-up capital held as treasury shares), or (ii) at least 100 members who have a right to vote on the resolution at the AGM in question and hold shares in HSBC Holdings on which there has been paid up an average sum, per member, of at least £100. The request must be received by HSBC Holdings not later than (i) six weeks before the AGM in question; or (ii) if later, the time at which the notice of AGM is published. A request may be in hard copy form or in electronic form, and must be authenticated by the person or persons making it. A request may be made in writing to HSBC Holdings at its UK address, referred to in the paragraph above or by sending an email to shareholderquestions@hsbc.com. Articles of Association The Articles of Association were last approved at the 2022 AGM. The Articles of Association can be found at www.hsbc.com/who-we-are/ leadership-and-governance/board-responsibilities. Report of the Directors | Corporate governance report 310 HSBC Holdings plc Annual Report and Accounts 2023 Events after the balance sheet date For details of events after the balance sheet date, see Note 39 on the financial statements. Change of control The Group is not party to any significant agreements that take effect, alter or terminate following a change of control of the Group. The Group does not have agreements with any Director or employee that would provide compensation for loss of office or employment resulting from a takeover bid. Branches The Group provides a wide range of banking and financial services through branches and offices in the UK and overseas. Research and development activities During the ordinary course of business, the Group develops new products and services within the global businesses. Political donations HSBC does not make any political donations or incur political expenditure within the ordinary meaning of those words. We have no intention of altering this policy. However, the definitions of political donations, political parties, political organisations and political expenditure used in the UK Companies Act 2006 are very wide. As a result, they may cover routine activities that form part of the normal business activities of the Group and are an accepted part of engaging with stakeholders. To ensure that neither the Group nor any of its subsidiaries inadvertently breaches the UK Companies Act 2006, authority is sought from shareholders at the AGM to make political donations. HSBC provides administrative support to two political action committees (’PACs’) in the US funded by voluntary political contributions by eligible employees. We do not control the PACs, and all decisions regarding the amounts and recipients of contributions are directed by a voluntary Board Finance Committee, which consists of contributing eligible employees. The PACs recorded combined political donations of $110,004 during 2023 (2022: $100,250). Charitable contributions For details of charitable contributions, see page 86. Internal control The Board is responsible for maintaining and reviewing the effectiveness of the Group’s risk management and internal control systems, and for determining the level and type of risks the Group is willing to take in achieving its strategic objectives. To meet this requirement and to discharge its obligations under the FCA Handbook and the PRA Rulebook, procedures have been designed: for safeguarding assets against unauthorised use or disposal; for maintaining proper accounting records; and for ensuring the reliability and usefulness of financial information used within the business or for publication. These procedures provide reasonable assurance against material misstatement, errors, losses or fraud. They are designed to provide effective internal control within the Group and accord with the Financial Reporting Council‘s guidance for Directors, issued in 2014, on risk management, internal control and related financial and business reporting. The procedures have been in place throughout the year and up to 21 February 2024, the date of publication of the Annual Report and Accounts 2023. The Board, the GRC and the GAC monitored the effectiveness of the Group’s system of risk management and internal control throughout the year. In particular, this focused on the Group’s regulatory remediation and change programmes, and involved working closely with management to better prioritise and understand where there are key interdependencies. In 2024, continued focus will be placed on overseeing emerging risks and potential risks arising from new products and offerings. To support the work of the Board, the GRC and the GAC in discharging their responsibilities in this regard, assurance was also provided by executive management confirming that a risk assessment had been undertaken and controls were in place to mitigate the risks arising from the Group’s key activities. Necessary actions will be taken to remedy any failings or weaknesses identified from these activities and included the implementation of additional assurance procedures including in relation to the Group's externally driven ESG and climate-related disclosures, change programmes and regulatory reporting. The key risk management and internal control procedures include the following: Global Principles The Group’s Global Principles set an overarching standard for all policies and procedures and are fundamental to the Group’s risk management structure. They inform and connect our purpose, values, strategy and risk management principles, guiding us to do the right thing and treat our customers and our colleagues fairly at all times. In 2024, the Global Principles will be replaced by a more concise and targeted version of the document, known as the HSBC Book. Risk management framework The risk management framework supports our Global Principles, and going forward, our HSBC Book. It outlines the key principles and practices that we employ in managing material risks. It applies to all categories of risk and supports a consistent approach in identifying, assessing, managing and reporting the risks we accept and incur in our activities. Delegation of authority within limits set by the Board Subject to certain matters reserved for the Board, the Group Chief Executive has been delegated authority limits and powers within which to manage the day-to-day affairs of the Group. A new delegation of authorities framework was implemented in April 2023 with the aim of providing a simpler Group structure within which the Board and its subsidiaries can manage their delegated powers. These delegated authorities can be used for the approval, signing and execution of specific written agreements and documents such as procurement contracts. The delegation of authorities framework is either granted via a separate board resolution or power of attorney or is set out in the relevant Group policy with clear systems of control that are appropriate to the business or function. Authorities to enter into credit and market risk exposures are delegated with limits to line management of Group companies in line with Group policy. Credit and market risks are measured and reported at subsidiary company level and aggregated for risk concentration analysis on a Group-wide basis. Risk identification and monitoring Systems and procedures are in place to identify, assess, control and monitor the material risk types facing HSBC as set out in the risk management framework. The Group‘s risk measurement and reporting systems are designed to help ensure that material risks are captured with all the attributes necessary to support well-founded decisions, that those attributes are accurately assessed and that information is delivered in a timely manner for those risks to be successfully managed and mitigated. Changes in market conditions/practices Processes are in place to identify new risks arising from changes in market conditions/practices or customer behaviours, which could expose the Group to heightened risk of loss or reputational damage. The Group employs both a top and emerging risks process to provide forward-looking views of issues with the potential to threaten the execution of our strategy or operations over the medium to long term. We remain committed to investing in the reliability and resilience of our IT systems and critical services, including those provided by third parties, that support all parts of our business. We do so to help protect our customers, affiliates and counterparties, and to help HSBC Holdings plc Annual Report and Accounts 2023 311 Corporate governance ensure that we minimise any disruption to services that could result in reputational and regulatory consequences. In our approach to defend against these threats, we invest in business and technical controls to help us detect, manage and recover from issues, including data loss, in a timely manner. We continue our focus on the quality and timeliness of the data used to inform management decisions, through measures such as early warning indicators, prudent active risk management of our risk appetite, and ensuring regular communication with our Board and other key stakeholders. Responsibility for risk management All employees are responsible for identifying and managing risk within the scope of their role as part of the three lines of defence model. This is an activity-based model to delineate management accountabilities and responsibilities for risk management and the control environment. The second line of defence sets the policy and guidelines for managing specific risk areas, provides advice and guidance in relation to the risk, and challenges the first line of defence (the risk owners) on effective risk management. The Board delegated authority to the GAC to annually review the independence, autonomy and effectiveness of the Group’s policies and procedures on whistleblowing, including the procedures for the protection of staff who raise concerns of detrimental treatment. Strategic plans Strategic plans are prepared for global businesses, global functions and geographical regions within the framework of the Group’s overall strategy. Financial resource plans, informed by detailed analysis of risk appetite describing the types and quantum of risk that the Group is prepared to take in executing its strategy, are prepared and adopted by all major Group operating companies and set out the key business initiatives and the likely financial effects of those initiatives. Internal control over financial reporting HSBC is required to comply with section 404 of the US Sarbanes- Oxley Act of 2002 and assess its effectiveness of internal control over financial reporting at 31 December 2023. In 2014, the GAC endorsed the adoption of the principles of the Committee of Sponsoring Organizations of the Treadway Commission (’COSO’) 2013 framework for the monitoring of risk management and internal control systems to satisfy the requirements of section 404 of the Sarbanes- Oxley Act. The primary mechanism through which comfort over risk management and internal control systems is achieved is through annual assessments of the effectiveness of controls to manage risk, and the reporting of issues on a regular basis through the various risk management and risk governance forums. The key risk management and internal control procedures over financial reporting include the following: Entity level controls Entity level controls are a defined suite of internal controls that have a pervasive influence over the entity as a whole and meet the principles of the COSO framework. They include controls related to the control environment, such as the Group's values and ethics, the promotion of effective risk management and the overarching governance exercised by the Board and its non-executive committees. The design and operational effectiveness of entity level controls are assessed on an ongoing basis. If issues are significant to the Group, they are escalated to the GRC and also to the GAC, if concerning financial reporting matters. Process level transactional controls Key process level controls that mitigate the risk of financial misstatement are identified, recorded and monitored in accordance with the risk framework. This includes the identification and assessment of relevant control issues against which action plans are tracked through to remediation. Further details of HSBC’s approach to risk management can be found on page 136. The GAC has continued to receive regular updates on HSBC’s ongoing activities for improving the effective oversight of end-to-end business processes, and management continued to identify opportunities for enhancing key controls, such as through the use of automation technologies. Financial reporting controls The Group’s financial reporting process is controlled using documented accounting policies and reporting formats, supported by detailed instructions and guidance on reporting requirements, issued to all reporting entities within the Group in advance of each reporting period end. The submission of financial information from each reporting entity is supported by a certification by the responsible financial officer and analytical review procedures at reporting entity and Group levels. Group Disclosure and Controls Committee Chaired by the Group Chief Financial Officer, the Group Disclosure and Controls Committee supports the discharge of the Group’s obligations under relevant legislation and regulation including the UK and Hong Kong listing rules, the UK Market Abuse Regulation and US Securities and Exchange Commission rules. In so doing, the Group Disclosure and Controls Committee is empowered to determine whether a new event or circumstance should be disclosed, including the form and timing of such disclosure, and review certain material disclosures made or to be made by the Group. The membership of the Group Disclosure and Controls Committee consists of senior management, including the Group Chief Financial Officer, Group Chief Risk and Compliance Officer, Group Chief Legal Officer, and Group Company Secretary and Chief Governance Officer. The Group’s brokers, external auditors and its external legal counsel also attend as required. The integrity of disclosures is underpinned by structures and processes within the Global Finance and Group Risk and Compliance functions that support rigorous analytical review of financial reporting and the maintenance of proper accounting records. As required by the Sarbanes-Oxley Act, the Group Chief Executive and the Group Chief Financial Officer have certified that the Group’s disclosure controls and procedures were effective as at the end of the period covered by the Annual Report and Accounts 2023. The annual review of the effectiveness of the Group’s system of risk management and internal control over financial reporting was conducted with reference to the COSO 2013 framework. Based on the assessment performed, the Directors concluded that for the year ended 31 December 2023, the Group’s internal control over financial reporting was effective. PwC has audited the effectiveness of HSBC’s internal control over financial reporting and has given an unqualified opinion. Other information included in the Annual Report and Accounts 2023 We include other non-statutory information in the Annual Report and Accounts to enable a broader perspective of our performance for the period, including ESG and regulatory capital and liquidity information. We highlight on pages 43 and 267 that we are seeking to enhance our governance, process, systems and controls capabilities in both areas, although the scale and nature of the challenges differ between reporting areas. Our improvements in regulatory reporting are intended to strengthen our global processes, improve consistency and enhance controls in order to meet regulatory expectations. ESG reporting continues to evolve, with a lack of globally consistent metrics, taxonomies and best practices and a high reliance on external data. The GAC provides oversight to our reporting improvements in both areas, and is also focused on increasing the level of internal and external assurance in these areas, in line with wider market developments (set out on page 267). Going concern The Board, having made appropriate enquiries, is satisfied that the Group as a whole has adequate resources to continue operations for a period of at least 12 months from the date of this report, and it therefore continues to adopt the going concern basis in preparing the financial statements. For further details, see page 40. Report of the Directors | Corporate governance report 312 HSBC Holdings plc Annual Report and Accounts 2023 Employees At 31 December 2023, HSBC had a total workforce equivalent to 221,000 full-time employees compared with 219,000 at the end of 2022. Our main centres of employment were India with approximately 42,000 employees, the UK with 33,000, mainland China with 33,000, Hong Kong with 26,000, Mexico with 17,000 and France with 6,000. Our business spans many cultures, communities and continents. We aspire to provide a high-performing environment where our colleagues can fulfil their potential by building their skills and capabilities while focusing on the development of a diverse and inclusive culture. We use employee surveys to assess progress and make changes. We want to provide an open culture, where our colleagues feel connected and supported to speak up, and where our leaders encourage and use feedback. Where we make organisational changes, we support our colleagues, in particular where there are job impacts. Employee relations We consult with and, where appropriate, negotiate with employee representative bodies where we have them. It is our policy to maintain well-developed communications and consultation programmes with all employee representative bodies. There have been no material disruptions to our operations from labour disputes during the past five years. We are committed to complying with the applicable employment laws and regulations in the jurisdictions in which we operate, including in relation to working hours and rest periods. HSBC’s global employment practices and relations policy provides the framework and controls through which we seek to uphold that commitment. Diversity and inclusion Our customers, colleagues and communities span many cultures and continents. We value difference and believe that diversity makes us stronger. We are dedicated to building a diverse and connected workforce where everyone feels a sense of belonging. Our Group People Committee, which is made up of Group Executive Committee members, governs our diversity and inclusion agenda. It meets regularly to agree actions to improve diverse representation and build a more inclusive culture. Members of our Group Executive Committee are held to account for the actions they take on diversity via aspirational goals contained within their performance scorecards. We expect all colleagues at HSBC to treat each other with dignity and respect to ensure an inclusive environment. Our policies make it clear that we do not tolerate unlawful discrimination, bullying or harassment on any grounds. To align our approach to inclusion best practices, we participate in global diversity benchmarks that help us to identify improvement opportunities. We also track a large number of diversity and inclusion metrics, including those included in the Group executive scorecards, which enable us to identify inclusion barriers and take action where required. Our approach to diversity and inclusion is set out on page 76 alongside our goals and progress. Further details of our diversity and inclusion activity, alongside our Gender and Ethnicity Pay Gap Reports 2023, can be found at www.hsbc.com/diversitycommitments. Employment of people with a disability We strongly believe in providing equal opportunities for our employees. The employment of people with a disability is included in this commitment. We are committed to retaining disabled employees in the workplace and to providing reasonable adjustments to enable this. Employee development We aim to build a dynamic, inclusive culture where the best want to develop the skills and experiences that help them fulfil their potential. This determines how we develop our people and recruit, identify and nurture talent. A range of resources bring this to life including: – HSBC University, our platform for learning and development with specific business and technical academies; – our My HSBC Career portal, which offers career development information and resources; and – HSBC Talent Marketplace, our online platform that uses AI to provide opportunities to learn as we work. Everyone at HSBC annually completes global mandatory training. It plays a critical role in shaping our culture by ensuring everyone is focused on issues that are fundamental to working at HSBC, from sustainability, to financial crime risk, to our intolerance of bullying and harassment. As the opportunities we face change, we provide development to key groups of colleagues through business and technical academies. This includes our risk academy, which helps us to develop broad capabilities in traditional areas of risk like financial crime but also in emerging risk issues like climate risk and the ethics of AI and data. Our approach to learning is skills based. Our academies work with our businesses to identify the key skills and capabilities we need in the future. Alongside this, we help colleagues identify, assess and develop the skills that match their ambition and aspirations. Our platform for learning content is Degreed. This helps colleagues identify, assess and develop key skills through internal and external training materials in a way that suits them. Content can range from quick videos, articles or podcasts to packaged programmes or learning pathways. Effective people management and impactful leadership remain critical to our ability to energise for growth. In 2023 we have continued to focus on equipping our management population with the skills they need to lead the organisation and energise our colleagues. We have continued to run our Enterprise Leadership Programme for our most senior leaders and developed the Managing Director Leadership Programme further following the launch in 2022. We have also refreshed our People Management Excellence programme which is available to leaders at all levels of the organisation to help them manage colleagues and nurture a productive team. HSBC Holdings plc Annual Report and Accounts 2023 313 Corporate governance Health and safety We are committed to providing a safe and healthy working environment for everyone. We have adopted global policies, mandatory procedures, and incident and information reporting systems across the organisation that reflect our core values and are aligned to international standards. Our global health and safety performance is subject to ongoing monitoring and assurance to ensure we are compliant with relevant laws and regulations. Our chief operating officers have overall responsibility for engendering a positive health and safety culture and ensuring that global policies, procedures and systems are put into practice locally. They also have responsibility for ensuring all local legal requirements are met. We delivered a range of programmes in 2023 to help us understand and manage our health and safety risks: – We reinforced our advice and risk assessment and control methodology on working from home for employees adopting a hybrid work style, providing more awareness and best practices on good ergonomics and well-being. – We delivered health and safety training and awareness to 235,000 of our employees and contractors globally, ensuring roles and responsibilities were clear and understood. – We completed the annual safety inspection on all of our buildings globally, to ensure we were meeting our standards and continuously improving our safety performance. – We maintained measures in our workplaces globally to minimise the risks from the spread of respiratory disease, including through the provision of hand sanitiser, improved ventilation, and guidance on good hygiene practices. – We continued to focus on enhancing the safety culture in our supply chain through our SAFER Together programme, covering the five key elements of best practice safety culture, including speaking up about safety, and recognising excellence. – We continued to provide our guidance and training programme for our construction partners, focusing on our key markets globally to reduce the likelihood of accidents occurring by helping them understand and deliver industry-leading health and safety performance. More than 7,500 construction workers received safety passport training across 20 countries. – In 2023, our Eat Well Live Well programme continued to promote healthier and more sustainable diets among our colleagues with 30% of global food sales from HSBC catering outlets comprising healthy options. We also extended the reach of our programme through the launch of increased plant-based offers, monthly events dedicated to Eat Well Live Well, and virtual teaching kitchens accessible to all our employees. – Protection of our colleagues and operations is of critical importance, and we have effective controls in place to protect our people from natural disasters (such as storms and earthquakes). In 2023, there were 27 named storms that passed over 2,010 of our buildings, resulting in no injuries. Only five buildings in Mexico were affected with minor business impact following Storm Otis. Employee health and safety 2023 2022 2021 Rate of workplace fatalities per 100,000 employees — — — Number of major injuries to employees1 12 7 14 All injury rate per 100,000 employees 110 70 64 Lost days due to work injury 594 485 358 1 Fractures, dislocation, concussion, loss of consciousness, overnight admission to hospital. Remuneration HSBC’s pay and performance strategy is designed to reward competitively the achievement of long-term sustainable performance and attract and motivate the very best people, regardless of gender, ethnicity, age, disability or any other factor unrelated to performance or experience with the Group, while performing their role in the long- term interests of our stakeholders. For further details of the Group’s approach to remuneration, see page 290. Employee share plans Summaries of the share options and share awards granted, exercised/ vested or lapsed during the year and other details required to be disclosed pursuant to Chapter 17 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited, including detailed summaries of the HSBC share plans, are available on our website at www.hsbc.com/who-we-are/leadership-and-governance/ remuneration and on the website of The Stock Exchange of Hong Kong Limited at www.hkex.com.hk, or can be obtained upon request from the Group Company Secretary and Chief Governance Officer, 8 Canada Square, London E14 5HQ. Particulars of options held by Directors of HSBC Holdings are set out on page 299. Note 5 on the financial statements gives details of share-based payments, including discretionary awards of shares granted under HSBC share plans. Report of the Directors | Corporate governance report 314 HSBC Holdings plc Annual Report and Accounts 2023 Statement of compliance The statement of corporate governance practices set out on pages 238 to 316 and the information referred to therein constitutes the ’Corporate governance report’ and ’Report of the Directors’ of HSBC Holdings. The websites referred to do not form part of this report. Relevant corporate governance codes, role profiles and policies UK Corporate Governance Code www.frc.org.uk Hong Kong Corporate Governance Code (set out in Appendix 14 to the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited ('HKEx')) www.hkex.com.hk Descriptions of the roles and responsibilities of the: – Group Chairman – Group Chief Executive – Senior Independent Director – Board www.hsbc.com/who-we-are/ leadership-and-governance/board- responsibilities Board and senior management www.hsbc.com/who-we-are/ leadership-and-governance Roles and responsibilities of the Board’s committees www.hsbc.com/who-we-are/ leadership-and-governance/board- committees Board’s policies on: – diversity and inclusion – shareholder communication – human rights – remuneration practices and governance www.hsbc.com/who-we-are/ leadership-and-governance/board- responsibilities Global Internal Audit Charter www.hsbc.com/who-we-are/ leadership-and-governance/ corporate-governance-codes/ internal-control HSBC is subject to corporate governance requirements in both the UK and Hong Kong. During 2023, HSBC complied with the provisions and requirements of both the UK and Hong Kong Corporate Governance Codes. Under the Hong Kong Code, the audit committee should be responsible for the oversight of all risk management and internal control systems. HSBC’s Group Risk Committee is responsible for oversight of internal control, other than internal control over financial reporting, and risk management systems. This is permitted under the UK Corporate Governance Code. HSBC Holdings has codified obligations for transactions in Group securities in accordance with the requirements of the UK Market Abuse Regulation and the rules governing the listing of securities on HKEx. The Group has been granted certain waivers by HKEx from strict compliance with the rules that take into account accepted practices in the UK, particularly in respect of employee share plans. During the year, all Directors were reminded of their obligations in respect of transacting in HSBC Group securities. Following specific enquiry all Directors have confirmed that they have complied with their obligations. The Group Audit Committee has reviewed and provided assurance to the HSBC Holdings Board on the publication of the Annual Report and Accounts 2023. On behalf of the Board Mark E Tucker Group Chairman HSBC Holdings plc Registered number 617987 21 February 2024 HSBC Holdings plc Annual Report and Accounts 2023 315 Corporate governance Directors’ responsibility statement The Directors are responsible for preparing the Annual Report and Accounts 2023, the Directors’ remuneration report and the financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law, the Directors have prepared the parent company (‘Company’) and the Group financial statements in accordance with UK-adopted international accounting standards. The company has also prepared financial statements in accordance with international financial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union. In preparing these financial statements, the Directors have also elected to comply with International Financial Reporting Standards issued by the International Accounting Standards Board (IFRS Accounting Standards). Under company law, the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and Group, and of the profit or loss of the Company and the Group for that period. In preparing these financial statements, the Directors are required to: – select suitable accounting policies and then apply them consistently; – make judgements and accounting estimates that are reasonable and prudent; – state whether applicable UK-adopted international accounting standards, international financial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union and IFRS Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and – prepare the financial statements on a going concern basis unless it is inappropriate to presume that the Company and Group will continue in business. The Directors are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions, and disclose with reasonable accuracy at any time the financial position of the Company and the Group and enable them to ensure that the financial statements and the Directors’ remuneration report comply with the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation. The Directors are responsible for the maintenance and integrity of the Annual Report and Accounts 2023 as they appear on the Company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. The Directors consider that the Annual Report and Accounts 2023, taken as a whole, is fair, balanced and understandable, and provides the information necessary for shareholders to assess the Company’s position and performance, business model and strategy. Each of the Directors, whose names and functions are listed in the ‘Report of the Directors: Corporate governance report’ on pages 239 to 243 of the Annual Report and Accounts 2023, confirms that, to the best of their knowledge: – the Group financial statements, which have been prepared in accordance with UK-adopted international accounting standards, international financial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union and IFRS Accounting Standards, give a true and fair view of the assets, liabilities, financial position, and profit or loss of the Group; and – the management report represented by the Report of the Directors includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties that it faces. The Group Audit Committee has responsibility, delegated to it from the Board, for overseeing all matters relating to external financial reporting. The Group Audit Committee report on page 266 sets out how the Group Audit Committee discharges its responsibilities. Disclosure of information to auditors In accordance with section 418 of the Companies Act 2006, the Directors’ report includes a statement, in the case of each Director in office as at the date the Report of the Directors is approved, that: – so far as the Director is aware, there is no relevant audit information of which the Company’s auditors are unaware; and – they have taken all the steps they ought to have taken as a Director in order to make themselves aware of any relevant audit information and to establish that the Company’s auditors are aware of that information. On behalf of the Board Mark E Tucker Group Chairman HSBC Holdings plc Registered number 617987 21 February 2024 Report of the Directors | Corporate governance report 316 HSBC Holdings plc Annual Report and Accounts 2023 Unlocking a world of travel freedom We have continued to build our suite of products aimed at internationally minded customers, with the launch of the TravelOne credit card. The card, which in May 2023 initially launched in Singapore, Malaysia and Vietnam, allows customers to earn extra reward points for travel and cross-border spending. They can then redeem them instantly with 17 international airline programmes and 20,000 hotel partners – a first in the markets where it has launched. TravelOne builds on our wealth strategy and supports our ambitions to grow our cross-border international customer franchise and unsecured lending business in south Asia. The financial statements provide detailed information and notes on our income, balance sheet, cash flows and changes in equity, alongside a report from our independent auditors. 318 Report of Independent Registered Public Accounting Firm to the Board of Directors and Shareholders of HSBC Holdings plc 329 Financial statements 341 Notes on the financial statements Financial statements 317 HSBC Holdings plc Annual Report and Accounts 2023 Independent auditors’ report to the members of HSBC Holdings plc Report on the audit of the financial statements Opinion In our opinion, HSBC Holdings plc’s group financial statements and parent company financial statements (the “financial statements”): – give a true and fair view of the state of the group’s and of the parent company’s affairs as at 31 December 2023 and of the group’s and parent company’s profit and the group’s and parent company’s cash flows for the year then ended; – have been properly prepared in accordance with UK-adopted international accounting standards; and – have been prepared in accordance with the requirements of the Companies Act 2006. We have audited the financial statements, included within the Annual Report and Accounts 2023 (the ’Annual Report’), which comprise: the consolidated and parent company balance sheets as at 31 December 2023; the consolidated and parent company income statements, the consolidated and parent company statements of comprehensive income, the consolidated and parent company statements of changes in equity and the consolidated and parent company statements of cash flows for the year then ended; and the notes to the financial statements, comprising material accounting policy information and other explanatory information. Certain notes to the financial statements have been presented elsewhere in the Annual Report, rather than in the notes to the financial statements. These are cross-referenced from the financial statements and are identified as ‘(Audited)’. The relevant disclosures are included in the Risk review section on pages 135 to 237 and the Directors’ remuneration report disclosures on pages 279 to 305. Our opinion is consistent with our reporting to the Group Audit Committee (’GAC’). Separate opinion in relation to international financial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union As explained in note 1.1(a) to the financial statements, the group and parent company, in addition to applying UK-adopted international accounting standards, have also applied international financial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union. In our opinion, the group and parent company financial statements have been properly prepared in accordance with international financial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union. Separate opinion in relation to International Financial Reporting Standards as issued by the International Accounting Standards Board As explained in note 1.1(a) to the financial statements, the group and parent company, in addition to applying UK-adopted international accounting standards, have also applied international financial reporting standards as issued by the International Accounting Standards Board (’IFRS Accounting Standards’). In our opinion, the group and parent company financial statements have been properly prepared in accordance with IFRS Accounting Standards. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”), International Standards on Auditing issued by the International Auditing and Assurance Standards Board (“ISAs”) and applicable law. Our responsibilities under ISAs (UK) and ISAs are further described in the Auditors’ responsibilities for the audit of the financial statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We remained independent of the group in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, which includes the FRC’s Ethical Standard, as applicable to listed public interest entities, and the International Code of Ethics for Professional Accountants (including International Independence Standards) issued by the International Ethics Standards Board for Accountants (‘IESBA Code’), and we have fulfilled our other ethical responsibilities in accordance with these requirements. To the best of our knowledge and belief, we declare that non-audit services prohibited by either the FRC’s Ethical Standard or Article 5(1) of Regulation (EU) No 537/2014 were not provided to the parent company or its controlled undertakings. Other than those disclosed in note 6, we have provided no non-audit services to the parent company or its controlled undertakings in the period under audit. Report of Independent Registered Public Accounting Firm to the Board of Directors and Shareholders of HSBC Holdings plc 318 HSBC Holdings plc Annual Report and Accounts 2023 Our audit approach Overview Audit scope – This was the fifth and final year that it has been my responsibility to form this opinion on behalf of PricewaterhouseCoopers LLP, who you first appointed on 31 March 2015 in relation to that year‘s audit. In addition to forming this opinion, in this report we have also provided information on how we approached the audit, how it changed from the previous year and details of the significant discussions that we had with the GAC. Key audit matters – Expected credit losses - Impairment of loans and advances (group) – Impairment of investment in associate - Bank of Communications Co., Ltd (‘BoCom‘) (group) – Investments in subsidiaries (parent company) – Valuation of defined benefit pension obligations (group) Materiality – Overall group materiality: US$1.6bn (2022: US$1bn) based on 5% of profit before tax adjusted for notable items. – Overall parent company materiality: US$1.5bn (2022: US$950m) based on 0.75% of total assets. This would result in an overall materiality of US$2.1bn and was therefore reduced below the group materiality. – Performance materiality: US$1.2bn (2022: US$750m) (group) and US$1.1bn (2022: US$712m) (parent company). The scope of our audit As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the financial statements. Key audit matters Key audit matters are those matters that, in the auditors’ professional judgement, were of most significance in the audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by the auditors, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. These matters, and any comments we make on the results of our procedures thereon, were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. This is not a complete list of all risks identified by our audit. Held for sale accounting (group), which was a key audit matter last year, is no longer included because the risk has reduced following the completion of the sale of the retail banking operations in France. Otherwise, the key audit matters below are consistent with last year. HSBC Holdings plc Annual Report and Accounts 2023 319 Financial statements Expected credit losses – Impairment of loans and advances (group) Nature of the key audit matter Determining expected credit losses (‘ECL’) involves management judgement and is subject to a high degree of estimation uncertainty. Management makes various assumptions when estimating ECL. The significant assumptions that we focused on in our audit included those with greater levels of management judgement and for which variations had the most significant impact on ECL. These included assumptions made in determining economic scenarios and their probability weightings (specifically the central and downside scenarios given these have the most material impact on ECL) and estimating discounted cash flows for material credit impaired exposures in relation to the mainland China commercial real estate portfolio. The level of estimation uncertainty and judgement has remained high during 2023 as a result of the uncertainties in the macroeconomic and geopolitical environment, persistently high levels of inflation in some territories and the rising global interest rate environment, as well as developments in mainland China’s commercial real estate sector and economy more broadly. Macroeconomic conditions vary between territories and industries, leading to uncertainty around judgements made in determining the severity and probability weighting of economic scenarios used in ECL models. The modelling methodologies used to estimate ECL are developed using historical experience. The impact of the prevailing macroeconomic conditions has resulted in certain limitations in the reliability of these methodologies to forecast the extent and timing of future customer defaults and therefore estimate ECL. In addition, modelling methodologies do not incorporate all factors that are relevant to estimating ECL, such as the differentiated impact of economic conditions on certain industry sectors. These limitations are addressed with management judgemental adjustments, the measurement of which is inherently judgemental and subject to estimation uncertainty. Matters discussed with the Group Audit Committee We held discussions with the GAC covering governance and controls over ECL, with a significant focus on the uncertain prevailing macroeconomic conditions and developments in mainland China’s commercial real estate sector. We discussed a number of areas, including: – the severity of economic scenarios, and their related probability weightings, across territories; – significant assumptions used to estimate the discounted cash flow projections for defaulted exposures in relation to the mainland China commercial real estate portfolio; – assumptions made in determining judgemental management adjustments; and – the disclosures made in relation to ECL. How our audit addressed our key audit matter We assessed the design and effectiveness of governance and controls over the estimation of ECL. We observed management’s review and challenge in governance forums for (1) the determination of economic scenarios and their probability weightings, and (2) the assessment of ECL for Retail and Wholesale portfolios, including the assessment of management judgemental adjustments. We also tested controls over: – model validation and monitoring; – the identification of credit impaired triggers; – the input of critical data into source systems and the flow and transformation of critical data from source systems to impairment models and management judgemental adjustments; – the calculation and approval of management judgemental adjustments to modelled outcomes; and – approval of significant individual impairments. We involved our economic experts in assessing the significant assumptions made in determining the severity and probability weighting of economic scenarios. These assessments considered the sensitivity of ECL to variations in the severity and probability weighting of economic scenarios. We involved our modelling specialists in assessing the appropriateness of the significant assumptions and methodologies used for models and certain management judgemental adjustments. We independently re-performed the calculations for a sample of those models and certain management judgemental adjustments. In respect of the mainland China commercial real estate portfolio, we involved our business recovery experts in assessing the discounted cash flows for a sample of credit impaired exposures. We further considered whether the judgements made in selecting the significant assumptions would give rise to indicators of possible management bias. In addition, we performed substantive testing over: – the compliance of ECL methodologies and assumptions with the requirements of IFRS 9; – a sample of critical data used in ECL models and to estimate management judgemental adjustments; and – assumptions and critical data for a sample of credit impaired wholesale exposures. We evaluated and tested the audited Credit Risk disclosures made in the Annual Report. Relevant references in the Annual Report and Accounts 2023 – Audited credit risk disclosures – Group Audit Committee Report – Note 1.2(d):Financial instruments measured at amortised cost – Note 1.2(i): Impairment of amortised cost and FVOCI financial assets Report of Independent Registered Public Accounting Firm to the Board of Directors and Shareholders of HSBC Holdings plc 320 HSBC Holdings plc Annual Report and Accounts 2023 Impairment of investment in associate – Bank of Communications Co., Ltd (‘BoCom’) (group) Nature of the key audit matter At 31 December 2023, the fair value of the investment in BoCom, based on the share price, had been lower than the carrying amount for a number of years. This is an indicator of potential impairment. An impairment test was performed by management, with supporting sensitivity analysis, using a value in use (‘VIU’) model. On this basis, the investment in BoCom was impaired by US$3.0bn. The carrying value of the investment in BoCom amounts to US$21.2bn at 31 December 2023. The methodology applied in the VIU model is dependent on various assumptions, both short term and long term in nature. These assumptions, which are subject to estimation uncertainty, are derived from a combination of management’s judgement, analysts’ forecasts, market data or other relevant information. The assumptions that we focused our audit on were those with greater levels of management judgement and subjectivity, and for which variations had the most significant impact on the VIU. Specifically, these significant assumptions included: – the discount rate; – short term assumptions for operating income growth rate, loans and advances to customers growth rate, cost-income ratio, and expected credit losses as a percentage of loans and advances to customers; – long-term assumptions for profit and asset growth rates, expected credit losses as a percentage of loans and advances to customers, and effective tax rates; and – capital related assumptions (risk-weighted assets as a percentage of total assets and capital adequacy ratios). Matters discussed with the Group Audit Committee We discussed the appropriateness of the methodology, its consistent application period over period and significant assumptions with the GAC. We also discussed the disclosures made in relation to BoCom, including the use of sensitivity analysis to explain estimation uncertainty. How our audit addressed our key audit matter We had oversight of the audit work performed by our component audit team in Hong Kong in relation to the impairment assessment of BoCom. This work included: – testing controls in place over the significant assumptions, the methodology and its consistent application period over period used to determine the VIU, assessing the appropriateness of the methodology used, its application, and the mathematical accuracy of the calculations; – challenging the appropriateness of the significant assumptions and, where relevant, their interrelationships; – obtaining evidence to corroborate and challenge the data supporting significant assumptions, which included past experience, external market information, third-party sources including analyst reports, information from BoCom management and historical publicly available BoCom financial information; – determining a reasonable range for the discount rate assumption, with the assistance of our valuation experts, and comparing it to the discount rate used by management; – assessing whether the judgements made in determining the significant assumptions would give rise to indicators of possible management bias; and – evaluating and testing the disclosures in relation to BoCom in the Annual Report. We observed certain meetings alongside the component auditor, management and BoCom management to identify facts and circumstances impacting significant assumptions relevant to the determination of the VIU. Representations were obtained from management that assumptions used were consistent with information currently available to the group. Relevant references in the Annual Report and Accounts 2023 – Group Audit Committee Report – Note 1.2(a): Interests in associates and joint arrangements – Note 18: Interests in associates and joint ventures HSBC Holdings plc Annual Report and Accounts 2023 321 Financial statements Investments in subsidiaries (parent company) Nature of the key audit matter Management reviewed investments in subsidiaries for indicators of impairment and indicators that impairment charges recognised in prior periods may no longer exist or may have decreased in accordance with IAS 36 as at 31 December 2023. Where indicators have been identified management estimated the recoverable amount using the higher of value in use (‘VIU‘) or fair value less cost to sell. The methodology used to estimate the recoverable amount is dependent on various assumptions, both short term and long term in nature. These assumptions, which are subject to estimation uncertainty, are derived from a combination of management’s judgement, experts engaged by management and market data. The significant assumptions that we focused our audit on were those with greater levels of management judgement and for which variations had the most significant impact on the recoverable amount. Specifically, these included: – HSBC’s business plan for 2024 to 2028 focusing on revenue, cost and expected credit loss forecasts; – regulatory capital requirements; – long term growth rates; and – discount rates. Management’s assessment resulted in an impairment charge of US$5.5bn in relation to the investment in HSBC Overseas Holdings (UK) Limited (‘HOHU’), which is an intermediate holding company of certain businesses in North America. This resulted in investment in subsidiaries of US$159bn at 31 December 2023. Matters discussed with the Group Audit Committee We discussed the impairment charge for HOHU, the appropriateness of methodologies used and significant assumptions with the GAC, giving consideration to the macroeconomic outlook and HSBC’s strategy. How our audit addressed our key audit matter We assessed the design and tested the effectiveness of controls in place over significant assumptions and the model used to determine the recoverable amounts. We assessed the appropriateness of the methodology used, and tested the mathematical accuracy of the calculations, to estimate the recoverable amounts. In respect of the significant assumptions, our testing included the following: – challenging management’s business plan and the prospects for HSBC’s businesses, as well as considering the achievement of historic forecasts; – obtaining and evaluating evidence relating to significant assumptions, from a combination of historical experience and external market and other financial information; – assessing whether the cash flows included in the model were in compliance with the relevant accounting standard; – assessing the sensitivity of the recoverable amount to reasonable variations in significant assumptions, both individually and in aggregate; and – determining a reasonable range for the discount rate used within the model, with the assistance of our valuation experts, and comparing it to the discount rate used by management. We evaluated and tested the disclosures made in the Annual Report in relation to investment in subsidiaries. Relevant references in the Annual Report and Accounts 2023 – Group Audit Committee Report – Note 1.2(a): Investments in subsidiaries – Note 19: Investments in subsidiaries Valuation of defined benefit pensions obligations (group) Nature of the key audit matter The group has a defined benefit obligation of US$27.0bn, of which US$19.8bn relates to HSBC Bank (UK) pension scheme (‘the principal plan’). The valuation of the defined benefit obligation for the principal plan is dependent on a number of actuarial assumptions. Management uses an actuarial expert to determine the valuation of the defined benefit obligations. The valuation methodology uses a number of market based inputs and other financial and demographic assumptions. The significant assumptions that we focused our audit on were those with greater levels of management judgement and for which variations had the most significant impact on the liability. Specifically, these included the discount rate, inflation rate and mortality rate. Matters discussed with the Group Audit Committee We discussed with the GAC the methodologies and significant assumptions used by management to determine the value of the defined benefit obligation. How our audit addressed our key audit matter We assessed the design and tested the effectiveness of governance and controls in place over the methodologies and the significant assumptions, including those in relation to the use of management’s experts. We also evaluated the objectivity and competence of management’s expert involved in the valuation of the defined benefit obligation of the principal plan. We assessed the appropriateness of the methodology used, and tested the accuracy of the calculation, to estimate the liability. In respect of the significant assumptions, we used our actuarial experts to understand the judgements made by management and their actuarial expert in determining the significant assumptions and compared these assumptions to our independently compiled expected ranges based on market observable indices and the knowledge and opinions of our actuarial experts. We evaluated and tested the disclosures made in the Annual Report in relation to the defined benefit pension obligation. Relevant references in the Annual Report and Accounts 2023 – Group Audit Committee Report – Note 1.2(k): Post-employment benefit plans – Note 5: Employee compensation and benefits Report of Independent Registered Public Accounting Firm to the Board of Directors and Shareholders of HSBC Holdings plc 322 HSBC Holdings plc Annual Report and Accounts 2023 How we tailored the audit scope We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole, taking into account the structure of the group and the parent company, the accounting processes and controls, and the industry in which they operate. The risks that HSBC faces are diverse, with the interdependencies between them being numerous and complex. In performing our risk assessment we engaged with a number of stakeholders to ensure we appropriately understood and considered these risks and their interrelationships. This included stakeholders within HSBC and our own experts within PwC. This engagement covered external factors across the geopolitical, macroeconomic and regulatory and accounting landscape, the impact of climate change risk as well as the internal environment at HSBC, driven by strategy and transformation. We evaluated and challenged management‘s assessment of the impact of climate change risk, which is set out on page 44, including their conclusion that there is no material impact on the financial statements. In making this evaluation we considered management’s use of stress testing and scenario analysis to arrive at the conclusion that there is no material impact on the financial statements. We considered management's assessment on the areas in the financial statements most likely to be impacted by climate risk, including: – the impact on ECL on loans and advances to customers, for both physical and transition risk; – the forecast cashflows from management’s five year business plan and long term growth rates used in estimating recoverable amounts as part of impairment assessments of investments in subsidiaries, goodwill and intangible assets; – the impact of climate related terms on the solely payments of principal and interest test for classification and measurement of loans and advances to customers; and – climate risks relating to contingent liabilities as HSBC faces increased reputational, legal and regulatory risk as it progresses towards its climate ambition. HSBC’s progress on their ESG targets is not included within the scope of this audit. We were engaged separately to provide independent limited assurance to the Directors over the following ESG data: – the 2021 and 2022 on-balance sheet financed emissions for 6 sectors (page 61); – the 2020 thermal coal financing drawn balance exposure (page 67) and the 2020 thermal coal mining on-balance sheet financed emissions (page 61); – the 2019, 2020, 2021 and 2022 off balance facilitated emissions for 2 sectors (page 61); – the cumulative progress made by HSBC on providing and facilitating sustainable financing and investments (page 49); and – HSBC’s own operations scope 1, 2 and 3 (limited to business travel) greenhouse gas emissions data for 2023 (page 64); and supply chain greenhouse gas emissions for purchased goods and services, and capital goods for 2023 (page 64). The work performed for a limited assurance report is substantially less than the work performed for our financial audit, which provides reasonable assurance. Scoping Through our risk assessment, we tailored our determination as to which entities and balances we needed to perform testing over to support our group opinion, taking into consideration the complex and disaggregated group structure, the accounting processes and controls as well as the industry in which they operate. The risks of material misstatement can be reduced to an acceptable level by testing the most financially significant entities within the group and those that drive particular significant risks identified as part of our risk assessment. This ensures that sufficient coverage has been obtained for each financial statement line item (’FSLI’). We continually assessed risks and changed the scope of our audit where necessary. Our risk assessment and scoping identified certain entities (collectively the ’Significant Subsidiaries’) for which we obtained audit opinions. We obtained full scope audit opinions for the consolidated financial position and performance of The Hongkong and Shanghai Banking Corporation Limited, HSBC Bank plc, and HSBC North America Holdings Inc. We also obtained full scope audit opinions for the company financial position and performance of HSBC UK Bank plc, HSBC Bank Canada and HSBC Mexico S.A. Banco. We obtained audit opinions over specific balances for HSBC Bank Middle East Limited - UAE Operations and the HSBC UK Bank plc group. The audits for HSBC Bank plc and HSBC UK Bank plc were performed by other PwC teams in the UK. All other audits were performed by other PwC network firms. Group-wide audit approach HSBC has entity level controls that have a pervasive influence across the group, as well as other global and regional governance and controls over aspects of financial reporting, such as those operated by the Global Risk function for expected credit losses. A significant amount of IT and operational processes and controls relevant to financial reporting are undertaken in operations centres run by Digital Business Services (‘DBS‘). Whilst these operations centres are not separate components, the IT and operational processes and controls are relevant to the financial information of the Significant Subsidiaries. Financial reporting processes and controls are also performed centrally in HSBC‘s Group Finance function and finance operation centres (‘Finance Operations’), including the impairment assessment of goodwill and intangible assets, held for sale classifications and the consolidation of the group‘s results, the preparation of financial statements, and management‘s oversight controls relevant to the group‘s financial reporting. Group-wide processes or processes in DBS and Finance Operations are subject to specified audit procedures or an audit over specific FSLIs. These procedures primarily relate to testing of IT general controls, IT dependencies, forward looking economic scenarios for ECL, operating expenses, intangible assets, valuation of financial instruments, existence testing of financial instruments, intercompany eliminations, reconciliations and consolidation as well as payroll. For these areas, we either performed audit work ourselves, or directed and provided oversight of the audit work performed by PwC teams in the UK, Poland, China, Sri Lanka, Malaysia, India, Mexico and the Philippines. Some of this work was relied upon by the PwC teams auditing the Significant Subsidiaries. This audit work, together with analytical review procedures and assessing the outcome of local external audits, also mitigated the risk of material misstatement for balances in entities that were not part of a Significant Subsidiary. HSBC Holdings plc Annual Report and Accounts 2023 323 Financial statements Significant Subsidiaries audit approach In March 2023, we held a meeting in Hong Kong with the partners and senior staff from the group audit team and certain PwC teams who undertake audits of the Significant Subsidiaries and the operations centres. The meeting focused primarily on our approach to auditing HSBC’s businesses, changes at HSBC and in our PwC teams, and how we continue to innovate and improve the quality of the audit with a focus on technology and our global delivery model. We also discussed our significant audit risks. We asked the partners and teams reporting to us on the Significant Subsidiaries to work to assigned materiality levels reflecting the size of the operations they audited. The overall materiality levels ranged from US$107m to US$1.0bn. Certain Significant Subsidiaries were audited to a local statutory audit materiality that was a lower level than our allocated group materiality. We designed global audit approaches for the products and services that substantially make up HSBC's global businesses, such as lending, deposits and derivatives. These approaches were provided to the partners and teams performing audit testing for the Significant Subsidiaries. We were in active dialogue throughout the year with the component auditors of the Significant Subsidiaries, including consideration of how they planned and performed their work. Senior members of our team undertook at least one in-person site visit where a full scope audit was requested and we had oversight over certain areas of audit work performed. We attended Audit Committee meetings for some of the Significant Subsidiaries. We also attended meetings with management for each of these Significant Subsidiaries at the year end. The audit of The Hongkong and Shanghai Banking Corporation Limited in Hong Kong relied upon work performed by other teams in Hong Kong and the PwC network firms in India, mainland China and Singapore. Similarly, the audit of HSBC Bank plc in the UK relied upon work performed by other teams in the UK and the PwC network firms in France and Germany. We considered how the audit partners and teams for the Significant Subsidiaries instructed and provided oversight to the work performed in these locations. Collectively, Significant Subsidiaries covered 83% of total assets and 74% of total operating income. Using the work of others We have continued our use of evidence provided by others through our reliance on management assurance testing of certain controls across the group. This included testing of controls performed by management themselves in certain low risk areas including reconciliations and footnote disclosure controls. We re-performed a portion of the testing to ensure appropriate quality of testing, as well as assessing the competence and objectivity of those performing the testing. We also used the work of PwC experts, for example economic experts for our work around the severity and probability weighting of macroeconomics variables as part of the expected credit loss allowance and actuaries on the estimates used in determining pension liabilities. An increasing number of controls are operated on behalf of HSBC by third parties. We obtained audit evidence from work that is scoped and provided by other auditors that are engaged by those third parties. For example, we obtained a report evidencing the testing of external systems and controls supporting HSBC's payroll and HR processes. Materiality The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures on the individual financial statement line items and disclosures and in evaluating the effect of misstatements, both individually and in aggregate on the financial statements as a whole. Based on our professional judgement, we determined materiality for the financial statements as a whole as follows: Financial statements – group Financial statements – parent company Overall materiality US$1.6bn (2022: US$1bn). US$1.5bn (2022: US$950m). How we determined it 5% of profit before tax adjusted for notable items (2022: adjusted profit before tax). 0.75% of total assets. This would result in an overall materiality of US$2.1bn and was therefore reduced below the group materiality. Rationale for benchmark applied We believe a standard benchmark of 5% of profit before tax adjusted for notable items is an appropriate quantitative indicator of materiality, although certain items could also be material for qualitative reasons. This benchmark is consistent with our approach for listed entities. A benchmark of total assets has been used, as the parent company‘s primary purpose is to act as a holding parent company with investments in the group‘s subsidiaries, not to generate operating profits and therefore a profit based measure is not relevant. We use performance materiality to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds overall materiality. Specifically, we use performance materiality in determining the scope of our audit and the nature and extent of our testing of account balances, classes of transactions and disclosures, for example in determining sample sizes. Our performance materiality was 75% (2022: 75%) of overall materiality, amounting to US$1.2bn (2022: US$750m) for the group financial statements and US$1.1bn (2022: US$712m) for the parent company financial statements. In determining the performance materiality, we considered a number of factors - the history of misstatements, risk assessment and aggregation risk and the effectiveness of controls - and concluded that an amount at the upper end of our normal range was appropriate. We agreed with the GAC that we would report to them misstatements identified during our audit above US$80m (group audit) (2022: US$50m) and US$80m (parent company audit) (2022: US$50m) as well as misstatements below those amounts that, in our view, warranted reporting for qualitative reasons. Report of Independent Registered Public Accounting Firm to the Board of Directors and Shareholders of HSBC Holdings plc 324 HSBC Holdings plc Annual Report and Accounts 2023 Conclusions relating to going concern Our evaluation of the directors’ assessment of the group's and the parent company’s ability to continue to adopt the going concern basis of accounting included: – performing a risk assessment to identify factors that could impact the going concern basis of accounting, including both internal risks (i.e. strategy execution) and external risks (i.e. macroeconomic conditions); – understanding and evaluating the group’s financial forecasts; – understanding and evaluating the group’s stress testing of liquidity and regulatory capital, including the severity of the stress scenarios that were used; – understanding and evaluating credit rating agency ratings and actions; and – reading and evaluating the adequacy of the disclosures made in the financial statements in relation to going concern. Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually or collectively, may cast significant doubt on the group's and the parent company’s ability to continue as a going concern for a period of at least twelve months from when the financial statements are authorised for issue. In auditing the financial statements, we have concluded that the directors’ use of the going concern basis of accounting in the preparation of the financial statements is appropriate. However, because not all future events or conditions can be predicted, this conclusion is not a guarantee as to the group‘s and the parent company's ability to continue as a going concern. In relation to the directors’ reporting on how they have applied the UK Corporate Governance Code, we have nothing material to add or draw attention to in relation to the directors’ statement in the financial statements about whether the directors considered it appropriate to adopt the going concern basis of accounting. Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of this report. Reporting on other information The other information comprises all of the information in the Annual Report other than the financial statements and our auditors’ report thereon. The directors are responsible for the other information. Our opinion on the financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except to the extent otherwise explicitly stated in this report, any form of assurance thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If we identify an apparent material inconsistency or material misstatement, we are required to perform procedures to conclude whether there is a material misstatement of the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report based on these responsibilities. With respect to the Strategic report and Report of the Directors, we also considered whether the disclosures required by the UK Companies Act 2006 have been included. Based on our work undertaken in the course of the audit, the Companies Act 2006 requires us also to report certain opinions and matters as described below. Strategic report and Report of the Directors In our opinion, based on the work undertaken in the course of the audit, the information given in the Strategic report and Report of the Directors for the year ended 31 December 2023 is consistent with the financial statements and has been prepared in accordance with applicable legal requirements. In light of the knowledge and understanding of the group and parent company and their environment obtained in the course of the audit, we did not identify any material misstatements in the Strategic report and Report of the Directors. Directors’ Remuneration In our opinion, the part of the Directors‘ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006. Corporate governance statement The Listing Rules require us to review the directors’ statements in relation to going concern, longer-term viability and that part of the corporate governance statement relating to the parent company’s compliance with the provisions of the UK Corporate Governance Code specified for our review. Our additional responsibilities with respect to the corporate governance statement as other information are described in the Reporting on other information section of this report. Based on the work undertaken as part of our audit, we have concluded that each of the following elements of the corporate governance statement is materially consistent with the financial statements and our knowledge obtained during the audit, and we have nothing material to add or draw attention to in relation to: – The directors’ confirmation that they have carried out an appropriate assessment of the emerging and principal risks; – The disclosures in the Annual Report that describe those principal risks, what procedures are in place to identify emerging risks and an explanation of how these are being managed or mitigated; – The directors’ statement in the financial statements about whether they considered it appropriate to adopt the going concern basis of accounting in preparing them, and their identification of any material uncertainties to the group’s and parent company’s ability to continue to do so over a period of at least twelve months from the date of approval of the financial statements; – The directors’ explanation as to their assessment of the group's and parent company’s prospects, the period this assessment covers and why the period is appropriate; and HSBC Holdings plc Annual Report and Accounts 2023 325 Financial statements – The directors’ statement as to whether they have a reasonable expectation that the parent company will be able to continue in operation and meet its liabilities as they fall due over the period of its assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions. Our review of the directors’ statement regarding the longer-term viability of the group and parent company was substantially less in scope than an audit and only consisted of making inquiries and considering the directors’ process supporting their statement; checking that the statement is in alignment with the relevant provisions of the UK Corporate Governance Code; and considering whether the statement is consistent with the financial statements and our knowledge and understanding of the group and parent company and their environment obtained in the course of the audit. In addition, based on the work undertaken as part of our audit, we have concluded that each of the following elements of the corporate governance statement is materially consistent with the financial statements and our knowledge obtained during the audit: – The directors’ statement that they consider the Annual Report, taken as a whole, is fair, balanced and understandable, and provides the information necessary for the members to assess the group’s and parent company's position, performance, business model and strategy; – The section of the Annual Report that describes the review of effectiveness of risk management and internal control systems; and – The section of the Annual Report describing the work of the GAC. We have nothing to report in respect of our responsibility to report when the directors’ statement relating to the parent company’s compliance with the Code does not properly disclose a departure from a relevant provision of the Code specified under the Listing Rules for review by the auditors. Responsibilities for the financial statements and the audit Responsibilities of the directors for the financial statements As explained more fully in the Directors’ responsibility statement, the directors are responsible for the preparation of the financial statements in accordance with the applicable framework and for being satisfied that they give a true and fair view. The directors are also responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the directors are responsible for assessing the group’s and the parent company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the group or the parent company or to cease operations, or have no realistic alternative but to do so. Auditors’ responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) and ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our responsibilities, outlined above, to detect material misstatements in respect of irregularities, including fraud. The extent to which our procedures are capable of detecting irregularities, including fraud, is detailed below. Based on our understanding of the group and industry, we identified that the principal risks of non-compliance with laws and regulations related to breaches of financial crime laws and regulations and regulatory compliance, including regulatory reporting requirements and conduct of business, and we considered the extent to which non-compliance might have a material effect on the financial statements. We also considered those laws and regulations that have a direct impact on the financial statements such as the Companies Act 2006 and relevant tax legislation. We evaluated management’s incentives and opportunities for fraudulent manipulation of the financial statements (including the risk of override of controls), and determined that the principal risks were related to posting inappropriate journal entries in relation to cost targets, and management bias in accounting estimates. The group engagement team shared this risk assessment with the component auditors so that they could include appropriate audit procedures in response to such risks in their work. Audit procedures performed by the group engagement team and/or component auditors included: – review of correspondence with and reports from regulators, including the Prudential Regulation Authority (’PRA’) and Financial Conduct Authority (’FCA’); – reviewed reporting to the GAC and GRC in respect of compliance and legal matters; – enquiries of management and review of internal audit reports, insofar as they related to the financial statements; – obtain legal confirmations from legal advisors relating to material litigation and compliance matters; – assessment of matters reported on the group‘s whistleblowing programmes and the results of management‘s investigation of such matters, insofar as they related to the financial statements; – challenging assumptions and judgements made by management in its significant accounting estimates, in particular in relation to the determination of expected credit losses, the impairment assessment of the investment in BoCom, valuation of defined benefit pensions obligations, the impairment assessment of investment in subsidiaries and valuation of financial instruments; – obtaining confirmations from third parties to confirm the existence of a sample of transactions and balances; and – identifying and testing journal entries, including those posted with certain descriptions, posted and approved by the same individual, backdated journals or posted by infrequent and unexpected users. There are inherent limitations in the audit procedures described above. We are less likely to become aware of instances of non-compliance with laws and regulations that are not closely related to events and transactions reflected in the financial statements. Also, the risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve deliberate concealment by, for example, forgery or intentional misrepresentations, or through collusion. Our audit testing might include testing complete populations of certain transactions and balances, possibly using data auditing techniques. However, it typically involves selecting a limited number of items for testing, rather than testing complete populations. We will often seek to Report of Independent Registered Public Accounting Firm to the Board of Directors and Shareholders of HSBC Holdings plc 326 HSBC Holdings plc Annual Report and Accounts 2023 target particular items for testing based on their size or risk characteristics. In other cases, we will use audit sampling to enable us to draw a conclusion about the population from which the sample is selected. A further description of our responsibilities for the audit of the financial statements in accordance with ISAs (UK) is located on the FRC’s website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditors’ report. As part of an audit in accordance with ISAs, we exercise professional judgement and maintain professional scepticism throughout the audit. We also: – identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control; – obtain an understanding of internal controls relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the group’s and parent company’s internal controls; – evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management; – conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the group’s and parent company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the group to cease to continue as a going concern; – evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation; and – obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the group and parent company to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group and parent company audit. We remain solely responsible for our audit opinion. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, actions taken to eliminate threats or safeguards applied. From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Use of this report This report, including the opinions, has been prepared for and only for the parent company’s members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. Other required reporting Companies Act 2006 exception reporting Under the Companies Act 2006 we are required to report to you if, in our opinion: – we have not obtained all the information and explanations we require for our audit; or – adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or – certain disclosures of directors’ remuneration specified by law are not made; or – the parent company financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with the accounting records and returns. We have no exceptions to report arising from this responsibility. Appointment Following the recommendation of the GAC, we were appointed by the members on 31 March 2015 to audit the financial statements for the year ended 31 December 2015 and subsequent financial periods. The period of total uninterrupted engagement is nine years, covering the years ended 31 December 2015 to 31 December 2023. HSBC Holdings plc Annual Report and Accounts 2023 327 Financial statements Other matter As required by the Financial Conduct Authority Disclosure Guidance and Transparency Rule 4.1.14R, these financial statements form part of the ESEF-prepared annual financial report filed on the National Storage Mechanism of the Financial Conduct Authority in accordance with the ESEF Regulatory Technical Standard (‘ESEF RTS’). This auditors’ report provides no assurance over whether the annual financial report has been prepared using the single electronic format specified in the ESEF RTS. Scott Berryman (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors London 21 February 2024 Report of Independent Registered Public Accounting Firm to the Board of Directors and Shareholders of HSBC Holdings plc 328 HSBC Holdings plc Annual Report and Accounts 2023 Financial statements 329 Consolidated income statement 330 Consolidated statement of comprehensive income 331 Consolidated balance sheet 332 Consolidated statement of changes in equity 335 Consolidated statement of cash flows 337 HSBC Holdings income statement 337 HSBC Holdings statement of comprehensive income 338 HSBC Holdings balance sheet 339 HSBC Holdings statement of changes in equity 340 HSBC Holdings statement of cash flows Consolidated income statement for the year ended 31 December 2023 2023 20221 2021 Notes* $m $m $m Net interest income 35,796 30,377 26,489 – interest income2,3 100,868 52,826 36,188 – interest expense4 (65,072) (22,449) (9,699) Net fee income 2 11,845 11,770 13,097 – fee income 15,616 15,124 16,788 – fee expense (3,771) (3,354) (3,691) Net income from financial instruments held for trading or managed on a fair value basis 3 16,661 10,278 7,744 Net income/(expense) from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit or loss 3 7,887 (13,831) 4,053 Net insurance premium income — — 10,870 Insurance finance (expense)/income 4 (7,809) 13,799 — Insurance service result 1,078 809 — – insurance revenue 2,259 1,977 — – insurance service expense (1,181) (1,168) — Gain on acquisition5 1,591 — — (Impairment)/reversal of impairment relating to the sale of our retail banking operations in France6 150 (2,316) — Other operating (expense)/income7 (1,141) (266) 1,687 Total operating income 66,058 50,620 63,940 Net insurance claims and benefits paid and movement in liabilities to policyholders — — (14,388) Net operating income before change in expected credit losses and other credit impairment charges8 66,058 50,620 49,552 Change in expected credit losses and other credit impairment charges (3,447) (3,584) 928 Net operating income 62,611 47,036 50,480 Employee compensation and benefits 5 (18,220) (18,003) (18,742) General and administrative expenses (10,383) (10,848) (11,592) Depreciation and impairment of property, plant and equipment and right-of-use assets9 (1,640) (2,149) (2,261) Amortisation and impairment of intangible assets (1,827) (1,701) (1,438) Goodwill impairment — — (587) Total operating expenses (32,070) (32,701) (34,620) Operating profit 30,541 14,335 15,860 Share of profit in associates and joint ventures 18 2,807 2,723 3,046 Impairment of interest in associate 18 (3,000) — — Profit before tax 30,348 17,058 18,906 Tax expense 7 (5,789) (809) (4,213) Profit for the year 24,559 16,249 14,693 Attributable to: – ordinary shareholders of the parent company 22,432 14,346 12,607 – preference shareholders of the parent company — — 7 – other equity holders 1,101 1,213 1,303 – non-controlling interests 1,026 690 776 Profit for the year 24,559 16,249 14,693 $ $ $ Basic earnings per ordinary share 9 1.15 0.72 0.62 Diluted earnings per ordinary share 9 1.14 0.72 0.62 * For Notes on the financial statements, see page 341. 1 From 1 January 2023, we adopted IFRS 17 ‘Insurance Contracts’, which replaced IFRS 4 ‘Insurance Contracts’. Comparative data for the financial year ended 31 December 2022 have been restated accordingly. Comparative data for the year ended 31 December 2021 are prepared on an IFRS 4 basis. 2 Interest income includes $88,657m (2022: $45,994m; 2021: $30,916m) of interest recognised on financial assets measured at amortised cost and $12,134m (2022: $6,293m; 2021: $4,337m) of interest recognised on financial assets measured at fair value through other comprehensive income. 3 Interest income is calculated using the effective interest method and comprises mainly interest recognised on financial assets measured at either amortised cost or fair value through other comprehensive income. 4 Interest expense includes $62,095m (2022: $20,798m; 2021: $8,227m) of interest on financial instruments, excluding interest on debt instruments issued by HSBC for funding purposes that are designated under the fair value option to reduce an accounting mismatch and on derivatives managed in conjunction with those debt instruments included in interest expense. 5 Provisional gain recognised in respect of the acquisition of SVB UK. 6 In the fourth quarter of 2023, an impairment loss of $2.0bn was recognised relating to the sale of our retail banking operations in France. This largely offset the $2.1bn recognised in the first quarter of 2023 on the reversal of the held for sale classification at that time. In 2023, a total net $0.1bn of credit was recognised in other operating income, reflecting the net asset value disposed under the final terms of sale. The $0.4bn impairment of goodwill recognised in the third quarter in 2022 has not been reversed. 7 Other operating (expense)/income includes a loss on net monetary positions of $1,667m (2022: $678m; 2021: $576m) as a result of applying IAS 29 ‘Financial Reporting in Hyperinflationary Economies’ and the disposal losses on capitalised Markets Treasury repositioning of $977m in 2023. 8 Net operating income before change in expected credit losses and other credit impairment charges also referred to as revenue. 9 Includes depreciation of the right-of-use assets of $663m (2022: $717m; 2021: $878m). HSBC Holdings plc Annual Report and Accounts 2023 329 Financial statements Consolidated statement of comprehensive income for the year ended 31 December 2023 2023 20221 2021 $m $m $m Profit for the year 24,559 16,249 14,693 Other comprehensive income/(expense) Items that will be reclassified subsequently to profit or loss when specific conditions are met: Debt instruments at fair value through other comprehensive income 2,599 (7,232) (2,139) – fair value gains/(losses) 2,381 (9,618) (2,270) – fair value losses/(gains) transferred to the income statement on disposal 905 (18) (464) – expected credit (recoveries)/losses recognised in the income statement 59 56 (49) – income taxes (746) 2,348 644 Cash flow hedges 2,953 (3,655) (664) – fair value gains/(losses) 2,534 (4,207) 595 – fair value (gains)/losses reclassified to the income statement 1,463 (758) (1,514) – income taxes (1,044) 1,310 255 Share of other comprehensive income/(expense) of associates and joint ventures 47 (367) 103 – share for the year 47 (367) 103 Net finance income/(expenses) from insurance contracts (364) 1,775 — – before income taxes (491) 2,393 — – income taxes 127 (618) — Exchange differences (204) (9,918) (2,393) Items that will not be reclassified subsequently to profit or loss: Fair value gains on property revaluation 1 280 — Remeasurement of defined benefit liability (314) (1,031) (274) – before income taxes (413) (1,723) (107) – income taxes 99 692 (167) Changes in fair value of financial liabilities designated at fair value upon initial recognition arising from changes in own credit risk (1,219) 1,922 531 – before income taxes (1,617) 2,573 512 – income taxes 398 (651) 19 Equity instruments designated at fair value through other comprehensive income (120) 107 (446) – fair value gains/(losses) (120) 107 (443) – income taxes — — (3) Effects of hyperinflation 1,604 877 315 Other comprehensive income/(expense) for the year, net of tax 4,983 (17,242) (4,967) Total comprehensive income/(expense) for the year 29,542 (993) 9,726 Attributable to: – ordinary shareholders of the parent company 27,397 (2,810) 7,765 – preference shareholders of the parent company — — 7 – other equity holders 1,101 1,213 1,303 – non-controlling interests 1,044 604 651 Total comprehensive income/(expense) for the year 29,542 (993) 9,726 1 From 1 January 2023, we adopted IFRS 17 ‘Insurance Contracts’, which replaced IFRS 4 ‘Insurance Contracts’. Comparative data for the financial year ended 31 December 2022 have been restated accordingly. Comparative data for the year ended 31 December 2021 are prepared on an IFRS 4 basis. Financial statements 330 HSBC Holdings plc Annual Report and Accounts 2023 Consolidated balance sheet at 31 December 2023 At1 31 Dec 31 Dec 1 Jan 2023 2022 2022 Notes* $m $m $m Assets Cash and balances at central banks 285,868 327,002 403,018 Items in the course of collection from other banks 6,342 7,297 4,136 Hong Kong Government certificates of indebtedness 42,024 43,787 42,578 Trading assets 11 289,159 218,093 248,842 Financial assets designated and otherwise mandatorily measured at fair value through profit or loss 14 110,643 100,101 110,795 Derivatives 15 229,714 284,159 196,882 Loans and advances to banks 112,902 104,475 82,567 Loans and advances to customers 938,535 923,561 1,044,534 Reverse repurchase agreements – non-trading 252,217 253,754 241,648 Financial investments 16 442,763 364,726 392,005 Assets held for sale 23 114,134 115,919 3,411 Prepayments, accrued income and other assets 22 165,255 156,149 136,196 Current tax assets 1,536 1,230 970 Interests in associates and joint ventures 18 27,344 29,254 29,609 Goodwill and intangible assets 21 12,487 11,419 11,169 Deferred tax assets 7 7,754 8,360 5,432 Total assets 3,038,677 2,949,286 2,953,792 Liabilities Hong Kong currency notes in circulation 42,024 43,787 42,578 Deposits by banks 73,163 66,722 101,152 Customer accounts 1,611,647 1,570,303 1,710,574 Repurchase agreements – non-trading 172,100 127,747 126,670 Items in the course of transmission to other banks 7,295 7,864 5,214 Trading liabilities 24 73,150 72,353 84,904 Financial liabilities designated at fair value 25 141,426 127,321 145,503 Derivatives 15 234,772 285,762 191,064 Debt securities in issue 26 93,917 78,149 78,557 Liabilities of disposal groups held for sale 23 108,406 114,597 9,005 Accruals, deferred income and other liabilities 27 136,606 134,313 115,900 Current tax liabilities 2,777 1,135 699 Insurance contract liabilities 4 120,851 108,816 119,307 Provisions 28 1,741 1,958 2,566 Deferred tax liabilities 7 1,238 972 3,294 Subordinated liabilities 29 24,954 22,290 20,487 Total liabilities 2,846,067 2,764,089 2,757,474 Equity Called up share capital 33 9,631 10,147 10,316 Share premium account 33 14,738 14,664 14,602 Other equity instruments 17,719 19,746 22,414 Other reserves (8,907) (9,133) 6,447 Retained earnings 152,148 142,409 135,236 Total shareholders’ equity 185,329 177,833 189,015 Non-controlling interests 19 7,281 7,364 7,303 Total equity 192,610 185,197 196,318 Total liabilities and equity 3,038,677 2,949,286 2,953,792 1 From 1 January 2023, we adopted IFRS 17 ‘Insurance Contracts’, which replaced IFRS 4 ‘Insurance Contracts’. We have restated 2022 comparative data and the IFRS 17 transition impact on the balance sheet at 1 January 2022. * For Notes on the financial statements, see page 341. The accompanying notes on pages 341 to 434 and the audited sections in the Risk review on pages 135 to 237 (including ‘Measurement uncertainty and sensitivity analysis of ECL estimates’ on pages 156 to 168, and ‘Directors’ remuneration report’ on pages 279 to 305 form an integral part of these financial statements. These financial statements were approved by the Board of Directors on 21 February 2024 and signed on its behalf by: Mark E Tucker Georges Elhedery Group Chairman Group Chief Financial Officer HSBC Holdings plc Annual Report and Accounts 2023 331 Financial statements for the year ended 31 December 2023 Other reserves Called up share capital and share premium Other equity instru- ments Financial assets at FVOCI reserve Cash flow hedging reserve Foreign exchange reserve Merger and other reserves 1,2 Insurance finance reserve3 Retained earnings 1,4 Total share- holders’ equity Non- controlling interests Total equity $m $m $m $m $m $m $m $m $m $m $m At 1 Jan 2023 24,811 19,746 (7,038) (3,808) (32,575) 33,209 1,079 142,409 177,833 7,364 185,197 Profit for the year — — — — — — — 23,533 23,533 1,026 24,559 Other comprehensive income (net of tax) — — 2,402 3,030 (211) 1 (371) 114 4,965 18 4,983 – debt instruments at fair value through other comprehensive income — — 2,574 — — — — — 2,574 25 2,599 – equity instruments designated at fair value through other comprehensive income — — (93) — — — — — (93) (27) (120) – cash flow hedges — — — 2,919 — — — — 2,919 34 2,953 – changes in fair value of financial liabilities designated at fair value upon initial recognition arising from changes in own credit risk — — — — — — — (1,220) (1,220) 1 (1,219) – property revaluation — — — — — 1 — — 1 — 1 – remeasurement of defined benefit asset/liability — — — — — — — (317) (317) 3 (314) – share of other comprehensive income of associates and joint ventures — — — — — — — 47 47 — 47 – effects of hyperinflation — — — — — — — 1,604 1,604 — 1,604 – insurance finance income/ (expense) recognised in other comprehensive income — — — — — — (364) — (364) — (364) – exchange differences — — (79) 111 (211) — (7) — (186) (18) (204) Total comprehensive income for the year — — 2,402 3,030 (211) 1 (371) 23,647 28,498 1,044 29,542 Shares issued under employee remuneration and share plans 79 — — — — — — (79) — — — Capital securities issued5 — 1,996 — — — — — — 1,996 — 1,996 Dividends to shareholders — — — — — — — (11,593) (11,593) (603) (12,196) Redemption of securities6 — (4,023) — — — — — 20 (4,003) — (4,003) Transfers7 — — — — — (5,130) — 5,130 — — — Cost of share-based payment arrangements — — — — — — — 482 482 — 482 Share buy-back8 — — — — — — — (7,025) (7,025) — (7,025) Cancellation of shares (521) — — — — 521 — — — — — Other movements — — 1,129 (255) (967) — 77 (843) (859) (524) (1,383) At 31 Dec 2023 24,369 17,719 (3,507) (1,033) (33,753) 28,601 785 152,148 185,329 7,281 192,610 Consolidated statement of changes in equity Financial statements 332 HSBC Holdings plc Annual Report and Accounts 2023 for the year ended 31 December 2022 Other reserves Called up share capital and share premium Other equity instru- ments Financial assets at FVOCI reserve Cash flow hedging reserve Foreign exchange reserve Merger and other reserves 1,2 Insurance finance reserve3 Retained earnings 1,4 Total share- holders’ equity Non- controlling interests Total equity $m $m $m $m $m $m $m $m $m $m $m At 31 Dec 2021 (IFRS 4) 24,918 22,414 (634) (197) (22,769) 30,060 — 144,458 198,250 8,527 206,777 Impact on transition to IFRS 179 — — 683 — — — (696) (9,222) (9,235) (1,224) (10,459) At 1 Jan 2022 24,918 22,414 49 (197) (22,769) 30,060 (696) 135,236 189,015 7,303 196,318 Profit for the year — — — — — — — 15,559 15,559 690 16,249 Other comprehensive income (net of tax) — — (7,089) (3,613) (9,806) 174 1,775 1,403 (17,156) (86) (17,242) – debt instruments at fair value through other comprehensive income — — (7,181) — — — — — (7,181) (51) (7,232) – equity instruments designated at fair value through other comprehensive income — — 92 — — — — — 92 15 107 – cash flow hedges — — — (3,613) — — — — (3,613) (42) (3,655) – changes in fair value of financial liabilities designated at fair value upon initial recognition arising from changes in own credit risk — — — — — — — 1,922 1,922 — 1,922 – property revaluation — — — — — 174 — — 174 106 280 – remeasurement of defined benefit asset/liability — — — — — — — (1,029) (1,029) (2) (1,031) – share of other comprehensive income of associates and joint ventures — — — — — — (367) (367) — (367) – effects of hyperinflation — — — — — — — 877 877 — 877 – insurance finance income/ (expense) recognised in other comprehensive income — — — — — — 1,775 — 1,775 — 1,775 – exchange differences — — — — (9,806) — — — (9,806) (112) (9,918) Total comprehensive income for the year — — (7,089) (3,613) (9,806) 174 1,775 16,962 (1,597) 604 (993) Shares issued under employee remuneration and share plans 67 — — — — — — (67) — — — Dividends to shareholders — — — — — — — (6,544) (6,544) (426) (6,970) Redemption of securities — (2,668) — — — — — 402 (2,266) — (2,266) Transfers — — — — — 2,499 — (2,499) — — — Cost of share-based payment arrangements — — — — — — — 400 400 — 400 Share buy-back — — — — — — — (1,000) (1,000) — (1,000) Cancellation of shares (174) — — — — 174 — — — — — Other movements — — 2 2 — 302 — (481) (175) (117) (292) At 31 Dec 2022 24,811 19,746 (7,038) (3,808) (32,575) 33,209 1,079 142,409 177,833 7,364 185,197 Consolidated statement of changes in equity (continued) HSBC Holdings plc Annual Report and Accounts 2023 333 Financial statements for the year ended 31 December 2021 Other reserves Called up share capital and share premium Other equity instru- ments Financial assets at FVOCI reserve Cash flow hedging reserve Foreign exchange reserve Merger and other reserves 1,2 Insurance finance reserve3 Retained earnings 1,4 Total share- holders’ equity Non- controlling interests Total equity $m $m $m $m $m $m $m $m $m $m $m At 1 Jan 2021 24,624 22,414 1,816 457 (20,375) 26,935 — 140,572 196,443 8,552 204,995 Profit for the year — — — — — — — 13,917 13,917 776 14,693 Other comprehensive income (net of tax) — — (2,455) (654) (2,394) — — 661 (4,842) (125) (4,967) – debt instruments at fair value through other comprehensive income — — (2,105) — — — — — (2,105) (34) (2,139) – equity instruments designated at fair value through other comprehensive income — — (350) — — — — — (350) (96) (446) – cash flow hedges — — — (654) — — — — (654) (10) (664) – changes in fair value of financial liabilities designated at fair value upon initial recognition arising from changes in own credit risk — — — — — — — 531 531 — 531 – remeasurement of defined benefit asset/liability — — — — — — — (288) (288) 14 (274) – share of other comprehensive income of associates and joint ventures — — — — — — — 103 103 — 103 – effects of hyperinflation — — — — — — — 315 315 — 315 – exchange differences — — — — (2,394) — — — (2,394) 1 (2,393) Total comprehensive income for the year — — (2,455) (654) (2,394) — — 14,578 9,075 651 9,726 Shares issued under employee remuneration and share plans 354 — — — — — — (336) 18 — 18 Capital securities issued — 2,000 — — — — — (4) 1,996 — 1,996 Dividends to shareholders — — — — — — — (5,790) (5,790) (593) (6,383) Redemption of securities — (2,000) — — — — — — (2,000) — (2,000) Transfers — — — — — 3,065 — (3,065) — — — Cost of share-based payment arrangements — — — — — — — 467 467 — 467 Cancellation of shares (60) — — — — 60 — (2,004) (2,004) — (2,004) Other movements — — 5 — — — — 40 45 (83) (38) At 31 Dec 2021 24,918 22,414 (634) (197) (22,769) 30,060 — 144,458 198,250 8,527 206,777 Consolidated statement of changes in equity (continued) 1 Cumulative goodwill amounting to $5,138m was charged against reserves in respect of acquisitions of subsidiaries prior to 1 January 1998, including $3,469m charged against the merger reserve arising on the acquisition of HSBC Bank plc. The balance of $1,669m was charged against retained earnings. 2 Statutory share premium relief under section 131 of the Companies Act 1985 was taken in respect of the acquisition of HSBC Bank plc in 1992, HSBC Continental Europe in 2000 and HSBC Finance Corporation in 2003, and the shares issued were recorded at their nominal value only. In HSBC’s consolidated financial statements, the fair value differences of $8,290m in respect of HSBC Continental Europe and $12,768m in respect of HSBC Finance Corporation were recognised in the merger reserve. The merger reserve created on the acquisition of HSBC Finance Corporation subsequently became attached to HSBC Overseas Holdings (UK) Limited, following a number of intra-Group reorganisations. During 2009, pursuant to section 131 of the Companies Act 1985, statutory share premium relief was taken in respect of the rights issue and $15,796m was recognised in the merger reserve. 3 The insurance finance reserve reflects the impact of the adoption of the other comprehensive income option for our insurance business in France. Underlying assets supporting these contracts are measured at fair value through other comprehensive income. Under this option, only the amount that matches income or expenses recognised in profit or loss on underlying items is included in finance income or expenses, resulting in the elimination of income statement accounting mismatches. The remaining amount of finance income or expenses for these insurance contracts is recognised in other comprehensive income (‘OCI’). 4 At 31 December 2023, retained earnings included 256,289,431 treasury shares (2022: 554,452,437; 2021: 558,397,704). These include treasury shares held within HSBC’s insurance business’s retirement funds for the benefit of policyholders or beneficiaries within employee trusts for the settlement of shares expected to be delivered under employee share schemes or bonus plans, and the market-making activities in Markets and Securities Services. 5 In March 2023, HSBC Holdings issued $2,000m 8.000% contingent convertible securities on which there were $4m of external issue costs. 6 In March 2023, HSBC Holdings redeemed $2,350m 6.250% contingent convertible securities. In September 2023, HSBC Holdings further redeemed €1,000m 6.000% and SGD750m 5.000% contingent convertible securities. 7 At 31 December 2023, an impairment of $5,512m of HSBC Overseas Holdings (UK) Limited was recognised, resulting in a permitted transfer of $5,130m from the merger reserve to retained earnings and a realisation of $382m shared-based payment reserve within retained earnings. 8 In May 2023, HSBC Holdings announced a share buy-back of up to $2.0bn, which was completed in July 2023. In August 2023, HSBC Holdings announced another share buy-back of up to $2.0bn, which was completed in October 2023. In October 2023, HSBC Holdings further announced a share buy-back of up to $3.0bn, which was completed in February 2024. 9 The impact of IFRS 17 on previously reported total equity was $(10,831)m at 31 December 2022. Financial statements 334 HSBC Holdings plc Annual Report and Accounts 2023 Profit before tax 30,348 17,058 18,906 Adjustments for non-cash items: Depreciation, amortisation and impairment 3,466 3,850 4,286 Net loss/(gain) from investing activities 1,213 11 (647) Share of profit in associates and joint ventures (2,807) (2,723) (3,046) Impairment of interest in associate 3,000 — — (Gain)/loss on acquisition/disposal of subsidiaries, businesses, associates and joint ventures (1,775) 2,554 — Change in expected credit losses gross of recoveries and other credit impairment charges 3,717 3,898 (519) Provisions including pensions 266 638 1,063 Share-based payment expense 482 400 467 Other non-cash items included in profit before tax (4,299) (774) 510 Elimination of exchange differences2 (10,678) 48,718 18,937 Changes in operating assets and liabilities Change in net trading securities and derivatives (63,247) 20,166 (9,226) Change in loans and advances to banks and customers (14,145) 31,649 (11,014) Change in reverse repurchase agreements – non-trading (2,095) (23,405) 552 Change in financial assets designated and otherwise mandatorily measured at fair value (9,994) 14,164 (4,254) Change in other assets3 (10,254) (12,858) 19,899 Change in deposits by banks and customer accounts 45,021 (91,194) 95,703 Change in repurchase agreements – non-trading 43,366 4,344 14,769 Change in debt securities in issue 11,945 12,518 (16,936) Change in financial liabilities designated at fair value 10,097 (13,654) (11,425) Change in other liabilities 8,742 6,021 (10,935) Dividends received from associates 1,067 944 808 Contributions paid to defined benefit plans (208) (194) (509) Tax paid (4,117) (2,776) (3,077) Net cash from operating activities 39,111 19,355 104,312 Purchase of financial investments3 (563,561) (511,097) (493,042) Proceeds from the sale and maturity of financial investments3 504,174 492,624 521,190 Net cash flows from the purchase and sale of property, plant and equipment (1,145) (1,284) (1,086) Net cash flows from disposal of loan portfolio and customer accounts 623 (3,530) 3,059 Net investment in intangible assets (2,550) (3,125) (2,479) Net cash flow from (acquisition)/disposal of subsidiaries, businesses, associates and joint ventures4 (453) (989) (106) Net cash from investing activities (62,912) (27,401) 27,536 Issue of ordinary share capital and other equity instruments 1,996 — 1,996 Cancellation of shares (5,812) (2,285) (707) Net sales/(purchases) of own shares for market-making and investment purposes (614) (91) (1,386) Net cash flow from change in stake of subsidiaries (19) (197) — Redemption of preference shares and other equity instruments (4,003) (2,266) (3,450) Subordinated loan capital issued 5,237 7,300 — Subordinated loan capital repaid5 (2,147) (1,777) (864) Dividends paid to shareholders of the parent company and non-controlling interests (12,196) (6,970) (6,383) Net cash from financing activities (17,558) (6,286) (10,794) Net increase/(decrease) in cash and cash equivalents (41,359) (14,332) 121,054 Cash and cash equivalents at 1 Jan 521,671 574,032 468,323 Exchange differences in respect of cash and cash equivalents 10,621 (38,029) (15,345) Cash and cash equivalents at 31 Dec6 490,933 521,671 574,032 Consolidated statement of cash flows for the year ended 31 December 2023 2023 20221 2021 $m $m $m HSBC Holdings plc Annual Report and Accounts 2023 335 Financial statements Cash and cash equivalents comprise: – cash and balances at central banks 285,868 327,002 403,018 – items in the course of collection from other banks 6,342 7,297 4,136 – loans and advances to banks of one month or less 76,620 72,295 55,705 – reverse repurchase agreements with banks of one month or less 64,341 68,682 76,658 – treasury bills, other bills and certificates of deposit less than three months 33,303 26,727 28,488 – cash collateral and net settlement accounts 15,819 19,445 11,241 – cash and cash equivalents held for sale7 15,935 8,087 — – less: items in the course of transmission to other banks (7,295) (7,864) (5,214) Cash and cash equivalents at 31 Dec6 490,933 521,671 574,032 Consolidated statement of cash flows (continued) for the year ended 31 December 2023 2023 20221 2021 $m $m $m Interest received was $98,910m (2022: $55,664m; 2021: $40,175m), interest paid was $65,980m (2022: $22,856m; 2021: $12,695m) and dividends received (excluding dividends received from associates, which are presented separately above) were $1,869m (2022: $1,638m; 2021: $1,898m). 1 From 1 January 2023, we adopted IFRS 17 ‘Insurance Contracts’, which replaced IFRS 4 ‘Insurance Contracts’. Comparative data for the financial year ended 31 December 2022 have been restated accordingly. Comparative data for the year ended 31 December 2021 are prepared on an IFRS 4 basis. 2 Adjustment to bring changes between opening and closing balance sheet amounts to average rates. This is not done on a line-by-line basis, as details cannot be determined without unreasonable expense. 3 Post adoption of IFRS 17 ‘Insurance Contracts’, certain assets have been reclassified from ‘Investing activities’ to ‘Operating activities’. The comparative data have not been re-presented. 4 The ‘Net cash flow on (acquisition)/disposal of subsidiaries, businesses, associates and joint ventures’ includes $1.2bn of net cash inflows from the acquisition of Silicon Valley Bank UK Limited in March 2023. 5 Subordinated liabilities changes during the year are attributable to repayments of $(2.1)bn (2022: $(1.8)bn; 2021: $(0.9)bn) of securities. Non-cash changes during the year included foreign exchange gains/(losses) of $0.6bn (2022: $(1.1)bn; 2021: $(0.3)bn) and fair value gains/(losses) of $0.8bn (2022: $(3.1)bn; 2021: $(1.0)bn). 6 At 31 December 2023, $61.8bn (2022: $59.3bn; 2021: $33.6bn) was not available for use by HSBC due to a range of restrictions, including currency exchange and other restrictions. 7 Includes $5.6bn (2022: $6.5bn) of cash and balances at central banks, $0.2bn (2022: $1.3bn) of reverse repurchase agreements with banks of one month or less, $10.5bn (2022: $0.2bn) of loans and advances to banks of one month or less and items in the course of transmission to other banks $(0.4)bn (2022: $(0.2)bn). Financial statements 336 HSBC Holdings plc Annual Report and Accounts 2023 HSBC Holdings income statement for the year ended 31 December 2023 2023 2022 2021 Notes* $m $m $m Net interest expense (5,339) (3,074) (2,367) – interest income 2,864 937 380 – interest expense (8,203) (4,011) (2,747) Fee (expense)/income 2 (3) (5) Net income from financial instruments held for trading or managed on a fair value basis 3 1,063 2,129 110 Changes in fair value of designated debt and related derivatives1 3 (1,468) 2,144 349 Changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss 3 3,692 (2,409) (420) Gains less losses from financial investments 45 58 — Dividend income from subsidiaries 16,824 9,478 11,404 Other operating income 332 91 230 Total operating income 15,151 8,414 9,301 Employee compensation and benefits 5 (15) (41) (30) General and administrative expenses (1,327) (1,586) (1,845) (Impairment) of subsidiaries/reversal of impairment 19 (5,574) 2,493 3,065 Total operating expenses (6,916) 866 1,190 Profit before tax 8,235 9,280 10,491 Tax credit2 977 3,077 343 Profit for the year 9,212 12,357 10,834 * For Notes on the financial statements, see page 341. 1 The debt instruments, issued for funding purposes, are designated under the fair value option to reduce an accounting mismatch. 2 The tax credit in 2022 includes $2.2bn arising from the recognition of a deferred tax asset from historical tax losses in HSBC Holdings. This was a result of improved profit forecasts for the UK tax group, which accelerated the expected utilisation of these losses and reduced uncertainty regarding their recoverability. The amounts recorded within profit before tax with respect to dividend income from subsidiaries and reversal of impairment of subsidiaries are not subject to tax. HSBC Holdings statement of comprehensive income for the year ended 31 December 2023 2023 2022 2021 $m $m $m Profit for the year 9,212 12,357 10,834 Other comprehensive income/(expense) Items that will not be reclassified subsequently to profit or loss: Changes in fair value of financial liabilities designated at fair value upon initial recognition arising from changes in own credit risk (124) 326 267 – before income taxes (166) 435 259 – income taxes 42 (109) 8 Other comprehensive income/(expense) for the year, net of tax (124) 326 267 Total comprehensive income for the year 9,088 12,683 11,101 HSBC Holdings plc Annual Report and Accounts 2023 337 Financial statements HSBC Holdings balance sheet 31 Dec 2023 31 Dec 2022 Notes* $m $m Assets Cash and balances with HSBC undertakings 7,029 3,210 Financial assets with HSBC undertakings designated and otherwise mandatorily measured at fair value 59,879 52,322 Derivatives 15 3,344 3,801 Loans and advances to HSBC undertakings 27,354 26,765 Financial investments 16 19,558 19,466 Prepayments, accrued income and other assets 5,341 5,242 Current tax assets 924 464 Investments in subsidiaries 19 159,478 167,542 Intangible assets 180 189 Deferred tax assets 2,082 2,100 Total assets at 31 Dec 285,169 281,101 Liabilities and equity Liabilities Amounts owed to HSBC undertakings 168 314 Financial liabilities designated at fair value 25 43,638 32,123 Derivatives 15 6,090 6,922 Debt securities in issue 26 65,239 66,938 Accruals, deferred income and other liabilities 4,289 1,969 Subordinated liabilities 29 24,439 19,727 Total liabilities 143,863 127,993 Equity Called up share capital 33 9,631 10,147 Share premium account 33 14,738 14,664 Other equity instruments 33 17,703 19,746 Merger and other reserves 35,946 40,555 Retained earnings 63,288 67,996 Total equity 141,306 153,108 Total liabilities and equity at 31 Dec 285,169 281,101 * For Notes on the financial statements, see page 341. The accompanying notes on pages 341 to 434, the audited sections in the Risk review on pages 135 to 237 and ‘Directors’ remuneration report’ on pages 279 to 305 form an integral part of these financial statements. These financial statements were approved by the Board of Directors on 21 February 2024 and signed on its behalf by: Mark E Tucker Georges Elhedery Group Chairman Group Chief Financial Officer Financial statements 338 HSBC Holdings plc Annual Report and Accounts 2023 HSBC Holdings statement of changes in equity for the year ended 31 December 2023 Other reserves Called up share capital Share premium Other equity instruments Retained earnings1,2 Merger and other reserves Total shareholders’ equity $m $m $m $m $m $m At 1 Jan 2023 10,147 14,664 19,746 67,996 40,555 153,108 Profit for the year — — — 9,212 — 9,212 Other comprehensive income (net of tax) — — — (124) — (124) – changes in fair value of financial liabilities designated at fair value due to movement in own credit risk — — — (124) — (124) Total comprehensive income for the year — — — 9,088 — 9,088 Shares issued under employee share plans 5 74 — (328) — (249) Capital securities issued3 — — 1,980 — — 1,980 Cancellation of shares4 (521) — — (7,025) 521 (7,025) Dividends to shareholders — — — (11,593) — (11,593) Redemption of capital securities5 — — (4,023) 20 — (4,003) Transfers6 — — — 5,130 (5,130) — Other movements — — — — — — At 31 Dec 2023 9,631 14,738 17,703 63,288 35,946 141,306 At 1 Jan 2022 10,316 14,602 22,414 65,116 37,882 150,330 Profit for the year — — — 12,357 — 12,357 Other comprehensive income (net of tax) — — — 326 — 326 – changes in fair value of financial liabilities designated at fair value due to movement in own credit risk — — — 326 — 326 Total comprehensive income for the year — — — 12,683 — 12,683 Shares issued under employee share plans 5 62 — (161) — (94) Capital securities issued — — — — — — Cancellation of shares (174) — — (1,001) 174 (1,001) Dividends to shareholders — — — (6,544) — (6,544) Redemption of capital securities — — (2,668) 402 — (2,266) Transfers6 — — — (2,499) 2,499 — Other movements — — — — — — At 31 Dec 2022 10,147 14,664 19,746 67,996 40,555 153,108 At 1 Jan 2021 10,347 14,277 22,414 65,005 34,757 146,800 Profit for the year — — — 10,834 — 10,834 Other comprehensive income (net of tax) — — — 267 — 267 – changes in fair value of financial liabilities designated at fair value due to movement in own credit risk — — — 267 — 267 Total comprehensive income for the year — — — 11,101 — 11,101 Shares issued under employee share plans 29 325 — (103) — 251 Capital securities issued — — 2,000 (20) — 1,980 Cancellation of shares (60) — — (2,004) 60 (2,004) Dividends to shareholders — — — (5,790) — (5,790) Redemption of capital securities — — (2,000) — — (2,000) Transfers6 — — — (3,065) 3,065 — Other movements — — — (8) — (8) At 31 Dec 2021 10,316 14,602 22,414 65,116 37,882 150,330 Dividends per ordinary share at 31 December 2023 were $0.53 (2022: $0.27; 2021: $0.22). 1 Retained earnings include unrealised profits from intercompany transactions and share-based payment reserves, which are excluded from distributable reserves. Distributable reserves include the distributable portions of retained earnings and the merger reserve. Distributable reserves are reduced by ordinary dividend payments, distributions on additional tier 1 instruments, share buy-backs and impairments in investments in subsidiaries. They are increased by profits and the realisation of retained earnings or merger reserves upon impairment of an associated investment in subsidiary. 2 At 31 December 2023, retained earnings included 20,018,490 ($100m) treasury shares (2022: 331,874,221 ($2,615m); 2021: 329,871,829 ($2,542m)). 3 In March 2023, HSBC Holdings issued $2,000m 8.000% contingent convertible securities, on which there were $20m of issue costs. 4 In May 2023, HSBC announced a share buy-back of up to $2.0bn, which was completed in July 2023. In August 2023, HSBC announced another share buy-back of up to $2.0bn, which was completed in October 2023. In October 2023, HSBC further announced a share buy-back of up to $3.0bn, which was completed in February 2024. 5 In March 2023, HSBC Holdings redeemed $2,350m 6.250% contingent convertible securities. In September 2023, HSBC Holdings further redeemed €1,000m 6.000% and SGD750m 5.000% contingent convertible securities. 6 At 31 December 2023, an impairment of $5,512m of HSBC Overseas Holdings (UK) Limited was recognised, resulting in a permitted transfer of $5,130m from the merger reserve to retained earnings, and a realisation of $382m share-based payment reserve within retained earnings. In 2022, a part-reversal of the impairment resulted in a transfer from retained earnings back to the merger reserve of $2,499m (2021: $3,065m). HSBC Holdings plc Annual Report and Accounts 2023 339 Financial statements HSBC Holdings statement of cash flows for the year ended 31 December 2023 2023 2022 2021 $m $m $m Profit before tax 8,235 9,280 10,491 Adjustments for non-cash items 5,611 (2,500) (2,954) – depreciation, amortisation and impairment/expected credit losses 5,629 (2,428) (2,976) – share-based payment expense — 1 2 – other non-cash items included in profit before tax (38) (73) 20 – elimination of exchange differences1 20 — — Changes in operating assets and liabilities Change in loans to HSBC undertakings (1,267) (1,657) 3,364 Change in financial assets with HSBC undertakings designated and otherwise mandatorily measured at fair value (7,767) (914) (4,409) Change in net trading securities and net derivatives (529) 4,712 47 Change in other assets 363 51 (226) Change in financial investments — 196 20 Change in debt securities in issue 1,964 (5,625) (2,833) Change in financial liabilities designated at fair value 3,096 (4,755) (1,396) Change in other liabilities 1,947 (3,394) (691) Tax received 577 215 32 Net cash from operating activities 12,230 (4,391) 1,445 Purchase of financial investments (7,803) (21,481) (16,966) Proceeds from the sale and maturity of financial investments 20,074 17,165 16,074 Net cash flow from capital contribution, acquisition and disposal of subsidiaries 2,476 (1,836) 663 Net investment in intangible assets (46) (39) (26) Net cash from investing activities 14,701 (6,191) (255) Issue of ordinary share capital and other equity instruments 2,059 67 2,334 Redemption of preference shares and other equity instruments (4,003) (2,266) (3,450) Purchase of treasury shares (855) (438) (28) Cancellation of shares (5,812) (2,298) (707) Subordinated loan capital issued 5,270 7,300 — Subordinated loan capital repaid — — — Debt securities issued 17,180 18,076 19,379 Debt securities repaid (13,047) (10,094) (5,569) Dividends paid on ordinary shares (10,492) (5,330) (4,480) Dividends paid to holders of other equity instruments (1,101) (1,214) (1,310) Net cash from financing activities (10,801) 3,803 6,169 Net increase/(decrease) in cash and cash equivalents 16,130 (6,779) 7,359 Cash and cash equivalents at 1 January 6,756 13,535 6,176 Exchange differences in respect of cash and cash equivalents2 (72) — — Cash and cash equivalents at 31 Dec 22,814 6,756 13,535 Cash and cash equivalents comprise: – cash at bank with HSBC undertakings 7,029 3,210 2,590 – cash collateral and net settlement accounts 3,422 3,544 93 – treasury and other eligible bills 12,363 2 10,852 Interest received was $5,695m (2022: $2,410m; 2021: $1,636m), interest paid was $7,754m (2022: $3,813m; 2021: $2,724m) and dividends received were $16,824m (2022: $9,478m; 2021: $11,404m). 1 Adjustment to bring changes between opening and closing balance sheet amounts to average rates. This is not done on a line-by-line basis, as details cannot be determined without unreasonable expense. As this change has immaterial impact, prior period comparatives have not been restated. 2 In 2023, additional disclosure has been made in respect of exchange differences on cash and cash equivalents. As this change has immaterial impact, prior period comparatives have not been restated. Financial statements 340 HSBC Holdings plc Annual Report and Accounts 2023 Notes on the financial statements Contents 341 1 Basis of preparation and material accounting policies 355 2 Net fee income 356 3 Net income/(expense) from financial instruments measured at fair value through profit or loss 356 4 Insurance business 363 5 Employee compensation and benefits 368 6 Auditor’s remuneration 368 7 Tax 371 8 Dividends 372 9 Earnings per share 372 10 Segmental analysis 375 11 Trading assets 375 12 Fair values of financial instruments carried at fair value 382 13 Fair values of financial instruments not carried at fair value 383 14 Financial assets designated and otherwise mandatorily measured at fair value through profit or loss 384 15 Derivatives 389 16 Financial investments 390 17 Assets pledged, collateral received and assets transferred 391 18 Interests in associates and joint ventures 395 19 Investments in subsidiaries 397 20 Structured entities 399 21 Goodwill and intangible assets 401 22 Prepayments, accrued income and other assets 401 23 Assets held for sale, liabilities of disposal groups held for sale and business acquisitions 404 24 Trading liabilities 404 25 Financial liabilities designated at fair value 404 26 Debt securities in issue 405 27 Accruals, deferred income and other liabilities 405 28 Provisions 406 29 Subordinated liabilities 407 30 Maturity analysis of assets, liabilities and off-balance sheet commitments 412 31 Offsetting of financial assets and financial liabilities 414 32 Interest rate benchmark reform 414 33 Called up share capital and other equity instruments 416 34 Contingent liabilities, contractual commitments and guarantees 416 35 Finance lease receivables 417 36 Legal proceedings and regulatory matters 420 37 Related party transactions 422 38 Effects of adoption of IFRS 17 426 39 Events after the balance sheet date 426 40 HSBC Holdings’ subsidiaries, joint ventures and associates 1 Basis of preparation and material accounting policies 1.1 Basis of preparation (a) Compliance with International Financial Reporting Standards The consolidated financial statements of HSBC and the separate financial statements of HSBC Holdings comply with UK-adopted international accounting standards and with the requirements of the Companies Act 2006, and have also applied international financial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union. These financial statements are also prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (‘IFRS Accounting Standards’), including interpretations issued by the IFRS Interpretations Committee, as there are no applicable differences from IFRS Accounting Standards for the periods presented. There were no unendorsed standards effective for the year ended 31 December 2023 affecting these consolidated and separate financial statements. Standards adopted during the year ended 31 December 2023 IFRS 17 ‘Insurance Contracts’ On 1 January 2023, the Group adopted the requirements of IFRS 17 ‘Insurance Contracts’ retrospectively with comparatives restated from the transition date, 1 January 2022. At transition, the Group’s total equity reduced by $10,459m. On adoption of IFRS 17, balances based on IFRS 4, including the present value of in-force long-term insurance business (‘PVIF’) asset in relation to the upfront recognition of future profits of in-force insurance contracts, were derecognised. Insurance contract liabilities have been remeasured under IFRS 17 based on groups of insurance contracts, which include the fulfilment cash flows comprising the best estimate of the present value of the future cash flows (for example premiums and payouts for claims, benefits and expenses), together with a risk adjustment for non-financial risk, as well as the contractual service margin (‘CSM’). The CSM represents the unearned profits that will be released and systematically recognised in insurance revenue as services are provided over the expected coverage period. In addition, the Group has made use of the option under the standard to re-designate certain eligible financial assets held to support insurance contract liabilities, which were predominantly measured at amortised cost, as financial assets measured at fair value through profit or loss, with comparatives restated from the transition date. The effects of adoption of IFRS 17 are set out in Note 38 with a description of the policy in Note 1.2(j). The key differences between IFRS 4 and IFRS 17 are summarised in the following table: HSBC Holdings plc Annual Report and Accounts 2023 341 Financial statements Balance sheet – Insurance contract liabilities for non-linked life insurance contracts are calculated by local actuarial principles. Liabilities under unit-linked life insurance contracts are at least equivalent to the surrender or transfer value, by reference to the value of the relevant underlying funds or indices. Grouping requirements follow local regulations. – An intangible asset for the PVIF is recognised, representing the upfront recognition of future profits associated with in-force insurance contracts. – Insurance contract liabilities are measured for groups of insurance contracts at current value, comprising the fulfilment cash flows and the CSM. – The fulfilment cash flows comprise the best estimate of the present value of the future cash flows, together with a risk adjustment for non-financial risk. – The CSM represents the unearned profit. Profit emergence/ recognition – The value of new business is reported as revenue on Day 1 as an increase in PVIF. – The impact of the majority of assumption changes is recognised immediately in the income statement. – Variances between actual and expected cash flows are recognised in the period they arise. – The CSM is systematically recognised in revenue as services are provided over the expected coverage period of the group of contracts (i.e. no Day 1 profit). – Contracts are measured using the general measurement model (‘GMM’) or the variable fee approach (‘VFA’) model for insurance contracts with direct participation features upon meeting the eligibility criteria. Under the VFA model, the Group’s share of the investment experience and assumption changes are absorbed by the CSM and released over time to profit or loss. For contracts measured under GMM, the Group’s share of the investment volatility is recorded in profit or loss as it arises. – Losses from onerous contracts are recognised in the income statement immediately. Investment return assumptions (discount rate) – PVIF is calculated based on long-term investment return assumptions based on assets held. It therefore includes investment margins expected to be earned in future. – Under the market consistent approach, expected future investment spreads are not included in the investment return assumption. Instead, the discount rate includes an illiquidity premium that reflects the nature of the associated insurance contract liabilities. Expenses – Total expenses to acquire and maintain the contract over its lifetime are included in the PVIF calculation. – Expenses are recognised across operating expenses and fee expense as incurred and the allowances for those expenses are released from the PVIF simultaneously. – Projected lifetime expenses that are directly attributable costs are included in the insurance contract liabilities and recognised in the insurance service result. – Non-attributable costs are reported in operating expenses. IFRS 4 IFRS 17 Transition In applying IFRS 17 for insurance contracts retrospectively, the full retrospective approach (‘FRA’) has been used unless it was impracticable. When the FRA is impracticable such as when there is a lack of sufficient and reliable data, an entity has an accounting policy choice to use either the modified retrospective approach (‘MRA’) or the fair value approach (‘FVA’). The Group has applied the FRA for new business from 2018 at the earliest, subject to practicability, and the FVA for the majority of contracts for which the FRA is impracticable. Under the FVA, the valuation of insurance liabilities on transition is based on the applicable requirements of IFRS 13 ‘Fair Value Measurement’. This requires consideration of the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The CSM is calculated as the difference between what a market participant would demand for assuming the unexpired risk associated with insurance contracts, including required profit, and the fulfilment cash flows that are determined using IFRS 17 principles. In determining the fair value, the Group considered the estimated profit margin that a market participant would demand in return for assuming the insurance liabilities with the consideration of the level of capital that a market participant would be required to hold, and the discount rate with an allowance for an illiquidity premium that takes into account the level of ‘matching’ between the Group’s assets and related liabilities. These assumptions were set taking into account the assumptions that a hypothetical market participant operating in each local jurisdiction would consider. Amendments to IAS 12 ‘International Tax Reform – Pillar Two Model Rules’ On 23 May 2023, the International Accounting Standards Board (‘IASB’) issued amendments to IAS 12 ‘International Tax Reform – Pillar Two Model Rules’, which became effective immediately and were approved for adoption by all members of the UK Endorsement Board on 19 July 2023 and by the European Union on 8 November 2023. On 20 June 2023, legislation was substantively enacted in the UK to introduce the OECD’s Pillar Two global minimum tax rules and a UK qualified domestic minimum top-up tax, with effect from 1 January 2024. The Group has applied the IAS 12 exception from recognising and disclosing information on associated deferred tax assets and liabilities. There were no other new standards or amendments to standards that had an effect on these financial statements. (b) Differences between IFRS Accounting Standards and Hong Kong Financial Reporting Standards There are no significant differences between IFRS Accounting Standards and Hong Kong Financial Reporting Standards in terms of their application to HSBC, and consequently there would be no significant differences had the financial statements been prepared in accordance with Hong Kong Financial Reporting Standards. The ‘Notes on the financial statements’, taken together with the ‘Report of the Directors’, include the aggregate of all disclosures necessary to satisfy IFRS Accounting Standards and Hong Kong Financial Reporting Standards. (c) Future accounting developments Minor amendments to IFRS Accounting Standards The IASB has published a number of minor amendments to IFRS Accounting Standards that are effective from 1 January 2024. HSBC expects they will have an insignificant effect, when adopted, on the consolidated financial statements of HSBC and the separate financial statements of HSBC Holdings. Additionally, in August 2023, the IASB published amendments to IAS 21 ‘Lack of Exchangeability’ effective from 1 January 2025. The Group is undertaking an assessment of the potential impact, which is not expected to be significant. Notes on the financial statements 342 HSBC Holdings plc Annual Report and Accounts 2023 (d) Foreign currencies HSBC’s consolidated financial statements are presented in US dollars because the US dollar and currencies linked to it form the major currency bloc in which HSBC transacts and funds its business. The US dollar is also HSBC Holdings’ functional currency because the US dollar and currencies linked to it are the most significant currencies relevant to the underlying transactions, events and conditions of its subsidiaries, as well as representing a significant proportion of its funds generated from financing activities. Transactions in foreign currencies are recorded at the rate of exchange at the date of the transaction. Assets and liabilities denominated in foreign currencies are translated at the rate of exchange at the balance sheet date, except non-monetary assets and liabilities measured at historical cost, which are translated using the rate of exchange at the initial transaction date. Exchange differences are included in other comprehensive income or in the income statement depending on where the gain or loss on the underlying item is recognised. Except for subsidiaries operating in hyperinflationary economies (see Note 1.2(p)), in the consolidated financial statements, the assets and liabilities of branches, subsidiaries, joint ventures and associates whose functional currency is not US dollars are translated into the Group’s presentation currency at the rate of exchange at the balance sheet date, while their results are translated into US dollars at the average rates of exchange for the reporting period. Exchange differences arising are recognised in other comprehensive income. On disposal of a foreign operation, exchange differences previously recognised in other comprehensive income are reclassified to the income statement. (e) Presentation of information Certain disclosures required by IFRS Accounting Standards have been included in the sections marked as (‘Audited’) in the Annual Report and Accounts 2023 as follows: – Disclosures concerning the nature and extent of risks relating to insurance contracts and financial instruments are included in the ‘Risk review’ on pages 135 to 237. – The ‘Own funds disclosure’ is included in the ‘Risk review’ on page 207. HSBC follows the UK Finance Disclosure Code. The UK Finance Disclosure Code aims to increase the quality and comparability of UK banks’ disclosures and sets out five disclosure principles together with supporting guidance agreed in 2010. In line with the principles of the UK Finance Disclosure Code, HSBC assesses good practice recommendations issued from time to time by relevant regulators and standard setters, and will assess the applicability and relevance of such guidance, enhancing disclosures where appropriate. (f) Critical estimates and judgements The preparation of financial information requires the use of estimates and judgements about future conditions. In view of the inherent uncertainties and the high level of subjectivity involved in the recognition or measurement of items, highlighted as the ‘critical estimates and judgements’ in section 1.2 below, it is possible that the outcomes in the next financial year could differ from those on which management’s estimates are based. This could result in materially different estimates and judgements from those reached by management for the purposes of these financial statements. Management’s selection of HSBC’s accounting policies that contain critical estimates and judgements reflects the materiality of the items to which the policies are applied and the high degree of judgement and estimation uncertainty involved. Management has considered the impact of climate-related risks on HSBC’s financial position and performance. While the effects of climate change are a source of uncertainty, as at 31 December 2023 management did not consider there to be a material impact on our critical judgements and estimates from the physical, transition and other climate-related risks in the short to medium term. In particular management has considered the known and observable potential impacts of climate-related risks of associated judgements and estimates in our value in use calculations. (g) Going concern The financial statements are prepared on a going concern basis, as the Directors are satisfied that the Group and parent company have the resources to continue in business for the foreseeable future. In making this assessment, the Directors have considered a wide range of information relating to present and future conditions, including future projections of profitability, liquidity, capital requirements and capital resources. These considerations include stressed scenarios that reflect the uncertainty in the macroeconomic environment following rising inflation, slower Chinese economic activity, and disrupted supply chains as a result of the ongoing Russia-Ukraine and Israel-Hamas wars. They also included other top and emerging risks, including climate change, as well as the related impacts on profitability, capital and liquidity. 1.2 Summary of material accounting policies (a) Consolidation and related policies Investments in subsidiaries Where an entity is governed by voting rights, HSBC consolidates when it holds – directly or indirectly – the necessary voting rights to pass resolutions by the governing body. In all other cases, the assessment of control is more complex and requires judgement of other factors, including having exposure to variability of returns, power to direct relevant activities, and whether power is held as agent or principal. Business combinations are accounted for using the acquisition method. The amount of non-controlling interest is measured either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s identifiable net assets. This election is made for each business combination. HSBC Holdings’ investments in subsidiaries are stated at cost less impairment losses. Impairment testing is performed where there is an indication of impairment, by comparing the recoverable amount of the relevant investment to its carrying amount. Indicators of impairment include both external and internal sources of information. Similarly, assessments are made as to whether an impairment loss recognised in prior periods may no longer exist or may have decreased. Where this is the case, such an impairment loss is reversed if there has been a change in the estimate used to determine the relevant recoverable amount since the last impairment loss was recognised, and to the extent that it does not increase the carrying amount above that had no impairment loss been previously recognised. HSBC Holdings plc Annual Report and Accounts 2023 343 Financial statements Critical estimates and judgements Investments in subsidiaries are tested for impairment when there is an indication that the investment may be impaired, which involves estimations of value in use reflecting management’s best estimate of the future cash flows of the investment and the rates used to discount these cash flows, both of which are subject to uncertain factors as follows: Judgements Estimates – The accuracy of forecast cash flows is subject to a high degree of uncertainty in volatile market conditions. Where such circumstances are determined to exist, management re-tests for impairment or reversal more frequently than once a year when indicators exist. This ensures that the assumptions on which the cash flow forecasts are based continue to reflect current market conditions and management’s best estimate of future business prospects. – The future cash flows of each investment are sensitive to the cash flows projected for the periods for which detailed forecasts are available and to assumptions regarding the long-term pattern of sustainable cash flows thereafter. Forecasts are compared with actual performance and verifiable economic data, but they reflect management’s view of future business prospects at the time of the assessment. – The rates used to discount future expected cash flows can have a significant effect on their valuation, and are based on the costs of equity assigned to the investment. The cost of equity percentage is generally derived from a capital asset pricing model and the market implied cost of equity, which incorporates inputs reflecting a number of financial and economic variables, including the risk-free interest rate in the country concerned and a premium for the risk of the business being evaluated. These variables are subject to fluctuations in external market rates and economic conditions beyond management’s control. – Key assumptions used in estimating impairment in subsidiaries and their reversal where relevant are described in Note 19. Goodwill Goodwill is allocated to cash-generating units (’CGUs’) for the purpose of impairment testing, which is undertaken at the lowest level at which goodwill is monitored for internal management purposes. HSBC’s CGUs are based on its main legal entities subdivided by global business, except for Global Banking and Markets, for which goodwill is monitored on a global basis. Impairment testing is performed at least once a year, or whenever there is an indication of impairment, by comparing the recoverable amount of a CGU with its carrying amount. Goodwill is included in a disposal group if the disposal group is a CGU to which goodwill has been allocated or it is an operation within such a CGU. The amount of goodwill included in a disposal group is measured on the basis of the relative values of the operation disposed of and the portion of the CGU retained. Critical estimates and judgements The review of goodwill and non-financial assets (see Note 1.2(n)) for impairment reflects management’s best estimate of the future cash flows of the CGUs and the rates used to discount these cash flows, both of which are subject to uncertain factors as follows: Judgements Estimates – The accuracy of forecast cash flows is subject to a high degree of uncertainty in volatile market conditions. Where such circumstances are determined to exist, management re-tests goodwill for impairment more frequently than once a year when indicators of impairment exist. This ensures that the assumptions on which the cash flow forecasts are based continue to reflect current market conditions and management’s best estimate of future business prospects. – The future cash flows of the CGUs are sensitive to the cash flows projected for the periods for which detailed forecasts are available and to assumptions regarding the long-term pattern of sustainable cash flows thereafter. Forecasts are compared with actual performance and verifiable economic data, but they reflect management’s view of future business prospects at the time of the assessment. – The rates used to discount future expected cash flows can have a significant effect on their valuation, and are based on the costs of equity assigned to individual CGUs. The cost of equity percentage is generally derived from a capital asset pricing model and market implied cost of equity, which incorporates inputs reflecting a number of financial and economic variables, including the risk-free interest rate in the country concerned and a premium for the risk of the business being evaluated. These variables are subject to fluctuations in external market rates and economic conditions beyond management’s control. – Key assumptions used in estimating goodwill and non-financial asset impairment are described in Note 21. The Group does not consider there to be a significant risk of a material adjustment to the carrying amount of goodwill in the next financial year, but does consider this to be an area that is inherently judgemental. HSBC sponsored structured entities HSBC is considered to sponsor another entity if, in addition to ongoing involvement with the entity, it had a key role in establishing that entity or in bringing together relevant counterparties so the transaction that is the purpose of the entity could occur. HSBC is generally not considered a sponsor if the only involvement with the entity is merely administrative. Interests in associates and joint arrangements Joint arrangements are investments in which HSBC, together with one or more parties, has joint control. Depending on HSBC’s rights and obligations, the joint arrangement is classified as either a joint operation or a joint venture. HSBC classifies investments in entities over which it has significant influence, and which are neither subsidiaries nor joint arrangements, as associates. HSBC recognises its share of the assets, liabilities and results in a joint operation. Investments in associates and interests in joint ventures are recognised using the equity method. The attributable share of the results and reserves of joint ventures and associates is included in the consolidated financial statements of HSBC based on either financial statements made up to 31 December or pro-rated amounts adjusted for any material transactions or events occurring between the date the financial statements are available and 31 December. Investments in associates and joint ventures are assessed at each reporting date and tested for impairment when there is an indication that the investment may be impaired, by comparing the recoverable amount of the relevant investment to its carrying amount. Goodwill on acquisitions of interests in joint ventures and associates is not tested separately for impairment, but is assessed as part of the carrying amount of the investment. Previously recognised impairments are assessed for reversal when there are indicators that they may no longer exist or have Notes on the financial statements 344 HSBC Holdings plc Annual Report and Accounts 2023 decreased. Any reversal, which may arise only from changes in estimates used to determine the prior impairment loss, is recognised to the extent that it does not increase the carrying amount above that had no impairment loss been previously recognised. Critical estimates and judgements The most significant critical estimates relate to the assessment of impairment of our investment in Bank of Communications Co., Limited (‘BoCom’), which involves estimations of value in use: Judgements Estimates – The value in use calculation uses discounted cash flow projections based on management’s best estimate of future earnings available to ordinary shareholders prepared in accordance with IAS 36 ‘Impairment of Assets’. – Key assumptions used in estimating BoCom’s value in use and the sensitivity of the value in use calculations to different assumptions are described in Note 18. (b) Income and expense Operating income Interest income and expense Interest income and expense for all financial instruments, excluding those classified as held for trading or designated at fair value, are recognised in ‘Interest income’ and ‘Interest expense’ in the income statement using the effective interest method. However, as an exception to this, interest on debt instruments issued by HSBC for funding purposes that are designated under the fair value option to reduce an accounting mismatch and on derivatives managed in conjunction with those debt instruments is included in interest expense. Interest on credit-impaired financial assets is recognised by applying the effective interest rate to the amortised cost (i.e. gross carrying amount of the asset less allowance for expected credit losses). Non-interest income and expense HSBC generates fee income from services provided at a fixed price over time, such as account service and card fees, or when HSBC delivers a specific transaction at a point in time, such as broking services and import/export services. With the exception of certain fund management and performance fees, all other fees are generated at a fixed price. Fund management and performance fees can be variable depending on the size of the customer portfolio and HSBC’s performance as fund manager. Variable fees are recognised when all uncertainties are resolved. Fee income is generally earned from short-term contracts with payment terms that do not include a significant financing component. HSBC acts as principal in the majority of contracts with customers, with the exception of broking services. For most brokerage trades, HSBC acts as agent in the transaction and recognises broking income net of fees payable to other parties in the arrangement. HSBC recognises fees earned on transaction-based arrangements at a point in time when it has fully provided the service to the customer. Where the contract requires services to be provided over time, income is recognised on a systematic basis over the life of the agreement. Where HSBC offers a package of services that contains multiple non-distinct performance obligations, such as those included in account service packages, the promised services are treated as a single performance obligation. If a package of services contains distinct performance obligations, the corresponding transaction price is allocated to each performance obligation based on the estimated stand-alone selling prices. Dividend income is recognised when the right to receive payment is established. This is the ex-dividend date for listed equity securities, and usually the date when shareholders approve the dividend for unlisted equity securities. Net income/(expense) from financial instruments measured at fair value through profit or loss includes the following: – ‘Net income from financial instruments held for trading or managed on a fair value basis’: This comprises net trading income, which includes all gains and losses from changes in the fair value of financial assets and financial liabilities held for trading and other financial instruments managed on a fair value basis, together with the related interest income, expense and dividends, excluding the effect of changes in the credit risk of liabilities managed on a fair value basis. It also includes all gains and losses from changes in the fair value of derivatives that are managed in conjunction with financial assets and liabilities measured at fair value through profit or loss. – ‘Net income/(expense) from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit or loss’: This includes all gains and losses from changes in the fair value, together with related interest income, expense and dividends in respect of financial assets and liabilities measured at fair value through profit or loss, and those derivatives managed in conjunction with the above that can be separately identifiable from other trading derivatives. – ‘Changes in fair value of designated debt instruments and related derivatives’: Interest paid on debt instruments and interest cash flows on related derivatives is presented in interest expense where doing so reduces an accounting mismatch. – ‘Changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss’: This includes interest on instruments that fail the solely payments of principal and interest test, see (d) below. The accounting policies for insurance service result and insurance finance income/(expenses) are disclosed in Note 1.2(j). (c) Valuation of financial instruments All financial instruments are initially recognised at fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value of a financial instrument on initial recognition is generally its transaction price (that is, the fair value of the consideration given or received). However, if there is a difference between the transaction price and the fair value of financial instruments whose fair value is based on a quoted price in an active market or a valuation technique that uses only data from observable markets, HSBC recognises the difference as a trading gain or loss at inception (a ‘day 1 gain or loss’). In all other cases, the entire day 1 gain or loss is deferred and recognised in the income statement over the life of the transaction until the transaction matures, is closed out, the valuation inputs become observable or HSBC enters into an offsetting transaction. The fair value of financial instruments is generally measured on an individual basis. However, in cases where HSBC manages a group of financial assets and liabilities according to its net market or credit risk exposure, the fair value of the group of financial instruments is measured on a net basis but the underlying financial assets and liabilities are presented separately in the financial statements, unless they satisfy the IFRS offsetting criteria. HSBC Holdings plc Annual Report and Accounts 2023 345 Financial statements Critical estimates and judgements The majority of valuation techniques employ only observable market data. However, certain financial instruments are classified on the basis of valuation techniques that feature one or more significant market inputs that are unobservable, and for them, the measurement of fair value is more judgemental: Judgements Estimates – An instrument in its entirety is classified as valued using significant unobservable inputs if, in the opinion of management, greater than 5% of the instrument’s valuation is driven by unobservable inputs. – ‘Unobservable’ in this context means that there is little or no current market data available from which to determine the price at which an arm’s length transaction would be likely to occur. It generally does not mean that there is no data available at all upon which to base a determination of fair value (consensus pricing data may, for example, be used). – Details on the Group’s Level 3 financial instruments and the sensitivity of their valuation to the effect of applying reasonably possible alternative assumptions in determining their fair value are set out in Note 12. (d) Financial instruments measured at amortised cost Financial assets that are held to collect the contractual cash flows and which contain contractual terms that give rise on specified dates to cash flows that are solely payments of principal and interest are measured at amortised cost. Such financial assets include most loans and advances to banks and customers and some debt securities. In addition, most financial liabilities are measured at amortised cost. HSBC accounts for regular way amortised cost financial instruments using trade date accounting. The carrying amount of these financial assets at initial recognition includes any directly attributable transactions costs. HSBC may commit to underwriting loans on fixed contractual terms for specified periods of time. When the loan arising from the lending commitment is expected to be sold shortly after origination, the commitment to lend is recorded as a derivative. When HSBC intends to hold the loan, the loan commitment is included in the impairment calculations set out below. Non-trading reverse repurchase, repurchase and similar agreements When debt securities are sold subject to a commitment to repurchase them at a predetermined price (‘repos’), they remain on the balance sheet and a liability is recorded in respect of the consideration received. Securities purchased under commitments to resell (‘reverse repos’) are not recognised on the balance sheet and an asset is recorded in respect of the initial consideration paid. Non-trading repos and reverse repos are measured at amortised cost. The difference between the sale and repurchase price or between the purchase and resale price is treated as interest and recognised in net interest income over the life of the agreement. Contracts that are economically equivalent to reverse repo or repo agreements (such as sales or purchases of debt securities entered into together with total return swaps with the same counterparty) are accounted for similarly to, and presented together with, reverse repo or repo agreements. (e) Financial assets measured at fair value through other comprehensive income Financial assets managed within a business model that is achieved by both collecting contractual cash flows and selling and which contain contractual terms that give rise on specified dates to cash flows that are solely payments of principal and interest are measured at fair value through other comprehensive income (‘FVOCI’). These comprise primarily debt securities. They are recognised on trade date when HSBC enters into contractual arrangements to purchase and are generally derecognised when they are either sold or redeemed. They are subsequently remeasured at fair value with changes therein (except for those relating to impairment, interest income and foreign currency exchange gains and losses) recognised in other comprehensive income until the assets are sold. Upon disposal, the cumulative gains or losses in other comprehensive income are recognised in the income statement as ‘Gains less losses from financial instruments’. Financial assets measured at FVOCI are included in the impairment calculations set out below and impairment is recognised in profit or loss. (f) Equity securities measured at fair value with fair value movements presented in other comprehensive income The equity securities for which fair value movements are shown in other comprehensive income are business facilitation and other similar investments where HSBC holds the investments other than to generate a capital return. Dividends from such investments are recognised in profit or loss. Gains or losses on the derecognition of these equity securities are not transferred to profit or loss. Otherwise, equity securities are measured at fair value through profit or loss. (g) Financial instruments designated at fair value through profit or loss Financial instruments, other than those held for trading, are classified in this category if they meet one or more of the criteria set out below and are so designated irrevocably at inception: – The use of the designation removes or significantly reduces an accounting mismatch. – A group of financial assets and liabilities or a group of financial liabilities is managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy. – The financial liability contains one or more non-closely related embedded derivatives. Designated financial assets are recognised when HSBC enters into contracts with counterparties, which is generally on trade date, and are normally derecognised when the rights to the cash flows expire or are transferred. Designated financial liabilities are recognised when HSBC enters into contracts with counterparties, which is generally on settlement date, and are normally derecognised when extinguished. Subsequent changes in fair values are recognised in the income statement in ‘Net income from financial instruments held for trading or managed on a fair value basis’ or ‘Net income/(expense) from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit or loss’ or ‘Changes in fair value of designated debt and related derivatives’ except for the effect of changes in the liabilities’ credit risk, which is presented in ‘Other comprehensive income’, unless that treatment would create or enlarge an accounting mismatch in profit or loss. Under the above criteria, the main classes of financial instruments designated by HSBC are: – Debt instruments for funding purposes that are designated to reduce an accounting mismatch: The interest and/or foreign exchange exposure on certain fixed-rate debt securities issued has been matched with the interest and/or foreign exchange exposure on certain swaps as part of a documented risk management strategy. Notes on the financial statements 346 HSBC Holdings plc Annual Report and Accounts 2023 – Financial assets and financial liabilities under unit-linked and non-linked investment contracts: A contract under which HSBC does not accept significant insurance risk from another party is not classified as an insurance contract, other than investment contracts with discretionary participation features (‘DPF’), but is accounted for as a financial liability. Customer liabilities under linked and certain non-linked investment contracts issued by insurance subsidiaries are determined based on the fair value of the assets held in the linked funds or by a valuation method. The related financial assets and liabilities are managed and reported to management on a fair value basis. Designation at fair value of the financial assets and related liabilities allows changes in fair values to be recorded in the income statement and presented in the same line. – Financial liabilities that contain both deposit and derivative components: These financial liabilities are managed and their performance evaluated on a fair value basis. (h) Derivatives Derivatives are financial instruments that derive their value from the price of underlying items such as equities, interest rates or other indices. Derivatives are recognised initially and are subsequently measured at fair value through profit or loss. Derivatives are classified as assets when their fair value is positive or as liabilities when their fair value is negative. This includes embedded derivatives in financial liabilities, which are bifurcated from the host contract when they meet the definition of a derivative on a stand-alone basis. Where the derivatives are managed with debt securities issued by HSBC that are designated at fair value where doing so reduces an accounting mismatch, the contractual interest is shown in ‘Interest expense’ together with the interest payable on the issued debt. Hedge accounting When derivatives are not part of fair value designated relationships, if held for risk management purposes they are designated in hedge accounting relationships where the required criteria for documentation and hedge effectiveness are met. HSBC uses these derivatives or, where allowed, other non-derivative hedging instruments in fair value hedges, cash flow hedges or hedges of net investments in foreign operations as appropriate to the risk being hedged. Fair value hedge Fair value hedge accounting does not change the recording of gains and losses on derivatives and other hedging instruments, but results in recognising changes in the fair value of the hedged assets or liabilities attributable to the hedged risk that would not otherwise be recognised in the income statement. If a hedge relationship no longer meets the criteria for hedge accounting, hedge accounting is discontinued and the cumulative adjustment to the carrying amount of a hedged item for which the effective interest rate method is used is amortised to the income statement on a recalculated effective interest rate, unless the hedged item has been derecognised, in which case it is recognised in the income statement immediately. Cash flow hedge The effective portion of gains and losses on hedging instruments is recognised in other comprehensive income and the ineffective portion of the change in fair value of derivative hedging instruments that are part of a cash flow hedge relationship is recognised immediately in the income statement within ‘Net income from financial instruments held for trading or managed on a fair value basis’. The accumulated gains and losses recognised in other comprehensive income are reclassified to the income statement in the same periods in which the hedged item affects profit or loss. When a hedge relationship is discontinued, or partially discontinued, any cumulative gain or loss recognised in other comprehensive income remains in equity until the forecast transaction is recognised in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss previously recognised in other comprehensive income is immediately reclassified to the income statement. Net investment hedge Hedges of net investments in foreign operations are accounted for in a similar way to cash flow hedges. The effective portion of gains and losses on the hedging instrument is recognised in other comprehensive income and other gains and losses are recognised immediately in the income statement. Gains and losses previously recognised in other comprehensive income are reclassified to the income statement on the disposal, or part-disposal, of the foreign operation. Derivatives that do not qualify for hedge accounting Non-qualifying hedges are derivatives entered into as economic hedges of assets and liabilities for which hedge accounting was not applied. (i) Impairment of amortised cost and FVOCI financial assets Expected credit losses (‘ECL’) are recognised for loans and advances to banks and customers, non-trading reverse repurchase agreements, other financial assets held at amortised cost, debt instruments measured at FVOCI, and certain loan commitments and financial guarantee contracts. At initial recognition, an allowance (or provision in the case of some loan commitments and financial guarantees) is recognised for ECL resulting from possible default events within the next 12 months, or less, where the remaining life is less than 12 months (’12-month ECL’). In the event of a significant increase in credit risk, an allowance (or provision) is recognised for ECL resulting from all possible default events over the expected life of the financial instrument (‘lifetime ECL’). Financial assets where 12-month ECL is recognised are considered to be ‘stage 1’; financial assets which are considered to have experienced a significant increase in credit risk are in ‘stage 2’; and financial assets for which there is objective evidence of impairment, and so are considered to be in default or otherwise credit impaired are in ‘stage 3’. Purchased or originated credit-impaired financial assets (‘POCI’) are treated differently as set out below. Credit impaired (stage 3) HSBC determines that a financial instrument is credit impaired and in stage 3 by considering relevant objective evidence, primarily whether contractual payments of either principal or interest are past due for more than 90 days, there are other indications that the borrower is unlikely to pay such as that a concession has been granted to the borrower for economic or legal reasons relating to the borrower’s financial condition, or the loan is otherwise considered to be in default. If such unlikeliness to pay is not identified at an earlier stage, it is deemed to occur when an exposure is 90 days past due. Therefore, the definitions of credit impaired and default are aligned as far as possible so that stage 3 represents all loans that are considered defaulted or otherwise credit impaired. Interest income is recognised by applying the effective interest rate to the amortised cost (i.e. gross carrying amount less allowance for ECL). HSBC Holdings plc Annual Report and Accounts 2023 347 Financial statements Write-off Financial assets (and the related impairment allowances) are normally written off, either partially or in full, when there is no realistic prospect of recovery. Where loans are secured, this is generally after receipt of any proceeds from the realisation of security. In circumstances where the net realisable value of any collateral has been determined and there is no reasonable expectation of further recovery, write-off may be earlier. Forbearance Loans are identified as forborne and classified as either performing or non-performing when HSBC modifies the contractual terms due to financial difficulty of the borrower. Non-performing forborne loans are stage 3 and classified as non-performing until they meet the curing criteria, as specified by applicable credit risk policy (for example, when the loan is no longer in default and no other indicators of default have been present for at least 12 months). Any amount written off as a result of any modification of contractual terms upon entering forbearance would not be reversed. The Group applies the EBA Guidelines on the application of definition of default for our retail portfolios, which affect credit risk policies and our reporting in respect of the status of loans as credit impaired principally due to forbearance (or curing thereof). Further details are provided under ‘Forborne loans and advances’ on page 148. Performing forborne loans are initially stage 2 and remain classified as forborne until they meet applicable curing criteria (for example, they continue to not be in default and no other indicators of default are present for a period of at least 24 months). At this point, the loan is either stage 1 or stage 2 as determined by comparing the risk of a default occurring at the reporting date (based on the modified contractual terms) and the risk of a default occurring at initial recognition (based on the original, unmodified contractual terms). A forborne loan is derecognised if the existing agreement is cancelled and a new agreement is made on substantially different terms, or if the terms of an existing agreement are modified such that the forborne loan is a substantially different financial instrument. Any new loans that arise following derecognition events in these circumstances would generally be classified as POCI and will continue to be disclosed as forborne. Loan modifications other than forborne loans Loan modifications that are not identified as forborne are considered to be commercial restructurings. Where a commercial restructuring results in a modification (whether legalised through an amendment to the existing terms or the issuance of a new loan contract) such that HSBC’s rights to the cash flows under the original contract have expired, the old loan is derecognised and the new loan is recognised at fair value. The rights to cash flows are generally considered to have expired if the commercial restructuring is at market rates and no payment-related concession has been provided. Modifications of certain higher credit risk wholesale loans are assessed for derecognition, having regard to changes in contractual terms that either individually or in combination are judged to result in a substantially different financial instrument. Mandatory and general offer loan modifications that are not borrower specific, for example market-wide customer relief programmes, generally do not result in derecognition, but their stage allocation is determined considering all available and supportable information under our ECL impairment policy. Changes made to these financial instruments that are economically equivalent and required by interest rate benchmark reform do not result in the derecognition or a change in the carrying amount of the financial instrument, but instead require the effective interest rate to be updated to reflect the change of the interest rate benchmark. Significant increase in credit risk (stage 2) An assessment of whether credit risk has increased significantly since initial recognition is performed at each reporting period by considering the change in the risk of default occurring over the remaining life of the financial instrument. The assessment explicitly or implicitly compares the risk of default occurring at the reporting date compared with that at initial recognition, taking into account reasonable and supportable information, including information about past events, current conditions and future economic conditions. The assessment is unbiased, probability-weighted, and to the extent relevant, uses forward-looking information consistent with that used in the measurement of ECL. The analysis of credit risk is multifactor. The determination of whether a specific factor is relevant and its weight compared with other factors depends on the type of product, the characteristics of the financial instrument and the borrower, and the geographical region. Therefore, it is not possible to provide a single set of criteria that will determine what is considered to be a significant increase in credit risk, and these criteria will differ for different types of lending, particularly between retail and wholesale. However, unless identified at an earlier stage, all financial assets are deemed to have suffered a significant increase in credit risk when 30 days past due. In addition, wholesale loans that are individually assessed, which are typically corporate and commercial customers, and included on a watch or worry list, are included in stage 2. For wholesale portfolios, the quantitative comparison assesses default risk using a lifetime probability of default (‘PD’), which encompasses a wide range of information including the obligor’s customer risk rating (‘CRR’), macroeconomic condition forecasts and credit transition probabilities. For origination CRRs up to 3.3, significant increase in credit risk is measured by comparing the average PD for the remaining term estimated at origination with the equivalent estimation at the reporting date. The quantitative measure of significance varies depending on the credit quality at origination as follows: Origination CRR Significance trigger – PD to increase by 0.1–1.2 15bps 2.1–3.3 30bps For CRRs greater than 3.3 that are not impaired, a significant increase in credit risk is considered to have occurred when the origination PD has doubled. The significance of changes in PD was informed by expert credit risk judgement, referenced to historical credit migrations and to relative changes in external market rates. Notes on the financial statements 348 HSBC Holdings plc Annual Report and Accounts 2023 For loans originated prior to the implementation of IFRS 9, the origination PD does not include adjustments to reflect expectations of future macroeconomic conditions since these are not available without the use of hindsight. In the absence of this data, origination PD must be approximated assuming through-the-cycle PDs and through-the-cycle migration probabilities, consistent with the instrument’s underlying modelling approach and the CRR at origination. For these loans, the quantitative comparison is supplemented with additional CRR deterioration- based thresholds, as set out in the table below: Origination CRR Additional significance criteria – number of CRR grade notches deterioration required to identify as significant credit deterioration (stage 2) (> or equal to) 0.1 5 notches 1.1–4.2 4 notches 4.3–5.1 3 notches 5.2–7.1 2 notches 7.2–8.2 1 notch 8.3 0 notch Further information about the 23-grade scale used for CRR can be found on page 148. For retail portfolios, default risk is assessed using a reporting date 12-month PD derived from internal models, which incorporate all available information about the customer. This PD is adjusted for the effect of macroeconomic forecasts for periods longer than 12 months and is considered to be a reasonable approximation of a lifetime PD measure. Retail exposures are first segmented into homogenous portfolios, generally by country, product and brand. Within each portfolio, the stage 2 accounts are defined as accounts with an adjusted 12-month PD greater than the average 12-month PD of loans in that portfolio 12 months before they become 30 days past due. The expert credit risk judgement is that no prior increase in credit risk is significant. This portfolio-specific threshold therefore identifies loans with a PD higher than would be expected from loans that are performing as originally expected and higher than that which would have been acceptable at origination. It therefore approximates a comparison of origination to reporting date PDs. We continue to refine the retail transfer criteria approach for certain portfolios as additional data becomes available, in order to utilise a more relative approach. These enhancements take advantage of the increase in origination-related data in the assessment of significant increases in credit risk by comparing remaining lifetime PD to the comparable remaining term lifetime PD at origination based on portfolio-specific origination segments. Unimpaired and without significant increase in credit risk (stage 1) ECL resulting from default events that are possible within the next 12 months (‘12-month ECL’) are recognised for financial instruments that remain in stage 1. Purchased or originated credit impaired Financial assets that are purchased or originated at a deep discount that reflects the incurred credit losses are considered to be POCI. This population includes new financial instruments recognised in most cases following the derecognition of forborne loans. The amount of change in lifetime ECL for a POCI loan is recognised in profit or loss until the POCI loan is derecognised, even if the lifetime ECL are less than the amount of ECL included in the estimated cash flows on initial recognition. Movement between stages Financial assets can be transferred between the different categories (other than POCI) depending on their relative increase in credit risk since initial recognition. Financial instruments are transferred out of stage 2 if their credit risk is no longer considered to be significantly increased since initial recognition based on the assessments described above. In the case of non-performing forborne loans, such financial instruments are transferred out of stage 3 when they no longer exhibit any evidence of credit impairment and meet the curing criteria as described above. Measurement of ECL The assessment of credit risk and the estimation of ECL are unbiased and probability-weighted, and incorporate all available information which is relevant to the assessment including information about past events, current conditions and reasonable and supportable forecasts of future events and economic conditions at the reporting date. In addition, the estimation of ECL should take into account the time value of money and considers other factors such as climate-related risks. In general, HSBC calculates ECL using three main components: a probability of default (‘PD’), a loss given default (’LGD’) and the exposure at default (‘EAD’). The 12-month ECL is calculated by multiplying the 12-month PD, LGD and EAD. Lifetime ECL is calculated using the lifetime PD instead. The 12-month and lifetime PDs represent the probability of default occurring over the next 12 months and the remaining maturity of the instrument respectively. The EAD represents the expected balance at default, taking into account the repayment of principal and interest from the balance sheet date to the default event together with any expected drawdowns of committed facilities. The LGD represents expected losses on the EAD given the event of default, taking into account, among other attributes, the mitigating effect of collateral value at the time it is expected to be realised and the time value of money. HSBC Holdings plc Annual Report and Accounts 2023 349 Financial statements HSBC makes use of the IRB framework where possible, with recalibration to meet the differing IFRS 9 requirements as set out in the following table: Model Regulatory capital IFRS 9 PD – Through the cycle (represents long-run average PD throughout a full economic cycle) – The definition of default includes a backstop of 90+ days past due – Point in time (based on current conditions, adjusted to take into account estimates of future conditions that will impact PD) – Default backstop of 90+ days past due for all portfolios EAD – Cannot be lower than current balance – Amortisation captured for term products LGD – Downturn LGD (consistent losses expected to be suffered during a severe but plausible economic downturn) – Regulatory floors may apply to mitigate risk of underestimating downturn LGD due to lack of historical data – Discounted using cost of capital – All collection costs included – Expected LGD (based on estimate of loss given default including the expected impact of future economic conditions such as changes in value of collateral) – No floors – Discounted using the original effective interest rate of the loan – Only costs associated with obtaining/selling collateral included Other – Discounted back from point of default to balance sheet date While 12-month PDs are recalibrated from IRB models where possible, the lifetime PDs are determined by projecting the 12-month PD using a term structure. For the wholesale methodology, the lifetime PD also takes into account credit migration, i.e. a customer migrating through the CRR bands over its life. The ECL for wholesale stage 3 is determined primarily on an individual basis using a discounted cash flow (‘DCF’) methodology. The expected future cash flows are based on estimates as of the reporting date, reflecting reasonable and supportable assumptions and projections of future recoveries and expected future receipts of interest. Collateral is taken into account if it is likely that the recovery of the outstanding amount will include realisation of collateral based on its estimated fair value of collateral at the time of expected realisation, less costs for obtaining and selling the collateral. The cash flows are discounted at a reasonable approximation of the original effective interest rate. For significant cases, cash flows under up to four different scenarios are probability-weighted by reference to the status of the borrower, economic scenarios applied more generally by the Group and judgement in relation to the likelihood of the work-out strategy succeeding or receivership being required. For less significant cases where an individual assessment is undertaken, the effect of different economic scenarios and work-out strategies results in an ECL calculation based on a most likely outcome which is adjusted to capture losses resulting from less likely but possible outcomes. For certain less significant cases, the bank may use a LGD-based modelled approach to ECL assessment, which factors in a range of economic scenarios. Period over which ECL is measured Expected credit loss is measured from the initial recognition of the financial asset. The maximum period considered when measuring ECL (be it 12-month or lifetime ECL) is the maximum contractual period over which HSBC is exposed to credit risk. However, where the financial instrument includes both a drawn and undrawn commitment and the contractual ability to demand repayment and cancel the undrawn commitment does not serve to limit HSBC’s exposure to credit risk to the contractual notice period, the contractual period does not determine the maximum period considered. Instead, ECL is measured over the period HSBC remains exposed to credit risk that is not mitigated by credit risk management actions. This applies to retail overdrafts and credit cards, where the period is the average time taken for stage 2 exposures to default or close as performing accounts, determined on a portfolio basis and ranging from between two and six years. In addition, for these facilities it is not possible to identify the ECL on the loan commitment component separately from the financial asset component. As a result, the total ECL is recognised in the loss allowance for the financial asset unless the total ECL exceeds the gross carrying amount of the financial asset, in which case the ECL is recognised as a provision. For wholesale overdraft facilities, credit risk management actions are taken no less frequently than on an annual basis. Forward-looking economic inputs HSBC applies multiple forward-looking global economic scenarios determined with reference to external forecast distributions representative of its view of forecast economic conditions. This approach is considered sufficient to calculate unbiased expected credit losses in most economic environments. In certain economic environments, additional analysis may be necessary and may result in additional scenarios or adjustments, to reflect a range of possible economic outcomes sufficient for an unbiased estimate. The detailed methodology is disclosed in ‘Measurement uncertainty and sensitivity analysis of ECL estimates’ on page 156. Critical estimates and judgements The calculation of the Group’s ECL under IFRS 9 requires the Group to make a number of judgements, assumptions and estimates. The most significant are set out below: Judgements Estimates – Defining what is considered to be a significant increase in credit risk – Determining the lifetime and point of initial recognition of overdrafts and credit cards – Selecting and calibrating the PD, LGD and EAD models, which support the calculations, including making reasonable and supportable judgements about how models react to current and future economic conditions – Selecting model inputs and economic forecasts, including determining whether sufficient and appropriately weighted economic forecasts are incorporated to calculate unbiased expected credit loss – Making management adjustments to account for late-breaking events, model and data limitations and deficiencies, and expert credit judgements – Selecting applicable recovery strategies for certain wholesale credit-impaired loans – The section ‘Measurement uncertainty and sensitivity analysis of ECL estimates’, marked as audited from page 156, sets out the assumptions used in determining ECL, and provides an indication of the sensitivity of the result to the application of different weightings being applied to different economic assumptions Notes on the financial statements 350 HSBC Holdings plc Annual Report and Accounts 2023 (j) Insurance contracts A contract is classified as an insurance contract where the Group accepts significant insurance risk from another party by agreeing to compensate that party if it is adversely affected by a specified uncertain future event. An insurance contract may also transfer financial risk, but is accounted for as an insurance contract if the insurance risk is significant. In addition, the Group issues investment contracts with DPF, which are also accounted under IFRS 17 ’Insurance Contracts’. Aggregation of insurance contracts Individual insurance contracts that are managed together and subject to similar risks are identified as a portfolio. Contracts that are managed together usually belong to the same product group, and have similar characteristics such as being subject to a similar pricing framework or similar product management, and are issued by the same legal entity. If a contract is exposed to more than one risk, the dominant risk of the contract is used to assess whether the contract features similar risks. Each portfolio is further separated by the contract’s expected profitability. The portfolios are split by their profitability into: (i) contracts that are onerous at initial recognition; (ii) contracts that at initial recognition have no significant possibility of becoming onerous subsequently; and (iii) the remaining contracts. These profitability groups are then divided by issue date, with most contracts the Group issues after the transition date being grouped into calendar quarter cohorts. For multi-currency groups of contracts, the Group considers its groups of contracts as being denominated in a single currency. The measurement of the insurance contract liability is based on groups of insurance contracts as established at initial recognition, and will include fulfilment cash flows as well as the CSM representing the unearned profit. The Group has elected to update the estimates used in the measurement on a year-to-date basis. Fulfilment cash flows The fulfilment cash flows comprise the following: Best estimates of future cash flows The cash flows within the contract boundary of each contract in the Group include amounts expected to be collected from premiums and payouts for claims, benefits and expenses, and are projected using a range of scenarios and assumptions in an unbiased way based on the Group’s demographic and operating experience along with external mortality data where the Group’s own experience data is not sufficiently large in size to be credible. Adjustment for the time value of money and financial risks associated with the future cash flows The estimates of future cash flows are adjusted to reflect the time value of money (i.e. discounting) and the financial risks to derive an expected present value. The Group generally makes use of stochastic modelling techniques in the estimation for products with options and guarantees. A bottom-up approach is used to determine the discount rate to be applied to a given set of expected future cash flows. This is derived as the sum of the risk-free yield and an illiquidity premium. The risk-free yield is determined based on observable market data, where such markets are considered to be deep, liquid and transparent. When information is not available, management judgement is applied to determine the appropriate risk-free yield. Illiquidity premiums reflect the liquidity characteristics of the associated insurance contracts. Risk adjustment for non-financial risk The risk adjustment reflects the compensation required for bearing the uncertainty about the amount and timing of future cash flows that arises from non-financial risk. It is calculated as a 75th percentile level of stress over a one-year period. The level of the stress is determined with reference to external regulatory stresses and internal economic capital stresses. For the main insurance manufacturing entity in these locations, the one-year 75th percentile level of stress corresponds to the following percentiles based on an ultimate view of risk over all future years: – Asia-Pacific (Hong Kong): 60th percentile (2022: 59th percentile). – Europe (France): 60th percentile (2022: 60th percentile). – Latin America (Mexico): 65th percentile (2022: 66th percentile). The Group does not disaggregate changes in the risk adjustment between insurance service result (comprising insurance revenue and insurance service expense) and insurance finance income or expenses. All changes are included in the insurance service result. Measurement models The variable fee approach (‘VFA’) measurement model is used for most of the contracts issued by the Group, which is mandatory upon meeting the following eligibility criteria at inception: – the contractual terms specify that the policyholder participates in a share of a clearly identified pool of underlying items; – the Group expects to pay to the policyholder a substantial share of the fair value returns on the underlying items. The Group considers that a substantial share is a majority of returns; and – the Group expects a substantial proportion of any change in the amounts to be paid to the policyholder to vary with the change in fair value of the underlying items. The Group considers that a substantial proportion is a majority proportion of change on a present value probability- weighted average of all scenarios. For some contracts measured under VFA, the other comprehensive income (‘OCI’) option is used. The OCI option is applied where the underlying items held by the Group are not accounted for at fair value through profit or loss. Under this option, only the amount that matches income or expenses recognised in profit or loss on underlying items is included in finance income or expenses for these insurance contracts, and hence results in the elimination of accounting mismatches. The remaining amount of finance income or expenses for these insurance contracts issued for the period is recognised in OCI. In addition, the risk mitigation option is used for a number of economic offsets against the instruments that meet specific requirements. The remaining contracts issued and the reinsurance contracts held are accounted for under the general measurement model (‘GMM’). HSBC Holdings plc Annual Report and Accounts 2023 351 Financial statements CSM and coverage units The CSM represents the unearned profit and results in no income or expense at initial recognition when the group of contracts is profitable. The CSM is adjusted at each subsequent reporting period for changes in fulfilment cash flows relating to future service (e.g. changes in non- economic assumptions, including mortality and morbidity rates). For initial recognition of onerous groups of contracts and when groups of contracts become onerous subsequently, losses are recognised in insurance service expense immediately. For groups of contracts measured using the VFA, changes in the Group’s share of the underlying items, and economic experience and economic assumption changes adjust the CSM, whereas these changes do not adjust the CSM under the GMM, but are recognised in profit or loss as they arise. However, under the risk mitigation option for VFA contracts, the changes in the fulfilment cash flows and the changes in the Group’s share in the fair value return on underlying items that the instruments mitigate are not adjusted in CSM but recognised in profit or loss. The risk mitigating instruments are primarily reinsurance contracts held. The CSM is systematically recognised in insurance revenue to reflect the insurance contract services provided, based on the coverage units of the group of contracts. Coverage units are determined by the quantity of benefits and the expected coverage period of the contracts. The Group identifies the quantity of the benefits provided as follows: – Insurance coverage: This is based on the expected net policyholder insurance benefit at each period after allowance for decrements, where net policyholder insurance benefit refers to the amount of sum assured less the fund value or surrender value. – Investment services (including both investment-return service and investment-related service): This is based on a constant measure basis which reflects the provision of access for the policyholder to the facility. For contracts that provide both insurance coverage and investment services, coverage units are weighted according to the expected present value of the future cash outflows for each service. Insurance service result Insurance revenue reflects the consideration to which the Group expects to be entitled in exchange for the provision of coverage and other insurance contract services (excluding any investment components). Insurance service expenses comprise the incurred claims and other incurred insurance service expenses (excluding any investment components), and losses on onerous groups of contracts and reversals of such losses. Insurance finance income and expenses Insurance finance income and expenses comprise the change in the carrying amount of the group of insurance contracts arising from the effects of the time value of money, financial risk and changes therein. For VFA contracts, changes in the fair value of underlying items (excluding additions and withdrawals) are recognised in insurance finance income or expenses. (k) Employee compensation and benefits Share-based payments HSBC enters into both equity-settled and cash-settled share-based payment arrangements with its employees as compensation for the provision of their services. The vesting period for these schemes may commence before the legal grant date if the employees have started to render services in respect of the award before the legal grant date, where there is a shared understanding of the terms and conditions of the arrangement. Expenses are recognised when the employee starts to render service to which the award relates. Cancellations result from the failure to meet a non-vesting condition during the vesting period, and are treated as an acceleration of vesting recognised immediately in the income statement. Failure to meet a vesting condition by the employee is not treated as a cancellation, and the amount of expense recognised for the award is adjusted to reflect the number of awards expected to vest. Post-employment benefit plans HSBC operates a number of pension schemes including defined benefit, defined contribution and post-employment benefit schemes. Payments to defined contribution schemes are charged as an expense as the employees render service. Defined benefit pension obligations are calculated using the projected unit credit method. The net charge to the income statement mainly comprises the service cost and the net interest on the net defined benefit asset or liability, and is presented in operating expenses. Remeasurements of the net defined benefit asset or liability, which comprise actuarial gains and losses, return on plan assets excluding interest and the effect of the asset ceiling (if any, excluding interest), are recognised immediately in other comprehensive income. The net defined benefit asset or liability represents the present value of defined benefit obligations reduced by the fair value of plan assets (see Note 1.2(c)), after applying the asset ceiling test, where the net defined benefit surplus is limited to the present value of available refunds and reductions in future contributions to the plan. The costs of obligations arising from other post-employment plans are accounted for on the same basis as defined benefit pension plans. Critical estimates and judgements The most significant critical estimates relate to the determination of key assumptions applied in calculating the defined benefit pension obligation for the principal plan. Judgements Estimates – A range of assumptions could be applied, and different assumptions could significantly alter the defined benefit obligation and the amounts recognised in profit or loss or OCI. – The calculation of the defined benefit pension obligation includes assumptions with regard to the discount rate, inflation rate, pension payments and deferred pensions, pay and mortality. Management determines these assumptions in consultation with the plan’s actuaries. – Key assumptions used in calculating the defined benefit pension obligation for the principal plan and the sensitivity of the calculation to different assumptions are described in Note 5. Notes on the financial statements 352 HSBC Holdings plc Annual Report and Accounts 2023 (l) Tax Income tax comprises current tax and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised in other comprehensive income or directly in equity, in which case the tax is recognised in the same statement as the related item appears. Current tax is the tax expected to be payable on the taxable profit for the year and on any adjustment to tax payable in respect of previous years. HSBC provides for potential current tax liabilities that may arise on the basis of the amounts expected to be paid to the tax authorities. Deferred tax is recognised on temporary differences between the carrying amounts of assets and liabilities in the balance sheet, and the amounts attributed to such assets and liabilities for tax purposes. Deferred tax is calculated using the tax rates expected to apply in the periods in which the assets will be realised or the liabilities settled. In assessing the probability and sufficiency of future taxable profit, management considers the availability of evidence to support the recognition of deferred tax assets, taking into account the inherent risks in long-term forecasting, including climate change-related, and drivers of recent history of tax losses where applicable. Management also considers the future reversal of existing taxable temporary differences and tax planning strategies, including corporate reorganisations. Current and deferred tax are calculated based on tax rates and laws enacted, or substantively enacted, by the balance sheet date. Critical estimates and judgements The recognition of deferred tax assets depends on judgements and estimates. Judgements Estimates – Specific judgements supporting deferred tax assets are described in Note 7. – The recognition of deferred tax assets is sensitive to estimates of future cash flows projected for periods for which detailed forecasts are available and to assumptions regarding the long-term pattern of cash flows thereafter, on which forecasts of future taxable profit are based, and which affect the expected recovery periods and the pattern of utilisation of tax losses and tax credits. See Note 7 for further detail. The Group does not consider there to be a significant risk of a material adjustment to the carrying amount of deferred tax assets in the next financial year, but does consider this to be an area that is inherently judgemental. (m) Provisions, contingent liabilities and guarantees Provisions Provisions are recognised when it is probable that an outflow of economic benefits will be required to settle a present legal or constructive obligation that has arisen as a result of past events and for which a reliable estimate can be made. Critical estimates and judgements The recognition and measurement of provisions requires the Group to make a number of judgements, assumptions and estimates. The most significant are set out below: Judgements Estimates – Determining whether a present obligation exists. Professional advice is taken on the assessment of litigation and similar obligations. – Provisions for legal proceedings and regulatory matters typically require a higher degree of judgement than other types of provisions. When matters are at an early stage, accounting judgements can be difficult because of the high degree of uncertainty associated with determining whether a present obligation exists, and estimating the probability and amount of any outflows that may arise. As matters progress, management and legal advisers evaluate on an ongoing basis whether provisions should be recognised, revising previous estimates as appropriate. At more advanced stages, it is typically easier to make estimates around a better defined set of possible outcomes. – Provisions for legal proceedings and regulatory matters remain very sensitive to the assumptions used in the estimate. There could be a wider range of possible outcomes for any pending legal proceedings, investigations or inquiries. As a result it is often not practicable to quantify a range of possible outcomes for individual matters. It is also not practicable to meaningfully quantify ranges of potential outcomes in aggregate for these types of provisions because of the diverse nature and circumstances of such matters and the wide range of uncertainties involved. Contingent liabilities, contractual commitments and guarantees Contingent liabilities Contingent liabilities, which include certain guarantees and letters of credit pledged as collateral security, and contingent liabilities related to legal proceedings or regulatory matters, are not recognised in the financial statements but are disclosed unless the probability of settlement is remote. Financial guarantee contracts Liabilities under financial guarantee contracts that are not classified as insurance contracts are recorded initially at their fair value, which is generally the fee received or present value of the fee receivable. (n) Impairment of non-financial assets Software under development is tested for impairment at least annually. Other non-financial assets are property, plant and equipment, intangible assets (excluding goodwill) and right-of-use assets. They are tested for impairment at the individual asset level when there is indication of impairment at that level, or at the CGU level for assets that do not have a recoverable amount at the individual asset level. In addition, impairment is also tested at the CGU level when there is indication of impairment at that level. For this purpose, CGUs are considered to be the principal operating legal entities divided by global business. HSBC Holdings plc Annual Report and Accounts 2023 353 Financial statements Impairment testing compares the carrying amount of the non-financial asset or CGU with its recoverable amount, which is the higher of the fair value less costs of disposal or the value in use. The carrying amount of a CGU comprises the carrying amount of its assets and liabilities, including non-financial assets that are directly attributable to it and non-financial assets that can be allocated to it on a reasonable and consistent basis. Non-financial assets that cannot be allocated to an individual CGU are tested for impairment at an appropriate grouping of CGUs. The recoverable amount of the CGU is the higher of the fair value less costs of disposal of the CGU, which is determined by independent and qualified valuers where relevant, and the value in use, which is calculated based on appropriate inputs (see Note 21). When the recoverable amount of a CGU is less than its carrying amount, an impairment loss is recognised in the income statement to the extent that the impairment can be allocated on a pro-rata basis to the non-financial assets by reducing their carrying amounts to the higher of their respective individual recoverable amount or nil. Impairment is not allocated to the financial assets in a CGU. Impairment losses recognised in prior periods for non-financial assets are reversed when there has been a change in the estimate used to determine the recoverable amount. The impairment loss is reversed to the extent that the carrying amount of the non-financial assets would not exceed the amount that would have been determined (net of amortisation or depreciation) had no impairment loss been recognised in prior periods. Critical estimates and judgements The review of goodwill and other non-financial assets for impairment reflects management’s best estimate of the future cash flows of the CGUs and the rates used to discount these cash flows, both of which are subject to uncertain factors as described in the ‘Critical estimates and judgements’ in Note 1.2(a). The Group does not consider there to be a significant risk of a material adjustment to the carrying amount of goodwill and non-financial assets in the next financial year, but does consider this to be an area that is inherently judgemental. (o) Non-current assets and disposal groups held for sale HSBC classifies non-current assets or disposal groups (including assets and liabilities) as held for sale when their carrying amounts will be recovered principally through sale rather than through continuing use. To be classified as held for sale, the non-current asset or disposal group must be available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets (or disposal groups), and the sale must be highly probable. For a sale to be highly probable, the appropriate level of management must be committed to a plan to sell the asset (or disposal group) and an active programme to locate a buyer and complete the plan must have been initiated. Further, the asset (or disposal group) must be actively marketed for sale at a price that is reasonable in relation to its current fair value. In addition, the sale should be expected to qualify as a completed sale within one year from the date of classification and actions required to complete the plan should indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. Held for sale assets and disposal groups are measured at the lower of their carrying amount and fair value less costs to sell except for those assets and liabilities that are not within the scope of the measurement requirements of IFRS 5. If the carrying amount of the non-current asset (or disposal group) is greater than the fair value less costs to sell, an impairment loss for any initial or subsequent write-down of the asset or disposal group to fair value less costs to sell is recognised. Any such impairment loss is first allocated against the non-current assets that are in scope of IFRS 5 for measurement. This first reduces the carrying amount of any goodwill allocated to the disposal group, and then to the other non-current assets of the disposal group pro rata on the basis of the carrying amount of each asset in the disposal group. Thereafter, any impairment loss in excess of the carrying amount of the non-current assets in scope of IFRS 5 for measurement is recognised against the total assets of the disposal group. Critical judgements The classification as held for sale depends on certain judgements: Judgements Management judgement is required in determining whether the IFRS 5 held for sale criteria are met, including whether a sale is highly probable and expected to complete within one year of classification. The exercise of judgement will normally consider the likelihood of successfully securing any necessary regulatory or governmental approvals, which are almost always required for sales of banking businesses, and sanctions risk. For large and complex plans, judgement will also include an assessment of the enforceability of any binding sale agreement, the nature and magnitude of any disincentives for non-performance, and the ability of the counterparty to undertake necessary pre-completion preparatory work, comply with conditions precedent, and otherwise be able to comply with contractual undertakings to achieve completion within the expected timescale. Once classified as held for sale, judgement is required to be applied on a continuous basis to ensure that classification remains appropriate in future accounting periods. (p) Hyperinflationary accounting Hyperinflationary accounting is applied to those subsidiary operations in countries where the three-year cumulative inflation rate is approaching or exceeding 100%. In 2023, this affected the Group’s operations in Argentina and Türkiye. The Group applies IAS 29 to the underlying financial information of relevant subsidiaries to restate their local currency results and financial position so as to be stated in terms of the measuring unit current at the end of the reporting period. Those restated results are translated into the Group’s presentation currency of US dollars for consolidation at the closing rate at the balance sheet date. Group comparatives are not restated for inflation and consequential adjustments to the opening balance sheet in relation to hyperinflationary subsidiaries are presented in other comprehensive income. The hyperinflationary gain or loss in respect of the net monetary position of the relevant subsidiary is included in profit or loss. When applying hyperinflation accounting for the first time, the underlying financial information is restated in terms of the measuring unit current at the end of the reporting period as if the relevant economy had always been hyperinflationary. Group comparatives are not restated for such historical adjustments. Notes on the financial statements 354 HSBC Holdings plc Annual Report and Accounts 2023 2 Net fee income Net fee income by global business 2023 Wealth and Personal Banking Commercial Banking Global Banking and Markets Corporate Centre Total $m $m $m $m $m Funds under management 1,763 71 539 — 2,373 Cards 2,385 353 38 — 2,776 Credit facilities 103 856 615 — 1,574 Broking income 463 22 592 — 1,077 Account services 402 788 347 — 1,537 Unit trusts 727 10 1 — 738 Underwriting — 3 583 — 586 Global custody 128 6 730 — 864 Remittances 86 389 347 1 823 Imports/exports — 470 154 — 624 Insurance agency commission 280 18 — — 298 Other 1,433 1,161 2,458 (2,706) 2,346 Fee income 7,770 4,147 6,404 (2,705) 15,616 Less: fee expense (2,416) (210) (3,858) 2,713 (3,771) Net fee income 5,354 3,937 2,546 8 11,845 20221 Wealth and Personal Banking Commercial Banking2 Global Banking and Markets2 Corporate Centre Total $m $m $m $m $m Funds under management 1,765 107 500 (12) 2,360 Cards 2,146 313 32 — 2,491 Credit facilities 100 783 591 — 1,474 Broking income 576 40 635 — 1,251 Account services 337 730 344 1 1,412 Unit trusts 682 14 — — 696 Underwriting 1 2 443 (5) 441 Global custody 140 19 762 — 921 Remittances 72 380 346 1 799 Imports/exports — 493 141 — 634 Insurance agency commission 283 16 1 — 300 Other 1,330 1,102 2,376 (2,463) 2,345 Fee income 7,432 3,999 6,171 (2,478) 15,124 Less: fee expense (2,128) (212) (3,459) 2,445 (3,354) Net fee income 5,304 3,787 2,712 (33) 11,770 2021 Wealth and Personal Banking Commercial Banking Global Banking and Markets Corporate Centre Total $m $m $m $m $m Funds under management 1,984 126 546 — 2,656 Cards 1,949 240 23 1 2,213 Credit facilities 103 833 690 1 1,627 Broking income 863 69 669 — 1,601 Account services 429 677 340 6 1,452 Unit trusts 1,065 23 — — 1,088 Underwriting 4 6 1,009 (2) 1,017 Global custody 167 24 787 — 978 Remittances 75 357 343 — 775 Imports/exports 1 474 145 — 620 Insurance agency commission 324 17 — — 341 Other 1,305 1,077 2,503 (2,465) 2,420 Fee income 8,269 3,923 7,055 (2,459) 16,788 Less: fee expense (2,375) (284) (3,452) 2,420 (3,691) Net fee income 5,894 3,639 3,603 (39) 13,097 1 From 1 January 2023, we adopted IFRS 17 ‘Insurance Contracts’, which replaced IFRS 4 ‘Insurance Contracts’. Comparative data for the financial year ended 31 December 2022 have been restated accordingly. Comparative data for the year ended 31 December 2021 are prepared on an IFRS 4 basis. 2 In the first quarter of 2023, following an internal review to assess which global businesses were best suited to serve our customers’ respective needs, a portfolio of our customers within our entities in Latin America was transferred from GBM to CMB for reporting purposes. Comparative data have been re-presented accordingly. HSBC Holdings plc Annual Report and Accounts 2023 355 Financial statements Net fee income included $6,971m of fees earned on financial assets that were not at fair value through profit or loss, other than amounts included in determining the effective interest rate (2022: $6,410m; 2021: $6,742m), $1,872m of fees payable on financial liabilities that were not at fair value through profit or loss, other than amounts included in determining the effective interest rate (2022: $1,613m; 2021: $1,520m), $3,452m of fees earned on trust and other fiduciary activities (2022: $3,492m; 2021: $3,849m) and $333m of fees payable relating to trust and other fiduciary activities (2022: $370m; 2021: $305m). 3 Net income/(expense) from financial instruments measured at fair value through profit or loss 2023 20221 2021 $m $m $m Net income/(expense) arising on: Net trading activities 20,391 2,372 6,668 Other instruments managed on a fair value basis (3,730) 7,906 1,076 Net income from financial instruments held for trading or managed on a fair value basis 16,661 10,278 7,744 Financial assets held to meet liabilities under insurance and investment contracts 8,086 (14,392) 4,134 Liabilities to customers under investment contracts (199) 561 (81) Net income/(expense) from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit or loss 7,887 (13,831) 4,053 1 From 1 January 2023, we adopted IFRS 17 ‘Insurance Contracts’, which replaced IFRS 4 ‘Insurance Contracts’. Comparative data for the financial year ended 31 December 2022 have been restated accordingly. Comparative data for the year ended 31 December 2021 are prepared on an IFRS 4 basis. HSBC Holdings 2023 2022 2021 $m $m $m Net income/(expense) arising on: – trading activities (546) 2,094 87 – other instruments managed on a fair value basis 1,609 35 23 Net income from financial instruments held for trading or managed on a fair value basis 1,063 2,129 110 Derivatives managed in conjunction with HSBC Holdings-issued debt securities 426 (1,529) (625) Other changes in fair value (1,894) 3,673 974 Changes in fair value of designated debt and related derivatives (1,468) 2,144 349 Changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss 3,692 (2,409) (420) Year ended 31 Dec 3,287 1,864 39 4 Insurance business Insurance service result Year ended 31 Dec 2023 Year ended 31 Dec 2022¹ Life direct participating and investment DPF contracts2 Life other contracts3 Total Life direct participating and investment DPF contracts2 Life other contracts3 Total $m $m $m $m $m $m Insurance revenue Amounts relating to changes in liabilities for remaining coverage 1,626 470 2,096 1,399 446 1,845 Contractual service margin recognised for services provided 975 151 1,126 781 151 932 Change in risk adjustment for non-financial risk for risk expired 21 15 36 17 17 34 Expected incurred claims and other insurance service expenses 594 304 898 528 278 806 Other 36 — 36 73 — 73 Recovery of insurance acquisition cash flows 109 54 163 102 30 132 Total insurance revenue 1,735 524 2,259 1,501 476 1,977 Insurance service expenses Incurred claims and other insurance service expenses (615) (292) (907) (573) (280) (853) Losses and reversal of losses on onerous contracts (32) (77) (109) (84) (86) (170) Amortisation of insurance acquisition cash flows (109) (54) (163) (102) (30) (132) Adjustments to liabilities for incurred claims (1) (1) (2) (2) (11) (13) Total insurance service expenses (757) (424) (1,181) (761) (407) (1,168) Total insurance service results 978 100 1,078 740 69 809 1 From 1 January 2023, we adopted IFRS 17 ‘Insurance Contracts’, which replaced IFRS 4 ‘Insurance Contracts’. Comparative data have been restated accordingly. 2 ‘Life direct participating and investment DPF contracts’ are substantially measured under the variable fee approach measurement model. 3 ‘Life other contracts’ are measured under the general measurement model and excludes reinsurance contracts. Notes on the financial statements 356 HSBC Holdings plc Annual Report and Accounts 2023 Net investment return Year ended 31 Dec 2023 Year ended 31 Dec 2022¹ Life direct participating and investment DPF contracts Life other contracts Total Life direct participating and investment DPF contracts Life other contracts Total $m $m $m $m $m $m Investment return Amounts recognised in profit or loss2 7,663 214 7,877 (13,520) (181) (13,701) Amounts recognised in OCI3 493 — 493 (2,392) — (2,392) Total investment return (memorandum) 8,156 214 8,370 (15,912) (181) (16,093) Net finance income/(expense) Changes in fair value of underlying items of direct participating contracts (7,995) — (7,995) 15,937 — 15,937 Effect of risk mitigation option (35) — (35) 99 — 99 Interest accreted — (127) (127) — (80) (80) Effect of changes in interest rates and other financial assumptions (12) (121) (133) — 233 233 Effect of measuring changes in estimates at current rates and adjusting the CSM at rates on initial recognition — (10) (10) — 3 3 Total net finance income/(expense) from insurance contracts (8,042) (258) (8,300) 16,036 156 16,192 Represented by: Amounts recognised in profit or loss (7,551) (258) (7,809) 13,643 156 13,799 Amounts recognised in OCI (491) — (491) 2,393 — 2,393 Total net investment results 114 (44) 70 124 (25) 99 Represented by: Amounts recognised in profit or loss 112 (44) 68 123 (25) 98 Amounts recognised in OCI 2 — 2 1 — 1 1 From 1 January 2023, we adopted IFRS 17 ‘Insurance Contracts’, which replaced IFRS 4 ‘Insurance Contracts’. Comparative data have been restated accordingly. 2 Total Group ‘Net income/(expense) from assets and liabilities of insurance business, including related derivatives, measured at fair value through profit or loss’ of $7,886m gain (2022: $13,831m loss) includes returns on assets and liabilities supporting insurance policies of $7,627m (2022: $13,949m loss) and on shareholder assets of $259m (2022: $118m gain). Investment returns of $7,877m (2022: $13,701m loss) include gains of $7,627m (2022: $13,949m loss) on underlying assets supporting insurance liabilities reported in ‘Net income/(expense) from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit or loss’, $257m gains (2022: $248m gain) reported in ‘Net interest income’ and $7m loss (2022: nil) reported in ‘Other operating income’. 3 ‘Amounts recognised in OCI’ gross of tax for the year ended 31 December 2023 included fair value gains of $497m (2022: $2,396m loss) and impairment of $4m (2022: $4m impairment reversals). Reconciliation of amounts included in other comprehensive income for financial assets measured at fair value through other comprehensive income – assets supporting contracts measured under the modified retrospective approach 2023 2022 $m $m Balance at 1 Jan (973) 622 Net change in fair value 451 (2,099) Net amount reclassified to profit or loss (6) (2) Related income tax (115) 543 Foreign exchange and other (27) (37) Balance at 31 Dec (670) (973) HSBC Holdings plc Annual Report and Accounts 2023 357 Financial statements Movements in carrying amounts of insurance contracts – analysis by remaining coverage and incurred claims Year ended 31 Dec 2023 Life direct participating and investment DPF contracts Life other contracts Liabilities for remaining coverage: Liabilities for remaining coverage: Excluding loss component Loss component Incurred claims Total Excluding loss component Loss component Incurred claims Total Total $m $m $m $m $m $m $m $m $m Opening assets (5) — — (5) (187) 21 35 (131) (136) Opening liabilities 104,676 114 355 105,145 3,359 109 203 3,671 108,816 Net opening balance at 1 Jan 2023 104,671 114 355 105,140 3,172 130 238 3,540 108,680 Changes in the statement of profit or loss and other comprehensive income Insurance revenue Contracts under the fair value approach (508) — — (508) (196) — — (196) (704) Contracts under the modified retrospective approach (148) — — (148) (22) — — (22) (170) Other contracts2 (1,079) — — (1,079) (306) — — (306) (1,385) Total insurance revenue (1,735) — — (1,735) (524) — — (524) (2,259) Insurance service expenses Incurred claims and other insurance service expenses — (6) 621 615 — (24) 316 292 907 Amortisation of insurance acquisition cash flows 109 — — 109 54 — — 54 163 Losses and reversal of losses on onerous contracts — 32 — 32 — 77 — 77 109 Adjustments to liabilities for incurred claims — — 1 1 — — 1 1 2 Total insurance service expenses 109 26 622 757 54 53 317 424 1,181 Investment components (8,104) — 8,104 — (818) — 818 — — Insurance service result (9,730) 26 8,726 (978) (1,288) 53 1,135 (100) (1,078) Net finance (income)/expense from insurance contracts3 8,042 — — 8,042 254 3 1 258 8,300 Other movements recognised in the statement of profit or loss 513 (5) (214) 294 (8) 4 (13) (17) 277 Effect of movements in exchange rates 942 1 6 949 25 (2) 8 31 980 Total changes in the statement of profit or loss and other comprehensive income (233) 22 8,518 8,307 (1,017) 58 1,131 172 8,479 Cash flows Premiums received 12,616 — — 12,616 1,256 — — 1,256 13,872 Claims and other insurance service expenses paid, including investment components, and other cash flows (15) — (8,502) (8,517) 1 — (1,112) (1,111) (9,628) Insurance acquisition cash flows (522) — — (522) (282) — — (282) (804) Total cash flows 12,079 — (8,502) 3,577 975 — (1,112) (137) 3,440 Other movements 14 (14) — — (9) (13) 22 — — Net closing balance at 31 Dec 2023 116,531 122 371 117,024 3,121 175 279 3,575 120,599 Closing assets (15) 1 1 (13) (279) (16) 56 (239) (252) Closing liabilities 116,546 121 370 117,037 3,400 191 223 3,814 120,851 Net closing balance at 31 Dec 2023 116,531 122 371 117,024 3,121 175 279 3,575 120,599 Notes on the financial statements 358 HSBC Holdings plc Annual Report and Accounts 2023 Movements in carrying amounts of insurance contracts – analysis by remaining coverage and incurred claims (continued) Year ended 31 Dec 20221 Life direct participating and investment DPF contracts Life other contracts Liabilities for remaining coverage: Liabilities for remaining coverage: Excluding loss component Loss component Incurred claims Total Excluding loss component Loss component Incurred claims Total Total $m $m $m $m $m $m $m $m $m Opening assets — — — — (159) 7 36 (116) (116) Opening liabilities 114,952 93 226 115,271 3,825 67 144 4,036 119,307 Net opening balance at 1 Jan 2022 114,952 93 226 115,271 3,666 74 180 3,920 119,191 Changes in the statement of profit or loss and other comprehensive income Insurance revenue Contracts under the fair value approach (571) — — (571) (234) — — (234) (805) Contracts under the modified retrospective approach (147) — — (147) (24) — — (24) (171) Other contracts2 (783) — — (783) (218) — — (218) (1,001) Total insurance revenue (1,501) — — (1,501) (476) — — (476) (1,977) Insurance service expenses Incurred claims and other insurance service expenses — 5 568 573 — (6) 286 280 853 Amortisation of insurance acquisition cash flows 102 — — 102 30 — — 30 132 Losses and reversal of losses on onerous contracts — 84 — 84 — 86 — 86 170 Adjustments to liabilities for incurred claims — — 2 2 — — 11 11 13 Total insurance service expenses 102 89 570 761 30 80 297 407 1,168 Investment components (5,487) — 5,487 — (549) — 549 — — Insurance service result (6,886) 89 6,057 (740) (995) 80 846 (69) (809) Net finance (income)/expense from insurance contracts3 (16,038) — 2 (16,036) (154) 2 (4) (156) (16,192) Effect of movements in exchange rates (2,159) (4) (11) (2,174) (88) (2) (3) (93) (2,267) Total changes in the statement of profit or loss and other comprehensive income (25,083) 85 6,048 (18,950) (1,237) 80 839 (318) (19,268) Cash flows Premiums received 12,740 — — 12,740 882 — — 882 13,622 Claims and other insurance service expenses paid, including investment components, and other cash flows — — (5,783) (5,783) — — (880) (880) (6,663) Insurance acquisition cash flows (423) — — (423) (162) — — (162) (585) Total cash flows 12,317 — (5,783) 6,534 720 — (880) (160) 6,374 Acquisition of subsidiaries and other movements 2,485 (64) (136) 2,285 23 (24) 99 98 2,383 Net closing balance at 31 Dec 2022 104,671 114 355 105,140 3,172 130 238 3,540 108,680 Closing assets (5) — — (5) (187) 21 35 (131) (136) Closing liabilities 104,676 114 355 105,145 3,359 109 203 3,671 108,816 Net closing balance at 31 Dec 2022 104,671 114 355 105,140 3,172 130 238 3,540 108,680 1 From 1 January 2023, we adopted IFRS 17 ‘Insurance Contracts’, which replaced IFRS 4 ‘Insurance Contracts’. Comparative data have been restated accordingly. 2 ‘Other contracts’ are those contracts measured by applying IFRS 17 from inception of the contracts. These include contracts measured under the full retrospective approach at transition and contracts incepted after transition and excludes reinsurance contracts. 3 ‘Net finance (income)/expense from insurance contracts’ expense of $8,300m (2022: $16,192m income) comprises expense of $7,809m (2022: $13,799m income) recognised in the statement of profit or loss and expense of $491m (2022: $2,393m income) recognised in the statement of other comprehensive income. HSBC Holdings plc Annual Report and Accounts 2023 359 Financial statements Movements in carrying amounts of insurance contracts – analysis by measurement component Year ended 31 Dec 2023 Life direct participating and investment DPF contracts Life other contracts Estimates of present value of future cash flows and risk adjustment Contractual service margin Estimates of present value of future cash flows and risk adjustment Contractual service margin Contracts under the fair value approach Contracts under the modified retros- pective approach Other contracts2 Total Contracts under the fair value approach Contracts under the modified retros- pective approach Other contracts2 Total Total $m $m $m $m $m $m $m $m $m $m $m Opening assets (18) 3 — 10 (5) (308) 86 — 91 (131) (136) Opening liabilities 96,174 4,364 792 3,815 105,145 3,162 325 18 166 3,671 108,816 Net opening balance at 1 Jan 2023 96,156 4,367 792 3,825 105,140 2,854 411 18 257 3,540 108,680 Changes in the statement of profit or loss and other comprehensive income Changes that relate to current services Contractual service margin recognised for services provided — (188) (70) (717) (975) — (69) (6) (76) (151) (1,126) Change in risk adjustment for non-financial risk expired (21) — — — (21) (15) — — — (15) (36) Experience adjustments 21 — — — 21 (12) — — — (12) 9 Changes that relate to future services Contracts initially recognised in the year (1,606) — — 1,619 13 (176) — — 207 31 44 Changes in estimates that adjust the contractual service margin (771) 368 (33) 436 — 21 26 6 (53) — — Changes in estimates that result in losses and reversal of losses on onerous contracts 19 — — — 19 46 — — — 46 65 Changes that relate to past services Adjustments to liabilities for incurred claims 1 — — — 1 1 — — — 1 2 Other movements recognised in insurance service result (36) — — — (36) — — — — — (36) Insurance service result (2,393) 180 (103) 1,338 (978) (135) (43) — 78 (100) (1,078) Net finance (income)/ expense from insurance contracts3 8,042 — — — 8,042 235 11 — 12 258 8,300 Other movements recognised in the statement of profit or loss 145 133 (1) 17 294 (43) 6 — 20 (17) 277 Effect of movements in exchange rates 883 2 27 37 949 — 12 1 18 31 980 Total changes in the statement of profit or loss and other comprehensive income 6,677 315 (77) 1,392 8,307 57 (14) 1 128 172 8,479 Cash flows Premiums received 12,616 — — — 12,616 1,256 — — — 1,256 13,872 Claims, other insurance service expenses paid (including investment components) and other cash flows (8,517) — — — (8,517) (1,111) — — — (1,111) (9,628) Insurance acquisition cash flows (522) — — — (522) (282) — — — (282) (804) Total cash flows 3,577 — — — 3,577 (137) — — — (137) 3,440 Net closing balance at 31 Dec 2023 106,410 4,682 715 5,217 117,024 2,774 397 19 385 3,575 120,599 Closing assets (30) 3 — 14 (13) (339) 36 — 64 (239) (252) Closing liabilities 106,440 4,679 715 5,203 117,037 3,113 361 19 321 3,814 120,851 Net closing balance at 31 Dec 2023 106,410 4,682 715 5,217 117,024 2,774 397 19 385 3,575 120,599 Notes on the financial statements 360 HSBC Holdings plc Annual Report and Accounts 2023 Movements in carrying amounts of insurance contracts – analysis by measurement component (continued) Year ended 31 Dec 20221 Life direct participating and investment DPF contracts Life other contracts Estimates of present value of future cash flows and risk adjustment Contractual service margin Estimates of present value of future cash flows and risk adjustment Contractual service margin Contracts under the fair value approach Contracts under the modified retros- pective approach Other contracts2 Total Contracts under the fair value approach Contracts under the modified retros- pective approach Other contracts2 Total Total $m $m $m $m $m $m $m $m $m $m $m Opening assets — — — — — (236) 57 — 63 (116) (116) Opening liabilities 105,861 5,823 704 2,883 115,271 3,532 331 26 147 4,036 119,307 Net opening balance at 1 Jan 2022 105,861 5,823 704 2,883 115,271 3,296 388 26 210 3,920 119,191 Changes in the statement of profit or loss and other comprehensive income Changes that relate to current services Contractual service margin recognised for services provided — (297) (69) (415) (781) — (69) (6) (76) (151) (932) Change in risk adjustment for non-financial risk expired (17) — — — (17) (17) — — — (17) (34) Experience adjustments 45 — — — 45 2 — — — 2 47 Changes that relate to future services Contracts initially recognised in the year (1,092) — — 1,101 9 (110) — — 117 7 16 Changes in estimates that adjust contractual service margin 820 (1,349) 208 321 — (7) 23 — (16) — — Changes in estimates that result in losses and reversal of losses on onerous contracts 75 — — — 75 79 — — — 79 154 Changes that relate to past services Adjustments to liabilities for incurred claims 2 — — — 2 11 — — — 11 13 Other movements recognised in insurance service result (73) — — — (73) — — — — — (73) Insurance service result (240) (1,646) 139 1,007 (740) (42) (46) (6) 25 (69) (809) Net finance (income)/expense from insurance contracts3 (16,025) (10) — (1) (16,036) (169) 7 — 6 (156) (16,192) Effect of movements in exchange rates (2,082) (16) (51) (25) (2,174) (74) (17) (2) — (93) (2,267) Total changes in the statement of profit or loss and other comprehensive income (18,347) (1,672) 88 981 (18,950) (285) (56) (8) 31 (318) (19,268) Cash flows Premiums received 12,740 — — — 12,740 882 — — — 882 13,622 Claims, other insurance service expenses paid (including investment components) and other cash flows (5,783) — — — (5,783) (880) — — — (880) (6,663) Insurance acquisition cash flows (423) — — — (423) (162) — — — (162) (585) Total cash flows 6,534 — — — 6,534 (160) — — — (160) 6,374 Acquisition of subsidiaries and other movements 2,108 216 — (39) 2,285 3 79 — 16 98 2,383 Net closing balance at 31 Dec 2022 96,156 4,367 792 3,825 105,140 2,854 411 18 257 3,540 108,680 Closing assets (18) 3 — 10 (5) (308) 86 — 91 (131) (136) Closing liabilities 96,174 4,364 792 3,815 105,145 3,162 325 18 166 3,671 108,816 Net closing balance at 31 Dec 2022 96,156 4,367 792 3,825 105,140 2,854 411 18 257 3,540 108,680 1 From 1 January 2023, we adopted IFRS 17 ‘Insurance Contracts’, which replaced IFRS 4 ‘Insurance Contracts’. Comparative data have been restated accordingly. 2 ‘Other contracts' are those contracts measured by applying IFRS 17 from inception of the contracts. These include contracts measured under the full retrospective approach at transition and contracts incepted after transition and excludes reinsurance contracts. 3 ‘Net finance (income)/expense from insurance contracts’ expense of $8,300m (2022: $16,192m income) comprises expense of $7,809m (2022: $13,799m income) recognised in the statement of profit or loss and expense of $491m (2022: $2,393m income) recognised in the statement of other comprehensive income. HSBC Holdings plc Annual Report and Accounts 2023 361 Financial statements Effect of contracts initially recognised in the year Year ended 31 Dec 2023 Year ended 31 Dec 20221 Profitable contracts issued Onerous contracts issued Total Profitable contracts issued Onerous contracts issued Total $m $m $m $m $m $m Life direct participating and investment DPF contracts Estimates of present value of cash outflows 12,418 215 12,633 9,714 123 9,837 – insurance acquisition cash flows 602 21 623 401 16 417 – claims and other insurance service expenses payable 11,816 194 12,010 9,313 107 9,420 Estimates of present value of cash inflows (14,074) (204) (14,278) (10,844) (115) (10,959) Risk adjustment for non-financial risk 37 2 39 29 1 30 Contractual service margin 1,619 — 1,619 1,101 — 1,101 Losses recognised on initial recognition — (13) (13) — (9) (9) Life other contracts Estimates of present value of cash outflows 1,116 464 1,580 640 111 751 – insurance acquisition cash flows 106 50 156 57 9 66 – claims and other insurance service expenses payable 1,010 414 1,424 583 102 685 Estimates of present value of cash inflows (1,350) (438) (1,788) (778) (105) (883) Risk adjustment for non-financial risk 27 5 32 21 1 22 Contractual service margin 207 — 207 117 — 117 Losses recognised on initial recognition — (31) (31) — (7) (7) 1 From 1 January 2023, we adopted IFRS 17 ‘Insurance Contracts’, which replaced IFRS 4 ‘Insurance Contracts’. Comparative data have been restated accordingly. Present value of expected future cash flows of insurance contract liabilities and contractual service margin Less than 1 year 1–2 years 2–3 years 3–4 years 4–5 years 5–10 years 10–20 years Over 20 years Total $m $m $m $m $m $m $m $m $m Insurance liability future cash flows Life direct participating and investment DPF contracts (2,620) (545) 2,321 2,419 3,344 11,695 23,351 65,897 105,862 Life other contracts 1,276 362 (347) 4 (45) 36 102 1,628 3,016 Insurance liability future cash flows at 31 Dec 2023 (1,344) (183) 1,974 2,423 3,299 11,731 23,453 67,525 108,878 Remaining contractual service margin Life direct participating and investment DPF contracts 917 848 783 722 666 2,597 2,653 1,428 10,614 Life other contracts 172 113 84 74 61 141 115 41 801 Remaining contractual service margin at 31 Dec 2023 1,089 961 867 796 727 2,738 2,768 1,469 11,415 Insurance liability future cash flows Life direct participating and investment DPF contracts (5,049) (1,891) 180 1,417 1,685 9,585 30,108 59,762 95,797 Life other contracts 695 770 395 (13) 38 172 182 859 3,098 Insurance liability future cash flows at 31 Dec 20221 (4,354) (1,121) 575 1,404 1,723 9,757 30,290 60,621 98,895 Remaining contractual service margin Life direct participating and investment DPF contracts 757 689 638 590 547 2,177 2,293 1,293 8,984 Life other contracts 194 64 56 48 42 134 99 49 686 Remaining contractual service margin at 31 Dec 20221 951 753 694 638 589 2,311 2,392 1,342 9,670 1 From 1 January 2023, we adopted IFRS 17 ‘Insurance Contracts’, which replaced IFRS 4 ‘Insurance Contracts’. Comparative data have been restated accordingly. Discount rates The discount rates applied to expected future cash flows are determined through a bottom-up approach as set out in Note 1.2(j) ‘Summary of material accounting policies – Insurance contracts’ on page 351. The blended average of discount rates used within our most material manufacturing entities are as follows: HSBC Life (International) Ltd Hang Seng Insurance Co Ltd HSBC Assurances Vie (France) HK$ US$ HK$ US$ € At 31 Dec 2023 10-year discount rate (%) 4.02 4.47 4.16 4.62 2.96 20-year discount rate (%) 4.21 4.91 4.34 5.06 2.97 At 31 Dec 2022 10-year discount rate (%) 4.56 4.59 4.70 4.80 3.66 20-year discount rate (%) 4.63 4.96 4.76 5.17 3.33 Notes on the financial statements 362 HSBC Holdings plc Annual Report and Accounts 2023 5 Employee compensation and benefits 2023 2022 2021 $m $m $m Employee compensation and benefits1 18,220 18,003 18,742 Capitalised wages and salaries2 1,403 1,285 870 Gross employee compensation and benefits for the year ended 31 Dec 19,623 19,288 19,612 Consists of: Wages and salaries 17,359 16,970 17,072 Social security costs 1,507 1,403 1,503 Post-employment benefits 757 915 1,037 Year ended 31 Dec 19,623 19,288 19,612 1 In 2023 and 2022, employee compensation and benefits are presented in the income statement net of software capitalisation costs and costs included in the insurance contract fulfilment cash flow liabilities under IFRS 17. In 2021, employee compensation and benefits are presented net of software capitalisation costs in the income statement. 2 Comprises $1,043m (2022: $922m; 2021: $870m) software capitalisation costs and $360m (2022: $363m; 2021: n/a) costs included in the insurance contract fulfilment cash flow liabilities under IFRS 17. Average number of persons employed by HSBC during the year by global business1 2023 2022 2021 Wealth and Personal Banking 132,336 135,676 138,026 Commercial Banking 46,826 48,004 44,992 Global Banking and Markets 48,043 48,597 48,179 Corporate Centre 347 365 359 Year ended 31 Dec 227,552 232,642 231,556 1 Average number of persons employed represents the number of persons with contracts of service with the Group. Average number of persons employed by HSBC during the year by legal entity1 2023 2022 2021 HSBC UK Bank plc 20,415 20,501 21,447 HSBC Bank plc 14,809 15,405 16,823 The Hongkong and Shanghai Banking Corporation Limited 54,321 54,792 55,253 HSBC Bank Middle East Limited 3,316 3,338 3,429 HSBC North America Holdings Inc. 6,046 6,749 8,197 HSBC Bank Canada 4,354 4,241 4,369 Grupo Financiero HSBC, S.A. de C.V. 14,412 14,484 14,529 Other trading entities2 9,247 10,026 10,442 Holding companies, shared service centres and intra-Group eliminations 100,632 103,106 97,067 Year ended 31 Dec 227,552 232,642 231,556 1 Average number of persons employed represents the number of persons with contracts of service with the Group. 2 Other trading entities includes entities located in Oman, Türkiye, Egypt and Saudi Arabia. Reconciliation of total incentive awards granted to income statement charge 2023 2022 2021 $m $m $m Total incentive awards approved for the current year 3,774 3,359 3,495 Less: deferred bonuses awarded, expected to be recognised in future periods (353) (343) (379) Total incentives awarded and recognised in the current year 3,421 3,016 3,116 Add: current year charges for deferred bonuses from previous years 375 239 270 Other (56) (22) 4 Income statement charge for incentive awards 3,740 3,233 3,390 Share-based payments ‘Wages and salaries’ includes the effect of share-based payments arrangements, of which $482m was equity settled (2022: $400m; 2021: $467m), as follows: 2023 2022 2021 $m $m $m Conditional share awards 499 402 479 Savings-related and other share award option plans 23 22 27 Year ended 31 Dec 522 424 506 HSBC Holdings plc Annual Report and Accounts 2023 363 Financial statements HSBC share awards Award Policy Deferred share awards (including annual incentive awards, long- term incentive (‘LTI’) awards delivered in shares) An assessment of performance over the relevant period ending on 31 December is used to determine the amount of the award to be granted. – Deferred awards generally require employees to remain in employment over the vesting period and are generally not subject to performance conditions after the grant date. An exception to these are LTI awards, which are subject to performance conditions. – Deferred share awards generally vest over a period of three, four, five or seven years. – Vested shares may be subject to a retention requirement post-vesting. – Awards are generally subject to malus and clawback provisions. International Employee Share Purchase Plan (‘ShareMatch’) The plan was first introduced in Hong Kong in 2013 and now includes employees based in 30 jurisdictions. – Shares are purchased in the market each quarter up to a maximum value of £750, or the equivalent in local currency. – Matching awards are added at a ratio of one free share for every three purchased. In mainland China, matching awards are settled in cash. – Matching awards vest subject to continued employment and the retention of the purchased shares for a maximum period of two years and nine months. Movement on HSBC share awards 2023 2022 Number Number (000s) (000s) Conditional share awards outstanding at 1 Jan 126,246 109,364 Additions during the year 72,289 90,190 Released in the year (70,054) (67,718) Forfeited in the year (3,458) (5,590) Conditional share awards outstanding at 31 Dec 125,023 126,246 Weighted average fair value of awards granted ($) 5.84 5.60 HSBC share option plans Main plans Policy Savings-related share option plans (‘Sharesave’) – From 2014, employees eligible for the UK plan could save up to £500 per month with the option to use the savings to acquire shares. – These are generally exercisable within six months following either the third or fifth anniversary of the commencement of a three-year or five-year contract, respectively. – The exercise price is set at a 20% (2022: 20%) discount to the market value immediately preceding the date of invitation. Calculation of fair values The fair values of share options are calculated using a Black-Scholes model. The fair value of a share award is based on the share price at the date of the grant. Movement on HSBC share option plans Savings-related share option plans Number WAEP1 (000s) £ Outstanding at 1 Jan 2023 115,651 2.89 Granted during the year2 23,382 4.70 Exercised during the year3 (49,007) 2.73 Expired during the year (3,832) 3.78 Forfeited during the year (2,200) 2.88 Outstanding at 31 Dec 2023 83,994 3.42 – of which exercisable 7,165 2.70 Weighted average remaining contractual life (years) 2.41 Outstanding at 1 Jan 2022 123,197 2.85 Granted during the year2 8,928 4.24 Exercised during the year3 (3,483) 3.49 Expired during the year (9,047) 3.55 Forfeited during the year (3,944) 2.79 Outstanding at 31 Dec 2022 115,651 2.89 – of which exercisable 4,029 4.11 Weighted average remaining contractual life (years) 2.26 1 Weighted average exercise price. 2 The weighted average fair value of options granted during the year was $1.92 (2022: $1.45). 3 The weighted average share price at the date the options were exercised was $7.39 (2022: $6.22). Notes on the financial statements 364 HSBC Holdings plc Annual Report and Accounts 2023 Post-employment benefit plans The Group operates pension plans throughout the world for its employees. ‘Pension risk management processes’ on page 206 contains details of the policies and practices associated with these pension plans, some of which are defined benefit plans. The largest defined benefit plan is the HBUK section of the HSBC Bank (UK) Pension Scheme (‘the principal plan’), created as a result of the HSBC Bank (UK) Pension Scheme being fully sectionalised in 2018 to meet the requirements of the Banking Reform Act. For further details of how the trustee of the HSBC Bank (UK) Pension Scheme manages climate risk, see ’Managing climate risk’ on page 65. HSBC holds on its balance sheet the net surplus or deficit, which is the difference between the fair value of plan assets and the discounted value of scheme liabilities at the balance sheet date for each plan. Surpluses are only recognised to the extent that they are recoverable through reduced contributions in the future or through potential future refunds from the schemes. In assessing whether a surplus is recoverable, HSBC has considered its current right to obtain a future refund or a reduction in future contributions together with the rights of third parties such as trustees. The principal plan The principal plan has a defined benefit section and a defined contribution section. The defined benefit section was closed to future benefit accrual in 2015, with defined benefits earned by employees at that date continuing to be linked to their salary while they remain employed by HSBC. The plan is overseen by an independent corporate trustee, who has a fiduciary responsibility for the operation of the plan. Its assets are held separately from the assets of the Group. The investment strategy of the plan is to hold the majority of assets in bonds, with the remainder in a diverse range of investments. It also includes some interest rate swaps to reduce interest rate risk, inflation swaps to reduce inflation risk and longevity swaps to reduce the impact of longer life expectancy. The principal plan is subject to the statutory funding objective requirements of the UK Pensions Act 2004, which requires that it be funded to at least the level of technical provisions (an actuarial estimate of the assets needed to provide for the benefits already built up under the plan). Where a funding valuation is carried out and identifies a deficit, the employer and trustee are required to agree to a deficit recovery plan. The latest funding valuation of the plan at 31 December 2019 was carried out by Colin G Singer of Willis Towers Watson Limited, who is a Fellow of the UK Institute and Faculty of Actuaries, using the projected unit credit method. At that date, the market value of the plan’s assets was £31.1bn ($41.1bn) and this exceeded the value placed on its liabilities on an ongoing basis by £2.5bn ($3.3bn), giving a funding level of 109%. These figures include defined contribution assets amounting to £2.4bn ($3.2bn). The main differences between the assumptions used for assessing the defined benefit liabilities for this funding valuation and those used for IAS 19 are that an element of prudence is contained in the funding valuation assumptions for discount rate, inflation rate and life expectancy. The funding valuation is used to judge the amount of cash contributions the Group needs to put into the pension scheme. It will always be different to the IAS 19 accounting surplus, which is an accounting rule concerning employee benefits and shown on the balance sheet of our financial statements. The next funding valuation, with an effective date of 31 December 2022, is currently underway and will be concluded no later than the regulatory deadline of 31 March 2024. The plan is estimated to remain in a comfortable surplus relative to the funding liabilities as at the end of 2022, based on assumptions consistent with those used to determine the funding liabilities for the 2019 valuation. The actuary also assessed the value of the liabilities if the plan were to have been stopped and an insurance company asked to secure all future pension payments. This is generally larger than the amount needed on the ongoing basis described above because an insurance company would use more prudent assumption, which would allow for reserves and include an explicit allowance for the future administrative expenses of the plan. Under this approach, the amount of assets needed was estimated to be £33bn ($44bn) at 31 December 2019. The trust deed gives the ability for HSBC UK to take a refund of surplus assets after the plan has been run down such that no further beneficiaries remain. In assessing whether a surplus is recoverable, HSBC UK has considered its right to obtain a future refund together with the rights of third parties such as trustees. On this basis, any net surplus in the HBUK section of the plan is recognised in HSBC UK’s financial statements and the Group’s financial statements. Income statement charge/(credit) 2023 2022 2021 $m $m $m Defined benefit pension plans (151) 42 243 Defined contribution pension plans 874 845 767 Pension plans 723 887 1,010 Defined benefit and contribution healthcare plans 34 28 27 Year ended 31 Dec 757 915 1,037 Net assets/(liabilities) recognised on the balance sheet in respect of defined benefit plans Fair value of plan assets Present value of defined benefit obligations Effect of limit on plan surpluses Total $m $m $m $m Defined benefit pension plans 33,897 (27,011) — 6,886 Defined benefit healthcare plans 107 (403) — (296) At 31 Dec 2023 34,004 (27,414) — 6,590 Total employee benefit liabilities (within Note 27 ‘Accruals, deferred income and other liabilities’) (1,160) Total employee benefit assets (within Note 22 ‘Prepayments, accrued income and other assets’) 7,750 Defined benefit pension plans 32,171 (25,693) — 6,478 Defined benefit healthcare plans 96 (388) — (292) At 31 Dec 2022 32,267 (26,081) — 6,186 Total employee benefit liabilities (within Note 27 ‘Accruals, deferred income and other liabilities’) (1,096) Total employee benefit assets (within Note 22 ‘Prepayments, accrued income and other assets’) 7,282 HSBC Holdings plc Annual Report and Accounts 2023 365 Financial statements HSBC Holdings Employee compensation and benefit expense in respect of HSBC Holdings’ employees in 2023 amounted to $15m (2022: $41m). The average number of persons employed during 2023 was 29 (2022: 42). A small number of employees are members of defined benefit pension plans. These employees are members of the HSBC Bank (UK) Pension Scheme. HSBC Holdings pays contributions to such plan for its own employees in accordance with the schedules of contributions determined by the trustees of the plan and recognises these contributions as an expense as they fall due. Defined benefit pension plans Net asset/(liability) under defined benefit pension plans Fair value of plan assets Present value of defined benefit obligations Effect of the asset ceiling Net defined benefit asset/(liability) Principal1 plan Other plans Principal1 plan Other plans Principal1 plan Other plans Principal1 plan Other plans $m $m $m $m $m $m $m $m At 1 Jan 2023 25,121 7,050 (18,787) (6,906) — — 6,334 144 Service cost — — (10) (150) — — (10) (150) – current service cost — — (14) (135) — — (14) (135) – past service cost and gains/(losses) from settlements — 4 (15) — — 4 (15) Net interest income/(cost) on the net defined benefit asset/ (liability) 1,247 298 (925) (286) — — 322 12 Remeasurement effects recognised in other comprehensive income (225) 110 7 (300) — — (218) (190) – return on plan assets (excluding interest income) (225) 110 — — — — (225) 110 – actuarial gains/(losses) financial assumptions — — (123) (327) — — (123) (327) – actuarial gains/(losses) demographic assumptions — — 357 17 — — 357 17 – actuarial gains/(losses) experience adjustments — — (227) 10 — — (227) 10 – other changes — — — — — — — — Exchange differences 1,472 228 (1,098) (190) — — 374 38 Benefits paid (1,063) (548) 1,063 629 — — — 81 Other movements2 38 169 (32) (26) — — 6 143 At 31 Dec 2023 26,590 7,307 (19,782) (7,229) — — 6,808 78 At 1 Jan 2022 41,384 10,047 (32,255) (10,022) — (23) 9,129 2 Service cost — — (30) (170) — — (30) (170) – current service cost — — (12) (161) — — (12) (161) – past service cost and losses from settlements — — (18) (9) — — (18) (9) Net interest income/(cost) on the net defined benefit asset/ (liability) 703 198 (546) (202) — (1) 157 (5) Remeasurement effects recognised in other comprehensive income (11,505) (2,181) 9,532 2,360 — (3) (1,973) 176 – return on plan assets (excluding interest income) (11,505) (2,181) — — — — (11,505) (2,181) – actuarial gains/(losses) financial assumptions — — 10,543 2,383 — — 10,543 2,383 – actuarial gains/(losses) demographic assumptions — — (123) 24 — — (123) 24 – actuarial gains/(losses) experience adjustments — — (888) (47) — — (888) (47) – other changes — — — — — (3) — (3) Exchange differences (4,288) (180) 3,325 35 — 2 (963) (143) Benefits paid (1,222) (616) 1,222 686 — — — 70 Other movements2 49 (218) (35) 407 — 25 14 214 At 31 Dec 2022 25,121 7,050 (18,787) (6,906) — — 6,334 144 1 For further details of the principal plan, see page 365. 2 Other movements include contributions by HSBC, contributions by employees, administrative costs and taxes paid by plan. HSBC expects to make $113m of contributions to defined benefit pension plans during 2024, consisting of $nil for the principal plan and $113m for other plans. Benefits expected to be paid from the plans to retirees over each of the next five years, and in aggregate for the five years thereafter, are as follows: Benefits expected to be paid from plans 2024 2025 2026 2027 2028 2029-2033 $m $m $m $m $m $m The principal plan1,2 1,125 1,160 1,196 1,234 1,273 6,988 Other plans1 465 473 456 478 476 2,403 1 The duration of the defined benefit obligation is 12.9 years for the principal plan under the disclosure assumptions adopted (2022: 13.2 years) and 10.3 years for all other plans combined (2022: 10.2 years). 2 For further details of the principal plan, see page 365. Notes on the financial statements 366 HSBC Holdings plc Annual Report and Accounts 2023 Fair value of plan assets by asset classes 31 Dec 2023 31 Dec 2022 Value Quoted market price in active market No quoted market price in active market Thereof HSBC1 Value Quoted market price in active market No quoted market price in active market Thereof HSBC1 $m $m $m $m $m $m $m $m The principal plan2 Fair value of plan assets 26,590 15,006 11,584 547 25,121 13,915 11,206 510 – equities3 83 — 83 — 112 — 112 — – bonds fixed income 5,262 4,739 523 — 5,285 4,822 463 — – bonds index-linked 10,300 10,300 — — 9,479 9,479 — — – derivatives 1,061 — 1,061 547 1,203 — 1,203 510 – property 830 — 830 — 842 — 842 — – pooled investment vehicles 9,087 — 9,087 — 8,586 — 8,586 — – other (33) (33) — — (386) (386) — — Other plans Fair value of plan assets 7,307 5,361 1,946 39 7,050 5,848 1,202 37 – equities 556 556 — 3 639 486 153 2 – bonds fixed income 3,624 3,623 1 5 3,571 3,472 99 4 – bonds index-linked 90 90 — — 58 58 — — – bonds other 447 415 32 — 1,357 1,007 350 — – derivatives 2 (1) 3 — 4 (1) 5 — – property 112 108 4 — 109 104 5 — – other 2,476 570 1,906 31 1,312 722 590 31 1 The fair value of plan assets includes derivatives entered into with HSBC Bank plc as detailed in Note 37. 2 For further details of the principal plan, see page 365. 3 Includes $83m (2022: $112m) in relation to private equities. Post-employment defined benefit plans’ principal actuarial financial assumptions HSBC determines the discount rates to be applied to its obligations in consultation with the plans’ local actuaries, on the basis of current average yields of high-quality (AA-rated or equivalent) debt instruments with maturities consistent with those of the defined benefit obligations. Key actuarial assumptions for the principal plan1 Discount rate Inflation rate (RPI) Inflation rate (CPI) Rate of increase for pensions Rate of pay increase % % % % % UK At 31 Dec 2023 4.65 3.23 2.67 3.14 3.42 At 31 Dec 2022 4.93 3.39 2.84 3.27 3.34 1 For further details of the principal plan, see page 365. Mortality tables and average life expectancy at age 60 for the principal plan1 Mortality table Life expectancy at age 60 for a male member currently: Life expectancy at age 60 for a female member currently: Aged 60 Aged 40 Aged 60 Aged 40 UK At 31 Dec 2023 SAPS S32 26.2 27.7 28.3 29.8 At 31 Dec 2022 SAPS S3 27.1 28.6 28.4 29.9 1 For further details of the principal plan, see page 365. 2 Self-administered pension scheme (‘SAPS’) S3 table, with different tables and multipliers adopted based on gender, pension amount and member status, reflecting the Scheme’s actual mortality experience. Improvements are projected in accordance with the Continuous Mortality Investigation’s CMI 2022 core projection model with an initial addition to improvement of 0.25% per annum, a long-term rate of improvement of 1.25% per annum, a 0% weighting to 2020 and 2021 mortality experience, and a 25% weighting to 2022 mortality experience reflecting updated long-term view on mortality improvements post-pandemic. The effect of changes in key assumptions on the principal plan1 Impact on HBUK section of the HSBC Bank (UK) Pension Scheme obligation2 Financial impact of increase Financial impact of decrease 2023 2022 2023 2022 $m $m $m $m Discount rate – increase/decrease of 0.25% (599) (582) 631 612 Inflation rate (RPI and CPI) – increase/decrease of 0.25% 500 466 (497) (446) Pension payments and deferred pensions – increase/decrease of 0.25% 622 551 (590) (519) Pay – increase/decrease of 0.25% 8 10 (6) (10) Change in mortality – increase/decrease of 1 year 613 470 (613) (489) 1 For further details of the principal plan, see page 365. 2 Sensitivities allow for HSBC UK’s convention of rounding pension assumptions during 2023 to the nearest 0.01% (2022: 0.01%). HSBC Holdings plc Annual Report and Accounts 2023 367 Financial statements The above sensitivity analyses are based on a change in an assumption while holding all other assumptions constant. In practice, this is unlikely to occur, and changes in some of the assumptions may be correlated. When calculating the sensitivity of the defined benefit obligation to significant actuarial assumptions the same method (present value of the defined benefit obligation calculated with the projected unit credit method at the end of the reporting period) has been applied as when calculating the defined benefit asset recognised in the balance sheet. The methods and types of assumptions used in preparing the sensitivity analysis did not change compared with the prior period. Directors’ emoluments Details of Directors’ emoluments, pensions and their interests are disclosed in the Directors’ remuneration report on page 279. 6 Auditor’s remuneration 2023 2022 2021 $m $m $m Audit fees payable to PwC1 109.8 97.6 88.1 Other audit fees payable 2.2 1.6 2.0 Year ended 31 Dec 112.0 99.2 90.1 Fees payable by HSBC to PwC 2023 2022 2021 $m $m $m Fees for HSBC Holdings’ statutory audit2 24.1 21.9 19.5 Fees for other services provided to HSBC 131.8 126.2 109.9 – audit of HSBC’s subsidiaries 85.7 75.7 68.6 – audit-related assurance services3 26.0 26.4 18.7 – other assurance services4,5 20.1 24.1 22.6 Year ended 31 Dec 155.9 148.1 129.4 1 Audit fees payable to PwC in 2023 included adjustments made to the prior year audit fee after finalisation of the 2022 financial statements. 2 Fees payable to PwC for the statutory audit of the consolidated financial statements of HSBC and the separate financial statements of HSBC Holdings. They include amounts payable for services relating to the consolidation returns of HSBC Holdings’ subsidiaries, which are clearly identifiable as being in support of the Group audit opinion. 3 Including services for assurance and other services that relate to statutory and regulatory filings, including interim reviews. 4 Including permitted services relating to attestation reports on internal controls of a service organisation primarily prepared for and used by third-party end users, including comfort letters. 5 Includes reviews of PRA regulatory reporting returns. No fees were payable by HSBC to PwC as principal auditor for the following types of services: internal audit services and services related to litigation, recruitment and remuneration. Fees payable by HSBC’s associated pension schemes to PwC 2023 2022 2021 $000 $000 $000 Audit of HSBC’s associated pension schemes 297 480 382 Year ended 31 Dec 297 480 382 No fees were payable by HSBC’s associated pension schemes to PwC as principal auditor for the following types of services: internal audit services, other assurance services, services related to corporate finance transactions, valuation and actuarial services, litigation, recruitment and remuneration, and information technology. In addition to the above, the estimated fees paid to PwC by third parties associated with HSBC amounted to $12.3m (2022: $13.1m; 2021: $6.3m). In these cases, HSBC was connected with the contracting party and may therefore have been involved in appointing PwC. These fees arose from services such as auditing mutual funds managed by HSBC and reviewing the financial position of corporate concerns that borrow from HSBC. Fees payable for non-audit services for HSBC Holdings are not disclosed separately because such fees are disclosed on a consolidated basis for the Group. 7 Tax Tax expense 2023 2022 2021 $m $m $m Current tax1 5,718 2,984 3,250 – for this year 5,737 3,264 3,182 – adjustments in respect of prior years (19) (280) 68 Deferred tax 71 (2,175) 963 – origination and reversal of temporary differences 19 (2,278) 874 – effect of changes in tax rates 17 (293) 132 – adjustments in respect of prior years 35 396 (43) Year ended 31 Dec2 5,789 809 4,213 1 Current tax included Hong Kong profits tax of $1,328m (2022: $604m; 2021: $813m). The Hong Kong tax rate applying to the profits of subsidiaries assessable in Hong Kong was 16.5% (2022: 16.5%; 2021: 16.5%). 2 In addition to amounts recorded in the income statement, a tax credit of $41m (2022: credit of $145m) was recorded directly to equity. Notes on the financial statements 368 HSBC Holdings plc Annual Report and Accounts 2023 Tax reconciliation The tax charged to the income statement differs from the tax charge that would apply if all profits had been taxed at the UK corporation tax rate as follows: 2023 2022 2021 $m % $m % $m % Profit before tax 30,348 17,058 18,906 Tax expense Taxation at UK corporation tax rate of 23.5% (2022: 19.0%, 2021: 19.0%) 7,132 23.5 3,241 19.0 3,592 19.0 Impact of differently taxed overseas profits in overseas locations (612) (2.0) 459 2.7 280 1.5 UK banking surcharge 350 1.2 283 1.7 332 1.8 Items increasing tax charge in 2023: – impairment of interest in associate 705 2.3 — — — — – local taxes and overseas withholding taxes 419 1.4 346 2.0 360 1.9 – impacts of hyperinflation 348 1.1 171 1.0 68 0.4 – other permanent disallowables 227 0.7 363 2.1 414 2.2 – bank levy 112 0.4 59 0.3 93 0.5 – impact of changes in tax rates 17 0.1 (293) (1.7) 132 0.7 – adjustments in respect of prior period 16 0.1 116 0.7 25 0.1 – tax impact of sale of French retail banking business — — 115 0.7 (434) (2.3) – impact of differences between French tax basis and IFRSs — — — — 434 2.3 Items reducing tax charge in 2023: – non-taxable income and gains (1,189) (3.9) (825) (4.8) (641) (3.4) – effect of profits in associates and joint ventures (571) (1.9) (504) (3.1) (414) (2.2) – movements in provisions for uncertain tax positions (472) (1.6) 27 0.2 15 0.1 – accounting gain on acquisition of SVB UK (442) (1.5) — — — — – deductions for AT1 coupon payments (229) (0.7) (246) (1.4) (270) (1.4) – movements in unrecognised deferred tax (22) (0.1) (2,503) (14.7) 227 1.1 Year ended 31 December 5,789 19.1 809 4.7 4,213 22.3 The Group’s profits are taxed at different rates depending on the country or territory in which the profits arise. The key applicable tax rates for 2023 include Hong Kong (16.5%), the US (21%) and the UK (23.5%). If the Group’s profits were taxed at the statutory rates of the countries in which the profits arose, then the tax rate for the year would have been 22.6% (2022: 23.3%). The effective tax rate for the year of 19.1% was higher than in the previous year (2022: 4.7%). The effective tax rate for the year was increased by 2.3% by the non-taxable impairment of the Group’s interest in BoCom, reduced by 1.6% by the release of provisions for uncertain tax positions and reduced by 1.5% by the non-taxable accounting gain on the acquisition of SVB UK. The effective tax rate for 2022 was reduced by 14.7% as a result of the recognition of previously unrecognised losses in the UK of $2.2bn and France of $0.3bn, in light of improved forecast profitability. On 20 June 2023, legislation was substantively enacted in the UK to introduce the ‘Pillar Two’ global minimum tax model rules of the OECD’s Inclusive Framework on Base Erosion and Profit Shifting (’BEPS’) and a UK qualified domestic minimum top-up tax, with effect from 1 January 2024. Under these rules, a top-up tax liability arises where the effective tax rate of the Group’s operations in a jurisdiction, calculated using principles set out in the Pillar Two legislation, is below 15%. Any resulting tax is payable by HSBC Holdings plc, being the Group’s ultimate parent, to HMRC. In response to the OECD’s Pillar Two global minimum tax rules, many national governments have announced their intention to introduce domestic minimum tax rules that are closely aligned to the OECD’s Pillar Two model rules. Where such qualifying domestic minimum tax rules are introduced, they may be expected to have the effect of increasing local tax liabilities to the 15% minimum rate, eliminating the top-up tax liability payable in the UK by HSBC Holdings plc in such cases. Based on the Group’s forecasts, top-up tax liabilities are expected to arise in approximately 10 jurisdictions as a result of low or 0% statutory tax rates, in particular in respect of the Group’s banking operations in Bermuda and the Channel Islands. Additionally, the application of local tax laws in Hong Kong and mainland China, particularly with regard to the non-taxation of dividend income and income on government bonds, has typically resulted in effective tax rates of below 15%. This is expected to create future top-up tax liabilities in these jurisdictions, which have statutory tax rates of 16.5% and 25%, respectively. The application of the Pillar Two global minimum tax rules and the introduction of new domestic minimum tax regimes are currently forecast to increase the Group’s annual effective tax rate by around 0.5 and 1.0 percentage points. Accounting for taxes involves some estimation because tax law is uncertain and its application requires a degree of judgement, which authorities may dispute. Liabilities are recognised based on best estimates of the probable outcome, taking into account external advice where appropriate. Exposures relating to legacy tax cases were reassessed during 2023, resulting in a credit of $472m to the income statement. We do not expect significant liabilities to arise in excess of the amounts provided. HSBC only recognises current and deferred tax assets where recovery is probable. HSBC Holdings plc Annual Report and Accounts 2023 369 Financial statements Movement of deferred tax assets and liabilities Loan impairment provisions Unused tax losses and tax credits Financial assets at FVOCI Cash flow hedges Retirement obligations Other Total $m $m $m $m $m $m $m Assets 1,062 4,397 850 1,271 — 3,048 10,628 Liabilities — — — — (1,673) (1,567) (3,240) At 1 Jan 2023 1,062 4,397 850 1,271 (1,673) 1,481 7,388 Income statement (39) 102 541 1 (114) (562) (71) Other comprehensive income — — (598) (974) 99 399 (1,074) Foreign exchange and other adjustments 135 45 83 121 (126) 15 273 At 31 Dec 2023 1,158 4,544 876 419 (1,814) 1,333 6,516 Assets1 1,158 4,544 876 419 — 2,933 9,930 Liabilities1 — — — — (1,814) (1,600) (3,414) Assets2 1,151 2,001 382 154 — 1,744 5,432 Liabilities2 — — — — (2,819) (475) (3,294) At 1 Jan 2022 1,151 2,001 382 154 (2,819) 1,269 2,138 Income statement 7 2,425 (1,127) 1 217 652 2,175 Other comprehensive income — — 2,281 1,159 692 (1,260) 2,872 Foreign exchange and other adjustments (96) (29) (686) (43) 237 820 203 At 31 Dec 2022 1,062 4,397 850 1,271 (1,673) 1,481 7,388 Assets1 1,062 4,397 850 1,271 — 3,048 10,628 Liabilities1 — — — — (1,673) (1,567) (3,240) 1 After netting off balances within countries, the balances as disclosed in the accounts are as follows: deferred tax assets of $7,754m (2022: $8,360m) and deferred tax liabilities of $1,238m (2022: $972m). 2 From 1 January 2023, we adopted IFRS 17 ‘Insurance Contracts’, which replaced IFRS 4 ‘Insurance Contracts’. We have restated 2022 comparative data. In applying judgement in recognising deferred tax assets, management has assessed all relevant information, including future business profit projections and the track record of meeting forecasts. Management’s assessment of the likely availability of future taxable profits against which to recover deferred tax assets is based on the most recent financial forecasts approved by management, which cover a five-year period and are extrapolated where necessary, and takes into consideration the reversal of existing taxable temporary differences and past business performance. When forecasts are extrapolated beyond five years, a number of different scenarios are considered, reflecting different downward risk adjustments, in order to assess the sensitivity of our recognition and measurement conclusions in the context of such longer-term forecasts. The Group’s net deferred tax asset of $6.5bn (2022: $7.4bn) included $3.3bn (2022: $4.0bn) of deferred tax assets relating to the UK, $3.1bn (2022: $3.3bn) of deferred tax assets relating to the US and a net deferred asset of $0.9bn (2022: $1.0bn) in France. The UK deferred tax asset of $3.3bn excluded a $1.9bn deferred tax liability arising on the UK pension scheme surplus, the reversal of which is not taken into account when estimating future taxable profits. The UK deferred tax assets are supported by forecasts of taxable profit, also taking into consideration the history of profitability in the relevant businesses. The majority of the deferred tax asset relates to tax attributes which do not expire and are forecast to be recovered within four years and as such are less sensitive to changes in long-term profit forecasts. The net US deferred tax asset of $3.1bn included $1.3bn related to US tax losses, of which $1.0bn expire in 10 to 15 years. Management expects the US deferred tax asset to be substantially recovered within 14 years, with the majority recovered in the first nine years. The net deferred tax asset in France of $0.9bn included $0.7bn related to tax losses, which are expected to be substantially recovered within 12 years. Unrecognised deferred tax The amount of gross temporary differences, unused tax losses and tax credits for which no deferred tax asset is recognised in the balance sheet was $10.4bn (2022: $9.2bn). This amount included unused US state tax losses of $4.0bn (2022: $4.1bn) which are forecast to expire before they are recovered and unused UK tax losses of $4.5bn (2022: $3.5bn), which arose prior to 1 April 2017 and can only be recovered against future taxable profits of HSBC Holdings. No deferred tax was recognised on these losses due to the absence of convincing evidence regarding the availability of sufficient future taxable profits against which to recover them. Deferred tax asset recognition is reassessed at each balance sheet date based on the available evidence. Of the total amounts unrecognised, $5.1bn (2022: $3.6bn) had no expiry date, $0.5bn (2022: $1.2bn) was scheduled to expire within 10 years and the remaining balance is expected to expire after 10 years. Deferred tax is not recognised in respect of the Group’s investments in subsidiaries and branches where HSBC is able to control the timing of remittance or other realisation and where remittance or realisation is not probable in the foreseeable future. The aggregate temporary differences relating to unrecognised deferred tax liabilities arising on investments in subsidiaries and branches was $14.4bn (2022: $11.7bn) and the corresponding unrecognised deferred tax liability was $0.7bn (2022: $0.7bn). Notes on the financial statements 370 HSBC Holdings plc Annual Report and Accounts 2023 8 Dividends Dividends to shareholders of the parent company 2023 2022 2021 Per share Total Per share Total Per share Total $ $m $ $m $ $m Dividends paid on ordinary shares In respect of previous year: – second interim dividend 0.23 4,589 0.18 3,576 0.15 3,059 In respect of current year: – first interim dividend 0.10 2,001 0.09 1,754 0.07 1,421 – second interim dividend 0.10 1,956 — — — — – third interim dividend 0.10 1,946 — — — — Total 0.53 10,492 0.27 5,330 0.22 4,480 Total dividends on preference shares classified as equity (paid quarterly)1 — — — — 4.99 7 Total coupons on capital securities classified as equity 1,101 1,214 1,303 Dividends to shareholders 11,593 6,544 5,790 1 HSBC Holdings called $1,450m 6.20% non-cumulative US dollar preference shares on 10 December 2020. The security was redeemed and cancelled on 13 January 2021. Total coupons on capital securities classified as equity 2023 2022 2021 Total Total Total First call date Per security $m $m $m Perpetual subordinated contingent convertible securities1 $2,000m issued at 6.875%2 Jun 2021 $68.750 — — 69 $2,250m issued at 6.375% Sep 2024 $63.750 143 143 143 $2,450m issued at 6.375% Mar 2025 $63.750 156 156 156 $3,000m issued at 6.000% May 2027 $60.000 180 180 180 $2,350m issued at 6.250%3 Mar 2023 $62.500 52 147 147 $1,800m issued at 6.500% Mar 2028 $65.000 117 117 117 $1,500m issued at 4.600% Dec 2030 $46.000 69 69 69 $1,000m issued at 4.000%4 Mar 2026 $40.000 40 40 20 $1,000m issued at 4.700%5 Mar 2031 $47.000 47 47 24 $2,000m issued at 8.000%6 Mar 2028 $80.000 80 — — €1,500m issued at 5.250%7 Sep 2022 €52.500 — 76 93 €1,000m issued at 6.000%8 Sep 2023 €60.000 56 63 70 €1,250m issued at 4.750% Jul 2029 €47.500 64 65 72 £1,000m issued at 5.875% Sep 2026 £58.750 72 70 80 SGD1,000m issued at 4.700%9 Jun 2022 SGD47.000 — 14 35 SGD750m issued at 5.000%10 Sep 2023 SGD50.000 25 27 28 Total 1,101 1,214 1,303 1 Discretionary coupons are paid semi-annually, based on the denominations of each security. 2 This security was called by HSBC Holdings on 15 April 2021 and was redeemed and cancelled on 1 June 2021. 3 This security was called by HSBC Holdings on 30 January 2023 and was redeemed and cancelled on 23 March 2023. 4 This security was issued by HSBC Holdings on 9 March 2021. The first call period commences six calendar months prior to the reset date of 9 September 2026. 5 This security was issued by HSBC Holdings on 9 March 2021. The first call period commences six calendar months prior to the reset date of 9 September 2031. 6 This security was issued by HSBC Holdings on 7 March 2023. The first call period commences six calendar months prior to the reset date of 7 September 2028. 7 This security was called by HSBC Holdings on 9 August 2022 and was redeemed and cancelled on 16 September 2022. 8 This security was called by HSBC Holdings on 3 August 2023 and was redeemed and cancelled on 29 September 2023. 9 This security was called by HSBC Holdings on 4 May 2022 and was redeemed and cancelled on 8 June 2022. 10 This security was called by HSBC Holdings on 3 August 2023 and was redeemed and cancelled on 25 September 2023. On 21 February 2024, the Directors approved a fourth interim dividend in respect of the financial year ended 31 December 2023 of $0.31 per ordinary share, a distribution of approximately $5,913m. The fourth interim dividend for 2023 will be payable on 25 April 2024 to holders on the Principal Register in the UK, the Hong Kong Overseas Branch Register or the Bermuda Overseas Branch Register on 8 March 2024. No liability was recorded in the financial statements in respect of the fourth interim dividend for 2023. On 4 January 2024, HSBC paid a coupon on its €1,250m subordinated capital securities, representing a total distribution of €30m ($33m). No liability was recorded in the balance sheet at 31 December 2023 in respect of this coupon payment. HSBC Holdings plc Annual Report and Accounts 2023 371 Financial statements 9 Earnings per share Basic earnings per ordinary share is calculated by dividing the profit attributable to ordinary shareholders of the parent company by the weighted average number of ordinary shares outstanding, excluding own shares held. Diluted earnings per ordinary share is calculated by dividing the basic earnings, which require no adjustment for the effects of dilutive potential ordinary shares, by the weighted average number of ordinary shares outstanding, excluding own shares held, plus the weighted average number of ordinary shares that would be issued on conversion of dilutive potential ordinary shares. Basic and diluted earnings per share 2023 2022¹ 2021 Profit Number of shares Per share Profit Number of shares Per share Profit Number of shares Per share $m (millions) $ $m (millions) $ $m (millions) $ Basic2 22,432 19,478 1.15 14,346 19,849 0.72 12,607 20,197 0.62 Effect of dilutive potential ordinary shares 122 137 105 Diluted2 22,432 19,600 1.14 14,346 19,986 0.72 12,607 20,302 0.62 1 From 1 January 2023, we adopted IFRS 17 ‘Insurance Contracts’, which replaced IFRS 4 ‘Insurance Contracts’. Comparative data for the financial year ended 31 December 2022 have been restated accordingly. Comparative data for the year ended 31 December 2021 are prepared on an IFRS 4 basis. 2 Weighted average number of ordinary shares outstanding (basic) or assuming dilution (diluted). The number of anti-dilutive employee share options excluded from the weighted average number of dilutive potential ordinary shares was 23 million (2022: 9.4 million; 2021: 8.6 million). 10 Segmental analysis The Group Chief Executive, supported by the rest of the Group Executive Committee (‘GEC’), is considered the Chief Operating Decision Maker (‘CODM’) for the purposes of identifying the Group’s reportable segments. Global business results are assessed by the CODM on the basis of constant currency performance that removes the effects of currency translation from reported results. Therefore, we disclose these results on a constant currency basis as required by IFRS Accounting Standards. The 2022 and 2021 income statements are converted at the average rates of exchange for 2023, and the balance sheets at 31 December 2022 and 31 December 2021 at the prevailing rates of exchange on 31 December 2023. Our operations are closely integrated and, accordingly, the presentation of data includes internal allocations of certain items of income and expense. These allocations include the costs of certain support services and global functions to the extent that they can be meaningfully attributed to global businesses. While such allocations have been made on a systematic and consistent basis, they necessarily involve a degree of subjectivity. Costs that are not allocated to global businesses are included in Corporate Centre. Where relevant, income and expense amounts presented include the results of inter-segment funding along with inter-company and inter- business line transactions. All such transactions are undertaken on arm’s length terms. Measurement of segmental assets, liabilities, income and expenses is in accordance with the Group’s accounting policies. Shared costs are included in segments on the basis of actual recharges. The intra-Group elimination items for the global businesses are presented in Corporate Centre. Resegmentation In the first quarter of 2023, following an internal review to assess which global businesses were best suited to serve our customers’ respective needs, a portfolio of our Global Banking customers within our entities in Latin America was transferred from Global Banking and Markets to Commercial Banking for reporting purposes. Comparative data have been re-presented accordingly. Similar smaller transfers from Global Banking and Markets to Commercial Banking were also undertaken within our entities in Australia and Indonesia, where comparative data have not been re-presented. Our global businesses We provide a comprehensive range of banking and related financial services to our customers in our three global businesses. The products and services offered to customers are organised by these global businesses. – Wealth and Personal Banking (‘WPB’) provides a full range of retail banking and wealth products to our customers from personal banking to ultra high net worth individuals. Typically, customer offerings include retail banking products, such as current and savings accounts, mortgages and personal loans, credit cards, debit cards and local and international payment services. We also provide wealth management services, including insurance and investment products, global asset management services, investment management and private wealth solutions for customers with more sophisticated and international requirements. – Commercial Banking (‘CMB’) offers a broad range of products and services to serve the needs of our commercial customers, including small and medium-sized enterprises, mid-market enterprises and corporates. These include credit and lending, international trade and receivables finance, treasury management and liquidity solutions (payments and cash management and commercial cards), commercial insurance and investments. CMB also offers customers access to products and services offered by other global businesses, such as Global Banking and Markets, which include foreign exchange products, raising capital on debt and equity markets and advisory services. – Global Banking and Markets (‘GBM’) provides tailored financial solutions to major government, corporate and institutional clients and private investors worldwide. The client-focused business lines deliver a full range of banking capabilities, including financing, advisory and transaction services, a markets business that provides services in credit, rates, foreign exchange, equities, money markets and securities services, and principal investment activities. Notes on the financial statements 372 HSBC Holdings plc Annual Report and Accounts 2023 HSBC constant currency profit before tax and balance sheet data 2023 Wealth and Personal Banking Commercial Banking3 Global Banking and Markets3 Corporate Centre Total $m $m $m $m $m Net operating income/(expense) before change in expected credit losses and other credit impairment charges2 27,275 22,867 16,115 (199) 66,058 – external 19,107 24,209 28,021 (5,279) 66,058 – inter-segment 8,168 (1,342) (11,906) 5,080 — – of which: net interest income/(expense)4 20,492 17,147 7,141 (8,984) 35,796 Change in expected credit losses and other credit impairment charges (1,058) (2,062) (326) (1) (3,447) Net operating income/(expense) 26,217 20,805 15,789 (200) 62,611 Total operating expenses (14,738) (7,524) (9,865) 57 (32,070) Operating profit/(loss) 11,479 13,281 5,924 (143) 30,541 Share of profit/(loss) in associates and joint ventures less impairment5 65 (1) — (257) (193) Constant currency profit before tax 11,544 13,280 5,924 (400) 30,348 % % % % % Share of HSBC’s constant currency profit before tax 38.0 43.8 19.5 (1.3) 100.0 Constant currency cost efficiency ratio 54.0 32.9 61.2 28.6 48.5 Constant currency balance sheet data $m $m $m $m $m Loans and advances to customers (net) 454,878 309,422 173,966 269 938,535 Interests in associates and joint ventures 551 28 111 26,654 27,344 Total external assets 937,079 632,406 1,331,395 137,797 3,038,677 Customer accounts 804,863 475,666 330,522 596 1,611,647 2022¹ Net operating income/(expense) before change in expected credit losses and other credit impairment charges2 20,884 16,283 14,602 (1,898) 49,871 – external 18,299 16,973 18,744 (4,145) 49,871 – inter-segment 2,585 (690) (4,142) 2,247 — – of which: net interest income/(expense)4 15,971 11,763 4,696 (2,668) 29,762 Change in expected credit losses and other credit impairment charges (1,186) (1,862) (573) (9) (3,630) Net operating income/(expense) 19,698 14,421 14,029 (1,907) 46,241 Total operating expenses (14,248) (6,894) (9,338) (1,822) (32,302) Operating profit/(loss) 5,450 7,527 4,691 (3,729) 13,939 Share of profit/(loss) in associates and joint ventures 30 — (2) 2,574 2,602 Constant currency profit/(loss) before tax 5,480 7,527 4,689 (1,155) 16,541 % % % % % Share of HSBC’s constant currency profit before tax 33.1 45.6 28.3 (7.0) 100.0 Constant currency cost efficiency ratio 68.2 42.3 64.0 (96.0) 64.8 Constant currency balance sheet data $m $m $m $m $m Loans and advances to customers (net) 434,122 316,863 190,202 361 941,548 Interests in associates and joint ventures 514 33 93 28,143 28,783 Total external assets 893,867 620,193 1,341,575 152,049 3,007,684 Customer accounts 793,310 472,424 332,303 458 1,598,495 HSBC Holdings plc Annual Report and Accounts 2023 373 Financial statements HSBC constant currency profit before tax and balance sheet data (continued) 2021 Wealth and Personal Banking Commercial Banking Global Banking and Markets Corporate Centre Total $m $m $m $m $m Net operating income/(expense) before change in expected credit losses and other credit impairment charges2 20,972 12,699 13,086 (678) 46,079 – external 20,787 12,685 14,533 (1,926) 46,079 – inter-segment 185 14 (1,447) 1,248 — – of which: net interest income/(expense)4 13,445 8,467 3,419 (714) 24,617 Change in expected credit losses and other credit impairment charges 195 339 221 3 758 Net operating income/(expense) 21,167 13,038 13,307 (675) 46,837 Total operating expenses (15,338) (6,691) (9,255) (960) (32,244) Operating profit/(loss) 5,829 6,347 4,052 (1,635) 14,593 Share of profit in associates and joint ventures 36 1 — 2,770 2,807 Constant currency profit/(loss) before tax 5,865 6,348 4,052 1,135 17,400 % % % % % Share of HSBC’s constant currency profit before tax 33.7 36.5 23.3 6.5 100.0 Constant currency cost efficiency ratio 73.1 52.7 70.7 (141.6) 70.0 Constant currency balance sheet data $m $m $m $m $m Loans and advances to customers (net) 473,304 340,603 196,193 712 1,010,812 Interests in associates and joint ventures 493 31 101 27,036 27,661 Total external assets 905,024 605,696 1,171,909 178,074 2,860,703 Customer accounts 834,767 495,492 322,306 622 1,653,187 1 From 1 January 2023, we adopted IFRS 17 ‘Insurance Contracts’, which replaced IFRS 4 ‘Insurance Contracts’. Comparative data for the financial year ended 31 December 2022 have been restated accordingly. Comparative data for the year ended 31 December 2021 are prepared on an IFRS 4 basis. 2 Net operating income before change in expected credit losses and other credit impairment charges, also referred to as revenue. 3 In the first quarter of 2023, following an internal review to assess which global businesses were best suited to serve our customers’ respective needs, a portfolio of our customers within our entities in Latin America was transferred from GBM to CMB for reporting purposes. Comparative data have been re-presented accordingly. 4 Net interest expense recognised in Corporate Centre includes $8.7bn (2022: $2.5bn; 2021: undisclosed) of interest expense in relation to the internal cost to fund trading and fair value net assets; and the funding cost of foreign exchange swaps in our Markets Treasury function. In the second quarter of 2023, we implemented a consistent reporting approach across the most material entities that contribute to our trading and fair value net assets, which resulted in an increase to the associated funding costs reported through the intersegment elimination in Corporate Centre. 5 Includes an impairment loss of $3.0bn recognised in respect of the Group’s investment in BoCom. See Note 18 on page 391. Reported external net operating income is attributed to countries and territories on the basis of the location of the branch responsible for reporting the results or advancing the funds: 2023 2022¹ 2021 $m $m $m Reported external net operating income/(expense) by country/territory2 66,058 50,620 49,552 – UK 11,027 11,710 10,909 – Hong Kong 20,185 15,454 14,245 – US 3,816 3,893 3,795 – France 4,208 (177) 2,179 – other countries/territories 26,822 19,740 18,424 1 From 1 January 2023, we adopted IFRS 17 ‘Insurance Contracts’, which replaced IFRS 4 ‘Insurance Contracts’. Comparative data for the financial year ended 31 December 2022 have been restated accordingly. Comparative data for the year ended 31 December 2021 are prepared on an IFRS 4 basis. 2 Net operating income before change in expected credit losses and other credit impairment charges, also referred to as revenue. Constant currency results reconciliation 2023 2022¹ 2021 Reported and constant currency Constant currency Currency translation Reported Constant currency Currency translation Reported $m $m $m $m $m $m $m Revenue2 66,058 49,871 (749) 50,620 46,079 (3,473) 49,552 ECL (3,447) (3,630) (46) (3,584) 758 (170) 928 Operating expenses (32,070) (32,302) 399 (32,701) (32,244) 2,376 (34,620) Share of profit in associates and joint ventures less impairment3 (193) 2,602 (121) 2,723 2,807 (239) 3,046 Profit before tax 30,348 16,541 (517) 17,058 17,400 (1,506) 18,906 1 From 1 January 2023, we adopted IFRS 17 ‘Insurance Contracts’, which replaced IFRS 4 ‘Insurance Contracts’. Comparative data for the financial year ended 31 December 2022 have been restated accordingly. Comparative data for the year ended 31 December 2021 are prepared on an IFRS 4 basis. 2 Net operating income before change in expected credit losses and other credit impairment charges, also referred to as revenue. 3 Includes an impairment loss of $3.0bn recognised in respect of the Group’s investment in BoCom. See Note 18 on page 391. Notes on the financial statements 374 HSBC Holdings plc Annual Report and Accounts 2023 Constant currency balance sheet reconciliation 2023 2022¹ 2021 Reported and constant currency Constant currency Currency translation Reported Constant currency Currency translation Reported $m $m $m $m $m $m $m Loans and advances to customers (net) 938,535 941,548 (17,987) 923,561 1,010,812 35,002 1,045,814 Interests in associates and joint ventures 27,344 28,783 471 29,254 27,661 1,948 29,609 Total external assets 3,038,677 3,007,684 (58,398) 2,949,286 2,860,703 97,236 2,957,939 Customer accounts 1,611,647 1,598,495 (28,192) 1,570,303 1,653,187 57,387 1,710,574 1 From 1 January 2023, we adopted IFRS 17 ‘Insurance Contracts’, which replaced IFRS 4 ‘Insurance Contracts’. Comparative data for the financial year ended 31 December 2022 have been restated accordingly. Comparative data for the year ended 31 December 2021 are prepared on an IFRS 4 basis. Notable items 2023 2022 2021 $m $m $m Year ended 31 Dec Notable items Revenue Disposals, acquisitions and related costs1,2 1,298 (2,737) — Fair value movements on financial instruments3 14 (618) (221) Restructuring and other related costs — (247) (307) Disposal losses on Markets Treasury repositioning (977) — — Operating expenses Disposals, acquisitions and related costs (321) (18) — Impairment of non-financial items — — (587) Restructuring and other related costs4 136 (2,882) (1,836) Impairment of interests in associates5 (3,000) — — 1 Includes the impact of the sale of our retail banking operations in France. 2 Includes the provisional gain of $1.6bn recognised in respect of the acquisition of SVB UK. 3 Fair value movements on non-qualifying hedges in HSBC Holdings. 4 Amounts in 2023 relate to reversals of restructuring provisions recognised during 2022. 5 Relates to an impairment loss of $3.0bn recognised in respect of the Group’s investment in BoCom. See Note 18 on page 391. 11 Trading assets 2023 2022 $m $m Treasury and other eligible bills 24,433 22,897 Debt securities 106,108 78,126 Equity securities 123,663 88,026 Trading securities 254,204 189,049 Loans and advances to banks1 9,761 8,769 Loans and advances to customers1 25,194 20,275 Year ended 31 Dec 289,159 218,093 1 Loans and advances to banks and customers include reverse repos, stock borrowing and other accounts. 12 Fair values of financial instruments carried at fair value Control framework Fair values are subject to a control framework designed to ensure that they are either determined or validated by a function independent of the risk taker. Where fair values are determined by reference to externally quoted prices or observable pricing inputs to models, independent price determination or validation is used. For inactive markets, HSBC sources alternative market information, with greater weight given to information that is considered to be more relevant and reliable. Examples of the factors considered are price observability, instrument comparability, consistency of data sources, underlying data accuracy and timing of prices. For fair values determined using valuation models, the control framework includes development or validation by independent support functions of the model logic, inputs, model outputs and adjustments. Valuation models are subject to a process of due diligence before becoming operational and are calibrated against external market data on an ongoing basis. Changes in fair value are generally subject to a profit and loss analysis process and are disaggregated into high-level categories including portfolio changes, market movements and other fair value adjustments. The majority of financial instruments measured at fair value are in GBM. GBM’s fair value governance structure comprises its Finance function, Valuation Committees and a Valuation Committee Review Group. Finance is responsible for establishing procedures governing valuation and ensuring fair values are in compliance with accounting standards. The fair values are reviewed by the Valuation Committees, which consist of independent support functions. These committees are overseen by the Valuation Committee Review Group, which considers all material subjective valuations. HSBC Holdings plc Annual Report and Accounts 2023 375 Financial statements Financial liabilities measured at fair value In certain circumstances, HSBC records its own debt in issue at fair value, based on quoted prices in an active market for the specific instrument. When quoted market prices are unavailable, the own debt in issue is valued using valuation techniques, the inputs for which are either based on quoted prices in an inactive market for the instrument or are estimated by comparison with quoted prices in an active market for similar instruments. In both cases, the fair value includes the effect of applying the credit spread that is appropriate to HSBC’s liabilities. The change in fair value of issued debt securities attributable to the Group’s own credit spread is computed as follows: for each security at each reporting date, an externally verifiable price is obtained or a price is derived using credit spreads for similar securities for the same issuer. Then, using discounted cash flow, each security is valued using an appropriate market discount curve. The difference in the valuations is attributable to the Group’s own credit spread. This methodology is applied consistently across all securities. Structured notes issued and certain other hybrid instruments are reported as financial liabilities designated at fair value. The credit spread applied to these instruments is derived from the spreads at which HSBC issues structured notes. Gains and losses arising from changes in the credit spread of liabilities issued by HSBC, recorded in other comprehensive income, reverse over the contractual life of the debt, provided that the debt is not repaid at a premium or a discount. Fair value hierarchy Fair values of financial assets and liabilities are determined according to the following hierarchy: – Level 1 – valuation technique using quoted market price. These are financial instruments with quoted prices for identical instruments in active markets that HSBC can access at the measurement date. – Level 2 – valuation technique using observable inputs. These are financial instruments with quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in inactive markets and financial instruments valued using models where all significant inputs are observable. – Level 3 – valuation technique with significant unobservable inputs. These are financial instruments valued using valuation techniques where one or more significant inputs are unobservable. Financial instruments carried at fair value and bases of valuation 2023 20221 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total $m $m $m $m $m $m $m $m Recurring fair value measurements at 31 Dec Assets Trading assets 202,020 82,833 4,306 289,159 148,592 64,684 4,817 218,093 Financial assets designated and otherwise mandatorily measured at fair value through profit or loss 27,030 63,825 19,788 110,643 23,146 59,548 17,407 100,101 Derivatives 931 226,714 2,069 229,714 2,917 279,278 1,964 284,159 Financial investments 215,228 76,591 2,618 294,437 181,659 71,040 2,961 255,660 Liabilities Trading liabilities 53,354 19,318 478 73,150 44,787 27,092 474 72,353 Financial liabilities designated at fair value 1,266 129,232 10,928 141,426 1,125 115,764 10,432 127,321 Derivatives 1,918 230,285 2,569 234,772 2,399 280,443 2,920 285,762 1 From 1 January 2023, we adopted IFRS 17 ‘Insurance Contracts’, which replaced IFRS 4 ‘Insurance Contracts’. We have restated 2022 comparative data. The table below provides the fair value levelling of assets held for sale and liabilities of disposal groups that have been classified as held for sale in accordance with IFRS 5. For further details, see Note 23. Financial instruments carried at fair value and bases of valuation – assets and liabilities held for sale 2023 2022 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total $m $m $m $m $m $m $m $m Recurring fair value measurements at 31 Dec Assets Trading assets 2,403 61 — 2,465 2,932 244 — 3,176 Financial assets designated and otherwise mandatorily measured at fair value through profit or loss — 15 49 64 — 14 47 61 Derivatives — 528 — 528 — 866 — 866 Financial investments 9,357 — 28 9,385 11,184 — — 11,184 Liabilities Trading liabilities 1,352 64 — 1,417 2,572 182 — 2,754 Financial liabilities designated at fair value — 2,370 — 2,370 — 3,523 — 3,523 Derivatives — 615 — 615 — 813 — 813 Notes on the financial statements 376 HSBC Holdings plc Annual Report and Accounts 2023 Transfers between Level 1 and Level 2 fair values Assets Liabilities Financial investments Trading assets Designated and otherwise mandatorily measured at fair value Derivatives Trading liabilities Designated at fair value Derivatives $m $m $m $m $m $m $m At 31 Dec 2023 Transfers from Level 1 to Level 2 13,200 8,066 1,709 — 54 — — Transfers from Level 2 to Level 1 9,975 5,758 2,477 — 309 — — At 31 Dec 2022 Transfers from Level 1 to Level 2 4,721 5,284 2,565 — 113 — — Transfers from Level 2 to Level 1 8,208 5,964 3,340 — 233 — — Transfers between levels of the fair value hierarchy are deemed to occur at the end of each quarterly reporting period. Transfers into and out of levels of the fair value hierarchy are primarily attributable to observability of valuation inputs and price transparency. Fair value adjustments We adopt the use of fair value adjustments when we take into consideration additional factors not incorporated within the valuation model that would otherwise be considered by a market participant. We classify fair value adjustments as either ‘risk-related’ or ‘model-related’. The majority of these adjustments relate to GBM. Movements in the amount of fair value adjustments do not necessarily translate in equivalent movements of profits or losses within the income statement, as these movements can be compensated by other related profits or loss effects. For example, as models are enhanced, fair value adjustments may no longer be required. Similarly, fair value adjustments will decrease when the related positions are unwound, but this may not result in profit or loss. Global Banking and Markets fair value adjustments 2023 2022 GBM Corporate Centre GBM Corporate Centre $m $m $m $m Type of adjustment Risk-related 692 41 650 40 – bid-offer 414 — 426 — – uncertainty 75 3 86 — – credit valuation adjustment 164 35 245 35 – debit valuation adjustment (54) — (175) — – funding fair value adjustment 93 3 68 5 Model-related 63 — 61 — – model limitation 63 — 61 — Inception profit (Day 1 P&L reserves) 86 — 97 — At 31 Dec 841 41 808 40 The increase in fair value adjustments was predominantly driven by the reduction in the debit valuation adjustment including a consideration of the overlap with the funding fair value adjustment. This was partly offset by reductions from changes to exposure, and tightening of credit and liquidity market spreads. Bid-offer IFRS 13 ‘Fair Value Measurement’ requires the use of the price within the bid-offer spread that is most representative of fair value. Valuation models will typically generate mid-market values. The bid-offer adjustment reflects the extent to which bid-offer costs would be incurred if substantially all residual net portfolio market risks were closed using available hedging instruments or by disposing of or unwinding the position. Uncertainty Certain model inputs may be less readily determinable from market data and/or the choice of model itself may be more subjective. In these circumstances, an adjustment may be necessary to reflect the likelihood that market participants would adopt more conservative values for uncertain parameters and/or model assumptions than those used in HSBC’s valuation model. Credit and debit valuation adjustments The credit valuation adjustment (‘CVA’) is an adjustment to the valuation of over-the-counter (‘OTC’) derivative contracts to reflect the possibility that the counterparty may default and that HSBC may not receive the full market value of the transactions. The debit valuation adjustment (‘DVA’) is an adjustment to the valuation of OTC derivative contracts to reflect the possibility that HSBC may default, and that it may not pay the full market value of the transactions. The DVA considers the overlap with the funding fair value adjustment. HSBC calculates a separate CVA and DVA for each legal entity, and for each counterparty to which the entity has exposure. With the exception of central clearing parties, all third-party counterparties are included in the CVA and DVA calculations, and these adjustments are not netted across Group entities. HSBC calculates the CVA by applying the probability of default (‘PD’) of the counterparty, conditional on the non-default of HSBC, to HSBC’s expected positive exposure to the counterparty and multiplying the result by the loss expected in the event of default. Conversely, HSBC calculates the DVA by applying the PD of HSBC, conditional on the non-default of the counterparty, to the expected positive exposure of the counterparty to HSBC and multiplying the result by the loss expected in the event of default. Both calculations are performed over the life of the potential exposure. For most products HSBC uses a simulation methodology, which incorporates a range of potential exposures over the life of the portfolio, to calculate the expected positive exposure to a counterparty. The simulation methodology includes credit mitigants, such as counterparty netting agreements and collateral agreements with the counterparty. HSBC Holdings plc Annual Report and Accounts 2023 377 Financial statements The methodologies do not, in general, account for ‘wrong-way risk’. Wrong-way risk is an adverse correlation between the counterparty’s probability of default and the mark-to-market value of the underlying transaction. The risk can either be general, perhaps related to the currency of the issuer country, or specific to the transaction concerned. When there is significant wrong-way risk, a trade-specific approach is applied to reflect this risk in the valuation. Funding fair value adjustment The funding fair value adjustment (‘FFVA’) is calculated by applying future market funding spreads to the expected future funding exposure of any uncollateralised component of the OTC derivative portfolio. The expected future funding exposure is calculated by a simulation methodology, where available, and is adjusted for events that may terminate the exposure, such as the default of HSBC or the counterparty. Model limitation Models used for portfolio valuation purposes may be based upon a simplified set of assumptions that do not capture all current and future material market characteristics. In these circumstances, model limitation adjustments are adopted. Inception profit (Day 1 P&L reserves) Inception profit adjustments are adopted when the fair value estimated by a valuation model is based on one or more significant unobservable inputs. The accounting for inception profit adjustments is discussed in Note 1. Fair value valuation bases Financial instruments measured at fair value using a valuation technique with significant unobservable inputs – Level 3 Assets Liabilities Financial investments Trading assets Designated and otherwise mandatorily measured at fair value through profit or loss Derivatives Total Trading liabilities Designated at fair value Derivatives Total $m $m $m $m $m $m $m $m $m Private equity including strategic investments 507 7 17,640 — 18,154 — 1 — 1 Asset-backed securities 309 128 8 — 445 — — — — Structured notes — — 3 — 3 — 10,331 — 10,331 Other derivatives — — — 2,069 2,069 — — 2,569 2,569 Other portfolios 1,802 4,171 2,137 — 8,110 478 596 — 1,074 At 31 Dec 2023 2,618 4,306 19,788 2,069 28,781 478 10,928 2,569 13,975 Private equity including strategic investments 647 19 15,653 — 16,319 92 — — 92 Asset-backed securities 438 208 95 — 741 — — — — Structured notes — — — — — — 10,432 — 10,432 Other derivatives — — — 1,964 1,964 — — 2,920 2,920 Other portfolios 1,876 4,590 1,659 — 8,125 382 — — 382 At 31 Dec 2022 2,961 4,817 17,407 1,964 27,149 474 10,432 2,920 13,826 Level 3 instruments are present in both ongoing and legacy businesses. Loans held for securitisation, derivatives with monolines, certain ‘other derivatives’ and predominantly all Level 3 asset-backed securities are legacy positions. HSBC has the capability to hold these positions. Private equity including strategic investments The fair value of a private equity investment (including strategic investments) is estimated on the basis of an analysis of the investee’s financial position and results, risk profile, prospects and other factors; by reference to market valuations for similar entities quoted in an active market; the price at which similar companies have changed ownership; or from published net asset values (‘NAV’) received. If necessary, adjustments are made to the NAV of funds to obtain the best estimate of fair value. Asset-backed securities While quoted market prices are generally used to determine the fair value of the asset-backed securities (‘ABSs’), valuation models are used to substantiate the reliability of the limited market data available and to identify whether any adjustments to quoted market prices are required. For certain ABSs, such as residential mortgage-backed securities, the valuation uses an industry standard model with assumptions relating to prepayment speeds, default rates and loss severity based on collateral type, and performance, as appropriate. The valuations output is benchmarked for consistency against observable data for securities of a similar nature. Structured notes The fair value of Level 3 structured notes is derived from the fair value of the underlying debt security, and the fair value of the embedded derivative is determined as described in the paragraph below on derivatives. These structured notes comprise principally equity-linked notes issued by HSBC, which provide the counterparty with a return linked to the performance of equity securities and other portfolios. Examples of the unobservable parameters include long-dated equity volatilities and correlations between equity prices, and interest and foreign exchange rates. Derivatives OTC derivative valuation models calculate the present value of expected future cash flows, based upon ‘no arbitrage’ principles. For many vanilla derivative products, the modelling approaches used are standard across the industry. For more complex derivative products, there may be some differences in market practice. Inputs to valuation models are determined from observable market data wherever possible, including prices available from exchanges, dealers, brokers or providers of consensus pricing. Certain inputs may not be observable in the market directly, but can be determined from observable prices via model calibration procedures or estimated from historical data or other sources. Notes on the financial statements 378 HSBC Holdings plc Annual Report and Accounts 2023 Reconciliation of fair value measurements in Level 3 of the fair value hierarchy Movement in Level 3 financial instruments Assets Liabilities Financial investments Trading assets Designated and otherwise mandatorily measured at fair value through profit or loss Derivatives Trading liabilities Designated at fair value Derivatives $m $m $m $m $m $m $m At 1 Jan 2023 2,961 4,817 17,407 1,964 474 10,432 2,920 Total gains/(losses) recognised in profit or loss (44) 266 921 692 75 97 910 – net income/(losses) from financial instruments held for trading or managed on a fair value basis — 266 — 692 75 97 910 – changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss — — 921 — — — — – gains less losses from financial investments at fair value through other comprehensive income (44) — — — — — — Total gains/(losses) recognised in other comprehensive income (‘OCI’)1 28 108 87 81 24 523 111 – financial investments: fair value gains/(losses) (44) — — — — 335 — – exchange differences 72 108 87 81 24 188 111 Purchases 353 2,276 3,555 — 291 — — New issuances — 2 — — 2 5,389 — Sales (290) (2,478) (658) — (320) (2) — Settlements (352) (872) (1,886) (1,018) (74) (3,258) (1,565) Transfers out (662) (922) (156) (240) (45) (2,881) (358) Transfers in 624 1,109 518 590 51 628 551 At 31 Dec 2023 2,618 4,306 19,788 2,069 478 10,928 2,569 Unrealised gains/(losses) recognised in profit or loss relating to assets and liabilities held at 31 Dec 2023 — (152) 82 737 — (433) (903) – net income/(losses) from financial instruments held for trading or managed on a fair value basis — (152) — 737 — — (903) – changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss — — 82 — — (433) — At 1 Jan 2022 3,389 2,662 14,238 2,478 785 7,880 3,088 IFRS 17 impacts (12) — 1,468 — — — — At 1 Jan 2022 (as restated) 3,377 2,662 15,706 2,478 785 7,880 3,088 Total gains/(losses) recognised in profit or loss (4) (245) 132 390 (52) (1,334) 1,014 – net income/(losses) from financial instruments held for trading or managed on a fair value basis — (245) — 390 (52) — 1,014 – changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss — — 132 — — (1,334) — – gains less losses from financial investments at fair value through other comprehensive income (4) — — — — — — Total gains/(losses) recognised in other comprehensive income (‘OCI’)1 (325) (137) (217) (219) (11) (345) (226) – financial investments: fair value gains/(losses) (202) — — — — 82 — – exchange differences (123) (137) (217) (219) (11) (427) (226) Purchases 1,048 3,436 4,410 — 178 — — New issuances 1 — — — 8 4,183 — Sales (240) (1,102) (801) — (152) (94) — Settlements (464) (1,273) (1,883) (918) (644) 182 (993) Transfers out (489) (442) (76) (409) (18) (1,296) (632) Transfers in 57 1,918 136 642 380 1,256 669 At 31 Dec 2022 2,961 4,817 17,407 1,964 474 10,432 2,920 Unrealised gains/(losses) recognised in profit or loss relating to assets and liabilities held at 31 Dec 2022 — (100) (158) 707 2 100 2,779 – net income/(losses) from financial instruments held for trading or managed on a fair value basis — (100) — 707 2 — 2,779 – changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss — — (158) — — 100 — 1 Included in ‘financial investments: fair value gains/(losses)’ in the current year and ‘exchange differences’ in the consolidated statement of comprehensive income. Transfers between levels of the fair value hierarchy are deemed to occur at the end of each quarterly reporting period. Transfers into and out of levels of the fair value hierarchy are primarily attributable to observability of valuation inputs and price transparency. HSBC Holdings plc Annual Report and Accounts 2023 379 Financial statements Effect of changes in significant unobservable assumptions to reasonably possible alternatives Sensitivity of fair values to reasonably possible alternative assumptions 2023 2022 Reflected in profit or loss Reflected in OCI Reflected in profit or loss Reflected in OCI Favourable changes Un- favourable changes Favourable changes Un- favourable changes Favourable changes Un- favourable changes Favourable changes Un- favourable changes $m $m $m $m $m $m $m $m Derivatives, trading assets and trading liabilities1 492 (531) — — 264 (291) — — Financial assets and liabilities designated and otherwise mandatorily measured at fair value through profit or loss 1,092 (1,100) — — 981 (978) — — Financial investments 13 (12) 61 (66) 11 (11) 65 (55) At 31 Dec 1,597 (1,643) 61 (66) 1,256 (1,280) 65 (55) 1 ‘Derivatives, trading assets and trading liabilities’ are presented as one category to reflect the manner in which these instruments are risk-managed. The sensitivity analysis aims to measure a range of fair values consistent with the application of a 95% confidence interval. Methodologies take account of the nature of the valuation technique employed, as well as the availability and reliability of observable proxy and historical data. When the fair value of a financial instrument is affected by more than one unobservable assumption, the above table reflects the most favourable or the most unfavourable change from varying the assumptions individually. Key unobservable inputs to Level 3 financial instruments The following table lists key unobservable inputs to Level 3 financial instruments and provides the range of those inputs at 31 December 2023. Quantitative information about significant unobservable inputs in Level 3 valuations Fair value 2023 2022 Assets Liabilities Key valuation techniques Key unobservable inputs Full range of inputs Full range of inputs $m $m Lower Higher Lower Higher Private equity including strategic investments 18,154 1 See below See below Asset-backed securities 445 — – collateralised loan/debt obligation 44 — Market proxy Bid quotes — 94 — 92 – other ABSs 401 — Market proxy Bid quotes — 220 — 99 Structured notes 3 10,331 – equity-linked notes 3 7,054 Model – Option model Equity volatility 6% 154% 6% 142% Model – Option model Equity correlation 34% 100% 32% 99% – Foreign exchange-linked notes — 1,733 Model – Option model Foreign exchange volatility 1% 34% 3% 37% – other — 1,544 Derivatives 2,069 2,569     – interest rate derivatives 864 784     securitisation swaps 146 136 Model – Discounted cash flow Prepayment rate 5% 10% 5% 10% long-dated swaptions 57 69 Model – Option model Interest rate volatility 11% 37% 8% 53% other 661 579 – Foreign exchange derivatives 308 427 Foreign exchange options 255 356 Model – Option model Foreign exchange volatility 1% 31% 1% 46% other 53 71 – equity derivatives 600 981 long-dated single stock options 391 609 Model – Option model Equity volatility 6% 110% 7% 153% other 209 372 – credit derivatives 297 377 Other portfolios 8,110 1,074 – repurchase agreements 1,090 310 Model – Discounted cash flow Interest rate curve 3% 8% 1% 9% – bonds 3,278 1 Market proxy Mid quotes — 101 — 102 – other1 3,742 763 At 31 Dec 2023 28,781 13,975 1 ‘Other’ includes a range of smaller asset holdings. The range of values above shows the highest and lowest unobservable inputs that have been used to value significant Level 3 exposures and reflects the diversity of the underlying financial instruments in scope and subsequent differentiation in pricing. Notes on the financial statements 380 HSBC Holdings plc Annual Report and Accounts 2023 Private equity including strategic investments Given the bespoke nature of the analysis in respect of each private equity holding, it is not practical to quote a range of key unobservable inputs. The valuation approach includes using a range of inputs that include company-specific financials, traded comparable companies multiples, published net asset values and qualitative assumptions, which are not directly comparable or quantifiable. Prepayment rates Prepayment rates are a measure of the anticipated future speed at which a loan portfolio will be repaid in advance of the due date. They vary according to the nature of the loan portfolio and expectations of future market conditions, and may be estimated using a variety of evidence, such as prepayment rates implied from proxy observable security prices, current or historical prepayment rates and macroeconomic modelling. Market proxy Market proxy pricing may be used for an instrument when specific market pricing is not available but there is evidence from instruments with common characteristics. In some cases it might be possible to identify a specific proxy, but more generally evidence across a wider range of instruments will be used to understand the factors that influence current market pricing and the manner of that influence. Volatility Volatility is a measure of the anticipated future variability of a market price. It varies by underlying reference market price, and by strike and maturity of the option. Certain volatilities, typically those of a longer-dated nature, are unobservable and are estimated from observable data. The range of unobservable volatilities reflects the wide variation in volatility inputs by reference market price. Correlation Correlation is a measure of the inter-relationship between two market variables and is expressed as a number between minus one and one. It is used to value more complex instruments where the payout is dependent upon more than one market variable. There is a wide range of instruments for which correlation is an input, and consequently a wide range of both same-asset correlations and cross-asset correlations is used. In general, the range of same-asset correlations will be narrower than the range of cross-asset correlations. Unobservable correlations may be estimated based upon a range of evidence, including consensus pricing services, HSBC trade prices, proxy correlations and examination of historical price relationships. The range of unobservable correlations quoted in the table reflects the wide variation in correlation inputs by market variable pair. Credit spread Credit spread is the premium over a benchmark interest rate required by the market to accept lower credit quality. In a discounted cash flow model, the credit spread increases the discount factors applied to future cash flows, thereby reducing the value of an asset. Credit spreads may be implied from market prices and may not be observable in more illiquid markets. Inter-relationships between key unobservable inputs Key unobservable inputs to Level 3 financial instruments may not be independent of each other. As described above, market variables may be correlated. This correlation typically reflects the manner in which different markets tend to react to macroeconomic or other events. Furthermore, the effect of changing market variables on the HSBC portfolio will depend on HSBC’s net risk position in respect of each variable. HSBC Holdings Basis of valuing HSBC Holdings’ financial assets and liabilities measured at fair value 2023 2022 $m $m Valuation technique using observable inputs: Level 2 Assets at 31 Dec – derivatives 3,344 3,801 – designated and otherwise mandatorily measured at fair value through profit or loss 59,879 52,322 Liabilities at 31 Dec – designated at fair value 43,638 32,123 – derivatives 6,090 6,922 HSBC Holdings plc Annual Report and Accounts 2023 381 Financial statements 13 Fair values of financial instruments not carried at fair value Fair values of financial instruments not carried at fair value and bases of valuation Fair value Carrying amount Quoted market price Level 1 Observable inputs Level 2 Significant unobservable inputs Level 3 Total $m $m $m $m $m At 31 Dec 2023 Assets Loans and advances to banks 112,902 2 111,263 1,479 112,744 Loans and advances to customers 938,535 — 13,258 911,124 924,382 Reverse repurchase agreements – non-trading 252,217 — 252,243 — 252,243 Financial investments – at amortised cost 148,326 115,383 30,765 440 146,588 Liabilities Deposits by banks 73,163 — 73,176 — 73,176 Customer accounts 1,611,647 — 1,611,795 — 1,611,795 Repurchase agreements – non-trading 172,100 — 172,081 — 172,081 Debt securities in issue 93,917 — 93,196 706 93,902 Subordinated liabilities 24,954 — 27,151 — 27,151 At 31 Dec 20221 Assets Loans and advances to banks 104,475 4 103,641 814 104,459 Loans and advances to customers 923,561 — 8,791 903,107 911,898 Reverse repurchase agreements – non-trading 253,754 — 253,668 — 253,668 Financial investments – at amortised cost 109,066 84,087 21,850 475 106,412 Liabilities Deposits by banks 66,722 — 66,831 — 66,831 Customer accounts 1,570,303 — 1,570,209 — 1,570,209 Repurchase agreements – non-trading 127,747 — 127,500 — 127,500 Debt securities in issue 78,149 — 76,640 381 77,021 Subordinated liabilities 22,290 — 22,723 — 22,723 1 From 1 January 2023, we adopted IFRS 17 ‘Insurance Contracts’, which replaced IFRS 4 ‘Insurance Contracts’. Comparative data for the financial year ended 31 December 2022 have been restated accordingly. Comparative data for the year ended 31 December 2021 are prepared on an IFRS 4 basis. Fair values of financial instruments not carried at fair value and bases of valuation – assets and disposal groups held for sale Fair value Carrying amount Quoted market price Level 1 Observable inputs Level 2 Significant unobservable inputs Level 3 Total $m $m $m $m $m At 31 Dec 2023 Assets Loans and advances to banks 10,487 — 10,487 — 10,487 Loans and advances to customers 73,376 — 90 72,200 72,290 Reverse repurchase agreements – non-trading 2,723 — 2,723 — 2,723 Financial investments – at amortised cost 7,624 7,530 — 5 7,535 Liabilities Deposits by banks 78 — 78 — 78 Customer accounts 85,950 — 86,475 — 86,475 Repurchase agreements – non-trading 2,768 — 2,768 — 2,768 Debt securities in issue 9,084 — 8,820 — 8,820 Subordinated liabilities 8 — 7 — 7 At 31 Dec 2022 Assets Loans and advances to banks 253 — 257 — 257 Loans and advances to customers 80,687 — 111 78,048 78,159 Reverse repurchase agreements – non-trading 4,646 — 4,646 — 4,646 Financial investments – at amortised cost 6,165 6,042 — — 6,042 Liabilities Deposits by banks 64 — 64 — 64 Customer accounts 85,274 — 85,303 — 85,303 Repurchase agreements – non-trading 3,266 — 3,266 — 3,266 Debt securities in issue 12,928 — 12,575 — 12,575 Subordinated liabilities 8 — 7 — 7 Other financial instruments not carried at fair value are typically short term in nature and reprice to current market rates frequently. Accordingly, their carrying amount is a reasonable approximation of fair value. They include cash and balances at central banks, items in the course of collection from and transmission to other banks, Hong Kong Government certificates of indebtedness and Hong Kong currency notes in circulation, all of which are measured at amortised cost. Notes on the financial statements 382 HSBC Holdings plc Annual Report and Accounts 2023 Valuation Fair value is an estimate of the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This may be different from the theoretical economic value attributed from an instrument’s cash flows over its expected future life. Our valuation methodologies and assumptions in determining fair values for which no observable market prices are available may differ from those of other companies. Loans and advances to banks and customers To determine the fair value of loans and advances to banks and customers, loans are segregated into portfolios of similar characteristics. Fair values are based on observable market transactions, when available. When they are unavailable, fair values are estimated using valuation models incorporating a range of input assumptions. These assumptions may include: value estimates from third-party brokers reflecting over- the-counter trading activity; forward-looking discounted cash flow models, taking account of expected customer prepayment rates, using assumptions that HSBC believes are consistent with those that would be used by market participants in valuing such loans; recent origination pricing for similar loans; and trading inputs from other market participants including observed primary and secondary trades. From time to time, we may engage a third-party valuation specialist to measure the fair value of a pool of loans. The fair value of loans reflects expected credit losses at the balance sheet date and estimates of market participants’ expectations of credit losses over the life of the loans, and the fair value effect of repricing between origination and the balance sheet date. For credit-impaired loans, fair value is estimated by discounting the future cash flows over the time period they are expected to be recovered. Financial investments The fair values of listed financial investments are determined using bid market prices. The fair values of unlisted financial investments are determined using valuation techniques that incorporate the prices and future earnings streams of equivalent quoted securities. Deposits by banks and customer accounts The fair values of on-demand deposits are approximated by their carrying amount. For deposits with longer-term maturities, fair values are estimated using discounted cash flows, applying current rates offered for deposits of similar remaining maturities. Debt securities in issue and subordinated liabilities Fair values in debt securities in issue and subordinated liabilities are determined using quoted market prices at the balance sheet date where available, or by reference to quoted market prices for similar instruments. Repurchase and reverse repurchase agreements – non-trading Fair values of repurchase and reverse repurchase agreements that are held on a non-trading basis provide approximate carrying amounts. This is due to the fact that balances are generally short dated. HSBC Holdings The methods used by HSBC Holdings to determine fair values of financial instruments for the purposes of measurement and disclosure are described above. Fair values of HSBC Holdings’ financial instruments not carried at fair value on the balance sheet 2023 2022 Carrying amount Fair value1 Carrying amount Fair value1 $m $m $m $m Assets at 31 Dec Loans and advances to HSBC undertakings 27,354 27,878 26,765 26,962 Financial investments – at amortised cost 19,558 19,531 19,466 19,314 Liabilities at 31 Dec Debt securities in issue 65,239 65,172 66,938 65,364 Subordinated liabilities 24,439 26,651 19,727 20,644 1 Fair values (other than Level 1 financial investments) were determined using valuation techniques with observable inputs (Level 2). 14 Financial assets designated and otherwise mandatorily measured at fair value through profit or loss 2023 2022¹ Designated at fair value Mandatorily measured at fair value Total Designated at fair value Mandatorily measured at fair value Total $m $m $m $m $m $m Securities 2,353 101,152 103,505 3,096 91,936 95,032 – treasury and other eligible bills 695 724 1,419 649 869 1,518 – debt securities 1,658 60,045 61,703 2,447 56,633 59,080 – equity securities — 40,383 40,383 — 34,434 34,434 Loans and advances to banks and customers 371 5,495 5,866 — 3,455 3,455 Other — 1,272 1,272 — 1,614 1,614 At 31 Dec 2,724 107,919 110,643 3,096 97,005 100,101 1 From 1 January 2023, we adopted IFRS 17 ‘Insurance Contracts’, which replaced IFRS 4 ‘Insurance Contracts’. We have restated 2022 comparative data. HSBC Holdings plc Annual Report and Accounts 2023 383 Financial statements 15 Derivatives Notional contract amounts and fair values of derivatives by product contract type held by HSBC Notional contract amount Fair value – Assets Fair value – Liabilities Trading Hedging Trading Hedging Total Trading Hedging Total $m $m $m $m $m $m $m $m Foreign exchange 9,463,768 63,547 99,014 935 99,949 99,949 780 100,729 Interest rate 14,853,397 361,312 223,534 5,119 228,653 225,443 4,080 229,523 Equities 677,149 — 14,427 — 14,427 17,603 — 17,603 Credit 153,606 — 1,351 — 1,351 1,861 — 1,861 Commodity and other 90,007 — 1,820 — 1,820 1,542 — 1,542 Gross total fair values 25,237,927 424,859 340,146 6,054 346,200 346,398 4,860 351,258 Offset (Note 31) (116,486) (116,486) At 31 Dec 2023 25,237,927 424,859 340,146 6,054 229,714 346,398 4,860 234,772 Foreign exchange 8,434,453 38,924 122,206 525 122,731 123,088 166 123,254 Interest rate 15,213,232 276,589 285,449 5,066 290,515 287,876 3,501 291,377 Equities 570,410 — 9,325 — 9,325 9,176 — 9,176 Credit 183,995 — 1,091 — 1,091 1,264 — 1,264 Commodity and other 78,414 — 1,484 — 1,484 1,678 — 1,678 Gross total fair values 24,480,504 315,513 419,555 5,591 425,146 423,082 3,667 426,749 Offset (Note 31) (140,987) (140,987) At 31 Dec 2022 24,480,504 315,513 419,555 5,591 284,159 423,082 3,667 285,762 1 From 1 January 2023, we adopted IFRS 17 ‘Insurance Contracts’, which replaced IFRS 4 ‘Insurance Contracts’. We have restated 2022 comparative data. The notional contract amounts of derivatives held for trading purposes and derivatives designated in hedge accounting relationships indicate the nominal value of transactions outstanding at the balance sheet date. They do not represent amounts at risk. Derivative assets and liabilities decreased during 2023, driven by yield curve movements and changes in foreign exchange rates. Notional contract amounts and fair values of derivatives by product contract type held by HSBC Holdings with subsidiaries Notional contract amount Assets Liabilities Trading Hedging Trading Hedging Total Trading Hedging Total $m $m $m $m $m $m $m $m Foreign exchange 66,711 — 486 — 486 1,705 — 1,705 Interest rate 33,480 92,268 1,730 1,128 2,858 747 3,638 4,385 At 31 Dec 2023 100,191 92,268 2,216 1,128 3,344 2,452 3,638 6,090 Foreign exchange 60,630 — 502 — 502 1,683 — 1,683 Interest rate 34,322 81,873 2,386 913 3,299 826 4,413 5,239 At 31 Dec 2022 94,952 81,873 2,888 913 3,801 2,509 4,413 6,922 Use of derivatives For details regarding the use of derivatives, see page 220 under ‘Market risk’. Trading derivatives Most of HSBC’s derivative transactions relate to sales and trading activities. Sales activities include the structuring and marketing of derivative products to customers to enable them to take, transfer, modify or reduce current or expected risks. Trading activities include market-making and risk management. Market-making entails quoting bid and offer prices to other market participants for the purpose of generating revenue based on spread and volume. Risk management activity is undertaken to manage the risk arising from client transactions, with the principal purpose of retaining client margin. Other derivatives classified as held for trading include non-qualifying hedging derivatives. Substantially all of HSBC Holdings’ derivatives entered into with subsidiaries are managed in conjunction with financial liabilities. Notes on the financial statements 384 HSBC Holdings plc Annual Report and Accounts 2023 Hedge accounting derivatives HSBC applies hedge accounting to manage the following risks: interest rate and foreign exchange risks. Further details of how these risks arise and how they are managed by the Group can be found in the ‘Risk review’. Hedged risk components HSBC designates a portion of cash flows of a financial instrument or a group of financial instruments for a specific interest rate or foreign currency risk component in a fair value or cash flow hedge. The designated risks and portions are either contractually specified or otherwise separately identifiable components of the financial instrument that are reliably measurable. Risk-free or benchmark interest rates generally are regarded as being both separately identifiable and reliably measurable, except for the Interest Rate Benchmark Reform Phase 2 transition where HSBC designates alternative benchmark rates as the hedged risk which may not have been separately identifiable upon initial designation, provided HSBC reasonably expects it will meet the requirement within 24 months from the first designation date. The designated risk components account for a significant portion of the overall changes in fair value or cash flows of the hedged items. HSBC uses net investment hedges to hedge the structural foreign exchange risk related to net investments in foreign operations including subsidiaries and branches whose functional currencies are different from that of the parent. When hedging with foreign exchange forward contracts, the spot rate component of the foreign exchange risk is designated for an amount of net assets as the hedged risk. Sources of hedge ineffectiveness may arise from basis risk, including but not limited to the discount rates used for calculating the fair value of derivatives, hedges using instruments with a non-zero fair value, and notional and timing differences between the hedged items and hedging instruments. Fair value hedges HSBC enters into fixed-for-floating-interest-rate swaps to manage the exposure to changes in fair value caused by movements in market interest rates on certain fixed-rate financial instruments that are not measured at fair value through profit or loss, including debt securities held and issued. HSBC hedging instrument by hedged risk Hedging instrument Carrying amount Notional amount1 Assets Liabilities Balance sheet presentation Change in fair value2 Hedged risk $m $m $m $m Interest rate3 172,985 3,729 2,965 Derivatives (1,043) At 31 Dec 2023 172,985 3,729 2,965 (1,043) Interest rate3 162,062 4,973 2,573 Derivatives 4,064 At 31 Dec 2022 162,062 4,973 2,573 4,064 1 The notional contract amounts of derivatives designated in qualifying hedge accounting relationships indicate the nominal value of transactions outstanding at the balance sheet date. They do not represent amounts at risk. 2 Used in effectiveness testing, which uses the full fair value change of the hedging instrument not excluding any component. 3 The hedged risk ‘interest rate’ includes inflation risk. HSBC hedged item by hedged risk Hedged item Ineffectiveness Carrying amount Accumulated fair value hedge adjustments included in carrying amount1 Change in fair value2 Recognised in profit and loss Assets Liabilities Assets Liabilities Balance sheet presentation Profit and loss presentation Hedged risk $m $m $m $m $m $m Interest rate3 82,321 (2,282) Financial investments - measured at fair value through other comprehensive income 2,053 5 Net income from financial instruments held for trading or managed on a fair value basis 514 32 Financial investments - measured at amortised cost 32 4,701 (18) Loans and advances to customers 122 — — Reverse repurchase agreements – non- trading 15 64,269 (2,147) Debt securities in issue (1,179) — — Deposits by banks — — — Subordinated liabilities 5 At 31 Dec 2023 87,536 64,269 (2,268) (2,147) 1,048 5 HSBC Holdings plc Annual Report and Accounts 2023 385 Financial statements HSBC hedged item by hedged risk (continued) Hedged item Ineffectiveness Carrying amount Accumulated fair value hedge adjustments included in carrying amount1 Change in fair value2 Recognised in profit and loss Assets Liabilities Assets Liabilities Balance sheet presentation Profit and loss presentation Hedged risk $m $m $m $m $m $m Interest rate3 82,792 (5,100) Financial investments - measured at fair value through other comprehensive income (8,005) (59) Net income from financial instruments held for trading or managed on a fair value basis 3,415 (210) Loans and advances to customers (233) 519 (18) Reverse repurchase agreements – non-trading (17) 49,180 (2,006) Debt securities in issue 4,138 83 — Deposits by banks (5) At 31 Dec 2022 86,726 49,263 (5,328) (2,006) (4,122) (59) 1 The accumulated amount of fair value adjustments remaining in the statement of financial position for hedged items that have ceased to be adjusted for hedging gains and losses were liabilities of $136m (2022: $252m) for FVOCI assets and liabilities of $1,256m (2022: $916m) for debt issued. 2 Used in effectiveness testing, which comprise an amount attributable to the designated hedged risk that can be a risk component. 3 The hedged risk ‘interest rate’ includes inflation risk. HSBC Holdings hedging instrument by hedged risk Hedging instrument Carrying amount Notional amount1,2 Assets Liabilities Balance sheet presentation Change in fair value3 Hedged risk $m $m $m $m Interest rate4 92,268 1,128 3,638 Derivatives 1,426 At 31 Dec 2023 92,268 1,128 3,638 1,426 Interest rate4 81,873 913 4,413 Derivatives (5,599) At 31 Dec 2022 81,873 913 4,413 (5,599) 1 The notional contract amounts of derivatives designated in qualifying hedge accounting relationships indicate the nominal value of transactions outstanding at the balance sheet date. They do not represent amounts at risk. 2 The notional amount of non-dynamic fair value hedges is equal to $92,268m (2022: $81,873m), of which the weighted-average maturity date is May 2029 and the weighted-average swap rate is 2.46% (2022: 2.33%). The majority of these hedges are internal to the Group. 3 Used in effectiveness testing, comprising the full fair value change of the hedging instrument not excluding any component. 4 The hedged risk ‘interest rate’ includes foreign exchange risk. HSBC Holdings hedged item by hedged risk Hedged item Ineffectiveness Carrying amount Accumulated fair value hedge adjustments included in carrying amount1 Change in fair value2 Recognised in profit and loss Assets Liabilities Assets Liabilities Balance sheet presentation Profit and loss presentation Hedged risk $m $m $m $m $m $m Interest rate3 80,889 (2,971) Debt securities in issue (1,716) 29 Net income from financial instruments held for trading or managed on a fair value basis 7,772 (490) Loans and advances to banks 319 At 31 Dec 2023 7,772 80,889 (490) (2,971) (1,397) 29 Interest rate3 68,223 (3,829) Debt securities in issue 6,258 (34) Net income from financial instruments held for trading or managed on a fair value basis 6,812 (789) Loans and advances to banks (693) At 31 Dec 2022 6,812 68,223 (789) (3,829) 5,565 (34) 1 The accumulated amount of fair value adjustments remaining in the statement of financial position for hedged items that have ceased to be adjusted for hedging gains and losses were liabilities of $1,299m (2022: $971m) for debt issued. 2 Used in effectiveness testing, comprising amount attributable to the designated hedged risk that can be a risk component. 3 The hedged risk ‘interest rate’ includes foreign exchange risk. For some debt securities held, HSBC manages interest rate risk in a dynamic risk management strategy. The assets in scope of this strategy are high-quality fixed-rate debt securities, which may be sold to meet liquidity and funding requirements. The interest rate risk of the HSBC fixed-rate debt securities issued is managed in a non-dynamic risk management strategy. Notes on the financial statements 386 HSBC Holdings plc Annual Report and Accounts 2023 Cash flow hedges HSBC’s cash flow hedging instruments consist principally of interest rate swaps and cross-currency swaps that are used to manage the variability in future interest cash flows of non-trading financial assets and liabilities, arising due to changes in market interest rates and foreign- currency basis. HSBC applies macro cash flow hedging for interest rate risk exposures on portfolios of replenishing current and forecasted issuances of non- trading assets and liabilities that bear interest at variable rates, including rolling such instruments. The amounts and timing of future cash flows, representing both principal and interest flows, are projected for each portfolio of financial assets and liabilities on the basis of their contractual terms and other relevant factors, including estimates of prepayments and defaults. The aggregate cash flows representing both principal balances and interest cash flows across all portfolios are used to determine the effectiveness and ineffectiveness. Macro cash flow hedges are considered to be dynamic hedges. HSBC also hedges the variability in future cash flows on foreign-denominated financial assets and liabilities arising due to changes in foreign exchange market rates with cross-currency swaps, which are considered dynamic hedges. Hedging instrument by hedged risk Hedging instrument Hedged item Ineffectiveness Carrying amount Change in fair value2 Change in fair value3 Recognised in profit and loss Profit and loss presentation Notional amount1 Assets Liabilities Balance sheet presentation Hedged risk $m $m $m $m $m $m Foreign currency 29,772 935 257 Derivatives 977 977 — Net income from financial instruments held for trading or managed on a fair value basis Interest rate 188,327 1,390 1,116 Derivatives 1,542 1,512 30 At 31 Dec 2023 218,099 2,325 1,373 2,519 2,489 30 Foreign currency 8,781 418 166 Derivatives 659 659 — Net income from financial instruments held for trading or managed on a fair value basis Interest rate 114,527 93 950 Derivatives (4,997) (4,973) (24) At 31 Dec 2022 123,308 511 1,116 (4,338) (4,314) (24) 1 The notional contract amounts of derivatives designated in qualifying hedge accounting relationships indicate the nominal value of transactions outstanding at the balance sheet date. They do not represent amounts at risk. 2 Used in effectiveness testing, comprising the full fair value change of the hedging instrument not excluding any component. 3 Used in effectiveness assessment, comprising amount attributable to the designated hedged risk that can be a risk component. Reconciliation of equity and analysis of other comprehensive income by risk type Interest rate Foreign currency $m $m Cash flow hedging reserve at 1 Jan 2023 (3,387) (421) Fair value gains/(losses) 1,512 977 Fair value (gains)/losses reclassified from the cash flow hedge reserve to the income statement in respect of: Hedged items that have affected profit or loss1 2,196 (718) Income taxes (937) (29) Others (285) 59 Cash flow hedging reserve at 31 Dec 2023 (901) (132) Cash flow hedging reserve at 1 Jan 2022 8 (205) Fair value gains/(losses) (4,973) 659 Fair value (gains)/losses reclassified from the cash flow hedge reserve to the income statement in respect of: Hedged items that have affected profit or loss 325 (926) Income taxes 1,123 28 Others 130 23 Cash flow hedging reserve at 31 Dec 2022 (3,387) (421) 1 Hedged items that have affected profit or loss are primarily recorded within interest income. Net investment hedges The Group applies hedge accounting in respect of certain net investments in non-US dollar functional currency foreign operations for changes in spot exchange rates only. Hedging could be undertaken for Group structural exposure to changes in the US dollar to foreign currency exchange rates using forward foreign exchange contracts or by financing with foreign currency borrowings. An economic relationship exists between the hedged net investment and hedging instrument due to the shared foreign currency risk exposure. For further details of our structural foreign exchange exposures, see page 205. HSBC Holdings plc Annual Report and Accounts 2023 387 Financial statements The aggregate positions at the reporting date and the performance indicators of both live and de-designated hedges are summarised below. Hedges of net investment in foreign operations Carrying amount Nominal amount Amounts recognised in OCI1 Change in fair value2 Hedge ineffectiveness recognised in income statement Derivative assets Derivative liabilities Description of hedged risk $m $m $m $m $m $m 2023 Pound sterling-denominated structural foreign exchange (404) 16,415 604 (843) — Swiss franc-denominated structural foreign exchange (23) 526 49 (62) — Hong Kong dollar-denominated structural foreign exchange — 5,792 — 2 — Other structural foreign exchange3 (96) 11,042 477 102 — Total — (523) 33,775 1,130 (801) — 2022 Pound sterling-denominated structural foreign exchange 264 — 14,000 1,447 1,573 — Swiss franc-denominated structural foreign exchange — (21) 727 111 10 — Hong Kong dollar-denominated structural foreign exchange — (19) 4,597 (2) (7) — Other structural foreign exchange3 — (117) 10,819 375 369 — Total 264 (157) 30,143 1,931 1,945 — 1 Amount recognised in OCI for Swiss franc includes $110m (2022: $110m) related to de-designated hedge. 2 Used in effectiveness assessment, comprising amount attributable to the designated hedged risk that can be a risk component. 3 Other currencies include euro, New Taiwan dollar, Singapore dollar, Canadian dollar, Omani rial, South Korean won, UAE dirham, Indian rupee, Chinese renminbi, Kuwaiti dinar, Qatari riyal, Saudi riyal, Indonesian rupiah and Philippine peso. Interest rate benchmark reform: Amendments to IFRS 9 and IAS 39 ‘Financial Instruments’ HSBC has applied both the first set of amendments (‘Phase 1’) and the second set of amendments (‘Phase 2’) to IFRS 9 and IAS 39 applicable to hedge accounting. The hedge accounting relationships that are affected by Phase 1 and Phase 2 amendments are presented in the balance sheet as ‘Financial assets designated and otherwise mandatorily measured at fair value through other comprehensive income’, ‘Loans and advances to customers’, ‘Debt securities in issue’ and ‘Deposits by banks’. The notional value of the derivatives impacted by the Ibor reform, including those designated in hedge accounting relationships, is disclosed in Note 32. For further details of Ibor transition, see ‘Ibor transition’ on page 139. For some of the Ibors included under the ‘Other’ header in the table below, judgement has been needed to establish whether a transition is required, since there are Ibor benchmarks that are subject to computation methodology improvements and insertion of fallback provisions without full clarity being provided by their administrators on whether these Ibor benchmarks will be demised. The notional amounts of interest rate derivatives designated in hedge accounting relationships do not represent the extent of the risk exposure managed by the Group but they are expected to be directly affected by market-wide Ibor reform and in scope of Phase 1 amendments and are shown in the table below. The cross-currency swaps designated in hedge accounting relationships and affected by Ibor reform are not significant and have not been presented below. Hedging instrument impacted by Ibor reform Hedging instrument Impacted by Ibor reform Not impacted by Ibor reform Notional amount3 €1 £ $ Other2 Total $m $m $m $m $m $m $m Fair value hedges 16,907 — — 4,384 21,291 151,694 172,985 Cash flow hedges 10,850 — — 3,504 14,354 173,973 188,327 At 31 Dec 2023 27,757 — — 7,888 35,645 325,667 361,312 Fair value hedges 12,756 — 2,015 12,643 27,414 134,648 162,062 Cash flow hedges 8,865 — — 27,830 36,695 77,832 114,527 At 31 Dec 2022 21,621 — 2,015 40,473 64,109 212,480 276,589 1 The notional contract amounts of euro interest rate derivatives impacted by Ibor reform consist of hedges with a Euribor benchmark. 2 Other benchmarks impacted by Ibor reform consist mainly of Emirates interbank offered rate, Mexican interbank equilibrium interest rate (‘TIIE’) and Korean won-related derivatives. In 2022, the Hong Kong interbank offered rate (‘HIBOR’) was included in ‘Other‘ given that reform in the benchmark was considered possible. At 31 December 2023, HIBOR was no longer expected to be directly affected by Ibor reform following the successful transition of all Libor settings and the HKMA’s affirmation that there are no plans to discontinue HIBOR. As a result HIBOR has been moved from ‘Other‘ to ‘Not impacted by Ibor reform‘. 3 The notional contract amounts of interest rate derivatives designated in qualifying hedge accounting relationships indicate the nominal value of transactions outstanding at the balance sheet date and they do not represent amounts at risk. Notes on the financial statements 388 HSBC Holdings plc Annual Report and Accounts 2023 Hedging instrument impacted by Ibor reform held by HSBC Holdings Hedging instrument Impacted by Ibor reform Not impacted by Ibor reform Notional amount € £ $ Other Total $m $m $m $m $m $m $m Fair value hedges 19,614 — — 583 20,197 72,071 92,268 At 31 Dec 2023 19,614 — — 583 20,197 72,071 92,268 Fair value hedges 15,210 — 2,000 1,336 18,546 63,327 81,873 At 31 Dec 2022 15,210 — 2,000 1,336 18,546 63,327 81,873 16 Financial investments Carrying amount of financial investments 2023 2022¹ $m $m Financial investments measured at fair value through other comprehensive income 294,437 255,660 – treasury and other eligible bills 102,438 86,749 – debt securities 190,119 167,107 – equity securities 1,447 1,696 – other instruments 433 108 Debt instruments measured at amortised cost 148,326 109,066 – treasury and other eligible bills 30,733 34,507 – debt securities 117,593 74,559 At 31 Dec 442,763 364,726 1 From 1 January 2023, we adopted IFRS 17 ‘Insurance Contracts’, which replaced IFRS 4 ‘Insurance Contracts’. We have restated 2022 comparative data. Equity instruments measured at fair value through other comprehensive income Fair value Dividends recognised Type of equity instruments $m $m Investments required by central institutions 609 27 Business facilitation 793 35 Others 45 2 At 31 Dec 2023 1,447 64 Investments required by central institutions 690 24 Business facilitation 954 28 Others 52 2 At 31 Dec 2022 1,696 54 Weighted average yields of investment debt securities Up to 1 year 1 to 5 years 5 to 10 years Over 10 years Yield Yield Yield Yield % % % % Debt securities measured at fair value through other comprehensive income US Treasury 2.1 2.0 2.0 2.4 US Government agencies 3.6 3.1 3.3 3.0 US Government-sponsored agencies 1.0 2.6 2.1 1.8 UK Government 0.2 2.8 0.8 2.5 Hong Kong Government 1.0 1.4 1.6 — Other governments 3.2 3.5 3.3 2.9 Asset-backed securities 1.4 6.6 4.8 5.3 Corporate debt and other securities 5.5 3.1 3.1 2.4 Debt securities measured at amortised cost US Treasury 8.9 3.7 3.7 2.1 US Government agencies 7.9 7.8 5.8 4.5 US Government-sponsored agencies 2.3 3.7 3.4 2.9 UK Government — — 0.9 4.5 Hong Kong Government — 2.6 — — Other governments 2.7 3.5 5.3 — Asset-backed securities 4.7 — 7.7 — Corporate debt and other securities 2.6 2.6 3.5 5.2 HSBC Holdings plc Annual Report and Accounts 2023 389 Financial statements The maturity distributions of ABSs are presented in the above table on the basis of contractual maturity dates. The weighted average yield for each range of maturities is calculated by dividing the annualised interest income for the year ended 31 December 2023 by the book amount of debt securities at that date. The yields do not include the effect of related derivatives. HSBC Holdings HSBC Holdings carrying amount of financial investments 2023 2022 $m $m Debt instruments measured at amortised cost – treasury and other eligible bills 15,629 12,796 – debt securities 3,929 6,670 At 31 Dec 19,558 19,466 Weighted average yields of investment debt securities Up to 1 year 1 to 5 years 5 to 10 years Over 10 years Yield Yield Yield Yield % % % % Debt securities measured at amortised cost US Treasury 3.2 4.3 — — The weighted average yield for each range of maturities is calculated by dividing the annualised interest income for the year ended 31 December 2023 by the book amount of debt securities at that date. The yields do not include the effect of related derivatives. 17 Assets pledged, collateral received and assets transferred Assets pledged 1 Financial assets pledged as collateral 2023 2022 $m $m Treasury bills and other eligible securities 20,504 18,364 Loans and advances to banks 13,636 10,198 Loans and advances to customers 27,490 27,627 Debt securities 88,367 60,542 Equity securities 40,280 26,902 Other 61,223 67,576 Assets pledged at 31 Dec 251,500 211,209 Assets pledged as collateral include all assets categorised as encumbered in the disclosure on page 27 of the Pillar 3 Disclosures at 31 December 2023, except for assets held for sale. The amount of assets pledged to secure liabilities may be greater than the book value of assets utilised as collateral. For example, in the case of securitisations and covered bonds, the amount of liabilities issued plus mandatory over-collateralisation is less than the book value of the pool of assets available for use as collateral. This is also the case where assets are placed with a custodian or a settlement agent that has a floating charge over all the assets placed to secure any liabilities under settlement accounts. These transactions are conducted under terms that are usual and customary for collateralised transactions including, where relevant, standard securities lending and borrowing, repurchase agreements and derivative margining. HSBC places both cash and non-cash collateral in relation to derivative transactions. Hong Kong currency notes in circulation are secured by the deposit of funds in respect of which the Hong Kong Government certificates of indebtedness are held. Financial assets pledged as collateral which the counterparty has the right to sell or repledge 2023 2022 $m $m Trading assets 77,847 56,894 Financial investments 39,324 27,841 At 31 Dec 117,171 84,735 Collateral received 1 The fair value of assets accepted as collateral relating primarily to standard securities lending, reverse repurchase agreements, swaps of securities and derivative margining that HSBC is permitted to sell or repledge in the absence of default was $495,653m (2022: $449,896m). The fair value of any such collateral sold or repledged was $284,108m (2022: $228,245m). HSBC is obliged to return equivalent securities. These transactions are conducted under terms that are usual and customary to standard securities lending, reverse repurchase agreements and derivative margining. Notes on the financial statements 390 HSBC Holdings plc Annual Report and Accounts 2023 Assets transferred 1 The assets pledged include transfers to third parties that do not qualify for derecognition, notably secured borrowings such as debt securities held by counterparties as collateral under repurchase agreements and equity securities lent under securities lending agreements, as well as swaps of equity and debt securities. For secured borrowings, the transferred asset collateral continues to be recognised in full while a related liability, reflecting the Group’s obligation to repurchase the assets for a fixed price at a future date, is also recognised on the balance sheet. Where securities are swapped, the transferred asset continues to be recognised in full. There is no associated liability as the non-cash collateral received is not recognised on the balance sheet. The Group is unable to use, sell or pledge the transferred assets for the duration of the transaction, and remains exposed to interest rate risk and credit risk on these pledged assets. Transferred financial assets not qualifying for full derecognition and associated financial liabilities Carrying amount of: Transferred assets Associated liabilities $m $m At 31 Dec 2023 Repurchase agreements 81,486 74,517 Securities lending agreements 46,663 3,826 At 31 Dec 2022 Repurchase agreements 52,604 48,501 Securities lending agreements 39,134 4,613 1 Excludes assets classified as held for sale. 18 Interests in associates and joint ventures Carrying amount of HSBC’s interests in associates and joint ventures 2023 2022 $m $m Interests in associates 27,200 29,127 Interests in joint ventures 144 127 Interests in associates and joint ventures 27,344 29,254 Principal associates of HSBC 2023 2022 Carrying amount Fair value1 Carrying amount Fair value1 $m $m $m $m Bank of Communications Co., Limited 21,210 8,812 23,307 8,141 Saudi Awwal Bank 4,659 6,438 4,494 6,602 1 Principal associates are listed on recognised stock exchanges. The fair values are based on the quoted market prices of the shares held (Level 1 in the fair value hierarchy). At 31 Dec 2023 Jurisdiction of incorporation and principal place of business Principal activity HSBC’s interest1 % Bank of Communications Co., Limited Mainland China Banking services 19.03 Saudi Awwal Bank Saudi Arabia Banking services 31.00 1 There has been no percentage change in HSBC’s shareholding interest in the principal associates when compared with 2022. Share of profit in associates and joint ventures 2023 2022 $m $m Bank of Communications Co., Limited 2,250 2,377 Saudi Awwal Bank 538 342 Other associates and joint ventures 19 4 Share of profit in associates and joint ventures 2,807 2,723 Less: Impairment of interest in BoCom (3,000) — A list of all associates and joint ventures is set out in Note 40. HSBC Holdings plc Annual Report and Accounts 2023 391 Financial statements Bank of Communications Co., Limited We maintain a 19.03% interest in Bank of Communications Co., Limited (‘BoCom’). The Group’s investment in BoCom is classified as an associate. Significant influence in BoCom was established with consideration of all relevant factors, including representation on BoCom’s Board of Directors and participation in a resource and experience sharing agreement (‘RES’). Under the RES, HSBC staff have been seconded to assist in the maintenance of BoCom’s financial and operating policies. Investments in associates are recognised using the equity method of accounting in accordance with IAS 28 ‘Investments in Associates and Joint Ventures’, whereby the investment is initially recognised at cost and adjusted thereafter for the post-acquisition change in the Group’s share of associate’s net assets. An impairment test is required if there is any indication of impairment. Impairment testing The fair value of the Group’s investment in BoCom had been below the carrying amount for approximately 12 years. We have previously disclosed that the excess of the value in use (‘VIU’) calculation over its balance sheet value has been marginal in recent years, and that reasonably possible changes in assumptions could generate an impairment. Recent macroeconomic, policy and industry-wide factors resulted in a wider range of possible VIU calculation outcomes, and our VIU calculation uses both historical experience and market participant views to estimate future cash flows, relevant discount rates and associated capital assumptions. At 31 December 2023, the Group performed an impairment test on the carrying amount, which resulted in an impairment of $3.0bn, as the recoverable amount as determined by a VIU calculation was lower than the carrying value. At 31 Dec 2023 At 31 Dec 2022 VIU Carrying value Fair value VIU Carrying value Fair value $bn $bn $bn $bn $bn $bn BoCom 21.2 21.2 8.8 23.5 23.3 8.1 The impairment test will be updated in future periods, reflecting updated assumptions in the VIU impairment calculation. Going forward, the carrying value will be aligned to the updated VIU calculation and capped at carrying value that would have been determined had no impairment loss been recognised, rather than at cost and adjusted thereafter for the post-acquisition change in the Group’s share of associate’s net assets, and therefore there is a risk of reversals or further impairments in future periods. The VIU may increase or decrease depending on the effect of changes to model inputs. The main model inputs are described below and are based on factors observed at period-end. The factors that could result in increases or reductions in the VIU include changes in BoCom’s short- term performance, a change in regulatory capital requirements or revisions to the forecast of BoCom’s future profitability. If the Group did not have significant influence in BoCom, the investment would be carried at fair value rather than the current carrying value. Basis of recoverable amount The impairment test was performed by comparing the recoverable amount of BoCom, determined by a VIU calculation, with its carrying value. The VIU calculation uses discounted cash flow projections based on management’s best estimates of future earnings available to ordinary shareholders prepared in accordance with IAS 36 ’Impairment of Assets’. Significant management judgement is required in arriving at the best estimate. There are two main components to the VIU calculation. The first component is management’s best estimate of BoCom’s earnings. Forecast earnings growth over the short to medium term is lower than recent (within the last five years) actual growth, and reflects the impact of recent macroeconomic, policy and industry factors in mainland China. As a result of management‘s intent to continue to retain its investment, earnings beyond the short to medium term are then extrapolated into perpetuity using a long-term growth rate to derive a terminal value, which comprises the majority of the VIU. The second component is the capital maintenance charge (‘CMC’), which is management’s forecast of the earnings that need to be withheld in order for BoCom to meet capital requirements over the forecast period, meaning that CMC is deducted when arriving at management’s estimate of future earnings available to ordinary shareholders. The CMC reflects the revised capital requirements arising from revisions of the ratio of risk-weighted assets to total assets assumption. The principal inputs to the CMC calculation include estimates of asset growth, the ratio of risk-weighted assets to total assets and the expected capital requirements. An increase in the CMC as a result of a change to these principal inputs would reduce VIU. Additionally, management considers other qualitative factors, to ensure that the inputs to the VIU calculation remain appropriate. Key assumptions in value in use calculation We used a number of assumptions in our VIU calculation, in accordance with the requirements of IAS 36: – Long-term profit growth rate: 3% (2022: 3%) for periods after 2027, which does not exceed forecast GDP growth in mainland China and is similar to forecasts by external analysts. – Long-term asset growth rate: 3% (2022: 3%) for periods after 2027, which is the rate that assets are expected to grow to achieve long-term profit growth of 3%. – Discount rate: 9.00% (2022: 10.04%), which is based on a capital asset pricing model (‘CAPM’), using market data. The discount rate used is within the range of 7.9% to 9.7% (2022: 8.4% to 10.4%) indicated by the CAPM, and decreased as a consequence of a market-driven reduction in beta. While the CAPM range sits at the lower end of the range adopted by selected external analysts of 8.8% to 13.5% (2022: 8.8% to 13.5%), we continue to regard the CAPM range as the most appropriate basis for determining this assumption. – Expected credit losses (‘ECL’) as a percentage of loans and advances to customers: ranges from 0.80% to 0.97% (2022: 0.99% to 1.05%) in the short to medium term, reflecting reported credit experience in mainland China. For periods after 2027, the ratio is 0.97% (2022: 0.97%), which is higher than BoCom’s average ECL as a percentage of loans and advances to customers in recent years prior to the pandemic. – Risk-weighted assets as a percentage of total assets: ranges from 62.0% to 63.7% (2022: 61.0% to 64.4%) in the short to medium term, reflecting higher risk-weights in the short term followed by an expected reversion to recent historical levels. For periods after 2027, the ratio is 62.0% (2022: 61.0%), which is similar to BoCom’s actual results in recent years. – Loans and advances to customers growth rate: ranges from 9.0% to 10.0% (2022: 7.1% to 11.0%) in the short to medium term, reflecting higher growth rate in loans and advances to customers as a result of recent macroeconomic, policy and industry factors in mainland China. Increases in the forecast growth rate of loans and advances to customers results in higher forecast ECL. Notes on the financial statements 392 HSBC Holdings plc Annual Report and Accounts 2023 – Operating income growth rate: ranges from -0.4% to 9.7% (2022: 1.9% to 7.7%) in the short to medium term, which is lower than BoCom’s actual results in recent years, and is impacted by projections of net interest income in the short term as a consequence of recent macroeconomic, policy and industry factors in mainland China. – Cost-income ratio: ranges from 35.5% to 39.8% (2022: 35.5% to 36.3%) in the short to medium term. These ratios are higher than BoCom‘s actual results in recent years and forecasts disclosed by external analysts. – Effective tax rate (‘ETR’): ranges from 5.3% to 15.0% (2022: 4.4% to 15.0%) in the short to medium term, reflecting BoCom’s actual results and an expected increase towards the long-term assumption through the forecast period. For periods after 2027, the rate is 15.0% (2022: 15.0%), which is higher than the recent historical average, and aligned to the minimum tax rate as proposed by the OECD/Group of 20 (‘G20’) Inclusive Framework on Base Erosion and Profit Shifting. – Capital requirements: capital adequacy ratio of 12.5% (2022: 12.5%) and tier 1 capital adequacy ratio of 9.5% (2022: 9.5%), based on BoCom’s capital risk appetite and capital requirements respectively. The following table further illustrates the impact on VIU of reasonably possible changes to key assumptions. This reflects the sensitivity of the VIU to each key assumption on its own and it is possible that more than one favourable and/or unfavourable change may occur at the same time. Loans and advances to customers growth rate has been added to the list of key assumptions detailed in the table to reflect the greater potential variability associated with the assumption as a result of recent macroeconomic, policy and industry factors in mainland China. The selected rates of reasonably possible changes to key assumptions are based on external analysts’ forecasts, statutory requirements and other relevant external data sources, which can change period to period. Unless specified, favourable and unfavourable changes are consistently applied throughout short-to-medium and long-term forecast years, based on a straight-line average of the base case assumption. Sensitivity of VIU to reasonably possible changes in key assumptions Favourable change Unfavourable change Increase in VIU VIU Decrease in VIU VIU bps $bn $bn bps $bn $bn At 31 Dec 2023 Long-term profit growth rate1 58 3.3 24.5 (79) (3.4) 17.8 Long-term asset growth rate1 (79) 4.5 25.7 58 (4.0) 17.2 Discount rate (110) 4.5 25.7 280 (6.1) 15.1 Expected credit losses as a percentage of loans and advances to customers 2023 to 2027: 78 2028 onwards: 91 2.9 24.1 2023 to 2027: 120 2028 onwards: 104 (4.4) 16.8 Risk-weighted assets as a percentage of total assets (150) 0.9 22.1 216 (1.6) 19.6 Loans and advances to customers growth rate (213) 3.2 24.4 207 (2.9) 18.3 Operating income growth rate 57 2.6 23.8 (81) (2.6) 18.6 Cost-income ratio (212) 0.8 22.0 99 (2.9) 18.3 Long-term effective tax rate (426) 1.6 22.8 1,000 (3.5) 17.7 Capital requirements – capital adequacy ratio — — 21.2 215 (7.5) 13.7 Capital requirements – tier 1 capital adequacy ratio — — 21.2 248 (3.7) 17.5 At 31 Dec 2022 Long-term profit growth rate1 75 3.6 27.1 (71) (2.7) 20.8 Long-term asset growth rate1 (71) 3.1 26.6 75 (4.1) 19.4 Discount rate (164) 6.9 30.4 136 (3.7) 19.8 Expected credit losses as a percentage of loans and advances to customers 2022 to 2026: 95 2027 onwards: 91 1.9 25.4 2022 to 2026: 120 2027 onwards: 104 (2.9) 20.6 Risk-weighted assets as a percentage of total assets (118) 0.1 23.6 239 (2.3) 21.2 Loans and advances to customers growth rate (75) 1.1 24.6 295 (3.2) 20.3 Operating income growth rate 44 1.3 24.8 (83) (2.5) 21.0 Cost-income ratio (122) 1.0 24.5 174 (2.1) 21.4 Long-term effective tax rate (426) 1.5 25.0 1,000 (3.6) 19.9 Capital requirements – capital adequacy ratio — — 23.5 191 (6.3) 17.2 Capital requirements – tier 1 capital adequacy ratio — — 23.5 266 (3.2) 20.3 1 The favourable and unfavourable ranges of the long-term profit growth rate and long-term asset growth rate assumptions reflect the close relationship between these assumptions, which would result in offsetting changes to each assumption. Considering the interrelationship of the changes set out in the table above, management estimates that the reasonably possible range of VIU is $13.1bn to $28.8bn (2022: $16.9bn to $28.7bn), acknowledging that the fair value of the Group’s investment has ranged from $6.8bn to $11.6bn over the last five years as at the date of the impairment tests. The possible range of VIU is based on impacts set out in the table above arising from the favourable/unfavourable change in the earnings in the short to medium term, the long-term expected credit losses as a percentage of loans and advances to customers, and a 50bps increase/decrease in the discount rate. All other long-term assumptions, and the basis of the CMC have been kept unchanged when determining the reasonably possible range of the VIU. Selected financial information of BoCom The statutory accounting reference date of BoCom is 31 December. For the year ended 31 December 2023, HSBC included the associate’s results on the basis of the financial statements for the 12 months ended 30 September 2023, taking into account any known changes in the subsequent period from 1 October 2023 to 31 December 2023 that would have materially affected the results. HSBC Holdings plc Annual Report and Accounts 2023 393 Financial statements Selected balance sheet information of BoCom At 30 Sep At 31 Dec 2023 2022 $m $m Cash and balances at central banks 112,800 116,942 Due from and placements with banks and other financial institutions 100,464 100,160 Loans and advances to customers 1,087,613 1,035,151 Other financial assets 587,949 583,898 Other assets 59,215 48,796 Total assets 1,948,041 1,884,947 Due to and placements from banks and other financial institutions 292,065 295,205 Deposits from customers 1,216,611 1,153,184 Other financial liabilities 251,246 249,230 Other liabilities 36,776 37,153 Total liabilities 1,796,698 1,734,772 Total equity 151,343 150,175 Reconciliation of BoCom’s total shareholders’ equity to the carrying amount in HSBC’s consolidated financial statements At 30 Sep 2023 2022 $m $m HSBC’s share of total shareholders’ equity 23,746 22,828 Goodwill originally arising on acquisition 464 479 Impairment (3,000) — Carrying amount 21,210 23,307 Selected income statement information of BoCom For the 9 months ended 30 Sep 2023 2022 $m $m Net interest income 17,519 19,004 Net fee and commission income 4,815 5,181 Credit and impairment losses (6,836) (7,641) Depreciation and amortisation (1,977) (1,785) Tax expense (552) (436) Profit for the year 9,835 10,102 Other comprehensive income 631 (37) Total comprehensive income 10,466 10,065 Dividends received from BoCom 736 749 Saudi Awwal Bank The Group’s investment in Saudi Awwal Bank (‘SAB’) is classified as an associate. HSBC is the largest shareholder in SAB with a shareholding of 31%. Significant influence in SAB is established via representation on the Board of Directors. Investments in associates are recognised using the equity method of accounting in accordance with IAS 28, as described previously for BoCom. Impairment testing There were no indicators of impairment at 31 December 2023. The fair value of the Group’s investment in SAB of $6.4bn was above the carrying amount of $4.7bn. Notes on the financial statements 394 HSBC Holdings plc Annual Report and Accounts 2023 19 Investments in subsidiaries Main subsidiaries of HSBC Holdings1 At 31 Dec 2023 Place of incorporation or registration HSBC’s interest % Share class Europe HSBC Bank plc England and Wales 100 £1 Ordinary, $0.01 Non-Cumulative Third Dollar Preference HSBC UK Bank plc England and Wales 100 £1 Ordinary HSBC Continental Europe France 99.99 €5 Actions HSBC Trinkaus & Burkhardt GmbH Germany 99.99 €1 Ordinary Asia Hang Seng Bank Limited2 Hong Kong 62.14 HK$5 Ordinary HSBC Bank (China) Company Limited People’s Republic of China 100 CNY1 Ordinary HSBC Bank Malaysia Berhad Malaysia 100 RM0.5 Ordinary HSBC Life (International) Limited Bermuda 100 HK$1 Ordinary The Hongkong and Shanghai Banking Corporation Limited Hong Kong 100 Ordinary no par value Middle East, North Africa and Türkiye HSBC Bank Middle East Limited United Arab Emirates 100 $1 Ordinary and $1 Cumulative Redeemable Preference shares North America HSBC Bank Canada Canada 100 Common no par value and Preference no par value HSBC Bank USA, N.A. US 100 $100 Common and $0.01 Preference Latin America HSBC Mexico, S.A., Institución de Banca Múltiple, Grupo Financiero HSBC Mexico 99.99 MXN2 Ordinary 1 Main subsidiaries are either held directly or indirectly via intermediate holding companies. There has been no material percentage change in HSBC’s shareholding for its main subsidiaries since 2022. 2 In addition to the strategic holding disclosed above, the Group held 0.09% (2022: 0.07%) shareholding as part of its trading books. Details of the debt, subordinated debt and preference shares issued by the main subsidiaries to parties external to the Group are included in Note 26 ‘Debt securities in issue’ and Note 29 ‘Subordinated liabilities’, respectively. A list of all related undertakings is set out in Note 40. The principal countries and territories of operation are the same as the countries and territories of incorporation except for HSBC Life (International) Limited, which operates mainly in Hong Kong. HSBC is structured as a network of regional banks and locally incorporated regulated banking entities. Each bank is separately capitalised in accordance with applicable prudential requirements and maintains a capital buffer consistent with the Group’s risk appetite for the relevant country or region. HSBC’s capital management process is incorporated in the financial resource plan, which is approved by the Board. HSBC Holdings is the primary provider of equity capital to its subsidiaries and also provides them with non-equity capital where necessary. These investments are substantially funded by HSBC Holdings’ issuance of equity and non-equity capital, and by profit retention. As part of its capital management process, HSBC Holdings seeks to maintain a balance between the composition of its capital and its investment in subsidiaries. Subject to this, there is no current or foreseen impediment to HSBC Holdings’ ability to provide funding for such investments. During 2023, consistent with the Group’s capital plan, the Group’s material subsidiaries did not experience any significant restrictions on paying dividends or repaying loans and advances. Also, there are no foreseen restrictions envisaged with regard to planned dividends or payments from material subsidiaries. However, the ability of subsidiaries to pay dividends or advance monies to HSBC Holdings depends on, among other things, their respective local regulatory capital and banking requirements, exchange controls, statutory reserves, and financial and operating performance. The amount of guarantees by HSBC Holdings in favour of other Group entities is set out in Note 34. Information on structured entities consolidated by HSBC where HSBC owns less than 50% of the voting rights is included in Note 20 ‘Structured entities’. In each of these cases, HSBC controls and consolidates an entity when it is exposed, or has rights, to variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Impairment testing of investments in subsidiaries At each reporting period end, HSBC Holdings reviews investments in subsidiaries for indicators of impairment. An impairment is recognised when the carrying amount exceeds the recoverable amount for that investment. The recoverable amount is the higher of the investment’s fair value less costs of disposal and its VIU, in accordance with the requirements of IAS 36. The VIU is calculated by discounting management’s cash flow projections for the investment. The cash flows represent the free cash flows based on the subsidiary’s binding capital requirements. We used a number of assumptions in our VIU calculation, in accordance with the requirements of IAS 36: – Management’s judgement in estimating future cash flows: The cash flow projections for each investment are based on the latest approved plans, which include forecast capital available for distribution based on the capital requirements of the subsidiary, taking into account minimum and core capital requirements. For the impairment test as at 31 December 2023, cash flow projections until the end of 2028 were considered in line with our internal planning horizon. Our cash flow projections include known and observable climate-related opportunities and costs associated with our sustainable products and operating model. – Long-term growth rates: The long-term growth rate is used to extrapolate the free cash flows in perpetuity because of the long-term perspective of the legal entity. The growth rate reflects long-term inflation for the country or territory within which the investment operates. HSBC Holdings plc Annual Report and Accounts 2023 395 Financial statements – Discount rates: The rate used to discount the cash flows is based on the cost of capital assigned to each investment, which is derived using a CAPM and market implied cost of equity. CAPM depends on a number of inputs reflecting financial and economic variables, including the risk-free rate and a premium to reflect the inherent risk of the business being evaluated. These variables are based on the market’s assessment of the economic variables and management’s judgement. The discount rates for each investment are refined to reflect the rates of inflation for the countries or territories within which the investment operates. In addition, for the purposes of testing investments for impairment, management supplements this process by comparing the discount rates derived using the internally generated CAPM, with cost of capital rates produced by external sources for businesses operating in similar markets. The impacts from climate risk are included to the extent that they are observable in discount rates and asset prices. As at 31 December 2023, the carrying amount of HSBC Holdings’ investments in subsidiaries was $159.5bn (2022: $167.5bn). The net year-on- year reduction was predominantly due to the recognition of a $5.5bn impairment of HSBC Holdings’ investment in HSBC Overseas Holdings (UK) Limited, resulting in a cumulative impairment of $10.2bn (2022: $4.7bn), and a carrying amount of $25.8bn as at 31 December 2023 (2022: $32.8bn). The recoverable amount of HSBC Overseas Holdings (UK) Limited is assessed as the aggregate of the recoverable amounts of its subsidiaries. During 2023, the principal subsidiaries of HSBC Overseas Holdings (UK) Limited were HSBC North America Holdings Limited, HSBC Bank Canada and HSBC Bank Bermuda. In October 2023, HSBC Bank Bermuda was transferred to HSBC Bank plc. As at 31 December 2023, the adjusted net asset value of HSBC Overseas Holdings (UK) Limited fell below the carrying amount therefore management assessed that indicators of impairment were present and an impairment test was performed. The recoverable amount reduced owing to lower projected profits and higher projected capital requirements for HSBC North America Holdings, the transfer of HSBC Bank Bermuda to HSBC Bank plc at its book value which stood below its assessed recoverable amount, and higher prevailing discount rates, as a result of which a $5.5bn impairment was recognised. As HSBC Overseas Holdings (UK) Limited has entered into a sales purchase agreement with Royal Bank of Canada to dispose of our banking business in Canada, the sales purchase agreement has been used to support the recoverable amount of $11.0bn (2022: $10.8bn) (inclusive of the preferred shares) under a fair value less costs of disposal basis. The fair value less costs of disposal of HSBC Bank Canada is at a $3.7bn (2022: $3.7bn) premium to the book value recorded in HSBC Overseas Holdings (UK) Limited. In 2024, a distribution of the proceeds from the planned sale of our banking business in Canada to HSBC Holdings from HSBC Overseas Holdings (UK) Limited could lead to a future impairment. In respect of distributable reserves, an impairment would be offset by the dividend income recognised on the distributions from sales proceeds. Impairment test results Investments Recoverable amount Discount rate Long-term growth rate At 31 Dec 2023 $m % % HSBC North America Holdings Limited 12,756 10.50 2.17 At 31 Dec 2022 HSBC North America Holdings Limited 18,363 10.00 2.22 Sensitivities of key assumptions in calculating VIU At 31 December 2023, the recoverable amount of HSBC Overseas Holdings (UK) Limited remained sensitive to reasonably possible changes in key assumptions impacting its principal subsidiary, HSBC North America Holdings Limited. In making an estimate of reasonably possible changes to assumptions, management considers the available evidence in respect of each input to the model. These include the external range of observable discount rates, historical performance against forecast, and risks attached to the key assumptions underlying cash flow. The following table presents a summary of the key assumptions underlying the most sensitive inputs to the model for HSBC North America Holdings Limited, the key risks attached to each, and details of a reasonably possible change to assumptions where, in the opinion of management, these could result in a change in VIU. Reasonably possible changes in key assumptions Input Key assumptions Associated risks Reasonably possible change Investment HSBC North America Holdings Limited (subsidiary of HSBC Overseas Holdings (UK) Limited) Free cash flows projections – Level of interest rates and yield curves. – Competitors’ positions within the market. – Strategic actions relating to revenue and costs are not achieved. – Free cash flow projections decrease by 10%. Discount rate – Discount rate used is a reasonable estimate of a suitable market rate for the profile of the business. – External evidence arises to suggest that the rate used is not appropriate to the business. – Discount rate decreases by 1%. – Discount rate increases by 1%. Notes on the financial statements 396 HSBC Holdings plc Annual Report and Accounts 2023 Sensitivity of VIU to reasonably possible changes in key assumptions In $bn (unless otherwise stated) HSBC North America Holdings Limited At 31 December 2023 VIU 12.8 Impact on VIU 100bps decrease in the discount rate – single variable1 1.6 100bps increase in the discount rate – single variable1, 2 (1.2) 10% decrease in forecast profitability – single variable1, 2 (1.3) 1 The recoverable amount of HSBC Overseas Holdings (UK) Limited represents the aggregate of recoverable amounts of the underlying subsidiaries. Single variable sensitivity analysis on a single subsidiary may therefore not be representative of the aggregate impact of the change in the variable. 2 As at 31 December 2022, the impact on the VIU of HSBC North America Holdings Limited of a 100bps increase in the discount rate was $(1.7)bn and a 10% decrease in forecast profitability was $(1.8)bn, respectively on a single variable basis. Subsidiaries with significant non-controlling interests 2023 2022¹ Hang Seng Bank Limited Proportion of ownership interests and voting rights held by non-controlling interests (%)2 37.86 37.86 Place of business Hong Kong Hong Kong $m $m Profit attributable to non-controlling interests 889 574 Accumulated non-controlling interests of the subsidiary 6,877 6,513 Dividends paid to non-controlling interests 490 361 Summarised financial information: – total assets 214,321 235,630 – total liabilities 194,621 216,917 – net operating income before changes in expected credit losses and other credit impairment charges 5,210 4,379 – profit for the year 2,356 1,518 – total comprehensive income for the year 2,723 1,428 1 From 1 January 2023, we adopted IFRS 17 ‘Insurance Contracts’, which replaced IFRS 4 ‘Insurance Contracts’. We have restated 2022 comparative data. 2 In addition to the strategic holding disclosed above, the Group held 0.09% (2022: 0.07%) shareholding as part of its trading books. 20 Structured entities HSBC is mainly involved with both consolidated and unconsolidated structured entities through the securitisation of financial assets, conduits and investment funds, established either by HSBC or a third party. Consolidated structured entities Total assets of HSBC’s consolidated structured entities, split by entity type Conduits Securitisations HSBC managed funds Other Total $bn $bn $bn $bn $bn At 31 Dec 2023 3.6 7.8 5.5 8.2 25.1 At 31 Dec 2022 4.2 7.2 4.8 7.5 23.7 Conduits HSBC has established and manages two types of conduits: securities investment conduits (‘SICs’) and multi-seller conduits. Securities investment conduits The SICs purchase highly rated ABSs to facilitate tailored investment opportunities. – At 31 December 2023, Solitaire, HSBC’s principal SIC, held $1.0bn of ABSs (2022: $1.3bn). It is currently funded entirely by commercial paper (‘CP’) issued to HSBC. At 31 December 2023, HSBC held $1.3bn of CP (2022: $1.5bn). Multi-seller conduit HSBC’s multi-seller conduit was established to provide access to flexible market-based sources of finance for its clients. Currently, HSBC bears risk equal to the transaction-specific facility offered to the multi-seller conduit, amounting to $6.1bn at 31 December 2023 (2022: $6.2bn). First loss protection is provided by the originator of the assets, and not by HSBC, through transaction-specific credit enhancements. A layer of secondary loss protection is provided by HSBC in the form of programme-wide enhancement facilities. Securitisations HSBC uses structured entities to securitise customer loans and advances it originates in order to diversify its sources of funding for asset origination and capital efficiency purposes. The loans and advances are transferred by HSBC to the structured entities for cash or synthetically through credit default swaps, and the structured entities issue debt securities to investors. HSBC managed funds HSBC has established a number of money market and non-money market funds. Where it is deemed to be acting as principal rather than agent in its role as investment manager, HSBC controls these funds. Other HSBC has entered into a number of transactions in the normal course of business, which include asset and structured finance transactions where it has control of the structured entity. In addition, HSBC is deemed to control a number of third-party managed funds through its involvement as a principal in the funds. HSBC Holdings plc Annual Report and Accounts 2023 397 Financial statements Unconsolidated structured entities The term ‘unconsolidated structured entities’ refers to all structured entities not controlled by HSBC. The Group enters into transactions with unconsolidated structured entities in the normal course of business to facilitate customer transactions and for specific investment opportunities. Nature and risks associated with HSBC interests in unconsolidated structured entities Securitisations HSBC managed funds Non-HSBC managed funds Other Total Total asset values of the entities ($m) 0–500 120 337 1,271 42 1,770 500–2,000 4 96 1,069 3 1,172 2,000–5,000 — 39 418 — 457 5,000–25,000 — 24 217 — 241 25,000+ — 3 11 — 14 Number of entities at 31 Dec 2023 124 499 2,986 45 3,654 $bn $bn $bn $bn $bn Total assets in relation to HSBC’s interests in the unconsolidated structured entities 3.2 13.9 20.7 3.3 41.1 – trading assets — 0.6 — — 0.6 – financial assets designated and otherwise mandatorily measured at fair value — 12.6 19.7 — 32.3 – loans and advances to customers 3.2 — 0.6 2.5 6.3 – financial investments — 0.7 0.4 — 1.1 – other assets — — — 0.8 0.8 Total liabilities in relation to HSBC’s interests in the unconsolidated structured entities — — — 0.3 0.3 – other liabilities — — — 0.3 0.3 Other off-balance sheet commitments 0.1 1.9 5.0 1.2 8.2 HSBC’s maximum exposure at 31 Dec 2023 3.3 15.8 25.7 4.2 49.0 Total asset values of the entities ($m) 0–500 85 338 1,321 41 1,785 500–2,000 8 102 929 4 1,043 2,000–5,000 — 28 388 — 416 5,000–25,000 — 18 206 — 224 25,000+ — 5 24 — 29 Number of entities at 31 Dec 2022 93 491 2,868 45 3,497 $bn $bn $bn $bn $bn Total assets in relation to HSBC’s interests in the unconsolidated structured entities 2.5 10.7 19.7 2.6 35.5 – trading assets — 0.4 0.1 — 0.5 – financial assets designated and otherwise mandatorily measured at fair value — 9.7 18.7 — 28.4 – loans and advances to customers 2.5 — 0.5 1.9 4.9 – financial investments — 0.6 0.4 — 1 – other assets — — — 0.7 0.7 Total liabilities in relation to HSBC’s interests in the unconsolidated structured entities — — — 0.4 0.4 – other liabilities — — — 0.4 0.4 Other off-balance sheet commitments 0.2 1.5 4.6 1.8 8.1 HSBC’s maximum exposure at 31 Dec 2022 2.7 12.2 24.3 4 43.2 The maximum exposure to loss from HSBC’s interests in unconsolidated structured entities represents the maximum loss it could incur as a result of its involvement with these entities regardless of the probability of the loss being incurred. – For commitments, guarantees and written credit default swaps, the maximum exposure to loss is the notional amount of potential future losses. – For retained and purchased investments and loans to unconsolidated structured entities, the maximum exposure to loss is the carrying amount of these interests at the balance sheet reporting date. The maximum exposure to loss is stated gross of the effects of hedging and collateral arrangements that HSBC has entered into in order to mitigate the Group’s exposure to loss. Securitisations HSBC has interests in unconsolidated securitisation vehicles through holding notes issued by these entities. In addition, HSBC has investments in ABSs issued by third-party structured entities. HSBC managed funds HSBC establishes and manages money market funds and non-money market investment funds to provide customers with investment opportunities. Further information on funds under management is provided on page 118. HSBC, as fund manager, may be entitled to receive management and performance fees based on the assets under management. HSBC may also retain units in these funds. Non-HSBC managed funds HSBC purchases and holds units of third-party managed funds in order to facilitate business and meet customer needs. Notes on the financial statements 398 HSBC Holdings plc Annual Report and Accounts 2023 Other HSBC has established structured entities in the normal course of business, such as structured credit transactions for customers, to provide finance to public and private sector infrastructure projects, and for asset and structured finance transactions. In addition to the interests disclosed above, HSBC enters into derivative contracts, reverse repos and stock borrowing transactions with structured entities. These interests arise in the normal course of business for the facilitation of third-party transactions and risk management solutions. HSBC sponsored structured entities The amount of assets transferred to and income received from such sponsored structured entities during 2023 and 2022 was not significant. 21 Goodwill and intangible assets 2023 2022¹ $m $m Goodwill 4,323 4,156 Other intangible assets2 8,164 7,263 At 31 Dec 12,487 11,419 1 From 1 January 2023, we adopted IFRS 17 ‘Insurance Contracts’, which replaced IFRS 4 ‘Insurance Contracts’. Comparative data have been restated accordingly. 2 Included within other intangible assets is internally generated software with a net carrying amount of $6,895m (2022: $6,166m). During the year, capitalisation of internally generated software was $2,306m (2022: $2,663m), reversal of impairment was $285m (2022: impairment of $125m) and amortisation was $1,877m (2022: $1,447m). Movement analysis of goodwill 2023 2022 $m $m Gross amount At 1 Jan 18,965 22,215 Exchange differences 523 (776) Reclassified to held for sale and additions1 73 (2,485) Other (1) 11 At 31 Dec 19,560 18,965 Accumulated impairment losses At 1 Jan (14,809) (17,182) Exchange differences (428) 482 Reclassified to held for sale1 — 1,891 At 31 Dec (15,237) (14,809) Net carrying amount at 31 Dec 4,323 4,156 1 Includes goodwill allocated to disposal groups as a result of the sales of our retail banking operations in France and branch operations in Greece, and planned sale of our banking business in Canada, offset by goodwill arising from the acquisition of L&T Investment Management Limited. For further details, see Note 23. Goodwill Impairment testing The Group’s impairment test in respect of goodwill allocated to each cash-generating unit (‘CGU’) is performed at 1 October each year. A review for indicators of impairment is undertaken at each subsequent quarter-end and at 31 December 2023. No indicators of impairment were identified as part of these reviews. Basis of the recoverable amount The recoverable amount of all CGUs to which goodwill has been allocated was equal to its value in use (‘VIU’) at each respective testing date. The VIU is calculated by discounting management’s cash flow projections for the CGU. The key assumptions used in the VIU calculation for each individually significant CGU that is not impaired are discussed below. Key assumptions in VIU calculation – significant CGUs at 1 October 2023 Carrying amount at 1 Oct 2023 of which goodwill Value in use at 1 Oct 2023 Discount rate Growth rate beyond initial cash flow Carrying amount at 1 Oct 2022 of which goodwill Value in use at 1 Oct 2022 Discount rate Growth rate beyond initial cash flow projections $m $m $m % % $m $m $m % % HSBC UK Bank plc – WPB1 11,167 2,597 27,933 10.4 2.0 N/A N/A N/A N/A N/A Europe – WPB1 N/A N/A N/A N/A N/A 15,215 2,643 46,596 9.9 2.0 1 Following change in the Reporting Framework the Group’s CGUs are main legal entities subdivided by global business effective 1 January 2023. HSBC Holdings plc Annual Report and Accounts 2023 399 Financial statements At 1 October 2023, aggregate goodwill of $1,599m (1 October 2022: $1,464m) had been allocated to CGUs that were not considered individually significant. The Group’s CGUs do not carry on their balance sheets any significant intangible assets with indefinite useful lives, other than goodwill. Management’s judgement in estimating the cash flows of a CGU The Group does not consider there to be a significant risk of a material adjustment to the carrying amount of goodwill in the next financial year, but does consider this to be an area that is inherently judgemental. The cash flow projections for each CGU are based on forecast profitability plans approved by the Board and minimum capital levels required to support the business operations of a CGU. The Board challenges and endorses planning assumptions in light of internal capital allocation decisions necessary to support our strategy, current market conditions and macroeconomic outlook. For the 1 October 2023 impairment test, cash flow projections until the end of 2028 were considered, in line with our internal planning horizon. Key assumptions underlying cash flow projections reflect management’s outlook on interest rates and inflation, as well as business strategy, including the scale of investment in technology and automation. Our cash flow projections include known and observable climate-related opportunities and costs associated with our sustainable products and operating model. As required by IFRS Accounting Standards, estimates of future cash flows exclude estimated cash inflows or outflows that are expected to arise from restructuring initiatives before an entity has a constructive obligation to carry out the plan, and would therefore have recognised a provision for restructuring costs. Discount rate The rate used to discount the cash flows is based on the cost of equity assigned to each CGU, which is derived using a capital asset pricing model (‘CAPM’) and market implied cost of equity. CAPM depends on a number of inputs reflecting financial and economic variables, including the risk-free rate and a premium to reflect the inherent risk of the business being evaluated. These variables are based on the market’s assessment of the economic variables and management’s judgement. The discount rates for each CGU are refined to reflect the rates of inflation for the countries within which the CGU operates. In addition, for the purposes of testing goodwill for impairment, management supplements this process by comparing the discount rates derived using the internally generated CAPM, with the cost of equity rates produced by external sources for businesses operating in similar markets. The impacts of climate risk are included to the extent that they are observable in discount rates and asset prices. Long-term growth rate The long-term growth rate is used to extrapolate the cash flows in perpetuity because of the long-term perspective within the Group of business units making up the CGUs. These growth rates reflect inflation for the countries within which the CGU operates or from which it derives revenue. Sensitivities of key assumptions in calculating VIU At 1 October 2023, given the extent by which VIU exceeds carrying amount, the HBUK WPB CGU was not sensitive to reasonably possible adverse changes in key assumptions supporting the recoverable amount. In making an estimate of reasonably possible changes to assumptions, management considers the available evidence in respect of each input to the VIU calculation, such as the external range of discount rates observable, historical performance against forecast and risks attaching to the key assumptions underlying cash flow projections. None of the remaining CGUs are individually significant. Other intangible assets Impairment testing Impairment of other intangible assets is assessed in accordance with our policy explained in Note 1.2(n) by comparing the net carrying amount of CGUs containing intangible assets with their recoverable amounts. Recoverable amounts are determined by calculating an estimated VIU or fair value, as appropriate, for each CGU. No significant impairment was recognised during the year. Key assumptions in VIU calculation The Group does not consider there to be a significant risk of a material adjustment to the carrying amount of other intangible assets in the next financial year, but does consider this to be an area that is inherently judgemental. We used a number of assumptions in our VIU calculation, in accordance with the requirements of IAS 36: – Management’s judgement in estimating future cash flows: We considered past business performance, current market conditions and our macroeconomic outlook to estimate future earnings. As required by IFRS Accounting Standards, estimates of future cash flows exclude estimated cash inflows or outflows that are expected to arise from restructuring initiatives before an entity has a constructive obligation to carry out the plan, and would therefore have recognised a provision for restructuring costs. For some businesses, this means that the benefit of certain strategic actions may not be included in the impairment assessment, including capital releases. Our cash flow projections include known and observable climate-related opportunities and costs associated with our sustainable products and operating model. – Long-term growth rates: The long-term growth rate is used to extrapolate the cash flows in perpetuity because of the long-term perspective of the businesses within the Group. – Discount rates: Rates are based on a combination of CAPM and market-implied calculations considering market data for the businesses and geographies in which the Group operates. The impacts of climate risk are included to the extent that they are observable in discount rates and asset prices. Sensitivity of estimates relating to non-financial assets As explained in Note 1.2(a), estimates of future cash flows for CGUs are made in the review of goodwill and non-financial assets for impairment. Non-financial assets include other intangible assets shown above, and owned property, plant and equipment and right-of-use assets (see Note 22). The most significant sources of estimation uncertainty are in respect of the goodwill balances disclosed above. There are no non- financial asset balances relating to individual CGUs which involve estimation uncertainty that represents a significant risk of resulting in a material adjustment to the results and financial position of the Group within the next financial year. Non-financial assets are widely distributed across CGUs within the legal entities of the Group, including Corporate Centre assets that cannot be allocated to CGUs and are therefore tested for impairment at consolidated level. The recoverable amounts of other intangible assets, owned property, plant and equipment, and right-of-use assets cannot be lower than individual asset fair values less costs to dispose, where relevant. At 31 December 2023 none of the CGUs were sensitive to reasonably possible adverse changes in key assumptions supporting the recoverable amount. In making an estimate of reasonably possible changes to assumptions, management considers the available evidence in respect of each input to the VIU calculation, such as the external range of discount rates observable, historical performance against forecast and risks attaching to the key assumptions underlying cash flow projections. Notes on the financial statements 400 HSBC Holdings plc Annual Report and Accounts 2023 22 Prepayments, accrued income and other assets 2023 2022¹ $m $m Prepayments and accrued income 13,854 10,279 Settlement accounts 32,853 19,565 Cash collateral and margin receivables 57,058 63,421 Bullion 13,701 15,752 Endorsements and acceptances 7,939 8,407 Insurance contract assets (Note 4) 252 136 Reinsurance contract assets 4,728 4,310 Employee benefit assets (Note 5) 7,750 7,282 Right-of-use assets 2,456 2,219 Owned property, plant and equipment 10,478 10,365 Other accounts 14,186 14,413 At 31 Dec 165,255 156,149 1 From 1 January 2023, we adopted IFRS 17 ‘Insurance Contracts’, which replaced IFRS 4 ‘Insurance Contracts’. We have restated 2022 comparative data. Prepayments, accrued income and other assets include $122,863m (2022: $112,464m) of financial assets, the majority of which are measured at amortised cost. 23 Assets held for sale, liabilities of disposal groups held for sale and business acquisitions 2023 2022 $m $m Held for sale at 31 Dec Disposal groups 115,836 118,055 Unallocated impairment losses1 (1,975) (2,385) Non-current assets held for sale 273 249 Assets held for sale 114,134 115,919 Liabilities of disposal groups held for sale 108,406 114,597 1 This represents impairment losses in excess of the carrying value of the non-current assets, excluded from the measurement scope of IFRS 5. Disposal groups and other planned disposals Sale of our retail banking operations in France On 1 January 2024, HSBC Continental Europe completed the sale of its retail banking business in France to CCF, a subsidiary of Promontoria MMB SAS (‘My Money Group’). The sale also included HSBC Continental Europe’s 100% ownership interest in HSBC SFH (France) and its 3% ownership interest in Crédit Logement. In the first quarter of 2023, the sale had become less certain, as a result of which we recognised a $2.1bn partial reversal of the impairment loss recognised in 2022, when the disposal group was classified as held for sale. In the fourth quarter of 2023, following the receipt of regulatory approvals and the satisfaction of other relevant conditions, we reclassified the disposal group as held for sale, and it was subsequently remeasured at the lower of the carrying amount and fair value less costs to sell. This resulted in the reinstatement of a €1.8bn ($2.0bn) pre-tax impairment loss reflecting the final terms of the sale, giving rise to a net reversal of impairment recognised in other operating income in the year of $0.1bn. Upon completion and in accordance with the terms of the sale, HSBC Continental Europe received a €0.1bn ($0.1bn) profit participation interest in the ultimate holding company of My Money Group. The associated impacts on initial recognition of this stake at fair value were recognised as part of the pre-tax loss on disposal. In addition, we recognised the reversal of a €0.4bn ($0.4bn) deferred tax liability, which had arisen as a consequence of the temporary difference in tax and accounting treatment in respect of the provision for loss on disposal, which was deductible in the French tax return in 2021. In accordance with the terms of the sale, HSBC Continental Europe retained a portfolio of €7.1bn ($7.8bn) consisting of home and certain other loans, in respect of which it may consider on-sale opportunities at a suitable time, and the CCF brand, which it licensed to the buyer under a long-term licence agreement. Additionally, HSBC Continental Europe’s subsidiaries, HSBC Assurances Vie (France) and HSBC Global Asset Management (France), have entered into distribution agreements with the buyer. Ongoing costs associated with the retention of the home and certain other loans, net of income on distribution agreements and the brand licence, are estimated to have an after-tax loss impact of €0.1bn ($0.1bn) in 2024 based on expected funding rates. Planned sale of our banking business in Canada On 29 November 2022, HSBC Holdings plc announced that its wholly-owned subsidiary, HSBC Overseas Holdings (UK) Limited, had entered into an agreement for the sale of its banking business in Canada to the Royal Bank of Canada. Completion of the transaction is expected to occur in the first quarter of 2024 and the required governmental approvals have been obtained. The majority of the estimated gain on sale of $5.2bn (as at 31 December 2023) will be recognised on completion, reduced by earnings recognised by the Group in the period to completion. There would be no tax on the gain recognised at completion. This estimated gain would also have been reduced by $0.3bn in fair value losses recognised on the related foreign exchange hedges in 2023. The estimated pre-tax profit on the sale will be recognised through a combination of the consolidation of HSBC Canada’s results into the Group’s financial statements (between the 30 June 2022 net asset reference date and until completion), and the remaining gain on sale recognised at completion. At 31 December 2023, total assets of $87.9bn and total liabilities of $81.5bn met the criteria to be classified as held for sale in accordance with IFRS 5. HSBC Holdings plc Annual Report and Accounts 2022 401 Financial statements Planned sale of our business in Russia On 30 June 2022, following a strategic review of our business in Russia, HSBC Europe BV (a wholly-owned subsidiary of HSBC Bank plc) entered into an agreement for the sale of its wholly-owned subsidiary HSBC Bank (RR) (Limited Liability Company). In 2022, a $0.3bn impairment loss on the planned sale was recognised, upon classification as held for sale in accordance with IFRS 5. As at 31 December 2023, following US sanctions designation of the buyer, the outcome of the planned sale became less certain. This resulted in the reversal of $0.2bn of the previously recognised loss, as the business was no longer classified as held for sale. However, owing to restrictions impacting the recoverability of assets in Russia, we recognised charges of $0.2bn in other operating income. Completion of the planned sale remains subject to regulatory approval. On completion, accumulated foreign currency translation reserves will be recycled to the income statement. Our branch operations in Greece On 24 May 2022, HSBC Continental Europe signed a sale and purchase agreement for the sale of its branch operations in Greece to Pancreta Bank SA. In the second quarter of 2022, we recognised a loss of $0.1bn upon reclassification as held for sale in accordance with IFRS 5. At completion on 28 July 2023, the disposal group included $0.3bn of loans and advances to customers and $1.1bn of customer accounts. Merger of our business in Oman In November 2022, HSBC Bank Oman SAOG entered into a binding merger agreement with Sohar International Bank SAOG, under which the two banks agreed to take the necessary steps to implement a merger by incorporation, whereby HSBC Bank Oman would merge into Sohar International Bank. Following regulatory and shareholder approvals, the merger was completed on 17 August 2023 by way of dissolution and transfer of all the assets and liabilities of HSBC Bank Oman to Sohar International Bank, with the shareholders of HSBC Bank Oman receiving the consideration in cash and shares in Sohar International Bank. Separately, HSBC Bank Middle East Limited is in the process of establishing a new wholesale banking branch in Oman subject to regulatory approvals. Our New Zealand loan portfolio In August 2023, the Hongkong and Shanghai Banking Corporation Limited (acting through its New Zealand branch) entered into an agreement with Pepper New Zealand Limited, a wholly-owned subsidiary of Pepper Money Limited, to sell its New Zealand retail mortgage loan portfolio. The sale was classified as held for sale in the third quarter of 2023 and was completed on 1 December 2023. Our retail business in Mauritius In November 2023, the Hongkong and Shanghai Banking Corporation Limited (acting through its Mauritius branch) entered into an agreement with ABSA Bank (Mauritius) Limited, a wholly-owned subsidiary of ABSA Bank Group Limited, to sell its Wealth and Personal Banking business. The sale is expected to complete in the second half of 2024 subject to regulatory approvals. At 31 December 2023, the major classes of assets and associated liabilities of disposal groups held for sale, excluding allocated impairment losses, were as follows: Canada Retail banking operations in France Other1 Total $m $m $m $m Assets of disposal groups held for sale Cash and balances at central banks2 5,370 226 — 5,596 Trading assets 2,465 — — 2,465 Financial assets designated and otherwise mandatorily measured at fair value through profit or loss 15 49 — 64 Derivatives 528 — — 528 Loans and advances to banks2 154 10,333 — 10,487 Loans and advances to customers 56,129 16,902 254 73,285 Reverse repurchase agreements – non-trading 2,723 — — 2,723 Financial investments3 16,978 33 17,011 Goodwill 225 — 225 Prepayments, accrued income and other assets 3,318 132 2 3,452 Total assets at 31 Dec 2023 87,905 27,675 256 115,836 Liabilities of disposal groups held for sale Trading liabilities 1,417 — — 1,417 Deposits by banks 78 — — 78 Customer accounts 63,001 22,307 642 85,950 Repurchase agreements – non-trading 2,768 — — 2,768 Financial liabilities designated at fair value — 2,370 — 2,370 Derivatives 608 7 — 615 Debt securities in issue 7,707 1,377 — 9,084 Subordinated liabilities 8 — — 8 Accruals, deferred income and other liabilities 5,916 196 4 6,116 Total liabilities at 31 Dec 2023 81,503 26,257 646 108,406 Expected date of completion First quarter of 2024 1 January 2024 Operating segment All global businesses WPB 1 Includes balances classified as held for sale in respect of the planned sale of our retail business in Mauritius and planned sale of our global hedge fund administration business across several markets. 2 Under the financial terms of the sale of our retail banking operations in France, HSBC Continental Europe will transfer the business with a net asset value of €1.7bn ($1.8bn) for a consideration of €1. Any required increase to the net asset value of the business to achieve this will be satisfied by the inclusion of additional cash. Based upon the net liabilities of the disposal group at 31 December 2023, HSBC would be expected to include a cash contribution of $11bn, of which $10.5bn was reclassified as held for sale at 31 December 2023 (‘Loans and advances to banks’, $10.3bn, ‘Cash and balances at central bank’, $0.2bn). 3 Includes financial investments measured at fair value through other comprehensive income of $9.4bn and debt instruments measured at amortised cost of $7.6bn. Notes on the financial statements 402 HSBC Holdings plc Annual Report and Accounts 2023 At 31 December 2022, the major classes of assets and associated liabilities of disposal groups held for sale, excluding allocated impairment losses, were as follows: Canada Retail banking operations in France Other Total $m $m $m $m Assets of disposal groups held for sale Cash and balances at central banks 4,664 71 1,811 6,546 Trading assets 3,168 — 8 3,176 Financial assets designated and otherwise mandatorily measured at fair value through profit or loss 13 47 1 61 Derivatives 866 — — 866 Loans and advances to banks 99 — 154 253 Loans and advances to customers 55,197 25,029 350 80,576 Reverse repurchase agreements – non-trading 4,396 — 250 4,646 Financial investments1 17,243 — 106 17,349 Goodwill 225 — — 225 Prepayments, accrued income and other assets 4,245 75 26 4,357 Total assets at 31 Dec 2022 90,127 25,222 2,706 118,055 Liabilities of disposal groups held for sale Trading liabilities 2,751 — 3 2,754 Deposits by banks 62 — 2 64 Customer accounts 60,606 22,348 2,320 85,274 Repurchase agreements – non-trading 3,266 — — 3,266 Financial liabilities designated at fair value — 3,523 — 3,523 Derivatives 806 7 — 813 Debt securities in issue 11,602 1,326 — 12,928 Subordinated liabilities 8 — — 8 Accruals, deferred income and other liabilities 5,727 159 81 5,967 Total liabilities at 31 Dec 2022 84,828 27,363 2,406 114,597 Expected date of completion Second half of 2023 Second half of 2023 Operating segment All global businesses WPB 1 Includes financial investments measured at fair value through other comprehensive income of $11.2bn and debt instruments measured at amortised cost of $6.2bn. Business acquisitions Acquisition of Silicon Valley Bank UK Limited In March 2023, HSBC UK Bank plc acquired Silicon Valley Bank UK Limited (‘SVB UK’), and in June 2023 changed its legal entity name to HSBC Innovation Bank Limited. The acquisition was funded from existing resources and brought the staff, assets and liabilities of SVB UK into the HSBC portfolio. On acquisition, we performed a preliminary assessment of the fair value of the assets and liabilities purchased. We established an opening balance sheet on 13 March 2023 and applied the result of the fair value assessment, which resulted in a reduction in net assets of $0.2bn. The provisional gain on acquisition of $1.6bn represents the difference between the consideration paid of £1 and the net assets acquired. Further due diligence has been performed post-acquisition, resulting in the recognition of an additional gain of $0.1bn at 30 September 2023, as required by IFRS 3 ‘Business Combinations’. HSBC Innovation Bank Limited contributed $0.5bn of revenue and $0.2bn to the Group profit after tax for the period from 13 March 2023 to 31 December 2023. As per the disclosure requirements set out in IFRS 3 ‘Business Combinations’, if HSBC Innovation Bank Limited had been acquired on 1 January 2023, management estimates that for the 12 months to 31 December 2023, consolidated revenue would have been $66bn and consolidated profit after tax would have been $25bn. In determining these amounts, management has assumed that the previously determined fair value adjustments, which arose on acquisition would have been the same if the acquisition had occurred on 1 January 2023. The details of the business combination at acquisition are as follows: At 13 Mar 2023 $m Fair value of assets acquired 11,367 Fair value of liabilities acquired (9,776) Fair value of net assets acquired 1,591 Provisional gain on acquisition 1,591 Consideration transferred settled in cash — Cash and cash equivalents acquired 1,243 Net cash inflow on acquisition 1,243 HSBC Holdings plc Annual Report and Accounts 2023 403 Financial statements Acquisition of Citibank China’s wealth management portfolio In October 2023, HSBC Bank (China) Company Limited, a wholly-owned subsidiary of The Hongkong and Shanghai Banking Corporation Limited, entered into an agreement to acquire Citibank China’s retail wealth management portfolio in mainland China. The portfolio comprises assets under management and deposits and the associated wealth customers. Upon completion, the acquired business will be integrated into HSBC Bank China’s Wealth and Personal Banking operations. The transaction is expected to complete in the first half of 2024. Acquisition of Silkroad Property Partners Singapore In October 2023, HSBC Global Asset Management Singapore Limited entered into an agreement to acquire 100% of the shares of Silkroad Property Partners Pte Ltd (‘Silkroad’) and for HSBC Global Asset Management Limited to acquire Silkroad’s affiliated General Partner entities. Silkroad is a Singapore headquartered Asia-Pacific-focused, real estate investment manager. The acquisition was completed on 31 January 2024. 24 Trading liabilities 2023 2022 $m $m Deposits by banks1 6,779 9,332 Customer accounts1 8,955 10,724 Other debt securities in issue (Note 26) 27 978 Other liabilities – net short positions in securities 57,389 51,319 At 31 Dec 73,150 72,353 1 ‘Deposits by banks’ and ‘Customer accounts’ include fair value repos, stock lending and other amounts. 25 Financial liabilities designated at fair value HSBC 2023 2022¹ $m $m Deposits by banks and customer accounts2 21,043 19,171 Liabilities to customers under investment contracts 5,103 5,374 Debt securities in issue (Note 26) 103,803 93,140 Subordinated liabilities (Note 29) 11,477 9,636 At 31 Dec 141,426 127,321 1 From 1 January 2023, we adopted IFRS 17 ‘Insurance Contracts’, which replaced IFRS 4 ‘Insurance Contracts’. We have restated 2022 comparative data. 2 Structured deposits placed at HSBC Bank USA are insured by the Federal Deposit Insurance Corporation, a US government agency, up to $250,000 per depositor. The carrying amount of financial liabilities designated at fair value was $4,421m less than the contractual amount at maturity (2022: $8,124m less). The cumulative amount of change in fair value attributable to changes in credit risk was a loss of $1,286m (2022: profit of $234m). HSBC Holdings 2023 2022 $m $m Debt securities in issue (Note 26) 35,189 25,423 Subordinated liabilities (Note 29) 8,449 6,700 At 31 Dec 43,638 32,123 The carrying amount of financial liabilities designated at fair value was $246m less than the contractual amount at maturity (2022: $2,405m less). The cumulative amount of change in fair value attributable to changes in credit risk was a loss of $682m (2022: $516m). 26 Debt securities in issue HSBC 2023 2022 $m $m Bonds and medium-term notes 160,632 145,240 Other debt securities in issue 37,115 27,027 Total debt securities in issue 197,747 172,267 Included within: – trading liabilities (Note 24) (27) (978) – financial liabilities designated at fair value (Note 25) (103,803) (93,140) At 31 Dec 93,917 78,149 Notes on the financial statements 404 HSBC Holdings plc Annual Report and Accounts 2023 HSBC Holdings 2023 2022 $m $m Debt securities 100,428 92,361 Included within: – financial liabilities designated at fair value (Note 25) (35,189) (25,423) At 31 Dec 65,239 66,938 27 Accruals, deferred income and other liabilities 2023 2022 $m $m Accruals and deferred income 16,814 12,605 Settlement accounts 28,423 18,178 Cash collateral and margin payables 56,832 70,298 Endorsements and acceptances 7,911 8,379 Employee benefit liabilities (Note 5) 1,160 1,096 Reinsurance contract liabilities 819 748 Lease liabilities 2,813 2,767 Other liabilities 21,834 20,242 At 31 Dec 136,606 134,313 1 Accruals, deferred income and other liabilities include $129,401m (2022: $125,957m) of financial liabilities, the majority of which are measured at amortised cost. 2 From 1 January 2023, we adopted IFRS 17 ‘Insurance Contracts’, which replaced IFRS 4 ‘Insurance Contracts’. Comparative data have been restated accordingly. 28 Provisions Restructuring costs Legal proceedings and regulatory matters Customer remediation Other provisions Total $m $m $m $m $m Provisions (excluding contractual commitments) At 1 Jan 2023 445 409 195 397 1,446 Additions 255 236 37 170 698 Amounts utilised (288) (231) (69) (68) (656) Unused amounts reversed (149) (30) (41) (95) (315) Exchange and other movements 21 (4) 8 16 41 At 31 Dec 2023 284 380 130 420 1,214 Contractual commitments1 At 1 Jan 2023 512 Net change in expected credit loss provision and other movements 15 At 31 Dec 2023 527 Total provisions At 31 Dec 2022 1,958 At 31 Dec 2023 1,741 Provisions (excluding contractual commitments) At 1 Jan 2022 383 619 386 558 1,946 Additions 434 271 60 206 971 Amounts utilised (288) (393) (106) (168) (955) Unused amounts reversed (87) (82) (109) (125) (403) Exchange and other movements 3 (6) (36) (74) (113) At 31 Dec 2022 445 409 195 397 1,446 Contractual commitments1 At 1 Jan 2022 620 Net change in expected credit loss provision and other movements (108) At 31 Dec 2022 512 Total provisions At 31 Dec 2021 2,566 At 31 Dec 2022 1,958 1 Contractual commitments include the expected credit loss provision in relation to off-balance sheet financial guarantee contracts and commitments where HSBC has become party to an irrevocable commitment, as defined under IFRS 9 ‘Financial Instruments’; and provisions for performance and other guarantee contracts. Further details of ‘Legal proceedings and regulatory matters’ are set out in Note 36. Legal proceedings include civil court, arbitration or tribunal proceedings brought against HSBC companies (whether by way of claim or counterclaim); or civil disputes that may, if not settled, result in court, arbitration or tribunal proceedings. ‘Regulatory matters’ refers to investigations, reviews and other actions carried out by, or in response to, the actions of regulators or law enforcement agencies in connection with alleged wrongdoing by HSBC. HSBC Holdings plc Annual Report and Accounts 2023 405 Financial statements Customer remediation refers to HSBC’s activities to compensate customers for losses or damages associated with a failure to comply with regulations or to treat customers fairly. Customer remediation is often initiated by HSBC in response to customer complaints and/or industry developments in sales practices, and is not necessarily initiated by regulatory action. For further details of the impact of IFRS 9 on undrawn loan commitments and financial guarantees, presented in ‘Contractual commitments’, see Note 34. Further analysis of the movement in the expected credit loss provision is disclosed within the ‘Reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to banks and customers including loan commitments and financial guarantees‘ table on page 169. Brazil PIS and COFINS tax matters Beginning in the late 1990s, HSBC Bank Brasil S.A. – Banco Múltiplo (‘HSBC Brazil’) and other financial services firms brought legal proceedings in Brazil challenging the assessment of PIS and COFINS taxes, which are federal taxes imposed on gross revenues earned by legal entities in Brazil. The Supreme Court of Brazil selected three cases – one involving an insurer, in 2007, and two involving other banks, in 2011 – to set standards that would apply to all of these proceedings. In June 2023, the court ruled against the financial services firms in all three cases. The standards set by the court in this ruling have not yet been applied to HSBC Brazil’s legacy cases, liability for which remained with HSBC after the sale of HSBC’s operations in Brazil to Bradesco in 2016. There are many factors that may affect the range of outcomes and any resulting financial impact for HSBC. Based upon the information currently available, a provision was recognised in respect of one legacy case. The remaining additional tax liability subject to challenge on all legacy PIS and COFINS cases is up to $0.4bn. 29 Subordinated liabilities HSBC’s subordinated liabilities 2023 2022 $m $m At amortised cost 24,954 22,290 – subordinated liabilities 23,149 20,547 – preferred securities 1,805 1,743 Designated at fair value (Note 25) 11,477 9,636 – subordinated liabilities 11,477 9,636 – preferred securities — — At 31 Dec 36,431 31,926 Issued by HSBC subsidiaries 4,154 6,094 Issued by HSBC Holdings 32,277 25,832 Subordinated liabilities rank behind senior obligations and generally count towards the capital base of HSBC. Capital securities may be called and redeemed by HSBC subject to prior notification to the PRA and, where relevant, the consent of the local banking regulator. If not redeemed at the first call date, coupons payable may reset or become floating rate based on relevant market rates. On subordinated liabilities other than floating rate notes, interest is payable at fixed rates of up to 10.176%. The balance sheet amounts disclosed in the following table are presented on an IFRS basis and do not reflect the amount that the instruments contribute to regulatory capital, principally due to regulatory amortisation and regulatory eligibility limits. HSBC’s subordinated liabilities: subsidiaries 2023 2022 $m $m Additional tier 1 capital securities issued by HSBC subsidiaries 1,672 1,584 Tier 2 securities issued by HSBC subsidiaries – Tier 2 securities issued by HSBC Bank plc 764 2,427 – Tier 2 securities issued by The Hongkong and Shanghai Banking Corporation Limited — 400 – Tier 2 securities issued by HSBC Bank USA Inc 223 223 – Tier 2 securities issued by HSBC Bank USA N.A. 1,449 1,405 – Tier 2 securities issued by HSBC Bank Canada1 — — Securities issued by other HSBC subsidiaries 46 55 Subordinated liabilities issued by HSBC subsidiaries at 31 Dec 4,154 6,094 1 Liability accounts for HSBC Bank Canada have been reclassified to ‘Liabilities of disposal groups held for sale’. HSBC Holdings’ subordinated liabilities 2023 2022 $m $m At amortised cost 24,439 19,727 Designated at fair value (Note 25) 8,449 6,700 At 31 Dec 32,888 26,427 HSBC Holdings’ subordinated liabilities in issue 2023 2022 $m $m Tier 2 securities issued by HSBC Holdings Amounts owed to third parties 31,975 25,527 Amounts owed to HSBC undertakings 913 900 Subordinated liabilities issued by HSBC Holdings at 31 Dec 32,888 26,427 Notes on the financial statements 406 HSBC Holdings plc Annual Report and Accounts 2023 Guaranteed by HSBC Holdings or HSBC Bank plc Capital securities guaranteed by HSBC Holdings or HSBC Bank plc were issued by the Jersey limited partnerships. The proceeds of these were lent to the respective guarantors by the limited partnerships in the form of subordinated notes. They qualified as additional tier 1 capital for HSBC under CRR II until 31 December 2021 by virtue of the application of grandfathering provisions. The capital security guaranteed by HSBC Bank plc also qualified as additional tier 1 capital for HSBC Bank plc (on a solo and a consolidated basis) under CRR II until 31 December 2021 by virtue of the same grandfathering process. Since 31 December 2021, these securities have no longer qualified as regulatory capital for HSBC or HSBC Bank plc. These preferred securities, together with the guarantee, are intended to provide investors with rights to income and capital distributions and distributions upon liquidation of the relevant issuer that are equivalent to the rights that they would have had if they had purchased non- cumulative perpetual preference shares of the relevant issuer. There are limitations on the payment of distributions if such payments are prohibited under UK banking regulations or other requirements, if a payment would cause a breach of HSBC’s capital adequacy requirements, or if HSBC Holdings or HSBC Bank plc has insufficient distributable reserves (as defined). HSBC Holdings and HSBC Bank plc have individually covenanted that, if prevented under certain circumstances from paying distributions on the preferred securities in full, they will not pay dividends or other distributions in respect of their ordinary shares, or repurchase or redeem their ordinary shares, until the distribution on the preferred securities has been paid in full. If the consolidated total capital ratio of HSBC Holdings falls below the regulatory minimum required or if the Directors expect it to do so in the near term, provided that proceedings have not been commenced for the liquidation, dissolution or winding up of HSBC Holdings, the holders’ interests in the preferred securities guaranteed by HSBC Holdings will be exchanged for interests in preference shares issued by HSBC Holdings that have economic terms which are in all material respects equivalent to the preferred securities and their guarantee. If the preferred securities guaranteed by HSBC Bank plc are outstanding in November 2048, or if the total capital ratio of HSBC Bank plc (on a solo or consolidated basis) falls below the regulatory minimum required, or if the Directors expect it to do so in the near term, provided that proceedings have not been commenced for the liquidation, dissolution or winding up of HSBC Bank plc, the holders’ interests in the preferred security guaranteed by HSBC Bank plc will be exchanged for interests in preference shares issued by HSBC Bank plc that have economic terms which are in all material respects equivalent to the preferred security and its guarantee. Tier 2 securities Tier 2 capital securities are either perpetual or dated subordinated securities on which there is an obligation to pay coupons. These capital securities are included within HSBC’s regulatory capital base as tier 2 capital under CRR II, either as fully eligible capital or by virtue of the application of grandfathering provisions. In accordance with CRR II, the capital contribution of all tier 2 securities is amortised for regulatory purposes in their final five years before maturity. 30 Maturity analysis of assets, liabilities and off-balance sheet commitments The table on page 408 provides an analysis of consolidated total assets, liabilities and off-balance sheet commitments by residual contractual maturity at the balance sheet date. These balances are included in the maturity analysis as follows: – Trading assets and liabilities (including trading derivatives but excluding reverse repos, repos and debt securities in issue) are included in the ‘Due not more than 1 month’ time bucket because trading balances are typically held for short periods of time. – Financial assets and liabilities with no contractual maturity (such as equity securities) are included in the ‘Due over 5 years’ time bucket. Undated or perpetual instruments are classified based on the contractual notice period, which the counterparty of the instrument is entitled to give. Where there is no contractual notice period, undated or perpetual contracts are included in the ‘Due over 5 years’ time bucket. – Non-financial assets and liabilities with no contractual maturity are included in the ‘Due over 5 years’ time bucket. – Financial instruments included within assets and liabilities of disposal groups held for sale are classified on the basis of the contractual maturity of the underlying instruments and not on the basis of the disposal transaction. – Liabilities under insurance contracts included in ‘other financial liabilities’ are irrespective of contractual maturity included in the ‘Due over 5 years’ time bucket in the maturity table provided below. An analysis of the present value of expected future cash flows of insurance contract liabilities and contractual service margin is provided on page 411. Liabilities under investment contracts are classified in accordance with their contractual maturity. Undated investment contracts are included in the ‘Due over 5 years’ time bucket, although such contracts are subject to surrender and transfer options by the policyholders. – Loan and other credit-related commitments are classified on the basis of the earliest date they can be drawn down. HSBC Holdings plc Annual Report and Accounts 2023 407 Financial statements HSBC Maturity analysis of assets, liabilities and off-balance sheet commitments Due not more than 1 month Due over 1 month but not more than 3 months Due over 3 months but not more than 6 months Due over 6 months but not more than 9 months Due over 9 months but not more than 1 year Due over 1 year but not more than 2 years Due over 2 years but not more than 5 years Due over 5 years Total $m $m $m $m $m $m $m $m $m Financial assets Cash and balances at central banks 285,868 — — — — — — — 285,868 Items in the course of collection from other banks 6,342 — — — — — — — 6,342 Hong Kong Government certificates of indebtedness 42,024 — — — — — — — 42,024 Trading assets 284,865 2,010 637 363 555 165 564 — 289,159 Financial assets designated or otherwise mandatorily measured at fair value 5,530 697 821 753 581 4,839 11,917 85,505 110,643 Derivatives 227,343 138 134 71 35 383 570 1,040 229,714 Loans and advances to banks 76,524 18,662 6,487 2,689 3,281 2,756 2,328 175 112,902 Loans and advances to customers 142,803 66,425 52,218 40,135 36,323 94,206 175,381 331,044 938,535 – personal 44,105 9,558 6,960 6,422 6,127 19,606 54,365 297,512 444,655 – corporate and commercial 83,281 50,268 38,250 24,685 24,566 61,612 106,598 30,592 419,852 – financial 15,417 6,599 7,008 9,028 5,630 12,988 14,418 2,940 74,028 Reverse repurchase agreements – non-trading 164,826 43,893 23,840 6,708 5,126 6,113 1,711 — 252,217 Financial investments 48,969 69,816 44,493 16,348 18,603 46,124 106,117 92,293 442,763 Assets held for sale2 39,882 2,929 7,041 4,176 3,261 17,085 33,015 7,943 115,332 Accrued income and other financial assets 108,138 6,574 4,404 550 698 220 764 1,513 122,861 Financial assets at 31 Dec 2023 1,433,114 211,144 140,075 71,793 68,463 171,891 332,367 519,513 2,948,360 Non-financial assets — — — — — — — 90,317 90,317 Total assets at 31 Dec 2023 1,433,114 211,144 140,075 71,793 68,463 171,891 332,367 609,830 3,038,677 Off-balance sheet commitments received Loan and other credit-related commitments 39,836 — — — — — — — 39,836 Financial liabilities Hong Kong currency notes in circulation 42,024 — — — — — — — 42,024 Deposits by banks 52,747 2,758 2,324 381 94 1,458 13,064 337 73,163 Customer accounts 1,343,858 138,117 78,611 20,832 17,724 7,785 4,616 104 1,611,647 – personal 621,112 84,909 61,286 14,794 12,465 5,507 2,742 2 802,817 – corporate and commercial 545,207 43,562 14,525 4,605 3,393 2,165 1,527 92 615,076 – financial 177,539 9,646 2,800 1,433 1,866 113 347 10 193,754 Repurchase agreements – non-trading 158,882 10,311 1,759 300 847 1 — — 172,100 Items in the course of transmission to other banks 7,295 — — — — — — — 7,295 Trading liabilities 66,548 6,302 300 — — — — — 73,150 Financial liabilities designated at fair value 22,080 8,366 7,823 7,197 6,239 16,679 39,497 33,545 141,426 – debt securities in issue: covered bonds — — — — — — — — — – debt securities in issue: unsecured 10,383 2,760 5,748 6,225 5,390 14,090 34,757 23,898 103,251 – subordinated liabilities and preferred securities — 1,995 — — — 1,471 3,429 4,581 11,476 – other 11,697 3,611 2,075 972 849 1,118 1,311 5,066 26,699 Derivatives 233,134 113 25 9 47 73 1,223 148 234,772 Debt securities in issue 6,891 6,664 10,816 6,896 6,427 6,317 27,452 22,454 93,917 – covered bonds — — — — — — 1,273 — 1,273 – otherwise secured 447 44 62 58 55 188 861 1,679 3,394 – unsecured 6,444 6,620 10,754 6,838 6,372 6,129 25,318 20,775 89,250 Liabilities of disposal groups held for sale3 69,868 5,231 5,479 6,728 6,541 4,730 7,918 1,511 108,006 Accruals and other financial liabilities 104,264 11,827 6,007 1,205 1,414 1,053 1,491 2,137 129,398 Subordinated liabilities — 13 — — — 1,790 897 22,254 24,954 Total financial liabilities at 31 Dec 2023 2,107,591 189,702 113,144 43,548 39,333 39,886 96,158 82,490 2,711,852 Non-financial liabilities — — — — — — — 134,215 134,215 Total liabilities at 31 Dec 2023 2,107,591 189,702 113,144 43,548 39,333 39,886 96,158 216,705 2,846,067 Off-balance sheet commitments given Loan and other credit-related commitments 895,140 95 126 72 171 439 807 300 897,150 – personal 256,272 21 30 46 107 279 745 192 257,692 – corporate and commercial 472,507 74 26 26 64 160 62 108 473,027 – financial 166,361 — 70 — — — — — 166,431 Notes on the financial statements 408 HSBC Holdings plc Annual Report and Accounts 2023 Maturity analysis of assets, liabilities and off-balance sheet commitments (continued) Due not more than 1 month Due over 1 month but not more than 3 months Due over 3 months but not more than 6 months Due over 6 months but not more than 9 months Due over 9 months but not more than 1 year Due over 1 year but not more than 2 years Due over 2 years but not more than 5 years Due over 5 years Total $m $m $m $m $m $m $m $m $m Financial assets Cash and balances at central banks 327,002 — — — — — — — 327,002 Items in the course of collection from other banks 7,297 — — — — — — — 7,297 Hong Kong Government certificates of indebtedness 43,787 — — — — — — — 43,787 Trading assets 213,234 1,333 1,343 338 425 808 222 390 218,093 Financial assets designated at fair value 3,282 718 1,369 1,178 479 1,967 13,353 77,755 100,101 Derivatives 281,724 132 29 21 65 261 1,052 875 284,159 Loans and advances to banks 72,240 13,965 8,323 860 2,328 3,058 3,569 132 104,475 Loans and advances to customers 139,934 75,486 58,951 35,633 33,730 99,933 173,076 306,818 923,561 – personal 41,834 9,141 6,659 5,745 5,773 18,326 51,050 273,487 412,015 – corporate and commercial 84,955 60,067 45,695 24,430 22,629 68,473 108,418 30,231 444,898 – financial 13,145 6,278 6,597 5,458 5,328 13,134 13,608 3,100 66,648 Reverse repurchase agreements – non-trading 171,173 51,736 16,164 5,840 2,776 3,999 2,066 — 253,754 Financial investments 46,493 79,309 30,722 11,798 13,067 40,710 67,951 74,676 364,726 Assets held for sale2 33,781 3,755 3,452 3,044 3,263 15,369 40,017 14,697 117,378 Accrued income and other financial assets 99,113 6,042 3,766 620 703 543 302 1,295 112,384 Financial assets at 31 Dec 2022 1,439,060 232,476 124,119 59,332 56,836 166,648 301,608 476,638 2,856,717 Non-financial assets — — — — — — — 92,569 92,569 Total assets at 31 Dec 2022 1,439,060 232,476 124,119 59,332 56,836 166,648 301,608 569,207 2,949,286 Off-balance sheet commitments received Loan and other credit-related commitments 27,340 — — — — — — — 27,340 Financial liabilities Hong Kong currency notes in circulation 43,787 — — — — — — — 43,787 Deposits by banks 46,994 359 3,510 205 136 1,455 13,737 326 66,722 Customer accounts 1,388,297 93,108 47,712 14,244 17,295 4,719 4,607 321 1,570,303 – personal 657,413 55,252 35,430 10,431 12,374 2,835 2,351 2 776,088 – corporate and commercial 555,539 31,624 10,385 3,080 3,824 1,667 2,146 274 608,539 – financial 175,345 6,232 1,897 733 1,097 217 110 45 185,676 Repurchase agreements – non-trading 121,193 3,804 685 170 645 1,250 — — 127,747 Items in the course of transmission to other banks 7,864 — — — — — — — 7,864 Trading liabilities 66,027 5,668 281 113 113 116 35 — 72,353 Financial liabilities designated at fair value 16,430 7,398 6,562 4,308 5,325 19,287 34,886 33,125 127,321 – debt securities in issue: covered bonds — — — — — — — — — – debt securities in issue: unsecured 7,056 3,620 4,793 3,157 4,288 16,234 29,941 23,510 92,599 – subordinated liabilities and preferred securities — — — — — 1,971 3,675 3,990 9,636 – other 9,374 3,778 1,769 1,151 1,037 1,082 1,270 5,625 25,086 Derivatives 284,412 73 18 46 57 171 849 136 285,762 Debt securities in issue 4,514 7,400 7,476 4,745 3,585 9,198 19,240 21,991 78,149 – covered bonds — — — — — — 601 — 601 – otherwise secured 705 28 40 38 36 124 656 1,346 2,973 – unsecured 3,809 7,372 7,436 4,707 3,549 9,074 17,983 20,645 74,575 Liabilities of disposal groups held for sale3 76,928 4,342 5,374 6,599 8,606 2,343 8,653 1,479 114,324 Accruals and other financial liabilities 104,295 9,576 4,776 967 1,564 1,028 2,016 1,725 125,947 Subordinated liabilities — — 11 160 — — 1,689 20,430 22,290 Total financial liabilities at 31 Dec 2022 2,160,741 131,728 76,405 31,557 37,326 39,567 85,712 79,533 2,642,569 Non-financial liabilities — — — — — — — 121,520 121,520 Total liabilities at 31 Dec 2022 2,160,741 131,728 76,405 31,557 37,326 39,567 85,712 201,053 2,764,089 Off-balance sheet commitments given Loan and other credit-related commitments 825,781 184 75 59 210 242 975 328 827,854 – personal 242,953 2 3 — 110 199 811 300 244,378 – corporate and commercial 449,843 176 72 59 84 43 163 28 450,468 – financial 132,985 6 — — 16 — 1 — 133,008 1 From 1 January 2023, we adopted IFRS 17 ‘Insurance Contracts’, which replaced IFRS 4 ‘Insurance Contracts’. Comparative data have been restated accordingly. 2 Unallocated impairment losses in relation to disposal groups of $2.0bn (2022: $2.4bn) and non-financial assets of $0.9bn (2022: $1bn) that are presented within assets held for sale on the balance sheet have been included within non-financial assets in the table above. 3 A total of $0.4bn (2022: $0.3bn) of non-financial liabilities that are presented within liabilities of disposal groups held for sale on the balance sheet have been included within non-financial liabilities in the table above. HSBC Holdings plc Annual Report and Accounts 2023 409 Financial statements HSBC Holdings Maturity analysis of assets, liabilities and off-balance sheet commitments Due not more than 1 month Due over 1 month but not more than 3 months Due over 3 months but not more than 6 months Due over 6 months but not more than 9 months Due over 9 months but not more than 1 year Due over 1 year but not more than 2 years Due over 2 years but not more than 5 years Due over 5 years Total $m $m $m $m $m $m $m $m $m Financial assets Cash at bank and in hand: – balances with HSBC undertakings 7,029 — — — — — — — 7,029 Financial assets with HSBC undertakings designated and otherwise mandatorily measured at fair value — — — — — 3,815 26,284 29,780 59,879 Derivatives 2,217 — — — — 18 675 434 3,344 Loans and advances to HSBC undertakings — — 120 — — 1,016 6,783 19,435 27,354 Financial investments 10,365 6,017 898 750 757 771 — — 19,558 Accrued income and other financial assets 3,511 860 254 229 5 — — — 4,859 Total financial assets at 31 Dec 2023 23,122 6,877 1,272 979 762 5,620 33,742 49,649 122,023 Non-financial assets — — — — — — — 163,146 163,146 Total assets at 31 Dec 2023 23,122 6,877 1,272 979 762 5,620 33,742 212,795 285,169 Financial liabilities Amounts owed to HSBC undertakings — 168 — — — — — — 168 Financial liabilities designated at fair value — — — — — 5,287 19,604 18,747 43,638 – debt securities in issue — — — — — 3,816 16,175 15,198 35,189 – subordinated liabilities and preferred securities — — — — — 1,471 3,429 3,549 8,449 Derivatives 2,452 209 7 59 75 558 1,318 1,412 6,090 Debt securities in issue — — 816 2,158 — 4,920 33,735 23,610 65,239 Accruals and other financial liabilities 1,437 1,599 1,049 127 34 — — 23 4,269 Subordinated liabilities — 1,987 — — — 1,600 880 19,972 24,439 Total financial liabilities 31 Dec 2023 3,889 3,963 1,872 2,344 109 12,365 55,537 63,764 143,843 Non-financial liabilities — — — — — — — 20 20 Total liabilities at 31 Dec 2023 3,889 3,963 1,872 2,344 109 12,365 55,537 63,784 143,863 Financial assets Cash at bank and in hand: – balances with HSBC undertakings 3,210 — — — — — — — 3,210 Financial assets with HSBC undertakings designated and otherwise mandatorily measured at fair value — — — — — 9,007 16,230 27,085 52,322 Derivatives 2,889 — — — — — 796 116 3,801 Loans and advances to HSBC undertakings — 2,163 240 — — 2,035 4,414 17,913 26,765 Financial investments 1,517 2,712 8,870 1,020 2,194 3,153 — — 19,466 Accrued income and other financial assets 68 4,147 179 90 4 — 14 — 4,502 Total financial assets at 31 Dec 2022 7,684 9,022 9,289 1,110 2,198 14,195 21,454 45,114 110,066 Non-financial assets — — — — — — — 171,035 171,035 Total assets at 31 Dec 2022 7,684 9,022 9,289 1,110 2,198 14,195 21,454 216,149 281,101 Financial liabilities Amounts owed to HSBC undertakings 48 266 — — — — — — 314 Financial liabilities designated at fair value — — — — — 1,447 16,459 14,217 32,123 – debt securities in issue — — — — — 1,447 12,784 11,192 25,423 – subordinated liabilities and preferred securities — — — — — — 3,675 3,025 6,700 Derivatives 2,540 — 35 — 102 460 1,638 2,147 6,922 Debt securities in issue — — 1,972 448 714 11,046 25,380 27,378 66,938 Accruals and other financial liabilities 722 450 648 61 35 — 14 31 1,961 Subordinated liabilities — — — — — 1,941 1,492 16,294 19,727 Total financial liabilities at 31 Dec 2022 3,310 716 2,655 509 851 14,894 44,983 60,067 127,985 Non-financial liabilities — — — — — — — 8 8 Total liabilities at 31 Dec 2022 3,310 716 2,655 509 851 14,894 44,983 60,075 127,993 Notes on the financial statements 410 HSBC Holdings plc Annual Report and Accounts 2023 Contractual maturity of financial liabilities The following table shows, on an undiscounted basis, all cash flows relating to principal and future coupon payments (except for trading liabilities and derivatives not treated as hedging derivatives). For this reason, balances in the following table do not agree directly with those in our consolidated balance sheet. Undiscounted cash flows payable in relation to hedging derivative liabilities are classified according to their contractual maturities. Trading liabilities and derivatives not treated as hedging derivatives are included in the ‘Due not more than 1 month’ time bucket and not by contractual maturity. In addition, loan and other credit-related commitments and financial guarantees are generally not recognised on our balance sheet. The undiscounted cash flows potentially payable under loan and other credit-related commitments and financial guarantees are classified on the basis of the earliest date they can be called. Cash flows payable by HSBC under financial liabilities by remaining contractual maturities Due not more than 1 month Due over 1 month but not more than 3 months Due over 3 months but not more than 1 year Due over 1 year but not more than 5 years Due over 5 years Total $m $m $m $m $m $m Deposits by banks 52,938 2,898 3,304 17,123 362 76,625 Customer accounts 1,345,006 141,348 119,660 13,423 109 1,619,546 Repurchase agreements – non-trading 159,264 10,457 2,996 1 — 172,718 Trading liabilities 73,150 — — — — 73,150 Financial liabilities designated at fair value 22,262 9,156 26,033 63,960 44,886 166,297 Derivatives 232,598 609 1,295 2,445 2,910 239,857 Debt securities in issue 6,837 7,407 24,117 43,513 27,119 108,993 Subordinated liabilities 39 135 1,465 9,020 34,920 45,579 Other financial liabilities1 149,904 9,752 5,943 2,555 2,109 170,263 2,041,998 181,762 184,813 152,040 112,415 2,673,028 Loan and other credit-related commitments 895,156 95 371 1,437 91 897,150 Financial guarantees2 16,966 4 39 — — 17,009 At 31 Dec 2023 2,954,120 181,861 185,223 153,477 112,506 3,587,187 Proportion of cash flows payable in period 83% 5% 5% 4% 3% Deposits by banks 47,082 406 4,024 16,050 359 67,921 Customer accounts 1,387,125 96,474 80,608 9,961 346 1,574,514 Repurchase agreements – non-trading 121,328 3,852 1,535 1,268 — 127,983 Trading liabilities 72,353 — — — — 72,353 Financial liabilities designated at fair value 16,687 7,859 18,740 63,606 43,475 150,367 Derivatives 283,512 171 1,181 2,222 1,059 288,145 Debt securities in issue 4,329 8,217 17,522 34,283 26,428 90,779 Subordinated liabilities 37 168 1,395 7,321 32,946 41,867 Other financial liabilities1 153,597 8,670 5,994 3,230 1,704 173,195 2,086,050 125,817 130,999 137,941 106,317 2,587,124 Loan and other credit-related commitments 825,781 184 344 1,217 328 827,854 Financial guarantees2 18,696 25 62 — — 18,783 At 31 Dec 2022 2,930,527 126,026 131,405 139,158 106,645 3,433,761 Proportion of cash flows payable in period 85% 4% 4% 4% 3% 1 Excludes financial liabilities of disposal groups. 2 Excludes performance guarantee contracts to which the impairment requirements in IFRS 9 are not applied. HSBC Holdings HSBC Holdings’ primary sources of liquidity are dividends received from subsidiaries, interest on and repayment of intra-Group loans and securities, and interest earned on its own liquid funds. HSBC Holdings also raises funds in the debt capital markets to meet the Group’s minimum requirement for own funds and eligible liabilities and maintain an appropriate liquidity buffer. HSBC Holdings uses this liquidity to meet its obligations, including interest and principal repayments on external debt liabilities, operating expenses and collateral on derivative transactions. HSBC Holdings is also subject to contingent liquidity risk by virtue of credit-related commitments and guarantees and similar contracts issued relating to its subsidiaries. Such commitments and guarantees are only issued after due consideration of HSBC Holdings’ ability to finance the commitments and guarantees and the likelihood of the need arising. HSBC Holdings actively manages the cash flows from its subsidiaries to optimise the amount of cash held at the holding company level. During 2023, consistent with the Group’s capital plan, the Group’s material subsidiaries did not experience any significant restrictions on paying dividends or repaying loans and advances. Also, there are no foreseen restrictions envisaged with regard to planned dividends or payments from material subsidiaries. However, the ability of subsidiaries to pay dividends or advance monies to HSBC Holdings depends on, among other things, their respective local regulatory capital and banking requirements, exchange controls, statutory reserves, and financial and operating performance. HSBC Holdings currently has sufficient liquidity to meet its present and forecast requirements. Liquidity risk in HSBC Holdings is overseen by Holdings ALCO. HSBC Holdings plc Annual Report and Accounts 2023 411 Financial statements The following table shows, on an undiscounted basis, all cash flows relating to principal and future coupon payments (except for trading liabilities and derivatives not treated as hedging derivatives). For this reason, balances in the following table do not agree directly with those in HSBC Holdings balance sheet. Undiscounted cash flows payable in relation to hedging derivative liabilities are classified according to their contractual maturities. Trading liabilities and derivatives not treated as hedging derivatives are included in the ‘Due not more than 1 month’ time bucket and not by contractual maturity. In addition, loan and other credit-related commitments and financial guarantees are generally not recognised on our balance sheet. The undiscounted cash flows potentially payable under loan and other credit-related commitments and financial guarantees are classified on the basis of the earliest date they can be called. Cash flows payable by HSBC Holdings under financial liabilities by remaining contractual maturities Due not more than 1 month Due over 1 month but not more than 3 months Due over 3 months but not more than 1 year Due over 1 year but not more than 5 years Due over 5 years Total $m $m $m $m $m $m Amounts owed to HSBC undertakings — 168 — — — 168 Financial liabilities designated at fair value 23 405 1,437 31,050 25,610 58,525 Derivatives 1,244 556 1,651 2,227 726 6,404 Debt securities in issue — 680 4,787 46,909 27,745 80,121 Subordinated liabilities 46 2,163 1,360 8,239 30,862 42,670 Other financial liabilities 1,436 1,620 1,210 — 23 4,289 2,749 5,592 10,445 88,425 84,966 192,177 Loan commitments — — — — — — Financial guarantees1 — — — — — — At 31 Dec 2023 2,749 5,592 10,445 88,425 84,966 192,177 Amounts owed to HSBC undertakings 48 266 — — — 314 Financial liabilities designated at fair value 11 72 1,139 22,921 19,196 43,339 Derivatives 1,182 177 1,089 4,231 1,321 8,000 Debt securities in issue — 544 4,899 44,608 32,540 82,591 Subordinated liabilities 46 161 1,068 8,262 27,045 36,582 Other financial liabilities 721 458 745 14 31 1,969 2,008 1,678 8,940 80,036 80,133 172,795 Loan commitments — — — — — — Financial guarantees1 — — — — — — At 31 Dec 2022 2,008 1,678 8,940 80,036 80,133 172,795 1 Excludes performance guarantee contracts to which the impairment requirements in IFRS 9 are not applied. Prior period comparatives have been restated. Refer to footnote 1 in Note 34. 31 Offsetting of financial assets and financial liabilities In the offsetting of financial assets and financial liabilities, the net amount is reported in the balance sheet when the offset criteria are met. This is achieved when there is a legally enforceable right to offset the recognised amounts and there is either an intention to settle on a net basis, or realise the asset and settle the liability simultaneously. In the following table, the ‘Amounts not set off in the balance sheet’ include transactions where: – the counterparty has an offsetting exposure with HSBC and a master netting or similar arrangement is in place with a right to set off only in the event of default, insolvency or bankruptcy, or the offset criteria are otherwise not satisfied; and – cash and non-cash collateral (debt securities and equities) has been received/pledged for derivatives and reverse repurchase/repurchase, stock borrowing/lending and similar agreements to cover net exposure in the event of a default or other predetermined events. The effect of over-collateralisation is excluded. ‘Amounts not subject to enforceable netting agreements’ include contracts executed in jurisdictions where the rights of offset may not be upheld under the local bankruptcy laws, and transactions where a legal opinion evidencing enforceability of the right of offset may not have been sought, or may have been unable to obtain. For risk management purposes, the net amounts of loans and advances to customers are subject to limits, which are monitored and the relevant customer agreements are subject to review and updated, as necessary, to ensure the legal right to set off remains appropriate. Notes on the financial statements 412 HSBC Holdings plc Annual Report and Accounts 2023 Offsetting of financial assets and financial liabilities Amounts subject to enforceable netting arrangements Amounts not subject to enforceable netting arrangements1 Total Amounts not set off in the balance sheet Gross amounts Amounts offset Net amounts in the balance sheet Financial instruments, including non-cash collateral Cash collateral Net amount $m $m $m $m $m $m $m $m Financial assets Derivatives (Note 15)2 341,473 (116,486) 224,987 (198,743) (22,926) 3,318 4,727 229,714 Reverse repos, stock borrowing and similar agreements classified as:3 – trading assets 29,152 (602) 28,550 (28,513) (34) 3 2,633 31,183 – non-trading assets 365,922 (135,210) 230,712 (230,240) (80) 392 21,653 252,365 Loans and advances to customers4 34,173 (15,792) 18,381 (15,613) (93) 2,675 2 18,383 At 31 Dec 2023 770,720 (268,090) 502,630 (473,109) (23,133) 6,388 29,015 531,645 Derivatives (Note 15)2 419,020 (140,987) 278,033 (236,372) (36,486) 5,175 6,126 284,159 Reverse repos, stock borrowing and similar agreements classified as:3 – trading assets 24,370 (236) 24,134 (24,105) (29) — 1,369 25,503 – non-trading assets 335,193 (102,888) 232,305 (231,432) (449) 424 21,689 253,994 Loans and advances to customers4 28,336 (12,384) 15,952 (13,166) — 2,786 267 16,219 At 31 Dec 20226 806,919 (256,495) 550,424 (505,075) (36,964) 8,385 29,451 579,875 Financial liabilities Derivatives (Note 15)2 344,799 (116,486) 228,313 (198,640) (23,748) 5,925 6,459 234,772 Repos, stock lending and similar agreements classified as:3 – trading liabilities 15,686 (172) 15,514 (15,453) — 61 6 15,520 – non-trading liabilities 270,493 (135,640) 134,853 (134,095) (669) 89 37,247 172,100 Customer accounts6 42,522 (15,792) 26,730 (15,613) (93) 11,024 13 26,743 At 31 Dec 2023 673,500 (268,090) 405,410 (363,801) (24,510) 17,099 43,725 449,135 Derivatives (Note 15)2 419,992 (140,987) 279,005 (239,234) (29,276) 10,495 6,757 285,762 Repos, stock lending and similar agreements classified as:3 – trading liabilities 20,026 (236) 19,790 (19,790) — — 5 19,795 – non-trading liabilities 206,827 (102,888) 103,939 (103,296) (249) 394 23,809 127,748 Customer accounts6 37,164 (12,384) 24,780 (13,166) — 11,614 14 24,794 At 31 Dec 20226 684,009 (256,495) 427,514 (375,486) (29,525) 22,503 30,585 458,099 1 These exposures continue to be secured by financial collateral, but we may not have sought or been able to obtain a legal opinion evidencing enforceability of the right of offset. 2 At 31 December 2023, the amount of cash margin received that had been offset against the gross derivatives assets was $5,105m (2022 $8,357m). The amount of cash margin paid that had been offset against the gross derivatives liabilities was $7,142m (2022: $10,918m). 3 For the amount of repos, reverse repos, stock lending, stock borrowing and similar agreements recognised on the balance sheet within ‘Trading assets’ of $31,183m (2022: $25,503m) and ‘Trading liabilities’ of $15,520m (2022: $19,795m), see the ‘Funding sources and uses’ table on page 211. 4 At 31 December 2023, the total amount of ‘Loans and advances to customers’ was $938,535m (2022: $923,561m), of which $18,381m (2022: $15,952m) was subject to offsetting. 5 From 1 January 2023, we adopted IFRS 17 ‘Insurance Contracts’, which replaced IFRS 4 ‘Insurance Contracts’. We have restated 2022 comparative data. 6 At 31 December 2023, the total amount of ‘Customer accounts’ was $1,611,647m (2022: $1,570,303m), of which $26,730m (2022: $24,780m) was subject to offsetting. HSBC Holdings plc Annual Report and Accounts 2023 413 Financial statements 32 Interest rate benchmark reform Financial instruments yet to transition to alternative benchmarks, by main benchmark USD Libor GBP Libor3 JPY Libor CDOR TIIE Others1 At 31 Dec 2023 $m $m $m $m $m $m Non-derivative financial assets2 2,644 45 — 2,132 3,961 1,941 Non-derivative financial liabilities 905 2,054 558 181 1,323 9 Derivative notional contract amount 12,013 — — 134,636 32,836 11,821 At 31 Dec 2022 Non-derivative financial assets2 54,348 304 — 1,695 3,635 4,144 Non-derivative financial liabilities 25,564 1,804 1,179 176 — — Derivative notional contract amount 2,348,412 68 — 119,832 17,698 56,759 1 Comprises financial instruments referencing other significant benchmark rates yet to transition to alternative benchmarks (euro Libor, SOR, THBFIX, MIFOR, Sibor and Johannesburg interbank average rate (‘JIBAR’)). An announcement was made by the South African regulator during the first half of 2023 on the cessation of the JIBAR. Therefore, JIBAR is also included in ‘Others‘ during the current period. 2 Gross carrying amount excluding allowances for expected credit losses. 3 Non-derivative assets exposure relates to contracts for clients requiring additional time for loan restructuring or repayment. The limited number of remaining contracts are expected to be transitioned prior to cessation of ‘synthetic’ GBP Libor from 31 March 2024. Non-derivative financial liabilities relate to MREL instruments that include references to GBP Libor in their contractual terms but are currently using a fixed interest rate. HSBC remains committed to seeking to remediate and/or mitigate the risks associated with these contracts by the relevant interest rate calculation dates. The amounts in the above table relate to HSBC’s main operating entities where HSBC has material exposures impacted by Ibor reform, including in the UK, Hong Kong, France, the US, Mexico, Canada, Singapore, the UAE, Bermuda, Australia, Qatar, Germany, Thailand, India and Japan. The amounts provide an indication of the extent of the Group’s exposure to the Ibor benchmarks that are due to be replaced. Amounts are in respect of financial instruments that: – contractually reference an interest rate benchmark that is planned to transition to an alternative benchmark; – have a contractual maturity date beyond the date by which the reference interest rate benchmark is expected to cease; and – are recognised on HSBC’s consolidated balance sheet. 33 Called up share capital and other equity instruments Called up share capital and share premium HSBC Holdings ordinary shares of $0.50 each, issued and fully paid 2023 2022 Number $m Number $m At 1 Jan 20,293,607,410 10,147 20,631,520,439 10,316 Shares issued under HSBC employee share plans 10,778,479 5 10,226,221 5 Shares issued in lieu of dividends — — — — Less: shares repurchased and cancelled 716,384,289 358 348,139,250 174 Less: treasury shares cancelled 325,273,407 163 — — At 31 Dec1 19,262,728,193 9,631 20,293,607,410 10,147 HSBC Holdings share premium 2023 2022 $m $m At 31 Dec 14,738 14,664 Total called up share capital and share premium 2023 2022 $m $m At 31 Dec 24,369 24,811 1 All HSBC Holdings ordinary shares in issue confer identical rights, including in respect of capital, dividends and voting. HSBC Holdings non-cumulative preference share of £0.01 The one non-cumulative sterling preference share of £0.01 (‘sterling preference share’) has been in issue since 29 December 2010 and is held by a subsidiary of HSBC Holdings. Dividends are paid quarterly at the sole and absolute discretion of the Board. The sterling preference share carries no rights of conversion into ordinary shares of HSBC Holdings and no right to attend or vote at shareholder meetings of HSBC Holdings. These securities can be redeemed by HSBC Holdings at any time, subject to prior approval by the PRA. Notes on the financial statements 414 HSBC Holdings plc Annual Report and Accounts 2023 Other equity instruments HSBC Holdings has included two types of additional tier 1 capital securities in its tier 1 capital, including the contingent convertible securities described below. These are accounted for as equity because HSBC does not have an obligation to transfer cash or a variable number of its own ordinary shares to holders under any circumstances outside its control. See Note 29 for additional tier 1 securities accounted for as liabilities. Additional tier 1 capital – contingent convertible securities HSBC Holdings continues to issue contingent convertible securities that are included in its capital base as fully CRR II-compliant additional tier 1 capital securities on an end point basis. These securities are marketed principally and subsequently allotted to corporate investors and fund managers. The net proceeds of the issuances are typically used for HSBC Holdings’ general corporate purposes and to further strengthen its capital base to meet requirements under CRR II. These securities bear a fixed rate of interest until their initial call dates. After the initial call dates, if they are not redeemed, the securities will bear interest at rates fixed periodically in advance for five-year periods based on credit spreads, fixed at issuance, above prevailing market rates. Interest on the contingent convertible securities will be due and payable only at the sole discretion of HSBC Holdings, and HSBC Holdings has sole and absolute discretion at all times to cancel for any reason (in whole or part) any interest payment that would otherwise be payable on any payment date. Distributions will not be paid if they are prohibited under UK banking regulations or if the Group has insufficient reserves or fails to meet the solvency conditions defined in the securities’ terms. The contingent convertible securities are undated and are repayable at the option of HSBC Holdings in whole typically at the initial call date or on any fifth anniversary after this date. In addition, the securities are repayable at the option of HSBC in whole for certain regulatory or tax reasons. Any repayments require the prior consent of the PRA. These securities rank pari passu with HSBC Holdings’ sterling preference shares and therefore rank ahead of ordinary shares. The contingent convertible securities will be converted into fully paid ordinary shares of HSBC Holdings at a predetermined price, should HSBC’s consolidated non-transitional CET1 ratio fall below 7.0%. Therefore, in accordance with the terms of the securities, if the non-transitional CET1 ratio breaches the 7.0% trigger, the securities will convert into ordinary shares at fixed contractual conversion prices in the issuance currencies of the relevant securities, subject to anti-dilution adjustments. HSBC’s additional tier 1 capital – contingent convertible securities in issue which are accounted for in equity Original nominal amount (LCY) First call date 2023 2022 $m $m $2,250m 6.375% perpetual subordinated contingent convertible securities Sep 2024 2,250 2,250 $2,450m 6.375% perpetual subordinated contingent convertible securities Mar 2025 2,450 2,450 $3,000m 6.000% perpetual subordinated contingent convertible securities May 2027 3,000 3,000 $2,350m 6.250% perpetual subordinated contingent convertible securities1 Mar 2023 — 2,350 $1,800m 6.500% perpetual subordinated contingent convertible securities Mar 2028 1,800 1,800 $1,500m 4.600% perpetual subordinated contingent convertible securities2 Dec 2030 1,500 1,500 €1,000m 4.000% perpetual subordinated contingent convertible securitiess3 Mar 2026 1,000 1,000 $1,000m 4.700% perpetual subordinated contingent convertible securities4 Mar 2031 1,000 1,000 $2,000m 8.000% perpetual subordinated contingent convertible securities5 Mar 2028 1,980 — €1,000m 6.000% perpetual subordinated contingent convertible securities6 Sep 2023 — 1,123 €1,250m 4.750% perpetual subordinated contingent convertible securities Jul 2029 1,422 1,422 S$750m 5.000% perpetual subordinated contingent convertible securities7 Sep 2023 — 550 €1,000m 5.875% perpetual subordinated contingent convertible securities Sep 2026 1,301 1,301 At 31 Dec 17,703 19,746 1 This security was called by HSBC Holdings on 30 January 2023 and redeemed and cancelled on 23 March 2023. 2 This security was issued by HSBC Holdings on 17 December 2020. The first call period commences six months prior to reset date of 17 June 2031. 3 This security was issued by HSBC Holdings on 9 March 2021. The first call period commences six months prior to reset date of 9 September 2026. 4 This security was issued by HSBC Holdings on 9 March 2021. The first call period commences six months prior to reset date of 9 September 2031. 5 This security was issued by HSBC Holdings on 7 March 2023. The first call period commences six months prior to reset date of 7 September 2028. This security has been accounted for net of directly attributable transaction costs. 6 This security was called by HSBC Holdings on 3 August 2023 and was redeemed and cancelled on 29 September 2023. 7 This security was called by HSBC Holdings on 3 August 2023 and was redeemed and cancelled on 25 September 2023. Shares under option For details of the options outstanding to subscribe for HSBC Holdings ordinary shares under the HSBC Holdings Savings-Related Share Option Plan (UK), see Note 5. Aggregate options outstanding under these plans 31 Dec 2023 31 Dec 2022 Number of HSBC Holdings ordinary shares Usual period of exercise Exercise price Number of HSBC Holdings ordinary shares Usual period of exercise Exercise price 83,993,678 2022 to 2029 £2.6270–£5.4490 115,650,723 2021 to 2028 £2.6270–5.9640 Maximum obligation to deliver HSBC Holdings ordinary shares At 31 December 2023, the maximum obligation to deliver HSBC Holdings ordinary shares under all of the above option arrangements and the HSBC International Employee Share Purchase Plan, together with long-term incentive awards and deferred share awards granted under the HSBC Share Plan 2011, was 208,539,316 (2022: 240,612,019). The total number of shares at 31 December 2023 held by employee benefit trusts that may be used to satisfy such obligations to deliver HSBC Holdings ordinary shares was 20,902,218 (2022: 12,315,711). HSBC Holdings plc Annual Report and Accounts 2023 415 Financial statements 34 Contingent liabilities, contractual commitments and guarantees HSBC HSBC Holdings1 2023 2022 2023 2022 $m $m $m $m Guarantees and other contingent liabilities: – financial guarantees 17,009 18,783 — — – performance and other guarantees 94,277 88,240 7,723 17,707 – other contingent liabilities 636 676 — 90 At 31 Dec 111,922 107,699 7,723 17,797 Commitments:2 – documentary credits and short-term trade-related transactions 7,818 8,241 — — – forward asset purchases and forward deposits placed 78,535 50,852 — — – standby facilities, credit lines and other commitments to lend 810,797 768,761 — — At 31 Dec 897,150 827,854 — — 1 Guarantees by HSBC Holdings are in favour of other Group entities. These include contracts that provide protection against credit risk on a specified exposure but do not meet the definition of financial guarantees, which have been reclassified to ‘performance and other guarantees’. Prior period comparatives have been restated and the full balance reclassified. 2 Includes $661,015m of commitments at 31 December 2023 (31 December 2022: $618,788m), to which the impairment requirements in IFRS 9 are applied where HSBC has become party to an irrevocable commitment. The preceding table discloses the nominal principal amounts of off-balance sheet liabilities and commitments for the Group, which represent the maximum amounts at risk should the contracts be fully drawn upon and the clients default. As a significant portion of guarantees and commitments are expected to expire without being drawn upon, the total of the nominal principal amounts is not indicative of future liquidity requirements. The expected credit loss provision relating to guarantees and commitments under IFRS 9 is disclosed in Note 28. The majority of the guarantees have a term of less than one year, while guarantees with terms of more than one year are subject to HSBC’s annual credit review process. Contingent liabilities arising from legal proceedings, regulatory and other matters against Group companies are excluded from this note but are disclosed in Notes 28 and 36. Financial Services Compensation Scheme The Financial Services Compensation Scheme (‘FSCS’) provides compensation, up to certain limits, to eligible customers of financial services firms that are unable, or likely to be unable, to pay claims against them. The FSCS may impose a further levy on the Group to the extent the industry levies imposed to date are not sufficient to cover the compensation due to customers in any future possible collapse. The ultimate FSCS levy to the industry as a result of a collapse cannot be estimated reliably. It is dependent on various uncertain factors including the potential recovery of assets by the FSCS, changes in the level of protected products (including deposits and investments) and the population of FSCS members at the time. Associates HSBC’s share of associates’ contingent liabilities, contractual commitments and guarantees amounted to $69.9bn at 31 December 2023 (2022: $64.8bn). No matters arose where HSBC was severally liable. 35 Finance lease receivables HSBC leases a variety of assets to third parties under finance leases, including transport assets (such as aircraft), property and general plant and machinery. At the end of lease terms, assets may be sold to third parties or leased for further terms. Rentals are calculated to recover the cost of assets less their residual value, and earn finance income. The table below excludes finance lease receivables reclassified on the balance sheet to ‘Assets held for sale’ in accordance with IFRS 5. Net investment in finance leases of $1,595m (2022: $1,502m) was reclassified to ‘Assets held for sale’ as a result of the planned sale of our banking business in Canada. 2023 2022 Total future minimum payments Unearned finance income Present value Total future minimum payments Unearned finance income Present value $m $m $m $m $m $m Lease receivables: No later than one year 2,355 (308) 2,047 2,159 (236) 1,923 One to two years 1,954 (249) 1,705 1,652 (201) 1,451 Two to three years 1,380 (189) 1,191 1,391 (161) 1,230 Three to four years 930 (153) 777 906 (131) 775 Four to five years 593 (132) 461 613 (112) 501 Later than one year and no later than five years 4,857 (723) 4,134 4,562 (605) 3,957 Later than five years 4,116 (838) 3,278 4,064 (736) 3,328 At 31 Dec 11,328 (1,869) 9,459 10,785 (1,577) 9,208 Notes on the financial statements 416 HSBC Holdings plc Annual Report and Accounts 2023 36 Legal proceedings and regulatory matters HSBC is party to legal proceedings and regulatory matters in a number of jurisdictions arising out of its normal business operations. Apart from the matters described below, HSBC considers that none of these matters are material. The recognition of provisions is determined in accordance with the accounting policies set out in Note 1. While the outcomes of legal proceedings and regulatory matters are inherently uncertain, management believes that, based on the information available to it, appropriate provisions have been made in respect of these matters as at 31 December 2023 (see Note 28). Where an individual provision is material, the fact that a provision has been made is stated and quantified, except to the extent that doing so would be seriously prejudicial. Any provision recognised does not constitute an admission of wrongdoing or legal liability. It is not practicable to provide an aggregate estimate of potential liability for our legal proceedings and regulatory matters as a class of contingent liabilities. Bernard L. Madoff Investment Securities LLC Various non-US HSBC companies provided custodial, administration and similar services to a number of funds incorporated outside the US whose assets were invested with Bernard L. Madoff Investment Securities LLC (‘Madoff Securities’). Based on information provided by Madoff Securities as at 30 November 2008, the purported aggregate value of these funds was $8.4bn, including fictitious profits reported by Madoff. Based on information available to HSBC, the funds’ actual transfers to Madoff Securities minus their actual withdrawals from Madoff Securities during the time HSBC serviced the funds are estimated to have totalled approximately $4bn. Various HSBC companies have been named as defendants in lawsuits arising out of Madoff Securities’ fraud. US litigation: The Madoff Securities Trustee has brought lawsuits against various HSBC companies and others, seeking recovery of alleged transfers from Madoff Securities to HSBC in the amount of $543m (plus interest), and these lawsuits remain pending in the US Bankruptcy Court for the Southern District of New York (the ‘US Bankruptcy Court’). Certain Fairfield entities (together, ‘Fairfield’) (in liquidation) have brought a lawsuit in the US against fund shareholders, including HSBC companies that acted as nominees for clients, seeking restitution of redemption payments in the amount of $382m (plus interest). Fairfield’s claims against most of the HSBC companies have been dismissed by the US Bankruptcy Court and the US District Court for the Southern District of New York, but remain pending on appeal before the US Court of Appeals for the Second Circuit. Fairfield’s claims against HSBC Private Bank (Suisse) SA and HSBC Securities Services Luxembourg (‘HSSL’) have not been dismissed and their appeals are also pending before the US Court of Appeals for the Second Circuit. Meanwhile, proceedings before the US Bankruptcy Court with respect to the claims against HSBC Private Bank (Suisse) SA and HSSL are ongoing. UK litigation: The Madoff Securities Trustee has filed a claim against various HSBC companies in the High Court of England and Wales, seeking recovery of transfers from Madoff Securities to HSBC. The claim has not yet been served and the amount claimed has not been specified. Cayman Islands litigation: In February 2013, Primeo Fund (‘Primeo’) (in liquidation) brought an action against HSSL and Bank of Bermuda (Cayman) Limited (now known as HSBC Cayman Limited), alleging breach of contract and breach of fiduciary duty and claiming damages. Following dismissal of Primeo’s action by the Grand Court and Court of Appeal of the Cayman Islands, in 2019, Primeo appealed to the Judicial Committee of the Privy Council. In November 2023, the Privy Council issued a judgment upholding the dismissal of Primeo’s claims. This matter is now closed. Luxembourg litigation: In 2009, Herald Fund SPC (‘Herald’) (in liquidation) brought an action against HSSL before the Luxembourg District Court, seeking restitution of cash and securities in the amount of $2.5bn (plus interest), or damages in the amount of $2bn (plus interest). In 2018, HSBC Bank plc was added to the claim and Herald increased the amount of the alleged damages claim to $5.6bn (plus interest). The Luxembourg District Court has dismissed Herald’s securities restitution claim, but reserved Herald’s cash restitution and damages claims. Herald has appealed this dismissal to the Luxembourg Court of Appeal, where the matter is pending. Beginning in 2009, various HSBC companies have been named as defendants in a number of actions brought by Alpha Prime Fund Limited (‘Alpha Prime’) in the Luxembourg District Court seeking damages for alleged breach of contract and negligence in the amount of $1.16bn (plus interest). These matters are currently pending before the Luxembourg District Court. Beginning in 2014, HSSL and the Luxembourg branch of HSBC Bank plc have been named as defendants in a number of actions brought by Senator Fund SPC (‘Senator’) before the Luxembourg District Court seeking restitution of securities in the amount of $625m (plus interest), or damages in the amount of $188m (plus interest). These matters are currently pending before the Luxembourg District Court. Based on the facts currently known, it is not practicable at this time for HSBC to predict the resolution of the pending matters, including the timing or any possible impact on HSBC, which could be significant. US Anti-Terrorism Act litigation Since November 2014, a number of lawsuits have been filed in federal courts in the US against various HSBC companies and others on behalf of plaintiffs who are, or are related to, alleged victims of terrorist attacks in the Middle East. In each case, it is alleged that the defendants aided and abetted the unlawful conduct of various sanctioned parties in violation of the US Anti-Terrorism Act, or provided banking services to customers alleged to have connections to terrorism financing. Seven actions, which seek damages for unspecified amounts, remain pending and HSBC’s motions to dismiss have been granted in three of these cases. These dismissals are subject to appeals and/or the plaintiffs re- pleading their claims. The four other actions are at an early stage. Based on the facts currently known, it is not practicable at this time for HSBC to predict the resolution of these matters, including the timing or any possible impact on HSBC, which could be significant. HSBC Holdings plc Annual Report and Accounts 2023 417 Financial statements Interbank offered rates investigation and litigation Euro interest rate derivatives: In December 2016, the European Commission (‘EC’) issued a decision finding that HSBC, among other banks, engaged in anti-competitive practices in connection with the pricing of euro interest rate derivatives, and the EC imposed a fine on HSBC based on a one-month infringement in 2007. The fine was annulled in 2019 and a lower fine was imposed in 2021. In January 2023, the European Court of Justice dismissed an appeal by HSBC and upheld the EC’s findings on HSBC’s liability. A separate appeal by HSBC concerning the amount of the fine remains pending before the General Court of the European Union. US dollar Libor: Beginning in 2011, HSBC and other panel banks have been named as defendants in a number of individual and putative class action lawsuits filed in federal and state courts in the US with respect to the setting of US dollar Libor. The complaints assert claims under various US federal and state laws, including antitrust and racketeering laws and the Commodity Exchange Act (‘US CEA’). HSBC has concluded class settlements with five groups of plaintiffs, and several class action lawsuits brought by other groups of plaintiffs have been voluntarily dismissed. A number of individual US dollar Libor-related actions seeking damages for unspecified amounts remain pending. Based on the facts currently known, it is not practicable at this time for HSBC to predict the resolution of the pending matters, including the timing or any possible impact on HSBC, which could be significant. Foreign exchange-related investigations and litigation In December 2016, Brazil’s Administrative Council of Economic Defense initiated an investigation into the onshore foreign exchange market and identified a number of banks, including HSBC, as subjects of its investigation, which remains ongoing. Since 2017, HSBC Bank plc, among other financial institutions, has been defending a complaint filed by the Competition Commission of South Africa before the South African Competition Tribunal for alleged anti-competitive behaviour in the South African foreign exchange market. In 2020, a revised complaint was filed which also named HSBC Bank USA N.A. (‘HSBC Bank USA’) as a defendant. In January 2024, the South African Competition Appeal Court dismissed HSBC Bank USA from the revised complaint, but denied HSBC Bank plc’s application to dismiss. The Competition Commission has appealed the dismissal of HSBC Bank USA to the Constitutional Court of South Africa. Since 2015, various HSBC companies and other banks have been named as defendants in a putative class action in the US District Court for the Southern District of New York filed by a group of retail customers who dealt in foreign exchange products. The plaintiffs allege that the defendants conspired to manipulate foreign exchange rates and seek damages for unspecified amounts. This action has been dismissed but remains pending on appeal. In January 2023, HSBC Bank plc and HSBC Holdings reached a settlement-in-principle with plaintiffs in Israel to resolve a class action filed in the local courts alleging foreign exchange-related misconduct. The settlement remains subject to court approval. Lawsuits alleging foreign exchange-related misconduct remain pending against HSBC and other banks in courts in Brazil. In February 2024, HSBC Bank plc and HSBC Holdings were joined to an existing claim brought in the UK Competition Appeals Tribunal against various other banks alleging historical anti-competitive behaviour in the foreign exchange market and seeking damages for unspecified amounts. This matter is at an early stage. It is possible that additional civil actions will be initiated against HSBC in relation to its historical foreign exchange activities. There are many factors that may affect the range of outcomes, and the resulting financial impact, of the pending matters, which could be significant. Precious metals fix-related litigation US litigation: HSBC and other members of The London Silver Market Fixing Limited are defending a class action pending in the US District Court for the Southern District of New York alleging that, from January 2007 to December 2013, the defendants conspired to manipulate the price of silver and silver derivatives for their collective benefit in violation of US antitrust laws, the US CEA and New York state law. In May 2023, this action, which seeks damages for unspecified amounts, was dismissed but remains pending on appeal. HSBC and other members of The London Platinum and Palladium Fixing Company Limited are defending a class action pending in the US District Court for the Southern District of New York alleging that, from January 2008 to November 2014, the defendants conspired to manipulate the price of platinum group metals and related financial products for their collective benefit in violation of US antitrust laws and the US CEA. In February 2023, the court reversed an earlier dismissal of the plaintiffs’ third amended complaint and this action, which seeks damages for unspecified amounts, is proceeding. Canada litigation: HSBC and other financial institutions are defending putative class actions filed in the Ontario and Quebec Superior Courts of Justice alleging that the defendants conspired to manipulate the price of silver, gold and related derivatives in violation of the Canadian Competition Act and common law. These actions each seek CA$1bn in damages plus CA$250m in punitive damages. Two of the actions are proceeding and the others have been stayed. Based on the facts currently known, it is not practicable at this time for HSBC to predict the resolution of these matters, including the timing or any possible impact on HSBC, which could be significant. Tax-related investigations Various tax administration, regulatory and law enforcement authorities around the world are conducting investigations in connection with allegations of tax evasion or tax fraud, money laundering and unlawful cross-border banking solicitation. HSBC continues to cooperate with these investigations. In March 2023, the French National Financial Prosecutor announced an investigation into a number of banks, including HSBC Continental Europe and the Paris branch of HSBC Bank plc, in connection with alleged tax fraud related to the dividend withholding tax treatment of certain trading activities. HSBC Bank plc and HSBC Germany also continue to cooperate with investigations by the German public prosecutor into numerous financial institutions and their employees, in connection with the dividend withholding tax treatment of certain trading activities. Based on the facts currently known, it is not practicable at this time for HSBC to predict the resolution of these matters, including the timing or any possible impact on HSBC, which could be significant. Notes on the financial statements 418 HSBC Holdings plc Annual Report and Accounts 2023 Gilts trading investigation and litigation Since 2018, the UK Competition and Markets Authority (‘CMA’) has been investigating HSBC and four other banks for suspected anti- competitive conduct in relation to the historical trading of gilts and related derivatives. In May 2023, the CMA announced its case against HSBC Bank plc and HSBC Holdings; both HSBC companies are contesting the CMA’s allegations. In June 2023, HSBC Bank plc and HSBC Securities (USA) Inc., among other banks, were named as defendants in a putative class action filed in the US District Court for the Southern District of New York by plaintiffs alleging anti-competitive conduct in the gilts market and seeking damages for unspecified amounts. In September 2023, the defendants filed a motion to dismiss which remains pending. It is possible that additional civil actions will be initiated against HSBC in relation to its historical gilts trading activities. Based on the facts currently known, it is not practicable at this time for HSBC to predict the resolution of these matters, including the timing or any possible impact on HSBC, which could be significant. UK depositor protection arrangements investigation In January 2022, the UK Prudential Regulation Authority (‘PRA’) commenced an investigation into HSBC Bank plc’s and HSBC UK Bank plc’s compliance with depositor protection arrangements under the Financial Services Compensation Scheme in the UK. In January 2024, the PRA concluded its investigation and imposed a £57m fine on HSBC Bank plc and HSBC UK Bank plc, which has been paid, and this matter is now closed. UK collections and recoveries investigation Since 2019, the FCA has been investigating HSBC Bank plc’s, HSBC UK Bank plc’s and Marks and Spencer Financial Services plc’s compliance with regulatory standards relating to collections and recoveries operations in the UK between 2017 and 2018. HSBC continues to cooperate with this investigation. There are many factors that may affect the range of outcomes, and the resulting financial impact, of this matter, which could be significant. Korean short selling investigation In December 2023, the Korean Securities and Futures Commission issued a decision to impose a fine on The Hongkong and Shanghai Banking Corporation Limited in connection with trades in breach of Korean short selling rules and to refer the case to the Korean Prosecutors’ Office for investigation. There are many factors that may affect the range of outcomes, and the resulting financial impact, of this matter, which could be significant. Silicon Valley Bank (‘SVB’) litigation In May 2023, First-Citizens Bank & Trust Company (‘First Citizens’) brought a lawsuit in the US District Court for the Northern District of California against various HSBC companies and seven US-based HSBC employees who had previously worked for SVB. The lawsuit seeks $1bn in damages and alleges, among other things, that the various HSBC companies conspired with the individual defendants to solicit employees from First Citizens and that the individual defendants took confidential information belonging to SVB and/or First Citizens. In January 2024, the court denied the defendants’ motion to dismiss in part and granted it in part, and directed the plaintiff to amend its complaint to specify its allegations as to each defendant. In February 2024, First Citizens filed its amended complaint. This action is ongoing. Based on the facts currently known, it is not practicable at this time for HSBC to predict the resolution of this matter, including the timing or any possible impact on HSBC, which could be significant. Film Finance litigation In June 2020, two separate investor groups issued claims against HSBC UK Bank plc (as successor to HSBC Private Bank (UK) Limited (‘PBGB’)) in the High Court of England and Wales seeking damages for unspecified amounts in connection with PBGB’s role in the development of Eclipse film finance schemes. These actions are ongoing. Based on the facts currently known, it is not practicable at this time for HSBC to predict the resolution of these matters, including the timing or any possible impact on HSBC, which could be significant. US mortgage securitisation litigation Beginning in 2014, a number of lawsuits were filed in various state and federal courts in the US against HSBC Bank USA, as a trustee of more than 280 mortgage securitisation trusts, seeking unspecified damages for losses in collateral value allegedly sustained by the trusts. HSBC Bank USA has reached settlements with a number of plaintiffs to resolve nearly all of these lawsuits. The remaining two actions are pending in a New York state court. HSBC Bank USA and certain of its affiliates continue to defend a mortgage loan repurchase action seeking unspecified damages and specific performance brought by the trustee of a mortgage securitisation trust in New York state court. There are many factors that may affect the range of outcomes, and the resulting financial impact, of the pending matters, which could be significant. Mexican government bond litigation HSBC Mexico S.A. and other banks are named as defendants in a consolidated putative class action pending in the US District Court for the Southern District of New York alleging anti-competitive conduct in the Mexican government bond market between 2006 and 2017 and seeking damages for unspecified amounts. In February 2024, the US Court of Appeals for the Second Circuit reversed an earlier dismissal of this lawsuit and this matter is proceeding. Based on the facts currently known, it is not practicable at this time for HSBC to predict the resolution of this matter, including the timing or any possible impact on HSBC, which could be significant. Stanford litigation Since 2009, HSBC Bank plc has been named as a defendant in numerous claims filed in courts in the UK and the US arising from the collapse of Stanford International Bank Ltd, for which it was a correspondent bank from 2003 to 2009. In February 2023, HSBC Bank plc reached settlements with the plaintiffs to resolve these claims. The US settlement is subject to court approval and the UK settlement has concluded. HSBC Holdings plc Annual Report and Accounts 2023 419 Financial statements Other regulatory investigations, reviews and litigation HSBC Holdings and/or certain of its affiliates are also subject to a number of other enquiries and examinations, requests for information, investigations and reviews by various regulators and competition and law enforcement authorities, as well as legal proceedings including litigation, arbitration and other contentious proceedings, in connection with various matters arising out of their ordinary course businesses and operations. At the present time, HSBC does not expect the ultimate resolution of any of these matters to be material to the Group’s financial position; however, given the uncertainties involved in legal proceedings and regulatory matters, there can be no assurance regarding the eventual outcome of a particular matter or matters. 37 Related party transactions Related parties of the Group and HSBC Holdings include subsidiaries, associates, joint ventures, post-employment benefit plans for HSBC employees, Key Management Personnel (‘KMP’) as defined by IAS 24, close family members of KMP and entities that are controlled or jointly controlled by KMP or their close family members. KMP are defined as those persons having authority and responsibility for planning, directing and controlling the activities of HSBC Holdings. These individuals also constitute ‘senior management’ for the purposes of the Hong Kong Listing Rules. In applying IAS 24, it was determined that for this financial reporting period all KMP included Directors, former Directors and senior management listed on pages 239 to 246 except for the roles of Group Chief Legal Officer, Group Head of Internal Audit, Group Chief Human Resources Officer, Group Chief Sustainability Officer, Group Head of Strategy, Group Chief Communications and Brand Officer, and Group Company Secretary and Chief Governance Officer who do not meet the criteria for KMP as provided for in the standard. Particulars of transactions with related parties are tabulated below. The disclosure of the year-end balance and the highest amounts outstanding during the year is considered to be the most meaningful information to represent the amount of the transactions and outstanding balances during the year. Key Management Personnel Details of Directors’ remuneration and interests in shares are disclosed in the ‘Directors’ remuneration report’ on pages 279 to 305. IAS 24 ‘Related Party Disclosures’ requires the following additional information for key management compensation. Compensation of Key Management Personnel 2023 2022 2021 $m $m $m Short-term employee benefits 51 52 50 Post-employment benefits 1 1 — Other long-term employee benefits 10 8 6 Share-based payments 29 26 27 Year ended 31 Dec 91 87 83 Shareholdings, options and other securities of Key Management Personnel 2023 2022 (000s) (000s) Number of options held over HSBC Holdings ordinary shares under employee share plans 32 35 Number of HSBC Holdings ordinary shares held beneficially and non-beneficially 20,409 18,185 Number of other HSBC securities held 228 228 At 31 Dec 20,669 18,448 Advances and credits, guarantees and deposit balances during the year with Key Management Personnel 2023 2022 Balance at 31 Dec Highest amounts outstanding during year Balance at 31 Dec Highest amounts outstanding during year $m $m $m $m Key Management Personnel Advances and credits1 11 16 16 25 Deposits 60 130 53 123 1 Advances and credits entered into by subsidiaries of HSBC Holdings plc during 2023 with Directors and former Directors, disclosed pursuant to section 413 of the Companies Act 2006, totalled $2.6m (2022: $2.5m). Some of the transactions were connected transactions as defined by the Rules Governing The Listing of Securities on The Stock Exchange of Hong Kong Limited, but were exempt from any disclosure requirements under the provisions of those rules. The above transactions were made in the ordinary course of business and on substantially the same terms, including interest rates and security, as for comparable transactions with persons of a similar standing or, where applicable, with other employees. The transactions did not involve more than the normal risk of repayment or present other unfavourable features. Notes on the financial statements 420 HSBC Holdings plc Annual Report and Accounts 2023 Associates and joint ventures The Group provides certain banking and financial services to associates and joint ventures including loans, overdrafts, interest and non-interest bearing deposits and current accounts. Details of the interests in associates and joint ventures are given in Note 18. Transactions and balances during the year with associates and joint ventures 2023 2022 Highest balance during the year Balance at 31 Dec Highest balance during the year Balance at 31 Dec $m $m $m $m Unsubordinated amounts due from joint ventures 98 94 140 90 Unsubordinated amounts due from associates 7,907 5,910 7,378 6,594 Amounts due to associates 3,002 1,668 2,548 1,295 Amounts due to joint ventures 95 61 57 53 Fair value of derivative assets with associates 1,514 795 1,205 841 Fair value of derivative liabilities with associates 4,388 2,962 4,319 3,648 Guarantees and commitments 503 331 513 293 The above outstanding balances arose in the ordinary course of business and on substantially the same terms, including interest rates and security, as for comparable transactions with third-party counterparties. Post-employment benefit plans At 31 December 2023, $3.1bn (2022: $2.9bn) of HSBC post-employment benefit plan assets were under management by HSBC companies, earning management fees of $13m in 2023 (2022: $13m). At 31 December 2023, HSBC’s post-employment benefit plans had placed deposits of $402m (2022: $369m) with its banking subsidiaries, earning interest payable to the schemes of $2m (2022: nil). The above outstanding balances arose from the ordinary course of business and on substantially the same terms, including interest rates and security, as for comparable transactions with third-party counterparties. The combined HSBC Bank (UK) Pension Scheme enters into swap transactions with HSBC to manage inflation and interest rate sensitivity of its liabilities and selected assets. At 31 December 2023, the gross notional value of the swaps was $7.1bn (2022: $6.6bn). These swaps had a positive fair value to the scheme of $0.5bn (2022: $0.5bn); and HSBC had delivered collateral of $0.6bn (2022: $0.5bn) to the scheme in respect of these arrangements. All swaps were executed at prevailing market rates and within standard market bid/offer spreads. HSBC Holdings Details of HSBC Holdings’ subsidiaries are shown in Note 40. Transactions and balances during the year with subsidiaries 2023 2022 Highest balance during the year Balance at 31 Dec Highest balance during the year Balance at 31 Dec $m $m $m $m Assets Cash and balances with HSBC undertakings 8,396 7,029 7,421 3,210 Financial assets with HSBC undertakings designated and otherwise mandatorily measured at fair value 60,309 59,879 52,322 52,322 Derivatives 4,010 3,344 5,380 3,801 Loans and advances to HSBC undertakings 28,213 27,354 26,765 26,765 Prepayments, accrued income and other assets 7,417 5,145 4,893 4,803 Investments in subsidiaries 167,542 159,478 167,542 167,542 Total related party assets at 31 Dec 275,887 262,229 264,323 258,443 Liabilities Amounts owed to HSBC undertakings 179 168 314 314 Derivatives 9,309 6,090 8,318 6,922 Accruals, deferred income and other liabilities 505 341 1,375 429 Subordinated liabilities 927 913 900 900 Total related party liabilities at 31 Dec 10,920 7,512 10,907 8,565 Guarantees and commitments 7,723 7,723 17,707 17,707 The above outstanding balances arose in the ordinary course of business and on substantially the same terms, including interest rates and security, as for comparable transactions with third-party counterparties. Some employees of HSBC Holdings are members of the HSBC Bank (UK) Pension Scheme, which is sponsored by a separate Group company. HSBC Holdings incurs a charge for these employees equal to the contributions paid into the scheme on their behalf. Disclosure in relation to the scheme is made in Note 5. HSBC Holdings plc Annual Report and Accounts 2023 421 Financial statements 38 Effects of adoption of IFRS 17 On 1 January 2023, the Group adopted IFRS 17 ‘Insurance Contracts’, and as required by the standard applied the requirements retrospectively, with comparatives restated from the transition date, 1 January 2022. The tables below provide the transition restatement impact on the Group’s consolidated balance sheet as at 1 January 2022, as well as the Group consolidated income statement and the Group consolidated statement of comprehensive income for the year ended 31 December 2022. Further information about the effect of the adoption of IFRS 17 is provided in Note 1 ‘Basis of preparation and material accounting policies’ on page 341. IFRS 17 transition impact on the Group consolidated balance sheet at 1 January 2022 Under IFRS 4 Removal of PVIF and IFRS 4 balances Remeasure- ment effect of IFRS 9 re- designations Recognition of IFRS 17 fulfilment cash flows Recognition of IFRS 17 contractual service margin Tax effect Under IFRS 17 Total movements $m $m $m $m $m $m $m $m Assets Financial assets designated and otherwise mandatorily measured at fair value through profit or loss 49,804 — 60,991 — — — 110,795 60,991 Loans and advances to banks 83,136 — (569) — — — 82,567 (569) Loans and advances to customers 1,045,814 — (1,280) — — — 1,044,534 (1,280) Financial investments 446,274 — (54,269) — — — 392,005 (54,269) Goodwill and intangible assets 20,622 (9,453) — — — — 11,169 (9,453) Deferred tax assets 4,624 — — — — 808 5,432 808 All other assets 1,307,665 (4,468) — 4,198 (105) — 1,307,290 (375) Total assets 2,957,939 (13,921) 4,873 4,198 (105) 808 2,953,792 (4,147) Liabilities and equity Liabilities Insurance contract liabilities 112,745 (112,745) — 109,393 9,914 — 119,307 6,562 Deferred tax liabilities 4,673 — — — — (1,379) 3,294 (1,379) All other liabilities 2,633,744 78 — 1,102 (51) — 2,634,873 1,129 Total liabilities 2,751,162 (112,667) — 110,495 9,863 (1,379) 2,757,474 6,312 Total shareholders’ equity 198,250 92,738 4,558 (99,631) (8,847) 1,947 189,015 (9,235) Non-controlling interests 8,527 6,008 315 (6,666) (1,121) 240 7,303 (1,224) Total equity 206,777 98,746 4,873 (106,297) (9,968) 2,187 196,318 (10,459) Total liabilities and equity 2,957,939 (13,921) 4,873 4,198 (105) 808 2,953,792 (4,147) Transition drivers Removal of PVIF and IFRS 4 balances The PVIF intangible asset of $9,453m previously reported under IFRS 4 within ‘Goodwill and intangible assets’ arose from the upfront recognition of future profits associated with in-force insurance contracts. The PVIF intangible asset is no longer reported following the transition to IFRS 17, as future profits are deferred within the CSM. Other IFRS 4 insurance contract assets (shown above within ‘All other assets’) and insurance contract liabilities are removed on transition, to be replaced with IFRS 17 balances. Remeasurement effect of IFRS 9 re-designations Loans and advances of $1,849m and debt securities of $53,201m, both supporting associated insurance liabilities, were re-designated from an amortised cost classification to fair value through profit and loss. Debt securities supporting the associated insurance liabilities of $1,068m were reclassified from fair value through other comprehensive income to fair value through profit or loss. The re-designations were made in order to more closely align the asset accounting with the valuation of the associated insurance liabilities. The re-designation of amortised cost assets generated a net increase to assets of $4,873m because the fair value measurement on transition was higher than the previous amortised cost carrying amount. Recognition of the IFRS 17 fulfilment cash flows The measurement of the insurance contracts liabilities under IFRS 17 is based on groups of insurance contracts and includes a liability for fulfilling the insurance contracts, such as premiums, directly attributable expenses, insurance benefits and claims including policyholder returns and the cost of guarantees. These are recorded within the fulfilment cash flow component of the insurance contract liability, together with the risk adjustment for non-financial risk. Recognition of the IFRS 17 contractual service margin The CSM is a component of the insurance contract liability and represents the future unearned profit associated with insurance contracts that will be released to the profit and loss over the expected coverage period. Tax effect The removal of deferred tax liabilities primarily results from the removal of the associated PVIF intangible asset, and new deferred tax assets are reported, where appropriate, on temporary differences between the new IFRS 17 accounting balances and their associated tax bases. Notes on the financial statements 422 HSBC Holdings plc Annual Report and Accounts 2023 IFRS 17 transition impact on the reported Group consolidated income statement for the year ended 31 December 2022 Under IFRS 4 Removal of PVIF and IFRS 4 balances Remeasure- ment effect of IFRS 9 re- designations Insurance finance income/ expense Contrac - tual service margin Onerous contracts Experience variance and other Attribut- able expenses Tax effect Under IFRS 17 $m $m $m $m $m $m $m $m $m $m Net interest income 32,610 — (2,233) — — — — — — 30,377 Net fee income 11,451 — — — — — — 319 — 11,770 Net income from financial instruments held for trading or managed on a fair value basis 10,469 — (191) — — — — — — 10,278 Net expense from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit or loss (3,394) — (10,437) — — — — — — (13,831) Net insurance premium income 12,825 (12,825) — — — — — — — — Insurance finance income/(expense) — — — 13,799 — — — — — 13,799 Insurance service result — — — — 965 (186) 30 — — 809 – insurance revenue — — — — 965 — 1,012 — — 1,977 – insurance service expense — — — — — (186) (982) — — (1,168) Other operating income/(loss) (2,365) (265) — 48 — — — — — (2,582) Total operating income 61,596 (13,090) (12,861) 13,847 965 (186) 30 319 — 50,620 Net insurance claims and benefits paid and movement in liabilities to policyholders (9,869) 9,869 — — — — — — — — Net operating income before change in expected credit losses and other credit impairment charges 51,727 (3,221) (12,861) 13,847 965 (186) 30 319 — 50,620 Change in expected credit losses and other credit impairment charges (3,592) — 8 — — — — — — (3,584) Net operating income 48,135 (3,221) (12,853) 13,847 965 (186) 30 319 — 47,036 Total operating expenses (33,330) — — — — — — 629 — (32,701) Operating profit 14,805 (3,221) (12,853) 13,847 965 (186) 30 948 — 14,335 Share of profit in associates and joint ventures 2,723 — — — — — — — — 2,723 Profit before tax 17,528 (3,221) (12,853) 13,847 965 (186) 30 948 — 17,058 Tax expense (858) — — — — — — — 49 (809) Profit for the period 16,670 (3,221) (12,853) 13,847 965 (186) 30 948 49 16,249 Transition drivers Removal of IFRS 4-based revenue items As a result of the removal of the PVIF intangible asset and IFRS 4 results, the associated revenue of $265m for the year ended 31 December 2022 that was previously reported within ‘Other operating income/(loss)’ is no longer reported under IFRS 17. This includes the removal of the value of new business and changes to PVIF intangible asset from valuation adjustments and experience variances. On the implementation of IFRS 17, new income statement line items associated with insurance contract accounting were introduced. Consequently, the previously reported IFRS 4 line items ‘Net insurance premium income’ and ‘Net insurance claims and benefits paid and movement in liabilities to policyholders’ were also removed. Remeasurement effect of IFRS 9 re-designations Following the re-designation of financial assets supporting associated insurance liabilities to fair value through profit or loss classification, the related income statement reporting also changed. Under our previous IFRS 4-based reporting convention, these assets generated interest income of $2,233m for the year ended 31 December 2022, which is no longer reported in ‘Net interest income’ under IFRS 17. To the extent that this interest income was shared with policyholders, the corresponding policyholder sharing obligation was previously included within the ‘net insurance claims and benefits paid and movement in liabilities to policyholders’ line. Following re-designation to fair value through profit or loss, gains and losses from changes in the fair value of underlying assets, together with interest income earned, are both reported within ‘Net expense from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit or loss’. Similar to an IFRS 4 basis, IFRS 17 accounting provides for an offset. While this offset was reported within the claims line under IFRS 4, under IFRS 17 it is reported within the ‘Insurance finance income/(expense)’ line described below. HSBC Holdings plc Annual Report and Accounts 2023 423 Financial statements Introduction of IFRS 17 income statement Insurance finance income/(expense) Insurance finance income/(expense) of $13,799m for the year ended 31 December 2022 represents the change in the carrying amount of insurance contracts arising from the effect of, and changes in, the time value of money and financial risk. For variable fee approach contracts, which represent more than 90% of HSBC’s insurance contracts, the insurance finance income/(expense) includes the changes in the fair value of underlying items (excluding additions and withdrawals). It therefore has an offsetting impact to investment income earned on underlying assets supporting insurance contracts. This includes an offsetting impact to the gains and losses on assets re-designated on transition to fair value through profit or loss, and which is now included in ‘Net expense from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit or loss’. Contractual service margin Revenue is recognised for the release of the CSM associated with the in-force business, which was allocated at a rate of approximately 9% during 2022. The CSM release is largely impacted by the constant measure allocation approach for investment services, but may vary over time primarily due to changes in the total amount of CSM reported on the balance sheet from factors such as new business written, the Group’s share of investment experience, or changes to assumptions. Onerous contracts Losses on onerous contracts are taken to the income statement as incurred. Experience variance and other ‘Experience variance and other’ represents the expected expenses, claims and recovery of acquisition cash flows, which are reported as part of the insurance revenue. This is offset with the actual expenses and claims incurred in the year and amortisation of acquisition cash flows, which are reported as part of insurance service expense. Attributable expenses Directly attributable expenses are the costs associated with originating and fulfilling an identified portfolio of insurance contracts. These costs include distribution fees paid to third parties as part of originating insurance contracts together with appropriate allocations of fixed and variable overheads, which are included within the fulfilment cash flows and are no longer shown on the operating expenses line, whereas non- attributable expenses remain in the operating expenses. IFRS 17 transition impact on the Group comprehensive income Year ended 31 Dec 2022 Under IFRS 17 Under IFRS 4 $m $m Total equity at 1 Jan 196,318 206,777 of which – retained earnings 135,236 144,458 – financial assets at FVOCI reserve 49 (634) – insurance finance reserve (696) — Profit for the period 16,249 16,670 Debt instruments at fair value through other comprehensive income (7,232) (5,468) Equity instruments designated at fair value through other comprehensive income 107 107 Insurance finance income recognised in other comprehensive income 1,775 — Other comprehensive expense for the period, net of tax (11,892) (11,940) Total comprehensive (expense)/income for the period (993) (631) Other movements (10,128) (10,118) Total equity at 31 Dec 185,197 196,028 Transition drivers Insurance finance reserve The insurance finance reserve reflects the impact of the adoption of the other comprehensive income option for our insurance business in France. Underlying assets supporting these contracts are measured at fair value through other comprehensive income. Under this option, only the amount that matches income or expenses recognised in profit or loss on underlying items is included in finance income or expenses, resulting in the elimination of income statement accounting mismatches. The remaining amount of finance income or expenses for these insurance contracts is recognised in OCI. At the transition date an insurance finance reserve of $696m was recognised and following transition, gains net of tax of $1,775m were recorded in the year ended 31 December 2022. An offsetting fair value through other comprehensive income reserve of $683m recorded on transition represents the accumulated fair value movements on assets supporting these insurance contract liabilities, with associated losses net of tax of $1,898m recorded within the fair value through other comprehensive income reserve for the year ended 31 December 2022. Notes on the financial statements 424 HSBC Holdings plc Annual Report and Accounts 2023 Group‘s consolidated balance sheet at the transition date and at 31 December 2022 Under IFRS 17 Under IFRS 4 31 Dec 1 Jan 31 Dec 1 Jan 2022 2022 2022 2022 $m $m $m $m Assets Cash and balances at central banks 327,002 403,018 327,002 403,018 Items in the course of collection from other banks 7,297 4,136 7,299 4,136 Hong Kong Government certificates of indebtedness 43,787 42,578 43,787 42,578 Trading assets 218,093 248,842 218,093 248,842 Financial assets designated and otherwise mandatorily measured at fair value through profit or loss 100,101 110,795 45,063 49,804 Derivatives 284,159 196,882 284,146 196,882 Loans and advances to banks 104,475 82,567 104,882 83,136 Loans and advances to customers 923,561 1,044,534 924,854 1,045,814 Reverse repurchase agreements – non-trading 253,754 241,648 253,754 241,648 Financial investments 364,726 392,005 425,563 446,274 Assets held for sale 115,919 3,411 115,919 3,411 Prepayments, accrued income and other assets 156,149 136,196 156,865 136,571 Current tax assets 1,230 970 1,230 970 Interests in associates and joint ventures 29,254 29,609 29,254 29,609 Goodwill and intangible assets 11,419 11,169 21,321 20,622 Deferred tax assets 8,360 5,432 7,498 4,624 Total assets 2,949,286 2,953,792 2,966,530 2,957,939 Liabilities and equity Liabilities Hong Kong currency notes in circulation 43,787 42,578 43,787 42,578 Deposits by banks 66,722 101,152 66,722 101,152 Customer accounts 1,570,303 1,710,574 1,570,303 1,710,574 Repurchase agreements – non-trading 127,747 126,670 127,747 126,670 Items in the course of transmission to other banks 7,864 5,214 7,864 5,214 Trading liabilities 72,353 84,904 72,353 84,904 Financial liabilities designated at fair value 127,321 145,503 127,327 145,502 Derivatives 285,762 191,064 285,764 191,064 Debt securities in issue 78,149 78,557 78,149 78,557 Liabilities of disposal groups held for sale 114,597 9,005 114,597 9,005 Accruals, deferred income and other liabilities 134,313 115,900 133,240 114,773 Current tax liabilities 1,135 699 1,135 698 Insurance contract liabilities 108,816 119,307 114,844 112,745 Provisions 1,958 2,566 1,958 2,566 Deferred tax liabilities 972 3,294 2,422 4,673 Subordinated liabilities 22,290 20,487 22,290 20,487 Total liabilities 2,764,089 2,757,474 2,770,502 2,751,162 Equity Called up share capital 10,147 10,316 10,147 10,316 Share premium account 14,664 14,602 14,664 14,602 Other equity instruments 19,746 22,414 19,746 22,414 Other reserves (9,133) 6,447 (9,141) 6,460 Retained earnings 142,409 135,236 152,068 144,458 Total shareholders‘ equity 177,833 189,015 187,484 198,250 Non-controlling interests 7,364 7,303 8,544 8,527 Total equity 185,197 196,318 196,028 206,777 Total liabilities and equity 2,949,286 2,953,792 2,966,530 2,957,939 HSBC Holdings plc Annual Report and Accounts 2023 425 Financial statements 39 Events after the balance sheet date On 1 January 2024, HSBC Continental Europe completed the sale of its retail banking business in France to CCF, a subsidiary of Promontoria MMB SAS (‘My Money Group’). The sale also included HSBC Continental Europe’s 100% ownership interest in HSBC SFH (France) and its 3% ownership interest in Crédit Logement. In the fourth quarter of 2023, a loss of $2.0bn was recognised upon reclassification to held for sale, in accordance with IFRS 5, which net of the $2.1bn partial reversal of impairment recognised in the first quarter of 2023, gave rise to a net reversal of impairment recognised in the year of $0.1bn. On 30 January 2024, the PRA concluded its investigation into HSBC Bank plc’s and HSBC UK Bank plc’s compliance with depositor protection arrangements under the Financial Services Compensation Scheme in the UK. The PRA imposed a fine of $73m (£57m) on these entities, which was fully provided for as at 31 December 2023, and has now been paid. On 31 January 2024, HSBC Global Asset Management Limited, through its indirect subsidiary HSBC Global Asset Management Singapore Limited, completed the acquisition of the Asia-Pacific-focused real estate investment manager Silkroad Property Partners Pte Ltd. HSBC Global Asset Management Limited also acquired Silkroad’s affiliated General Partner entities as part of the transaction. On 6 February 2024, HSBC Europe B.V., an indirect subsidiary of HSBC Holdings plc, signed an agreement to sell HSBC Bank Armenia CJSC, its wholly-owned subsidiary, to Ardshinbank CJSC subject to regulatory approvals. The transaction is expected to complete within the next 12 months. A fourth interim dividend for 2023 of $0.31 per ordinary share (a distribution of approximately $5,913m) was approved by the Directors after 31 December 2023. On 21 February 2024, HSBC Holdings announced a share buy-back programme to purchase its ordinary shares up to a maximum consideration of $2.0bn, which is expected to commence shortly and complete by our first quarter 2024 results announcement. HSBC Holdings called $2,500m 3.803% and $500m floating rate senior unsecured debt securities on 25 January 2024. These securities are expected to be redeemed and cancelled on 11 March 2024. These accounts were approved by the Board of Directors on 21 February 2024 and authorised for issue. 40 HSBC Holdings’ subsidiaries, joint ventures and associates In accordance with section 409 of the Companies Act 2006 a list of HSBC Holdings plc subsidiaries, joint ventures and associates, the registered office addresses and the effective percentages of equity owned at 31 December 2023 are disclosed below. Unless otherwise stated, the share capital comprises ordinary or common shares that are held by Group subsidiaries. The ownership percentage is provided for each undertaking. The undertakings below are consolidated by HSBC unless otherwise indicated. Notes on the financial statements 426 HSBC Holdings plc Annual Report and Accounts 2023 Subsidiaries Subsidiaries % of share class held by immediate parent company (or by the Group where this varies) Footnotes 452 TALF SPV LLC 100.00 1, 15 AI Nominees (UK) One Limited 100.00 1, 16 AI Nominees (UK) Two Limited 100.00 116 Almacenadora Banpacifico S.A. (In Liquidation) 99.99 17 Assetfinance December (F) Limited 100.00 18 Assetfinance December (H) Limited 100.00 16 Assetfinance December (P) Limited 100.00 16 Assetfinance December (R) Limited 100.00 16 Assetfinance June (A) Limited 100.00 16 Assetfinance June (D) Limited 100.00 18 Assetfinance Limited (In Liquidation) 100.00 19 Assetfinance March (B) Limited 100.00 20 Assetfinance March (D) Limited 100.00 18 Assetfinance March (F) Limited 100.00 16 Assetfinance September (F) Limited 100.00 16 Assetfinance September (G) Limited 100.00 18 B&Q Financial Services Limited 100.00 16 Banco HSBC S.A. 100.00 21 Banco Nominees (Guernsey) Limited 100.00 22 Banco Nominees 2 (Guernsey) Limited 100.00 22 Banco Nominees Limited 100.00 23 Beau Soleil Limited Partnership N/A 0, 24 Beijing HSBC Real Estate Leasing Company Limited 100.00 1, 12, 25 Beijing Miyun HSBC Rural Bank Company Limited 100.00 12, 26 BentallGreenOak China Real Estate Investments, L.P. N/A 0, 1, 27 Canada Crescent Nominees (UK) Limited 100.00 16 Canada Square Nominees (UK) Limited 100.00 16 Canada Water Nominees (UK) Limited (In Liquidation) 100.00 19 Capco/Cove, Inc. 100.00 28 Card-Flo #1, Inc. 100.00 15 Card-Flo #3, Inc. 100.00 15 CC&H Holdings LLC 100.00 29 CCF & Partners Asset Management Limited 100.00 (99.99) 16 CCF Holding (Liban) S.A.L. (In Liquidation) 74.99 30 Charterhouse Administrators (D.T.) Limited 100.00 (99.99) 16 Charterhouse Management Services Limited 100.00 (99.99) 16 Charterhouse Pensions Limited 100.00 16 Chongqing Dazu HSBC Rural Bank Company Limited 100.00 12, 31 Chongqing Fengdu HSBC Rural Bank Company Limited 100.00 12, 32 Chongqing Rongchang HSBC Rural Bank Company Limited 100.00 12, 33 COIF Nominees Limited N/A 0, 16 Corsair IV Financial Services Capital Partners - B LP N/A 0, 1, 34 Dalian Pulandian HSBC Rural Bank Company Limited 100.00 12, 35 Decision One Mortgage Company, LLC N/A 0, 36 Dempar 1 100.00 (99.99) 4, 37 Desarrollo Turistico, S.A. de C.V. (In Liquidation) 100.00 (99.99) 17 Electronic Data Process México, S.A. de C.V. 100.00 1, 38 Eton Corporate Services Limited 100.00 22 Flandres Contentieux S.A. 100.00 (99.99) 4, 37 Foncière Elysées 100.00 (99.99) 4, 37 Fujian Yongan HSBC Rural Bank Company Limited 100.00 12, 39 Fulcher Enterprises Company Limited 100.00 (62.14) 40 Fundacion HSBC, A.C. 100.00 (99.99) 11, 17 Giller Ltd. 100.00 28 GPIF Co-Investment, LLC N/A 0, 15 Griffin International Limited 100.00 16 Grupo Financiero HSBC, S. A. de C. V. 99.99 17 Guangdong Enping HSBC Rural Bank Company Limited 100.00 12, 41 Guangzhou HSBC Real Estate Company Ltd (广州汇丰房地产有限公司) 100.00 1, 12, 42 Hang Seng (Nominee) Limited 100.00 (62.14) 40 Hang Seng Bank (China) Limited N/A 0, 12, 43 Hang Seng Bank (Trustee) Limited 100.00 (62.14) 40 Hang Seng Bank Limited 62.14 40 Hang Seng Bullion Company Limited 100.00 (62.14) 40 Hang Seng Credit Limited 100.00 (62.14) 40 Hang Seng Data Services Limited 100.00 (62.14) 40 Hang Seng Finance Limited 100.00 (62.14) 40 Hang Seng Financial Information Limited 100.00 (62.14) 40 Hang Seng Indexes (Netherlands) B.V. N/A 0, 1, 44 Hang Seng Indexes Company Limited 100.00 (62.14) 40 Hang Seng Insurance Company Limited 100.00 (62.14) 40 Hang Seng Investment Management Limited 100.00 (62.14) 40 Hang Seng Investment Services Limited 100.00 (62.14) 40 Hang Seng Qianhai Fund Management Company Limited N/A 0, 12, 45 Hang Seng Real Estate Management Limited 100.00 (62.14) 40 Hang Seng Securities Limited 100.00 (62.14) 40 Hang Seng Security Management Limited 100.00 (62.14) 40 HASE Wealth Limited 100.00 (62.14) 1, 40 Haseba Investment Company Limited 100.00 (62.14) 40 HFC Bank Limited (In Liquidation) 100.00 19 High Time Investments Limited 100.00 (62.14) 40 HLF 100.00 (99.99) 4, 37 Honey Blue Enterprises Limited (亨京企業有 限公司) 100.00 1, 46 Honey Green Enterprises Ltd. 100.00 47 Honey Grey Enterprises Limited (亨穗企業有 限公司) 100.00 1, 48 Honey Silver Enterprises Limited (亨深企業有 限公司) 100.00 1, 48 Household International Europe Limited (In Liquidation) 100.00 5, 49 Household Pooling Corporation 100.00 50 Housing (USA) LLP N/A 0, 1, 29 HSBC (BGF) Investments Limited 100.00 16 HSBC (General Partner) Limited 100.00 2, 51 HSBC (Guernsey) GP PCC Limited 100.00 22 HSBC (Kuala Lumpur) Nominees Sdn Bhd 100.00 52 HSBC (Malaysia) Trustee Berhad 100.00 53 HSBC (Singapore) Nominees Pte Ltd 100.00 54 HSBC Agency (India) Private Limited 100.00 55 HSBC Alternative Investments Limited 100.00 16 HSBC Amanah Malaysia Berhad 100.00 52 HSBC Americas Corporation (Delaware) 100.00 15 HSBC Argentina Holdings S.A. 100.00 56 HSBC Asia Holdings B.V. 100.00 16 HSBC Asia Holdings Limited 100.00 2, 48 HSBC Asia Pacific Holdings (UK) Limited 100.00 5, 16 HSBC Asset Finance (UK) Limited 100.00 16 HSBC Asset Finance M.O.G. Holdings (UK) Limited 100.00 16 HSBC Asset Management (Fund Services UK) Limited 100.00 1, 16 HSBC Asset Management (India) Private Limited 99.99 3, 57 HSBC Asset Management (Japan) Limited 100.00 58 HSBC Assurances Vie (France) 100.00 (99.99) 4, 59 HSBC Australia Holdings Pty Limited 100.00 5, 60 Subsidiaries % of share class held by immediate parent company (or by the Group where this varies) Footnotes HSBC Holdings plc Annual Report and Accounts 2023 427 Financial statements HSBC BANK (CHILE) 100.00 61 HSBC Bank (China) Company Limited N/A 0, 12, 62 HSBC Bank (General Partner) Limited 100.00 51 HSBC Bank (Mauritius) Limited 100.00 63 HSBC Bank (RR) (Limited Liability Company) N/A 0, 13, 64 HSBC Bank (Singapore) Limited 100.00 54 HSBC Bank (Taiwan) Limited 100.00 65 HSBC Bank (Uruguay) S.A. 100.00 66 HSBC Bank (Vietnam) Ltd. 100.00 67 HSBC Bank A.S. 100.00 (99.99) 68 HSBC Bank Argentina S.A. 99.99 56 HSBC Bank Armenia cjsc 100.00 69 HSBC Bank Australia Limited 100.00 60 HSBC Bank Bermuda Limited 100.00 23 HSBC Bank Canada 100.00 3, 70 HSBC Bank Capital Funding (Sterling 1) LP N/A 0, 51 HSBC Bank Capital Funding (Sterling 2) LP N/A 0, 51 HSBC Bank Egypt S.A.E 99.62 (94.54) 71 HSBC Bank Malaysia Berhad 100.00 3, 52 HSBC Bank Malta p.l.c. 70.03 72 HSBC Bank Middle East Limited 100.00 3, 73 HSBC Bank Middle East Limited Representative Office Morocco SARL (In Liquidation) 100.00 74 HSBC Bank Pension Trust (UK) Limited 100.00 16 HSBC Bank plc 100.00 2, 3, 16 HSBC Bank USA, National Association 100.00 3, 75 HSBC Branch Nominee (UK) Limited 100.00 18 HSBC Brasil Holding S.A. 100.00 21 HSBC Broking Forex (Asia) Limited 100.00 48 HSBC Broking Futures (Asia) Limited 100.00 48 HSBC Broking Futures (Hong Kong) Limited 100.00 48 HSBC Broking Securities (Asia) Limited 100.00 48 HSBC Broking Securities (Hong Kong) Limited 100.00 48 HSBC Broking Services (Asia) Limited 100.00 48 HSBC Canadian Covered Bond (Legislative) GP Inc. 100.00 76 HSBC Canadian Covered Bond (Legislative) Guarantor Limited Partnership N/A 0, 76 HSBC Capital (USA), Inc. 100.00 3, 15 HSBC Capital Funding (Dollar 1) L.P. N/A 0, 51 HSBC Card Services Inc. 100.00 15 HSBC Casa de Bolsa, S.A. de C.V., Grupo Financiero HSBC 100.00 (99.99) 17 HSBC Cayman Limited 100.00 192 HSBC Cayman Services Limited 100.00 77 HSBC City Funding Holdings (In Liquidation) 100.00 19 HSBC Client Holdings Nominee (UK) Limited 100.00 16 HSBC Client Nominee (Jersey) Limited 100.00 78 HSBC Columbia Funding, LLC N/A 0, 15 HSBC Continental Europe 99.99 4, 37 HSBC Corporate Advisory (Malaysia) Sdn Bhd 100.00 52 HSBC Corporate Finance (Hong Kong) Limited 100.00 48 HSBC Corporate Secretary (UK) Limited 100.00 1, 2, 16 HSBC Corporate Services (Shanghai) Co., Ltd N/A 0, 1, 79 HSBC Corporate Trustee Company (UK) Limited 100.00 16 HSBC Custody Nominees (Australia) Limited 100.00 60 HSBC Custody Services (Guernsey) Limited 100.00 22 HSBC Daisy Investments (Mauritius) Limited 100.00 80 HSBC Diversified Loan Fund General Partner Sarl N/A 0, 81 HSBC Electronic Data Processing (Guangdong) Limited N/A 0, 12, 82 HSBC Electronic Data Processing (Malaysia) Sdn Bhd 100.00 83 HSBC Electronic Data Processing (Philippines), Inc. 99.99 84 Subsidiaries % of share class held by immediate parent company (or by the Group where this varies) Footnotes HSBC Electronic Data Processing India Private Limited 100.00 85 HSBC Electronic Data Processing Lanka (Private) Limited 100.00 86 HSBC Electronic Data Service Delivery (Egypt) S.A.E. 100.00 87 HSBC Epargne Entreprise (France) 100.00 (99.99) 4, 59 HSBC Equipment Finance (UK) Limited 100.00 18 HSBC Equity (UK) Limited 100.00 16 HSBC Europe B.V. 100.00 16 HSBC Executor & Trustee Company (UK) Limited 100.00 18 HSBC Factoring (France) 100.00 (99.99) 4, 37 HSBC Finance (Netherlands) 100.00 2, 16 HSBC Finance Corporation 100.00 3, 15 HSBC Finance Limited 100.00 16 HSBC Finance Mortgages Inc. 100.00 88 HSBC Finance Transformation (UK) Limited 100.00 16 HSBC Financial Advisors Singapore Pte. Ltd. 100.00 1, 54 HSBC Financial Services (Lebanon) s.a.l. 99.80 89 HSBC Financial Services (Uruguay) S.A. (In Liquidation) 100.00 90 HSBC FinTech Services (Shanghai) Company Limited N/A 0, 1, 91 HSBC Global Asset Management (Bermuda) Limited 100.00 3, 23 HSBC Global Asset Management (Canada) Limited 100.00 70 HSBC Global Asset Management (Deutschland) GmbH 100.00 (99.99) 6, 92 HSBC Global Asset Management (France) 100.00 (99.99) 4, 59 HSBC Global Asset Management (Hong Kong) Limited 100.00 24 HSBC Global Asset Management (Malta) Limited 100.00 (70.03) 93 HSBC Global Asset Management (México), S.A. de C.V., Sociedad Operadora de Fondos de Inversión, Grupo Financiero HSBC 100.00 (99.99) 17 HSBC Global Asset Management (Singapore) Limited 100.00 54 HSBC Global Asset Management (Switzerland) AG 100.00 4, 94 HSBC Global Asset Management (Taiwan) Limited 100.00 95 HSBC Global Asset Management (UK) Limited 100.00 16 HSBC Global Asset Management (USA) Inc. 100.00 96 HSBC Global Asset Management Argentina S.A. Sociedad Gerente de Fondos Comunes de Inversión 100.00 (99.99) 97 HSBC Global Asset Management Holdings (Bahamas) Limited 100.00 98 HSBC Global Asset Management Limited 100.00 2, 16 HSBC Global Custody Nominee (UK) Limited 100.00 16 HSBC Global Custody Proprietary Nominee (UK) Limited 100.00 1, 16 HSBC Global Services (Canada) Limited 100.00 88 HSBC Global Services (China) Holdings Limited 100.00 16 HSBC Global Services (Hong Kong) Limited 100.00 99 HSBC Global Services (UK) Limited 100.00 16 HSBC Global Services Limited 100.00 2, 16 HSBC Group Management Services Limited 100.00 16 HSBC Group Nominees UK Limited 100.00 2, 16 HSBC Holdings B.V. 100.00 16 HSBC IM Pension Trust Limited 100.00 16 HSBC Infrastructure Debt GP 1 S.à r.l. N/A 0, 1, 100 HSBC Infrastructure Debt GP 2 S.à r.l. N/A 0, 1, 100 Subsidiaries % of share class held by immediate parent company (or by the Group where this varies) Footnotes Notes on the financial statements 428 HSBC Holdings plc Annual Report and Accounts 2023 HSBC Infrastructure Limited (In Liquidation) 100.00 19 HSBC Innovation Bank Limited 100.00 1, 101 HSBC INSN (Non Operating) Pte. Ltd. (In Liquidation) 100.00 54 HSBC Institutional Trust Services (Asia) Limited 100.00 48 HSBC Institutional Trust Services (Bermuda) Limited 100.00 23 HSBC Institutional Trust Services (Mauritius) Limited 100.00 102 HSBC Institutional Trust Services (Singapore) Limited 100.00 54 HSBC Insurance (Asia-Pacific) Holdings Limited 100.00 103 HSBC Insurance (Asia) Limited 100.00 104 HSBC Insurance (Bermuda) Limited 100.00 105 HSBC Insurance Agency (USA) Inc. 100.00 106 HSBC Insurance Brokerage Company Limited N/A 0, 1, 107 HSBC Insurance Brokers Greater China Limited 100.00 1, 108 HSBC Insurance Holdings Limited (In Liquidation) 100.00 2, 16 HSBC Insurance SAC 1 (Bermuda) Limited 100.00 23 HSBC Insurance SAC 2 (Bermuda) Limited 100.00 1, 109 HSBC Insurance Services Holdings Limited 100.00 16 HSBC International Finance Corporation (Delaware) 100.00 110 HSBC International Trustee (BVI) Limited 100.00 10, 111 HSBC International Trustee (Holdings) Pte. Limited 100.00 54 HSBC International Trustee Limited 100.00 112 HSBC Inversiones S.A. 100.00 61 HSBC InvestDirect (India) Private Limited 99.99 57 HSBC InvestDirect Financial Services (India) Limited 99.99 57 HSBC InvestDirect Sales & Marketing (India) Limited 98.99 113 HSBC InvestDirect Securities (India) Private Limited 99.99 57 HSBC Investment and Insurance Brokerage, Philippines Inc. 99.99 114 HSBC Investment Bank Holdings B.V. 100.00 16 HSBC Investment Bank Holdings Limited 100.00 16 HSBC Investment Company Limited 100.00 2, 16 HSBC Investment Funds (Canada) Inc. 100.00 5, 115 HSBC Investment Funds (Hong Kong) Limited 100.00 24 HSBC Investment Funds (Luxembourg) SA 100.00 116 HSBC Invoice Finance (UK) Limited 100.00 18 HSBC Issuer Services Common Depositary Nominee (UK) Limited 100.00 16 HSBC Issuer Services Depositary Nominee (UK) Limited (In Liquidation) 100.00 19 HSBC Latin America B.V. 100.00 16 HSBC Latin America Holdings (UK) Limited 100.00 2, 16 HSBC Leasing (Asia) Limited 100.00 48 HSBC Life (Bermuda) Limited 100.00 1, 23 HSBC Life (Cornell Centre) Limited 100.00 104 HSBC Life (Edwick Centre) Limited 100.00 104 HSBC Life (International) Limited 100.00 23 HSBC Life (Property) Limited 100.00 104 HSBC Life (Singapore) Pte. Ltd. 100.00 1, 54 HSBC Life (Tsing Yi Industrial) Limited 100.00 104 HSBC Life (UK) Limited 100.00 16 HSBC Life (Workshop) Limited 100.00 1, 104 HSBC Life Assurance (Malta) Limited 100.00 (70.03) 93 HSBC Life Insurance Company Limited N/A 0, 12, 117 HSBC LU Nominees Limited 100.00 16 HSBC Management (Guernsey) Limited 100.00 118 Subsidiaries % of share class held by immediate parent company (or by the Group where this varies) Footnotes HSBC Markets (USA) Inc. 100.00 15 HSBC Marking Name Nominee (UK) Limited 100.00 16 HSBC Master Trust Trustee Limited 100.00 16 HSBC Mexico, S.A., Institucion de Banca Multiple, Grupo Financiero HSBC 99.99 17 HSBC Middle East Asset CO. LLC 100.00 119 HSBC Middle East Holdings B.V. 100.00 2, 3, 73 HSBC Middle East Leasing Partnership N/A 0, 120 HSBC Middle East Securities L.L.C 100.00 121 HSBC Mortgage Corporation (Canada) 100.00 122 HSBC Mortgage Corporation (USA) 100.00 15 HSBC Nominees (Asing) Sdn Bhd 100.00 52 HSBC Nominees (Hong Kong) Limited 100.00 48 HSBC Nominees (New Zealand) Limited 100.00 123 HSBC Nominees (Tempatan) Sdn Bhd 100.00 52 HSBC North America Holdings Inc. 100.00 3, 15 HSBC Operational Services GmbH 100.00 (99.99) 6, 92 HSBC Overseas Holdings (UK) Limited 100.00 2, 3, 16 HSBC Overseas Investments Corporation (New York) 100.00 124 HSBC Overseas Nominee (UK) Limited 100.00 16 HSBC Participaciones (Argentina) S.A. 100.00 (99.99) 56 HSBC PB Corporate Services 1 Limited 100.00 125 HSBC PB Services (Suisse) SA 100.00 126 HSBC Pension Trust (Ireland) DAC 100.00 127 HSBC Pensiones, S.A. (In Liquidation) 100.00 (99.99) 17 HSBC Philanthropy Foundation Beijing N/A 0, 191 HSBC PI Holdings (Mauritius) Limited 100.00 128 HSBC Portfoy Yonetimi A.S. 100.00 129 HSBC Preferential LP (UK) 100.00 16 HSBC Private Bank (Luxembourg) S.A. 100.00 (99.99) 116 HSBC Private Bank (Suisse) SA 100.00 130 HSBC Private Bank (UK) Limited 100.00 16 HSBC Private Banking Holdings (Suisse) SA 100.00 126 HSBC Private Banking Nominee 3 (Jersey) Limited 100.00 125 HSBC Private Equity Investments (UK) Limited 100.00 16 HSBC Private Investment Counsel (Canada) Inc. 100.00 3, 115 HSBC Private Markets Management SARL N/A 0, 1, 131 HSBC Private Trustee (Hong Kong) Limited 100.00 48 HSBC Professional Services (India) Private Limited 100.00 132 HSBC Property (UK) Limited 100.00 16 HSBC Property Funds (Holding) Limited 100.00 16 HSBC Provident Fund Trustee (Hong Kong) Limited 100.00 48 HSBC Qianhai Securities Limited N/A 0, 12, 133 HSBC Real Estate Leasing (France) 100.00 (99.99) 4, 37 HSBC REGIO Fund General Partner S.à r.l. N/A 0, 1, 100 HSBC REIM (France) 100.00 (99.99) 4, 59 HSBC Retirement Benefits Trustee (UK) Limited 100.00 1, 2, 16 HSBC Retirement Services Limited 100.00 1, 16 HSBC Saudi Arabia, Closed Joint Stock Company 100.00 (66.18) 134 HSBC Savings Bank (Philippines) Inc. 99.99 135 HSBC Securities (Canada) Inc. 100.00 88 HSBC Securities (Egypt) S.A.E. (In Liquidation) 100.00 (94.65) 71 HSBC Securities (Japan) Co., Ltd. 100.00 1, 58 HSBC Securities (Japan) Limited (In Liquidation) 100.00 16 HSBC Securities (Singapore) Pte Limited 100.00 54 HSBC Securities (South Africa) (Pty) Limited 100.00 136 HSBC Securities (Taiwan) Corporation Limited 100.00 65 Subsidiaries % of share class held by immediate parent company (or by the Group where this varies) Footnotes HSBC Holdings plc Annual Report and Accounts 2023 429 Financial statements HSBC Securities (USA) Inc. 100.00 15 HSBC Securities and Capital Markets (India) Private Limited 99.99 5, 113 HSBC Securities Brokers (Asia) Limited 100.00 48 HSBC Securities Investments (Asia) Limited 100.00 48 HSBC Securities Services (Bermuda) Limited 100.00 23 HSBC Securities Services (Guernsey) Limited 100.00 22 HSBC Securities Services (Ireland) DAC 100.00 127 HSBC Securities Services (Luxembourg) S.A. 100.00 116 HSBC Securities Services Holdings (Ireland) DAC 100.00 127 HSBC Securities Services Nominees Limited 100.00 1, 48 HSBC Seguros de Retiro (Argentina) S.A. 100.00 (99.99) 56 HSBC Seguros de Vida (Argentina) S.A. 100.00 (99.99) 56 HSBC Seguros, S.A de C.V., Grupo Financiero HSBC 100.00 (99.99) 17 HSBC Service Company Germany GmbH 100.00 (99.99) 1, 6, 92 HSBC Service Delivery (Polska) Sp. z o.o. 100.00 137 HSBC Services (France) 100.00 (99.99) 4, 37 HSBC Services Japan Limited 100.00 138 HSBC Services USA Inc. 100.00 139 HSBC Servicios Financieros, S.A. de C.V 100.00 (99.99) 17 HSBC Servicios, S.A. DE C.V., Grupo Financiero HSBC 100.00 (99.99) 17 HSBC SFH (France) 100.00 (99.99) 59 HSBC SFT (C.I.) Limited 100.00 22 HSBC Software Development (Guangdong) Limited N/A 0, 12, 140 HSBC Software Development (India) Private Limited 100.00 (99.99) 141 HSBC Software Development (Malaysia) Sdn Bhd 100.00 83 HSBC Specialist Investments Limited 100.00 3, 16 HSBC Technology & Services (China) Limited N/A 0, 12, 142 HSBC Technology & Services (USA) Inc. 100.00 15 HSBC Transaction Services GmbH 100.00 (99.99) 6, 92 HSBC Trinkaus & Burkhardt (International) S.A. 100.00 (99.99) 143 HSBC Trinkaus & Burkhardt Gesellschaft fur Bankbeteiligungen mbH 100.00 (99.99) 92 HSBC Trinkhaus & Burkhardt GmbH 100.00 (99.99) 1, 6, 144 HSBC Trinkaus Family Office GmbH 100.00 (99.99) 6, 92 HSBC Trinkaus Real Estate GmbH 100.00 (99.99) 6, 92 HSBC Trust Company (Canada) 100.00 122 HSBC Trust Company (Delaware), National Association 100.00 110 HSBC Trust Company (UK) Limited 100.00 16 HSBC Trustee (C.I.) Limited 100.00 125 HSBC Trustee (Cayman) Limited 100.00 145 HSBC Trustee (Guernsey) Limited 100.00 22 HSBC Trustee (Hong Kong) Limited 100.00 48 HSBC Trustee (Singapore) Limited 100.00 54 HSBC UK Bank plc 100.00 2, 18 HSBC UK Client Nominee Limited 100.00 18 HSBC UK Holdings Limited (In Liquidation) 100.00 2, 3, 146 HSBC UK Societal Projects Limited N/A 0, 1, 18 HSBC USA Inc. 100.00 3, 124 HSBC Ventures USA Inc. 100.00 15 HSBC Violet Investments (Mauritius) Limited 100.00 80 HSBC Wealth Client Nominee Limited 100.00 1, 18 HSBC Yatirim Menkul Degerler A.S. 100.00 68 HSI Asset Securitization Corporation 100.00 15 HSI International Limited 100.00 (62.14) 40 HSIL Investments Limited 100.00 16 Hubei Macheng HSBC Rural Bank Company Limited N/A 0, 12, 147 Hubei Suizhou Cengdu HSBC Rural Bank Company Limited N/A 0, 12, 148 Subsidiaries % of share class held by immediate parent company (or by the Group where this varies) Footnotes Hubei Tianmen HSBC Rural Bank Company Limited N/A 0, 12, 149 Hunan Pingjiang HSBC Rural Bank Company Limited N/A 0, 12, 150 Imenson Limited 100.00 (62.14) 40 INKA Internationale Kapitalanlagegesellschaft mbH 100.00 (99.99) 92 Inmobiliaria Bisa, S.A. de C.V. 99.98 17 Inmobiliaria Grufin, S.A. de C.V. 100.00 (99.99) 17 Inmobiliaria Guatusi, S.A. de C.V. 100.00 (99.99) 17 James Capel (Nominees) Limited 100.00 16 James Capel (Taiwan) Nominees Limited 100.00 16 John Lewis Financial Services Limited 100.00 16 Keyser Ullmann Limited 100.00 (99.99) 16 Lion Corporate Services Limited 100.00 48 Lion International Corporate Services Limited 100.00 1, 151 Lion International Management Limited 100.00 151 Lion Management (Hong Kong) Limited 100.00 1, 48 Lyndholme Limited 100.00 48 Marks and Spencer Financial Services plc 100.00 152 Marks and Spencer Unit Trust Management Limited 100.00 152 Midcorp Limited 100.00 16 Midland Bank (Branch Nominees) Limited 100.00 18 Midland Nominees Limited 100.00 18 MP Payments Group Limited 100.00 1, 16 MP Payments Netherlands B.V. 100.00 1, 153 MP Payments Operations Limited 100.00 1, 16 MP Payments Singapore Pte. Ltd. 100.00 1, 154 MP Payments UK Limited 100.00 1, 16 MW Gestion SA 100.00 56 Prudential Client HSBC GIS Nominee (UK) Limited 100.00 16 PT Bank HSBC Indonesia 99.99 (98.93) 155 PT HSBC Sekuritas Indonesia 100.00 (85.00) 155 R/CLIP Corp. 100.00 15 Real Estate Collateral Management Company 100.00 15 Republic Nominees Limited 100.00 22 RLUKREF Nominees (UK) One Limited 100.00 1, 16 RLUKREF Nominees (UK) Two Limited 100.00 1, 16 S.A.P.C. - Ufipro Recouvrement 99.99 11, 37 Saf Baiyun 100.00 (99.99) 4, 37 Saf Guangzhou 100.00 (99.99) 4, 37 SCI HSBC Assurances Immo 100.00 (99.99) 11, 59 Serai Limited 100.00 48 Serai Technology Development (Shanghai) Limited (丝睿科技开发（上海）有限公司) N/A 0, 1, 12, 156 SFM 100.00 (99.99) 4, 37 SFSS Nominees (Pty) Limited 100.00 136 Shandong Rongcheng HSBC Rural Bank Company Limited N/A 0, 12, 157 Shenzhen HSBC Development Company Ltd N/A 0, 1, 12, 158 Sico Limited 100.00 159 SNC Les Oliviers D'Antibes 60.00 (59.99) 11, 59 SNCB/M6-2008 A 100.00 (99.99) 4, 37 SNCB/M6-2007 A 100.00 (99.99) 4, 37 SNCB/M6-2007 B 100.00 (99.99) 4, 37 Société Française et Suisse 100.00 (99.99) 4, 37 Somers Dublin DAC 100.00 (99.99) 127 Somers Nominees (Far East) Limited 100.00 23 Sopingest 100.00 (99.99) 4, 37 South Yorkshire Light Rail Limited 100.00 16 St Cross Trustees Limited 100.00 18 Sterling Credit Limited 100.00 183 Sun Hung Kai Development (Lujiazui III) Limited N/A 0, 12, 160 Subsidiaries % of share class held by immediate parent company (or by the Group where this varies) Footnotes Notes on the financial statements 430 HSBC Holdings plc Annual Report and Accounts 2023 Swan National Limited (In Liquidation) 100.00 19 The Hongkong and Shanghai Banking Corporation Limited 100.00 5, 48 The Venture Catalysts Limited (In Liquidation) 100.00 19 Tooley Street View Limited 100.00 2, 16 Trinkaus Europa Immobilien-Fonds Nr.3 Objekt Utrecht Verwaltungs-GmbH 100.00 (99.99) 6, 92 Trinkaus Immobilien-Fonds Geschaeftsfuehrungs-GmbH 100.00 (99.99) 6, 92 Trinkaus Immobilien-Fonds Verwaltungs- GmbH 100.00 (99.99) 6, 92 Trinkaus Private Equity Management GmbH 100.00 (99.99) 6, 92 Trinkaus Private Equity Verwaltungs GmbH 100.00 (99.99) 6, 92 Turnsonic (Nominees) Limited 100.00 18 Valeurs Mobilières Elysées 100.00 (99.99) 4, 37 Wardley Limited 100.00 48 Wayfoong Nominees Limited 100.00 48 Westminster House, LLC N/A 0, 15 Woodex Limited 100.00 23 Yan Nin Development Company Limited 100.00 (62.14) 40 Subsidiaries % of share class held by immediate parent company (or by the Group where this varies) Footnotes Joint ventures The undertakings below are joint ventures and equity accounted. Joint ventures % of share class held by immediate parent company (or by the Group where this varies) Footnotes Climate Asset Management Limited 40.00 1, 161 Global Payments Technology Mexico S.A. De C.V 50.00 162 HCM Holdings Limited (In Liquidation) 50.99 19 MK HoldCo Limited 50.32 1, 163 Pentagreen Capital Pte. Ltd 50.00 1, 164 ProServe Bermuda Limited 50.00 165 The London Silver Market Fixing Limited N/A 0, 1, 166 Vaultex UK Limited 50.00 167 Associates The undertakings below are associates and equity accounted. Associates % of share class held by immediate parent company (or by the Group where this varies) Footnotes Bank of Communications Co., Ltd. 19.03 168 Barrowgate Limited 15.31 169 BGF Group plc 24.62 170 Bud Financial Limited 4.84 1, 171 Canara HSBC Life Insurance Company Limited 26.00 172 Contour Pte Ltd 9.87 1, 173 Divido Financial Services Limited 7.70 1, 174 Electronic Payment Services Company (Hong Kong) Limited 38.66 48 Episode Six Inc. 5.69 1, 175 EPS Company (Hong Kong) Limited 38.66 48 Euro Secured Notes Issuer 16.67 176 HSBC Jintrust Fund Management Company Limited N/A 0, 177 HSBC UK Covered Bonds (LM) Limited 20.00 1, 178 HSBC UK Covered Bonds LLP N/A 0, 1, 18 Liquidity Match LLC N/A 0, 1, 179 London Precious Metals Clearing Limited 30.00 1, 180 MENA Infrastructure Fund (GP) Ltd 33.33 181 Monese Ltd 5.39 1, 182 Quantexa Ltd 9.36 183 RadiantESG Global Investors LLC N/A 0, 1, 184 Saudi Awwal Bank 31.00 186 Services Epargne Entreprise 14.18 187 The London Gold Market Fixing Limited N/A 0, 188 Threadneedle Software Holdings Limited 7.10 1, 189 Trade Information Network Limited 12.76 1, 161 Trinkaus Europa Immobilien-Fonds Nr. 7 Frankfurt Mertonviertel KG N/A 0, 92 We Trade Innovation Designated Activity Company (In Liquidation) 9.88 1, 190 HSBC Holdings plc Annual Report and Accounts 2023 431 Financial statements Footnotes for Note 40 Description of shares 0 Where an entity is governed by voting rights, HSBC consolidates when it holds – directly or indirectly – the necessary voting rights to pass resolutions by the governing body. In all other cases, the assessment of control is more complex and requires judgement of other factors, including having exposure to variability of returns, power to direct relevant activities, and whether power is held as an agent or principal. HSBC’s consolidation policy is described in Note 1.2(a). 1 Management has determined that these undertakings are excluded from consolidation in the Group accounts as these entities do not meet the definition of subsidiaries in accordance with IFRS. HSBC’s consolidation policy is described in Note 1.2(a). 2 Directly held by HSBC Holdings plc 3 Preference Shares 4 Actions 5 Redeemable Preference Shares 6 GmbH Anteil 7 Limited and Unlimited Liability Shares 8 Liquidating Share Class 9 Nominal Shares 10 Non-Participating Voting Shares 11 Parts 12 Registered Capital Shares 13 Russian Limited Liability Company Shares 14 Stückaktien 15 c/o The Corporation Trust Company, 1209 Orange Street, Wilmington, Delaware, United States of America, 19801 16 8 Canada Square, London, United Kingdom, E14 5HQ 17 Paseo de la Reforma 347 Col. Cuauhtemoc, Mexico, 06500 18 1 Centenary Square, Birmingham, United Kingdom, B1 1HQ 19 C/O Teneo Financial Advisory Limited, The Colmore Building, 20 Colmore Circus, Queensway, Birmingham, United Kingdom, B4 6AT 20 5 Donegal Square South , Northern Ireland, Belfast, United Kingdom, BT1 5JP 21 1909 Avenida Presidente Juscelino Kubitschek, 19° andar, Torre Norte, São Paulo Corporate Towers, São Paulo, Brazil, 04551-903 22 Arnold House, St Julians Avenue, St Peter Port, Guernsey, GY1 3NF 23 37 Front Street, Harbourview Centre, Ground Floor, Hamilton, Pembroke, Bermuda, HM 11 24 HSBC Main Building, 1 Queen's Road Central, Hong Kong 25 2401-55 24/F, Office Tower Two 1 Jianguomenwai Street, Chaoyang District, Beijing, China 26 First Floor, Xinhua Bookstore Xindong Road (SE of roundabout), Miyun District, Beijing, China 27 Oak House Hirzel Street, St Peter Port, Guernsey, GY1 2NP 28 2929 Walden Avenue, Depew, New York, United States of America, 14043 29 Corporation Service Company 251 Little Falls Drive, Wilmington, Delaware, United States of America, 19808 30 Solidere - Rue Saad Zaghloul Immeuble - 170 Marfaa, P.O. Box 17 5476 Mar Michael, Beyrouth, Lebanon, 11042040 31 No 1, Bei Huan East Road Dazu County, Chongqing, China 32 No 107 Ping Du Avenue (E), Sanhe Town, Fengdu County, Chongqing, China 33 No. 3, 5, 7, Haitang Erzhi Road Changyuan, Rongchang, Chongqing, China, 402460 34 c/o Walkers Corporate Services Limited Walker House, 87 Mary Street, George Town, Grand Cayman, Cayman Islands, KY1-9005 Registered offices 35 First & Second Floor, No.3 Nanshan Road, Pulandian, Dalian, Liaoning, China 36 160 Mine Lake CT, Ste 200, Raleigh, North Carolina, United States of America, 27615-6417 37 38 Avenue Kléber, Paris, France, 75116 38 Avenida de las Granjas 972, Building A, Floor 2, Colonia Santa Bárbara, Alcaldía Azcapotzalco, Mexico City, Mexico, 02230 39 No. 1 1211 Yanjiang Zhong Road, Yongan, Fujian, China 40 83 Des Voeux Road Central, Hong Kong 41 No. 44 Xin Ping Road Central, Encheng, Enping, Guangdong, China, 529400 42 Room 311, Cheng Hui No. 2, Nan Sha Street, Nan Sha District, Guangzhou, Guangdong, China 43 34/F, 36/F, Unit 031 of 45/F, and 46/F, Hang Seng Bank Tower 1000 Lujiazui Ring Road, Pilot Free Trade Zone, Shanghai, China, 200120 44 Gustav Mahlerplein 2 1082 MA, Amsterdam, Netherlands 45 1001 T2 Office Building, Qianhai Kerry Business Center, Qianhai Avenue, Nanshan Street, Qianhai Shenzhen-Hong Kong Cooperation Zone, Shenzhen, Guangdong, China 46 1 Queen’s Road Central, Hong Kong 47 Commerce House, Wickhams Cay 1, P.O. Box 3140, Road Town, Tortola, British Virgin Islands, VG1110 48 1 Queen's Road Central, Hong Kong 49 156 C/O Teneo Financial Advisory Limited, Great Charles Street, Queensway, West Midlands, Birmingham, United Kingdom, B3 3HN 50 701 S CARSON ST STE 200, Carson City, Nevada, United States of America, 89701 51 HSBC House Esplanade, St. Helier, Jersey, JE4 8UB 52 Level 21, Menara IQ, Lingkaran TRX, Tun Razak Exchange, Kuala Lumpur, Malaysia, 55188 53 Level 19, Menara IQ, Lingkaran TRX, Tun Razak Exchange, Kuala Lumpur, Malaysia, 55188 54 10 Marina Boulevard, #48-01 Marina Bay Financial Centre, Singapore, 018983 55 52/60, M G Road Fort, Mumbai, India, 400 001 56 557 Bouchard Level 20, Ciudad de Buenos Aires, Federal Capital, Argentina, C1106ABG 57 9-11 Floors, NESCO IT Park Building No. 3 Western Express Highway, Goregaon (East), Mumbai, India, 400063 58 HSBC Building 11-1, Nihonbashi 3-chome, Chuo-ku, Tokyo, Japan, 103-0027 59 Immeuble Cœur Défense 110 esplanade du Général de Gaulle, Courbevoie, France, 92400 60 Level 36 Tower 1 International Towers Sydney, 100 Barangaroo Avenue, Sydney, New South Wales, Australia, 2000 61 Isidora Goyenechea 2800 23rd floor, Las Condes, Santiago, Chile, 7550647 62 HSBC Building Shanghai ifc, 8 Century Avenue, Pudong, Shanghai, China, 200120 63 IconEbene, Level 5 Office 1 (West Wing), Rue de L’institut, Ebene, Mauritius 64 2 Paveletskaya Square Building 2, Moscow, Russia, 115054 65 54F, 7 Xinyi Road Sec. 5 Xinyi District, Taipei, Taiwan 66 1266 Dr Luis Bonativa 1266 Piso 30 (Torre IV WTC), Montevideo, Uruguay, CP 11.000 67 The Metropolitan 235 Dong Khoi Street, District 1, Ho Chi Minh City, Vietnam 68 Esentepe Mah. Büyükdere Caddesi No.128 Şişli, Istanbul, Turkiye, 34394 69 90 Area 42 Paronyan Street, Yerevan, Armenia, 0015 70 885 West Georgia Street 3rd Floor, Vancouver, British Columbia, Canada, V6C 3E9 71 306 Corniche El Nil, Maadi, Egypt, 11728 Registered offices Notes on the financial statements 432 HSBC Holdings plc Annual Report and Accounts 2023 72 116 Archbishop Street, Valletta, Malta 73 Unit 401, Level 4 Gate Precinct Building 2, Dubai International Financial Centre, P. O. Box 30444, Dubai, United Arab Emirates 74 Majer Consulting, Office 54/44, Building A1, Residence Ryad Anfa, Boulevard Omar El Khayam, Casa Finance City (CFC), Casablanca, Morocco 75 1800 Tysons Boulevard Suite 50, Tysons, Virginia, United States of America, 22102 76 66 Wellington Street West, Suite 5300, Toronto, Ontario, Canada, M5K 1E6 77 P.O. Box 1109, Strathvale House, Ground floor, 90 North Church Street, George Town, Grand Cayman, Cayman Islands, KY1-1102 78 HSBC House Esplanade, St. Helier, Jersey, JE1 1HS 79 RM 2113 HSBC Building, Shanghai ifc, No. 8 Century Avenue, Pudong, Shanghai, China, 200120 80 c/o Rogers Capital St. Louis Business Centre, Cnr Desroches & St Louis Streets, Port Louis, Mauritius 81 49 avenue J.F. Kennedy, Luxembourg, 1855 82 4-17/F, Office Tower 2 TaiKoo Hui, No. 381 Tian He Road, Tian He District, Guangzhou, Guangdong, China 83 Suite 1005, 10th Floor, Wisma Hamzah Kwong, Hing No. 1, Leboh Ampang, Kuala Lumpur, Malaysia, 50100 84 Building C-1 UP Ayala Technohub, Commonwealth Avenue, Diliman, Quezon City, Metro Manila, Philippines 85 HSBC House Plot No.8 Survey No.64 (Part), Hightec City Layout Madhapur, Hyderabad, India, 500081 86 Mireka City 324/9 Havelock Road, Colombo 05, Sri Lanka, 00500 87 Smart Village 28th Km Cairo- Alexandria Desert Road Building, Cairo, Egypt 88 16 York Street, 6th Floor, Toronto, Ontario, Canada, M5J 0E6 89 Centre Ville 1341 Building - 4th Floor Patriarche Howayek Street, PO Box Riad El Solh, Lebanon, 9597 90 World Trade Center Montevideo Avenida Luis Alberto de Herrera 1248, Torre 1, Piso 15, Oficina 1502, Montevideo, Uruguay, CP 11300 91 Room 655, Building A, No.888 Huan Hu West 2nd Road, Lingang New Area, China (Shanghai) Pilot Free Trade Zone, Shanghai, China 92 Hansaallee 3, Düsseldorf, Germany, 40549 93 80 Mill Street, Qormi, Malta, QRM 3101 94 Gartenstrasse 26, Zurich, Switzerland, 8002 95 36F., No. 68 Sec. 5, Zhongxiao E. Rd., Xinyi Dist., Taipei City, Taiwan, 110419 96 452 Fifth Avenue, New York, United States of America, NY10018 97 Bouchard 557, Piso 18° , Cdad. Autónoma de Buenos Aires, Argentina, 1106 98 Mareva House 4 George Street, Nassau, Bahamas 99 1 Queen’s Road Central, Hong Kong 100 4 rue Peternelchen, Howald, Luxembourg, 2370 101 Alphabeta 14-18 Finsbury Square, London, United Kingdom, EC2A 1BR 102 IConEbene Rue de L’institut, Ebene, Mauritius 103 HSBC Main Building, 1 Queen's Road Central, Hong Kong 104 18th Floor Tower 1, HSBC Centre 1 Sham Mong Road, Kowloon, Hong Kong 105 37 Front Street, Harbourview Center, Ground Floor, Hamilton, Pembroke, Bermuda, HM 11 106 CT Corporation System 28 Liberty Street, New York, New York, United States of America, 10005 107 Unit 201, Floor 2, Building 3 No. 12, Anxiang Street, Shunyi District, Beijing, China 108 HSBC Main Building, 1 Queen’s Road Central, Hong Kong 109 37 Front Street, Harbourview Centre, Ground Floor, Hamilton Pembroke, Bermuda, HM 11 Registered offices 110 300 Delaware Avenue Suite 1401, Wilmington, Delaware, United States of America, 19801 111 Woodbourne Hall, Road Town, Tortola, British Virgin Islands, P.O. Box 916 112 Craigmuir Chambers, Road Town Tortola, British Virgin Islands, VG1110 113 52/60 M G Road Fort, Mumbai, India, 400 001 114 5/F HSBC Centre 3058 Fifth Ave West, Bonifacio Global City, Taguig City, Philippines 115 300-885 West Georgia Street, Vancouver, British Columbia, Canada, V6C 3E9 116 18 Boulevard de Kockelscheuer, Luxembourg, 1821 117 Unit 2002 of 20/F, Unit 2101 of 21/F HSBC Building, 8 Century Avenue, China (Shanghai) Pilot Free Trade Zone, Shanghai, China, 200120 118 Arnold House, St Julians Avenue, St Peter Port, Guernsey, GY1 1WA 119 HSBC Tower, Downtown Dubai, P.O. Box 66. United Arab Emirates 120 Unit 401, Level 4, Gate Precinct Building 2, Dubai International Financial Centre, P. O. Box 506553, Dubai, United Arab Emirates 121 Level 16, HSBC Tower, Downtown Dubai, P.O. Box 66, United Arab Emirates 122 885 West Georgia Street, Suite 300, Vancouver, British Columbia, Canada, V6C 3E9 123 HSBC Tower, Level 21, 188 Quay Street, Auckland, New Zealand, 1010 124 The Corporation Trust Incorporated, 2405 York Road, Suite 201, Lutherville Timonium, Maryland, United States of America, 21093 125 HSBC House Esplanade, St. Helier, Jersey, JE1 1GT 126 Quai des Bergues 9-17 , Geneva, Switzerland, 1201 127 1 Grand Canal Square Grand Canal Harbour, Dublin 2, Ireland, D02 P820 128 6th floor HSBC Centre 18, Cybercity, Ebene, Mauritius, 72201 129 Esentepe Mah. Büyükdere Caddesi No.128, 34394, Şişli, Istanbul, Turkiye 130 Quai des Bergues 9-17, Geneva, Switzerland, 1201 131 5 rue Heienhaff, Senningerberg, Luxembourg, L-1736 132 52/60 M G Road, Fort, Mumbai, India, 400 001 133 Unit 2201, 22/F, Qianhai Chow Tai Fook Finance Tower (Phase I) No. 66 Shu Niu Avenue, Nanshan Subdistrict, the Shenzhen Qianhai Shenzhen-Hong Kong Cooperation Zone, the PRC, Shenzhen, China, 518054 134 HSBC Building 7267 Olaya - Al Murrooj , Riyadh, Kingdom of Saudi Arabia, 12283 - 2255 135 Unit 1 GF The Commerical Complex Madrigal Avenue, Ayala Alabang Village, Muntinlupa City, Philippines, 1780 136 1 Mutual Place, 107 Rivonia Road, Sandton, Gauteng, South Africa, 2196 137 Kapelanka 42A , Krakow, Poland, 30-347 138 Mareva House, 4 George Street, Nassau, Bahamas 139 C T Corporation System 820 Bear Tavern Road, West Trenton, New Jersey, United States of America, 08628 140 L22, Office Tower 2, Taikoo Hui, 381 Tianhe Road, Tianhe District, Guangzhou, Guangdong, China 141 Business Bay, Wing 2 Tower B, Survey no 103, Hissa no. 2, Airport Road, Yerwada, Pune, India, 411006 142 Room 3102, L31 HSBC Building, Shanghai ifc, 8 Century Avenue, China (Shanghai) Free Trade Zone, Shanghai, China, 200120 143 16 Boulevard d'Avranches, Luxembourg, L-1160 144 3 Hansaallee, Düsseldorf, Nordrhein-Westfalen, Germany, 40549 145 P.O. Box 309 Ugland House, Grand Cayman, Cayman Islands, KY1-1104 Registered offices HSBC Holdings plc Annual Report and Accounts 2023 433 Financial statements 146 c/o Teneo Financial Advisory Limited The Colmore Building, 20 Colmore Circus, Queensway, Birmingham, United Kingdom, B4 6AT 147 No. 56 Yu Rong Street, Macheng, China, 438300 148 No. 205 Lie Shan Road, Suizhou, Hubei, China 149 Building 3, Yin Zuo Di Jing Wan Tianmen New City, Tianmen, Hubei Province, China 150 RM101, 102 & 106 Sunshine Fairview, Sunshine Garden, Pedestrian Walkway, Pingjiang, China 151 Craigmuir Chambers, Road Town, Tortola, British Virgin Islands, VG1110 152 Kings Meadow Chester Business Park, Chester, United Kingdom, CH99 9FB 153 De Entree, 236 , Amsterdam, Netherlands, 1101 EE 154 10 Marina Boulevard, #48-01 Marina Bay Financial Centre, Singapore, 018983 155 5th Floor, World Trade Center 1, Jl. Jend. Sudirman Kav. 29-31, Jakarta, Indonesia, 12920 156 Room 667, 6/F, Tower A, No. 8 Century Avenue, Pudong District, Shanghai, China 157 No.198-2 Chengshan Avenue (E), Rongcheng, China, 264300 158 Room 1303-13062 Marine Center Main Tower, 59 Linhai Rd, Nanshan District, Shenzhen, China 159 Woodbourne Hall, Road Town, Tortola, British Virgin Islands, P.O. Box 3162 160 RM 2112, HSBC Building, Shanghai ifc No. 8 Century Road, Pudong, Shanghai, China, 200120 161 3 More London Riverside, London, United Kingdom, SE1 2AQ 162 296, Floor 18, Office A Paseo de la Reforma, Mexico City, Mexico, 06600 163 35 Ballards Lane, London, United Kingdom, N3 1XW 164 1 Raffles Quay #23-01, Singapore, 048583 165 c/o MUFG Fund Services (Bermuda) Limited, Cedar House, 4th Floor North, 41 Cedar Avenue, Hamilton, Bermuda, HM12 166 27 Old Gloucester Street, London, United Kingdom, WC1N 3AX 167 All Saints Triangle Caledonian Road, London, United Kingdom, N1 9UT Registered offices 168 188 Yin Cheng Zhong Lu (Shanghai) Pilot Free Trade Zone, China 169 50/F, Lee Garden One, 33 Hysan Avenue, Hong Kong 170 13-15 York Buildings, London, United Kingdom, WC2N 6JU 171 167-169 Great Portland Street, 5th Floor, London, United Kingdom, W1W 5PF 172 Unit No. 208, 2nd Floor, Kanchenjunga Building, 18 Barakhamba Road, New Delhi, India, 110001 173 1 Harbourfront Avenue, #14-07 Keppel Bay Tower, Singapore, 098632 174 Office 7, 35-37 Ludgate Hill, London, United Kingdom, EC4M 7JN 175 251 Little Falls Drive, New Castle, Wilmington, United States of America, 19808 176 3 Avenue de l'Opera , Paris, France, 75001 177 17F, HSBC Building, Shanghai ifc 8 Century Avenue, Pudong, Shanghai, China 178 10th Floor 5 Churchill Place, London, United Kingdom, E14 5HU 179 100 Town Square Place, Suite 201, Jersey City, New Jersey, United States of America, 07310 180 7th Floor, 62 Threadneedle Street, London, United Kingdom, EC2R 8HP 181 Unit 705, Level 7, Currency House-Tower 2, Dubai International Financial Centre, P.O. BOX 506553, Dubai, United Arab Emirates 182 Eagle House, 163 City Road, London, United Kingdom, EC1V 1NR 183 Hill House, 1 Little New Street, London, United Kingdom, EC4A 3TR 184 4482 Deer Ridge Road, Danville, CA, Delaware, United States of America, 94506 185 9004 Al Ulaya - Al Olaya Dis. Unit no. 1, Riyadh, Kingdom of Saudi Arabia, 12214-2652 186 7206 Prince Abdul Aziz Bin Musaid Bin Jalawi, 4065 Al Murabba District, 12613 Riyadh, Kingdom of Saudi Arabia 187 32 Rue du Champ de Tir, Nantes, France, 44300 188 c/o Hackwood Secretaries Limited, One Silk Street, London, United Kingdom, EC2Y 8HQ 189 2nd Floor, Regis House, 45 King William Street, London, United Kingdom, EC4R 9AN 190 10 Earlsfort Terrace, Dublin, Ireland, D02 T380 191 Meeting Room 18.R005, 18/F Fortune Financial Center, No. 5 Dongsanhuan Zhong Road, Chaoyang District, Beijing, 100020, China 192 P.O. Box, 309 Ugland House, Grand Cayman, Cayman Islands, KY1-1104 Registered offices Notes on the financial statements 434 HSBC Holdings plc Annual Report and Accounts 2023 Shareholder information Contents 435 Fourth interim dividend for 2023 435 Interim dividends for 2024 435 Other equity instruments 435 2023 Annual General Meeting 436 Earnings releases and interim results 436 Shareholder enquiries and communications 437 Stock symbols 437 Investor relations 437 Where more information about HSBC is available 438 Taxation of shares and dividends 439 Approach to ESG reporting 441 Cautionary statement regarding forward-looking statements 443 Certain defined terms 444 Abbreviations This section gives important information for our shareholders, including contact information. It also includes an overview of key abbreviations and terminology used throughout the Annual Report and Accounts. A glossary of terms used in the Annual Report and Accounts can be found in the Investors section of www.hsbc.com. Fourth interim dividend for 2023 The Directors have approved a fourth interim dividend for 2023 of $0.31 per ordinary share. Information on the currencies in which shareholders may elect to have the cash dividend paid can be viewed at www.hsbc.com/investors. The interim dividend will be paid in cash. The timetable for the interim dividend is: Announcement 21 February 2024 Shares quoted ex-dividend in London, Hong Kong and Bermuda and American Depositary Shares (‘ADS’) quoted ex-dividend in New York 7 March 2024 Record date – London, Hong Kong, New York, Bermuda1 8 March 2024 Mailing of Annual Report and Accounts 2023 and/or Strategic Report 2023 22 March 2024 Final date for dividend election changes including Investor Centre electronic instructions and revocations of standing instructions for dividend elections 11 April 2024 Exchange rate determined for payment of dividends in pounds sterling and Hong Kong dollars 15 April 2024 Payment date 25 April 2024 1 Removals to and from the Overseas Branch register of shareholders in Hong Kong will not be permitted on this date. Interim dividends for 2024 For the financial year 2023, the Group reverted to paying quarterly dividends, and achieved a dividend payout ratio of 50% of reported earnings per ordinary share (’EPS’), in line with our published target for 2023 and 2024. EPS for this purpose excludes material notable items and related impacts (including those associated with the sale of our retail banking operations in France, the agreed sale of our banking business in Canada and our acquisition of SVB UK). The Board has adopted a dividend policy designed to provide sustainable cash dividends, while retaining the flexibility to invest and grow the business in the future, supplemented by additional shareholder distributions, if appropriate. Dividends are approved in US dollars and, at the election of the shareholder, paid in cash in one of, or in a combination of, US dollars, pounds sterling and Hong Kong dollars. Other equity instruments Additional tier 1 capital – contingent convertible securities HSBC continues to issue contingent convertible securities that are included in its capital base as fully CRR II-compliant additional tier 1 capital securities. For further details on these securities, see Note 33 on the financial statements. HSBC issued $2,000m 8.000% perpetual contingent convertible securities on 7 March 2023. 2023 Annual General Meeting With the exception of the shareholder requisitioned Resolutions 16, 17 and 18, which the Board recommended that shareholders vote against, all resolutions considered at the 2023 AGM held at 11:00am on 5 May 2023 at The Eastside Rooms, 2 Woodcock Street, Birmingham, B7 4BL, UK, were passed on a poll. HSBC Holdings plc Annual Report and Accounts 2023 435 Additional information Earnings releases and interim results First and third quarter results for 2024 will be released on 30 April 2024 and 29 October 2024, respectively. The interim results for the six months to 30 June 2024 will be issued on 31 July 2024. Shareholder enquiries and communications Enquiries Any enquiries relating to shareholdings on the share register (for example, transfers of shares, changes of name or address, lost share certificates or dividend cheques) should be sent to the Registrars at the address given below. The Registrars offer an online facility, Investor Centre, which enables shareholders to manage their shareholding electronically. Principal Register: Computershare Investor Services PLC The Pavilions, Bridgwater Road, Bristol, BS99 6ZZ, United Kingdom Telephone: +44 (0) 370 702 0137 www.investorcentre.co.uk/contactus Investor Centre: www.investorcentre.co.uk Hong Kong Overseas Branch Register: Computershare Hong Kong Investor Services Limited Rooms 1712–1716, 17th Floor Hopewell Centre, 183 Queen’s Road East, Hong Kong Telephone: +852 2862 8555 hsbc.ecom@computershare.com.hk Investor Centre: www.investorcentre.com/hk Bermuda Overseas Branch Register: Investor Relations Team HSBC Bank Bermuda Limited, 37 Front Street, Hamilton, HM 11, Bermuda hbbm.shareholder.services@hsbc.bm Investor Centre: www.investorcentre.com/bm ADS Depositary: The Bank of New York Mellon Shareowner Services, P.O. Box 43006, Providence RI 02940-3078, USA Telephone (US): +1 877 283 5786 Telephone (International): +1 201 680 6825 shrrelations@cpushareownerservices.com www.mybnymdr.com If you have elected to receive general shareholder communications directly from HSBC Holdings, it is important to remember that your main contact for all matters relating to your investment remains the registered shareholder, or custodian or broker, who administers the investment on your behalf. Therefore, any changes or queries relating to your personal details and holding (including any administration of it) must continue to be directed to your existing contact at your investment manager or custodian or broker. HSBC Holdings cannot guarantee dealing with matters directed to it in error. Shareholders who wish to receive a hard copy of the Annual Report and Accounts 2023 should contact HSBC’s Registrars. Please visit www.hsbc.com/investors/investor-contacts for further information. You can also download an online version of the report from www.hsbc.com. Electronic communications Shareholders may at any time choose to receive corporate communications in printed form or to receive notifications of their availability on HSBC’s website. To receive notifications of the availability of a corporate communication on HSBC’s website by email, or revoke or amend an instruction to receive such notifications by email, go to www.hsbc.com/investors/shareholder-information/manage-your-shareholding. If you received a notification of the availability of this document on HSBC’s website and would like to receive a printed copy, or if you would like to receive future corporate communications in printed form, please write or send an email (quoting your shareholder reference number) to the appropriate Registrars at the address given above. Printed copies will be provided without charge. Additional information 436 HSBC Holdings plc Annual Report and Accounts 2023 Chinese translation A Chinese translation of the Annual Report and Accounts 2023 will be available upon request after 22 March 2024 from the Registrars (contact details above). Please also contact the Registrars if you wish to receive Chinese translations of future documents, or if you have received a Chinese translation of this document and do not wish to receive them in future. 《2023 年報及賬目》備有中譯本，各界人士可於2024年3月22日之後，向上列股份登記處索閱。 閣下如欲於日後收取相關文件的中譯本，或已收到本文件的中譯本但不希望繼續收取有關譯本，均請聯絡股份登記處。 Stock symbols HSBC Holdings ordinary shares trade under the following stock symbols: London Stock Exchange HSBA* New York Stock Exchange (ADS) HSBC Hong Kong Stock Exchange 5 Bermuda Stock Exchange HSBC.BH ∗ HSBC’s Primary market Investor relations Enquiries relating to HSBC’s strategy or operations may be directed to: Neil Sankoff, Global Head of Investor Relations Yafei Tian, Head of Investor Relations, Asia-Pacific HSBC Holdings plc The Hongkong and Shanghai Banking 8 Canada Square Corporation Limited London E14 5HQ 1 Queen’s Road Central United Kingdom Hong Kong Telephone: +44 (0) 20 7991 5072 Telephone: +852 2899 8909 Email: investorrelations@hsbc.com Email: investorrelations@hsbc.com.hk Where more information about HSBC is available The Annual Report and Accounts 2023 and other information on HSBC may be downloaded from HSBC’s website: www.hsbc.com. Reports, statements and information that HSBC Holdings files with the Securities and Exchange Commission are available at www.sec.gov. Investors can also request hard copies of these documents upon payment of a duplicating fee by writing to the SEC at the Office of Investor Education and Advocacy, 100 F Street N.E., Washington, DC 20549-0213 or by emailing PublicInfo@sec.gov. Investors should call the Commission at (1) 202 551 8090 if they require further assistance. Investors may also obtain the reports and other information that HSBC Holdings files at www.nyse.com (telephone number (1) 212 656 3000). HM Treasury has transposed the requirements set out under CRD IV and issued the Capital Requirements Country-by-Country Reporting Regulations 2013. The legislation requires HSBC Holdings to publish additional information in respect of the year ended 31 December 2023 by 31 December 2024. This information will be available on HSBC’s website: www.hsbc.com/tax. HSBC Holdings plc Annual Report and Accounts 2023 437 Additional information Taxation of shares and dividends Taxation – UK residents The following is a summary, under current law (unless otherwise noted) and the current published practice of HM Revenue and Customs (‘HMRC’), of certain UK tax considerations that are likely to be material to the ownership and disposition of HSBC Holdings ordinary shares. The summary does not purport to be a comprehensive description of all the tax considerations that may be relevant to a holder of shares. In particular, the summary deals with shareholders who are resident solely in the UK for UK tax purposes and only with holders who hold the shares as investments and who are the beneficial owners of the shares, and does not address the tax treatment of certain classes of holders such as dealers in securities. Holders and prospective purchasers should consult their own advisers regarding the tax consequences of an investment in shares in light of their particular circumstances, including the effect of any national, state or local laws. Taxation of dividends Currently, no tax is withheld from dividends paid by HSBC Holdings. UK resident individuals UK resident individuals are generally entitled to a tax-free annual allowance in respect of dividends received. The amount of the allowance for the tax year beginning 6 April 2023 is £1,000. To the extent that dividend income received by an individual in the relevant tax year does not exceed the allowance, a nil tax rate will apply. Dividend income in excess of this allowance will be taxed at 8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers and 39.35% for additional rate taxpayers. UK resident companies Shareholders that are within the charge to UK corporation tax should generally be entitled to an exemption from UK corporation tax on any dividends received from HSBC Holdings. However, the exemptions are not comprehensive and are subject to anti-avoidance rules. If the conditions for exemption are not met or cease to be satisfied, or a shareholder within the charge to UK corporation tax elects for an otherwise exempt dividend to be taxable, the shareholder will be subject to UK corporation tax on dividends received from HSBC Holdings at the rate of corporation tax applicable to that shareholder. Taxation of capital gains The computation of the capital gains tax liability arising on disposals of shares in HSBC Holdings by shareholders subject to UK tax on capital gains can be complex, partly depending on whether, for example, the shares were purchased since April 1991, acquired in 1991 in exchange for shares in The Hongkong and Shanghai Banking Corporation Limited, or acquired subsequent to 1991 in exchange for shares in other companies. For capital gains tax purposes, the acquisition cost for ordinary shares is adjusted to take account of subsequent rights and capitalisation issues. Any capital gain arising on a disposal of shares in HSBC Holdings by a UK company may also be adjusted to take account of indexation allowance if the shares were acquired before 1 January 2018, although the level of indexation allowance that is given in calculating the gain would be frozen at the value that would have been applied to a disposal of those shares in December 2017. If in doubt, shareholders are recommended to consult their professional advisers. Stamp duty and stamp duty reserve tax Transfers of shares by a written instrument of transfer generally will be subject to UK stamp duty at the rate of 0.5% of the consideration paid for the transfer (rounded up to the next £5), and such stamp duty is generally payable by the transferee. An agreement to transfer shares, or any interest therein, normally will give rise to a charge to stamp duty reserve tax at the rate of 0.5% of the consideration. However, provided an instrument of transfer of the shares is executed pursuant to the agreement and duly stamped before the date on which the stamp duty reserve tax becomes payable, under the current published practice of HMRC it will not be necessary to pay the stamp duty reserve tax, nor to apply for such tax to be cancelled. Stamp duty reserve tax is generally payable by the transferee. Paperless transfers of shares within CREST, the UK’s paperless share transfer system, are liable to stamp duty reserve tax at the rate of 0.5% of the consideration. In CREST transactions, the tax is calculated and payment made automatically. Deposits of shares into CREST generally will not be subject to stamp duty reserve tax, unless the transfer into CREST is itself for consideration. Until 31 December 2023, the charge to stamp duty reserve tax at 1.5% on the issue of shares (and transfers integral to capital raising) to a depositary receipt issuer or a clearance service was incompatible with European Union law as retained in the UK following the UK’s departure from the European Union, and was not imposed by HMRC. If the UK Finance Bill 2023-24 is enacted in the form it stands as at the date hereof, that 1.5% charge will be repealed with retrospective effect from 1 January 2024. Taxation – US residents The following is a summary, under current law, of the principal UK tax and US federal income tax considerations that are likely to be material to the ownership and disposition of shares or American Depositary Shares (‘ADSs’) by a holder that is a US holder, as defined below, and who is not resident in the UK for UK tax purposes. The summary does not purport to be a comprehensive description of all of the tax considerations that may be relevant to a holder of shares or ADSs. In particular, the summary deals only with US holders that hold shares or ADSs as capital assets, and does not address the tax treatment of holders that are subject to special tax rules. These include banks, tax-exempt entities, insurance companies, dealers in securities or currencies, persons that hold shares or ADSs as part of an integrated investment (including a ‘straddle’ or ‘hedge’) comprised of a share or ADS and one or more other positions, and persons that own directly or indirectly 10% or more (by vote or value) of the stock of HSBC Holdings. This discussion is based on laws, treaties, judicial decisions and regulatory interpretations in effect on the date hereof, all of which are subject to change. For the purposes of this discussion, a ‘US holder’ is a beneficial holder that is a citizen or resident of the United States, a US domestic corporation or otherwise is subject to US federal income taxes on a net income basis in respect thereof. Holders and prospective purchasers should consult their own advisers regarding the tax consequences of an investment in shares or ADSs in light of their particular circumstances, including the effect of any national, state or local laws. Any US federal tax advice included in the Annual Report and Accounts 2023 is for informational purposes only. It was not intended or written to be used, and cannot be used, for the purpose of avoiding US federal tax penalties. Taxation of dividends Currently, no tax is withheld from dividends paid by HSBC Holdings. For US tax purposes, a US holder must include cash dividends paid on the shares or ADSs in ordinary income on the date that such holder or the ADS depositary receives them, translating dividends paid in UK pounds sterling into US dollars using the exchange rate in effect on the date of receipt. A US holder that elects to receive shares in lieu of a cash dividend must include in ordinary income the fair market value of such shares on the dividend payment date, and the tax basis of those shares will equal such fair market value. Subject to certain exceptions for positions that are held for less than 61 days, and subject to a foreign corporation being considered a ‘qualified foreign corporation’ (which includes not being classified for US federal income tax purposes as a passive foreign investment company), certain dividends (‘qualified dividends’) received by an individual US holder generally will be subject to US taxation at preferential rates. Additional information 438 HSBC Holdings plc Annual Report and Accounts 2023 Based on the company’s audited financial statements and relevant market and shareholder data, HSBC Holdings does not believe that it was a passive investment company for its 2023 taxable year and does not anticipate becoming a passive foreign investment company in 2024 or the foreseeable future. Accordingly, dividends paid on the shares or ADSs generally should be eligible for qualified dividends treatment. Taxation of capital gains Gains realised by a US holder on the sale or other disposition of shares or ADSs normally will not be subject to UK taxation unless at the time of the sale or other disposition the holder carries on a trade, profession or vocation in the UK through a branch or agency or permanent establishment and the shares or ADSs are or have been used, held or acquired for the purposes of such trade, profession, vocation, branch or agency or permanent establishment. Such gains will be included in income for US tax purposes, and will be long-term capital gains if the shares or ADSs were held for more than one year. A long-term capital gain realised by an individual US holder generally will be subject to US tax at preferential rates. Inheritance tax Shares or ADSs held by an individual whose domicile is determined to be the US for the purposes of the United States–United Kingdom Double Taxation Convention relating to estate and gift taxes (the ‘Estate Tax Treaty’) and who is not for such purposes a national of the UK will not, provided any US federal estate or gift tax chargeable has been paid, be subject to UK inheritance tax on the individual’s death or on a lifetime transfer of shares or ADSs except in certain cases where the shares or ADSs (i) are comprised in a settlement (unless, at the time of the settlement, the settlor was domiciled in the US and was not a national of the UK), (ii) are part of the business property of a UK permanent establishment of an enterprise, or (iii) pertain to a UK fixed base of an individual used for the performance of independent personal services. In such cases, the Estate Tax Treaty generally provides a credit against US federal tax liability for the amount of any tax paid in the UK in a case where the shares or ADSs are subject to both UK inheritance tax and to US federal estate or gift tax. Stamp duty and stamp duty reserve tax – ADSs If shares are transferred to a clearance service or American Depositary Receipt (‘ADR’) issuer (which will include a transfer of shares to the depositary) UK stamp duty and/or stamp duty reserve tax will be payable unless the UK Finance Bill 2023-24 is enacted in the form it stands as at the date hereof and the transfer is, or is treated as being, in the course of a capital raising arrangement. The stamp duty or stamp duty reserve tax is generally payable on the consideration for the transfer and is payable at the aggregate rate of 1.5%. The amount of stamp duty reserve tax payable on such a transfer will be reduced by any stamp duty paid in connection with the same transfer. No stamp duty will be payable on the transfer of, or agreement to transfer, an ADS, provided that the ADR and any separate instrument of transfer or written agreement to transfer remain at all times outside the UK, and provided further that any such transfer or written agreement to transfer is not executed in the UK. No stamp duty reserve tax will be payable on a transfer of, or agreement to transfer, an ADS effected by the transfer of an ADR. US information reporting and backup withholding tax Distributions made on shares or ADSs and proceeds from the sale of shares or ADSs that are paid within the US, or through certain financial intermediaries to US holders, are subject to US information reporting and may be subject to a US ‘backup’ withholding tax. General exceptions to this rule happen when the US holder: establishes that it is a corporation (other than an S corporation) or other exempt holder; or provides a correct taxpayer identification number, certifies that no loss of exemption from backup withholding has occurred and otherwise complies with the applicable requirements of the backup withholding rules. Holders that are not US persons (as defined in the US Internal Revenue Code of 1986, as amended) generally are not subject to US information reporting or backup withholding tax, but may be required to comply with applicable certification procedures to establish that they are not US persons in order to avoid the application of such US information reporting requirements or backup withholding tax to payments received within the US or through certain financial intermediaries. Approach to ESG reporting The information set out in the ESG review on pages 41 to 98, taken together with other information relating to ESG issues included in this Annual Report and Accounts 2023, aims to provide key ESG information and data relevant to our operations for the year ended 31 December 2023. The data is compiled for the financial year 1 January to 31 December 2023 unless otherwise specified. Measurement techniques and calculations are explained next to data tables where necessary. There are no significant changes from the previous reporting period in terms of scope, boundary or measurement of our reporting of ESG matters. Where relevant, rationale is provided for any restatement of information or data that has been previously published. We have also considered our obligations under the Environmental, Social and Governance Reporting Guide contained in Appendix C2 to The Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited (‘ESG Guide’) and under LR9.8.6R(8) of the Financial Conduct Authority’s (‘FCA’) Listing Rules. We will continue to develop and refine our reporting and disclosures on ESG matters in line with feedback received from our investors and other stakeholders, and in view of our obligations under the ESG Guide and the FCA’s Listing Rules. ESG Guide We comply with the ‘comply or explain’ provisions in the ESG Guide, save for certain items, which we describe in more detail below: – A1(b) on relevant laws/regulations relating to air and greenhouse gas emissions, discharges into water and land, and generation of hazardous and non-hazardous waste, and on emissions: taking into account the nature of our business, we do not believe that there are relevant laws and regulations in these areas that have significant impacts on our operations. Nevertheless, we are fully compliant with our publication of information regarding scope 1 and 2 carbon emissions, while we only partially publish information on scope 3 carbon emissions, as the data required for that publication is not yet fully available. – A1.3 on total hazardous waste produced, A1.4 on total non- hazardous waste produced: Taking into account the nature of our business, we do not consider hazardous waste to be a material issue for our stakeholders. As such, we report only on total waste produced, which includes hazardous and non-hazardous waste. – A1.6 on handling hazardous and non-hazardous waste: Taking into account the nature of our business, we do not consider this to be a material issue for our stakeholders. Notwithstanding this, we continue to focus on the reduction and recycling of all waste. Building on the success of our previous operational environmental strategy, we are continuing to seek to identify key opportunities where we can lessen our wider environmental impact, including waste management. For further details, please see our ESG review on page 63. – A2.4 on sourcing water issue and water efficiency target: Taking into account the nature of our business, we do not consider this to be a material issue for our stakeholders. Notwithstanding this, we have implemented measures to further reduce water consumption through the installation of flow restrictors, auto-taps and low or zero flush sanitary fittings and continue to track our water consumption. – A2.5 on packaging material, B6(b) on issues related to health and safety and labelling relating to products and services provided, B6.1 on percentage of total products sold or shipped subject to recalls for safety and health reasons and B6.4 in recall procedures: Taking into account the nature of our business, we do not consider these to be material issues for our stakeholders. This is aligned with the materiality reporting principle that is set out in the ESG Guide. See ‘How we decide what to measure’ on page 43 HSBC Holdings plc Annual Report and Accounts 2023 439 Additional information for further information on how we determine what matters are material to our stakeholders. TCFD recommendations and recommended disclosures As noted on page 17, we have considered our ‘comply or explain’ obligation under both the UK’s Financial Conduct Authority’s Listing Rules and Sections 414 CA and 414CB of the UK Companies Act 2006, and confirm that we have made disclosures consistent with the TCFD Recommendations and Recommended Disclosures, including its annexes and supplemental guidance, save for certain items, which we summarise below: Targets setting Metrics and targets (c) relating to short-term targets: For financed emissions we do not plan to set 2025 targets. We set targets in line with the Net-Zero Banking Alliance (‘NZBA‘) guidelines by setting 2030 targets. While the NZBA define 2030 as intermediate, we use different time horizons for climate risk management. We define short term as time periods up to 2025; medium term is between 2026 and 2035; and long term is between 2036 and 2050. In 2023, we disclose interim 2030 financed emissions targets for seven sectors comprising five on-balance sheet and two combined financed emissions targets, as we outline on page 18. For the shipping sector, we have taken a decision not to set a standalone financed emissions target. The decision follows a reduction in our exposure to the sector after the strategic sale of part of our European shipping portfolio. This aligns with NZBA guidelines on sector inclusion for target setting. We have now set combined on-balance sheet financed emissions and facilitated emissions targets for two emissions-intensive sectors: oil and gas, and power and utilities, and report the combined progress for both sectors. We intend to review the financed emissions baselines and targets annually and restate where relevant, to help ensure that they are aligned with market practice and current climate science. For further details on the restatements and targets and progress of financed emissions, see section ’Our approach to financed emissions recalculations’ and ’Targets and Progress’ on page 56 and 57. Metrics and targets (c) relating to capital deployment target: We do not currently disclose a target for capital deployment. In relation to capital deployment, since 2015, we have issued more than $2bn of our own green bonds and structured green bonds with the capital invested into a variety of green projects, including: green buildings, renewable energy and clean transportation projects. In 2023, we further progressed our internal review and enhancement of the green bond framework, with further refinement including internal and external review to be undertaken in 2024. This will be subject to continuous review and monitoring to ensure that they remain up to date and reflect updated standards, taxonomies and best practices. Any such developments in standards, taxonomies and best practices over time could result in revisions in our reporting going forward and lead to differences year-on-year as compared to prior years. See the HSBC Green Bond Report for further information. Metrics and targets (c) relating to internal carbon pricing target: We do not currently disclose internal carbon pricing target due to transitional challenges such as developing the appropriate systems and processes, but we considered carbon prices as an input for our climate scenario analysis exercise. We expect to further enhance the disclosure in the medium term as more data becomes available. Impacts on financial planning and performance Strategy (b) relating to financial planning and performance: We have used climate scenarios to inform our organisation’s business, strategy and financial planning. In 2023, we continued to incorporate certain aspects of sustainable finance and financed emissions within our financial planning process. We do not fully disclose impacts from climate-related opportunities on financial planning and performance including on revenue, costs and the balance sheet, quantitative scenario analysis, detailed climate risk exposures for all sectors and geographies or physical risk metrics. This is due to transitional challenges in relation to data limitations, although nascent work is ongoing in these areas. We expect these data limitations to be addressed in the medium term as more reliable data becomes available and technology solutions are implemented. Strategy (b) related to transition plan: We published our Group-wide net zero transition plan in January 2024. In this plan, we provided an overview of our approach to net zero and the actions we are taking to help meet our ambitions. We want to be clear about our approach, the change underway today and what we plan to do in the future. We also want to be transparent about where there are still unresolved issues and uncertainties. We are still developing our disclosures, including considerations of possible additional data in relation to our financial plans, budgets, and related financial approach for the implementation of the transition plan in the medium term (e.g. amount of capital and other expenditures supporting our decarbonisation strategy). Metrics and targets (a) relating to internal carbon prices and climate- related opportunities metrics: We do not currently disclose internal carbon prices due to transitional challenges such as data challenges. But we considered carbon prices as an input for our climate scenario analysis exercise. In addition, we do not currently fully disclose the proportion of revenue or proportion of assets, capital deployment or other business activities aligned with climate-related opportunities, including revenue from products and services designed for a low- carbon economy, forward-looking metrics consistent with our business or strategic planning time horizons. In relation to sustainable finance revenue and assets we are disclosing certain elements. We expect the data and system limitations related to financial planning and performance, and climate-related opportunities metrics to be addressed in the medium term as more reliable data becomes available and technology solutions are implemented. We expect to further enhance this disclosure in the medium term. Impacts of transition and physical risk Strategy (c) relating to quantitative scenario analysis: We do not currently fully disclose the impacts of transition and physical risk quantitatively, due to transitional challenges including data limitations and evolving science and methodologies. In 2023, we have disclosed the impairment impacts for our wholesale, retail and commercial real estate portfolios in different climate scenarios. In addition, we have disclosed losses on our retail mortgage book under three scenarios and flood depths for specific markets. For our wholesale book, we have disclosed potential implications on our expected credit losses for 11 sectors under two scenarios. We have also disclosed a heat map showing how we expect the risks to evolve over time. Metrics and targets (a) relating to detailed climate-related risk exposure metrics for physical and transition risks: We do not fully disclose metrics used to assess the impact of climate-related physical (chronic) and transitions (policy and legal, technology and market) risks on retail lending, parts of wholesale lending and other financial intermediary business activities (specifically credit exposure, equity and debt holdings, or trading positions, each broken down by industry, geography, credit quality and average tenor). We are aiming to develop the appropriate systems, data and processes to provide these disclosures in future years. We disclose the exposure to six high transition risk wholesale sectors and the flood risk exposure and Energy Performance Certificate breakdown for the UK portfolio. Metrics and targets (c) on targets related to physical risk: We do not currently disclose targets used to measure and manage physical risk. This is due to transitional challenges including data limitations of physical risk metrics. For retail, we do not use targets to measure and manage physical risk. In 2023 we introduced internally a global ‘soft trigger’ monitoring and review process for physical risk exposure where a market reaches or exceeds a set threshold, as this ensures markets are actively considering their balance sheet risk exposure to peril events. We also consider physical and transition risk as an input for our climate scenario analysis exercise. We expect to further enhance our disclosures as our data, quantitative scenario analysis, risk metrics and physical risk targets evolve, and technology solutions are implemented in the medium term. Additional information 440 HSBC Holdings plc Annual Report and Accounts 2023 Scope 3 emissions disclosure Metrics and targets (b) relating to scope 3 emissions metrics: We currently disclose partial scope 3 greenhouse gas emissions including business travel, supply chain and financed emissions. We currently disclose four out of 15 categories of scope 3 greenhouse gas emissions including business travel, supply chain and financed emissions. In relation to financed emissions, we publish on-balance sheet financed emissions for a number of sectors as detailed on page 18. We also publish facilitated emissions for the oil and gas, and power and utilities sectors. Future disclosures on financed emissions and related risks are reliant on our customers publicly disclosing their greenhouse gas emissions, targets and plans, and related risks. We recognise the need to provide early transparency on climate disclosures but balance this with the recognition that existing data and reporting processes require significant enhancements. Other matters Strategy (b) relating to access to capital: We have considered the impact of climate-related issues on our businesses, strategy and financial planning. Our access to capital may be impacted by reputational concerns as a result of climate action or inaction. In addition, if we are perceived to mislead stakeholders on our business activities or if we fail to achieve our stated net zero ambitions, we could face reputational damage, impacting our revenue-generating ability and potentially our access to capital markets. We expect to further enhance the disclosure in the medium term as more data becomes available. To manage these risks we have integrated climate risk into our existing risk taxonomy, and incorporated it within the risk management framework through the policies and controls for the existing risks where appropriate. Metrics and targets (c) relating to water usage target: We have described the targets used by the organisation to manage climate- related risks and opportunities and performance against targets. However, taking into account the nature of our business, we do not consider water usage to be a material target for our business and, therefore, we have not included a target in this year’s disclosure. With respect to our obligations under LR9.8.6R(8) of the FCA’s Listing Rules, as part of considering what to measure and publicly report, we perform an assessment to ascertain the appropriate level of detail to be included in the climate-related financial disclosures that are set out in our Annual Report and Accounts. Our assessment takes into account factors such as the level of our exposure to climate-related risks and opportunities, the scope and objectives of our climate- related strategy, transitional challenges, and the nature, size and complexity of our business. See ‘How we decide what to measure’ on page 43 for further information. Cautionary statement regarding forward-looking statements This Annual Report and Accounts 2023 contains certain forward- looking statements with respect to HSBC’s financial condition; results of operations and business, including the strategic priorities; financial, investment and capital targets; and ESG targets, commitments and ambitions described herein. Statements that are not historical facts, including statements about HSBC’s beliefs and expectations, are forward-looking statements. Words such as ‘may’, ‘will’, ‘should’, ‘expects’, ‘targets’, ‘anticipates’, ‘intends’, ‘plans’, ‘believes’, ‘seeks’, ‘estimates’, ‘potential’ and ‘reasonably possible’, or the negative thereof, other variations thereon or similar expressions are intended to identify forward-looking statements. These statements are based on current plans, information, data, estimates and projections, and therefore undue reliance should not be placed on them. Forward-looking statements speak only as of the date they are made. HSBC makes no commitment to revise or update any forward-looking statements to reflect events or circumstances occurring or existing after the date of any forward-looking statements. Written and/or oral forward-looking statements may also be made in the periodic reports to the US Securities and Exchange Commission, summary financial statements to shareholders, proxy statements, offering circulars and prospectuses, press releases and other written materials, and in oral statements made by HSBC’s directors, officers or employees to third parties, including financial analysts. Forward-looking statements involve inherent risks and uncertainties. Readers are cautioned that a number of factors could cause actual results to differ, in some instances materially, from those anticipated or implied in any forward- looking statement. These include, but are not limited to: – changes in general economic conditions in the markets in which we operate, such as new, continuing or deepening recessions, prolonged inflationary pressures and fluctuations in employment levels and the creditworthiness of customers beyond those factored into consensus forecasts; the Russia-Ukraine war and the Israel-Hamas war and their impact on global economies and the markets where HSBC operates, which could have a material adverse effect on (among other things) our financial condition, results of operations, prospects, liquidity, capital position and credit ratings; deviations from the market and economic assumptions that form the basis for our ECL measurements (including, without limitation, as a result of the Russia-Ukraine war and the Israel-Hamas war, inflationary pressures, commodity price changes, and ongoing developments in the commercial real estate sector in mainland China); potential changes in HSBC’s dividend policy; changes and volatility in foreign exchange rates and interest rates levels, including the accounting impact resulting from financial reporting in respect of hyperinflationary economies; volatility in equity markets; lack of liquidity in wholesale funding or capital markets, which may affect our ability to meet our obligations under financing facilities or to fund new loans, investments and businesses; geopolitical tensions or diplomatic developments producing social instability or legal uncertainty, such as the Russia-Ukraine war or the Israel-Hamas war (including the continuation and escalation thereof) and the related imposition of sanctions and trade restrictions, supply chain restrictions and disruptions, sustained increases in energy prices and key commodity prices, claims of human rights violations, diplomatic tensions, including between China and the US, the UK, the EU, India and other countries, and developments in Hong Kong and Taiwan, alongside other potential areas of tension, which may adversely affect HSBC by creating regulatory, reputational and market risks; the efficacy of government, customer, and HSBC’s actions in managing and mitigating ESG risks, in particular climate risk, nature-related risks and human rights risks, and in supporting the global transition to net zero carbon emissions, each of which can impact HSBC both directly and indirectly through our customers and which may result in potential financial and non- financial impacts; illiquidity and downward price pressure in national real estate markets; adverse changes in central banks’ policies with respect to the provision of liquidity support to financial markets; heightened market concerns over sovereign creditworthiness in over-indebted countries; adverse changes in the funding status of public or private defined benefit pensions; societal shifts in customer financing and investment needs, including consumer perception as to the continuing availability of credit; exposure to counterparty risk, including third parties using us as a conduit for illegal activities without our knowledge; the discontinuation of certain key Ibors and the transition of the remaining legacy Ibor contracts to near risk-free benchmark rates, which continues to expose HSBC to some financial and non- financial risks; and price competition in the market segments we serve; – changes in government policy and regulation, including the monetary, interest rate and other policies of central banks and other regulatory authorities in the principal markets in which we operate and the consequences thereof (including, without limitation, actions taken as a result of the impact of the Russia- Ukraine war on inflation); initiatives to change the size, scope of activities and interconnectedness of financial institutions in connection with the implementation of stricter regulation of financial institutions in key markets worldwide; revised capital and liquidity benchmarks, which could serve to deleverage bank balance sheets and lower returns available from the current business model and portfolio mix; changes to tax laws and tax rates applicable to HSBC, including the imposition of levies or taxes designed to change business mix and risk appetite; the HSBC Holdings plc Annual Report and Accounts 2023 441 Additional information practices, pricing or responsibilities of financial institutions serving their consumer markets; expropriation, nationalisation, confiscation of assets and changes in legislation relating to foreign ownership; the UK’s relationship with the EU, which continues to be characterised by uncertainty and political disagreement, despite the signing of the Trade and Cooperation Agreement between the UK and the EU, particularly with respect to the potential divergence of UK and EU law on the regulation of financial services; changes in government approach and regulatory treatment in relation to ESG disclosures and reporting requirements, and the current lack of a single standardised regulatory approach to ESG across all sectors and markets; changes in UK macroeconomic and fiscal policy, which may result in fluctuations in the value of the pound sterling; general changes in government policy that may significantly influence investor decisions; the costs, effects and outcomes of regulatory reviews, actions or litigation, including any additional compliance requirements; and the effects of competition in the markets where we operate including increased competition from non-bank financial services companies; and – factors specific to HSBC, including our success in adequately identifying the risks we face, such as the incidence of loan losses or delinquency, and managing those risks (through account management, hedging and other techniques); our ability to achieve our financial, investment, capital and ESG targets, commitments and ambitions (including the positions set forth in our thermal coal phase-out policy and our energy policy and our targets to reduce our on-balance sheet financed emissions and, where applicable, facilitated emissions in our portfolio of selected high-emitting sectors), which may result in our failure to achieve any of the expected benefits of our strategic priorities; evolving regulatory requirements and the development of new technologies, including artificial intelligence, affecting how we manage model risk; model limitations or failure, including, without limitation, the impact that high inflationary pressures and rising interest rates have had on the performance and usage of financial models, which may require us to hold additional capital, incur losses and/or use compensating controls, such as judgemental post-model adjustments, to address model limitations; changes to the judgements, estimates and assumptions we base our financial statements on; changes in our ability to meet the requirements of regulatory stress tests; a reduction in the credit ratings assigned to us or any of our subsidiaries, which could increase the cost or decrease the availability of our funding and affect our liquidity position and net interest margin; changes to the reliability and security of our data management, data privacy, information and technology infrastructure, including threats from cyber-attacks, which may impact our ability to service clients and may result in financial loss, business disruption and/or loss of customer services and data; the accuracy and effective use of data, including internal management information that may not have been independently verified; changes in insurance customer behaviour and insurance claim rates; our dependence on loan payments and dividends from subsidiaries to meet our obligations; changes in our reporting frameworks and accounting standards, which have had and may continue to have a material impact on the way we prepare our financial statements; our ability to successfully execute planned strategic acquisitions and disposals; our success in adequately integrating acquired businesses into our business, including the integration of SVB UK into our CMB business; changes in our ability to manage third-party, fraud, financial crime and reputational risks inherent in our operations; employee misconduct, which may result in regulatory sanctions and/or reputational or financial harm; changes in skill requirements, ways of working and talent shortages, which may affect our ability to recruit and retain senior management and diverse and skilled personnel; and changes in our ability to develop sustainable finance and ESG-related products consistent with the evolving expectations of our regulators, and our capacity to measure the environmental and social impacts from our financing activity (including as a result of data limitations and changes in methodologies), which may affect our ability to achieve our ESG ambitions, targets and commitments, including our net zero ambition, our targets to reduce on-balance sheet financed emissions and, where applicable, facilitated emissions in our portfolio of selected high-emitting sectors and the positions set forth in our thermal coal phase-out policy and our energy policy, and increase the risk of greenwashing. Effective risk management depends on, among other things, our ability through stress testing and other techniques to prepare for events that cannot be captured by the statistical models it uses; our success in addressing operational, legal and regulatory, and litigation challenges; and other risks and uncertainties we identify in ‘Top and emerging risks’ on pages 140 to 144. This Annual Report and Accounts 2023 contains a number of images, graphics, infographics, text boxes and illustrative case studies and credentials which aim to give a high-level overview of certain elements of our disclosures and to improve accessibility for readers. These images, graphics, infographics, text boxes and illustrative case studies and credentials are designed to be read within the context of the Annual Report and Accounts 2023 as a whole. Additional cautionary statement regarding ESG data, metrics and forward-looking statements The Annual Report and Accounts 2023 contains a number of forward- looking statements (as defined above) with respect to HSBC’s ESG targets, commitments, ambitions, climate-related pathways, processes and plans, and the methodologies and scenarios we use, or intend to use, to assess our progress in relation to these (‘ESG- related forward-looking statements’). In preparing the ESG-related information contained in the Annual Report and Accounts 2023, HSBC has made a number of key judgements, estimations and assumptions, and the processes and issues involved are complex. We have used ESG (including climate) data, models and methodologies that we consider, as of the date on which they were used, to be appropriate and suitable to understand and assess climate change risk and its impact, to analyse financed emissions - and operational and supply chain emissions, to set ESG- related targets and to evaluate the classification of sustainable finance and investments. However, these data, models and methodologies are often new, are rapidly evolving and are not of the same standard as those available in the context of other financial information, nor are they subject to the same or equivalent disclosure standards, historical reference points, benchmarks or globally accepted accounting principles. In particular, it is not possible to rely on historical data as a strong indicator of future trajectories in the case of climate change and its evolution. Outputs of models, processed data and methodologies are also likely to be affected by underlying data quality, which can be hard to assess and we expect industry guidance, market practice, and regulations in this field to continue to change. We also face challenges in relation to our ability to access data on a timely basis, lack of consistency and comparability between data that is available and our ability to collect and process relevant data. Consequently, the ESG-related forward-looking statements and ESG metrics disclosed in the Annual Report and Accounts 2023 carry an additional degree of inherent risk and uncertainty. Due to the unpredictable evolution of climate change and its future impact and the uncertainty of future policy and market response to ESG-related issues and the effectiveness of any such response, HSBC may have to re-evaluate its progress towards its ESG ambitions, commitments and targets in the future, update the methodologies it uses or alter its approach to ESG (including climate) analysis and may be required to amend, update and recalculate its ESG disclosures and assessments in the future, as market practice and data quality and availability develop. No assurance can be given by or on behalf of HSBC as to the likelihood of the achievement or reasonableness of any projections, estimates, forecasts, targets, commitments, ambitions, prospects or returns contained herein. Readers are cautioned that a number of factors, both external and those specific to HSBC, could cause actual achievements, results, performance or other future events or conditions to differ, in some cases materially, from those stated, implied and/or reflected in any ESG-related forward-looking statement or metric due to a variety of risks, uncertainties and other factors (including without limitation those referred to below): Additional information 442 HSBC Holdings plc Annual Report and Accounts 2023 – Climate change projection risk: this includes, for example, the evolution of climate change and its impacts, changes in the scientific assessment of climate change impacts, transition pathways and future risk exposure and limitations of climate scenario forecasts; – ESG projection risk: ESG metrics are complex and are still subject to development. In addition, the scenarios employed in relation to them, and the models that analyse them have limitations that are sensitive to key assumptions and parameters, which are themselves subject to some uncertainty, and cannot fully capture all of the potential effects of climate, policy and technology-driven outcomes; – Changes in the ESG regulatory landscape: this involves changes in government approach and regulatory treatment in relation to ESG disclosures and reporting requirements, and the current lack of a single standardised regulatory approach to ESG across all sectors and markets; – Variation in reporting standards: ESG reporting standards are still developing and are not standardised or comparable across all sectors and markets, new reporting standards in relation to different ESG metrics are still emerging; – Data availability, accuracy, verifiability and data gaps: our disclosures are limited by the availability of high quality data in some areas and our own ability to timely collect and process such data as required. Where data is not available for all sectors or consistently year on year, there may be an impact to our data quality scores. While we expect our data quality scores to improve over time, as companies continue to expand their disclosures to meet growing regulatory and stakeholder expectations, there may be unexpected fluctuations within sectors year on year, and/or differences between the data quality scores between sectors. Any such changes in the availability and quality of data over time, or our ability to collect and process such data, could result in revisions to reported data going forward, including on financed emissions, meaning that such data may not be reconcilable or comparable year-on year; – Developing methodologies and scenarios: the methodologies and scenarios HSBC uses to assess financed emissions and set ESG- related targets may develop over time in line with market practice, regulation and/or developments in science, where applicable. Such developments could result in revisions to reported data, including on financed emissions or the classification of sustainable finance and investments, meaning that data outputs may not be reconcilable or comparable year-on year; and – Risk management capabilities: global actions, including HSBC’s own actions, may not be effective in transitioning to net zero and in managing relevant ESG risks, including in particular climate, nature-related and human rights risks, each of which can impact HSBC both directly and indirectly through our customers, and which may result in potential financial and non-financial impacts to HBSC. In particular: – we may not be able to achieve our ESG targets, commitments and ambitions (including with respect to the positions set forth in our thermal coal phase-out policy and our energy policy, and our targets to reduce our on-balance sheet financed emissions and, where applicable, facilitated emissions in our portfolio of selected high-emitting sectors), which may result in our failure to achieve some or all of the expected benefits of our strategic priorities; and – we may not be able to develop sustainable finance and ESG- related products consistent with the evolving expectations of our regulators, and our capacity to measure the environmental and social impacts from our financing activity may diminish (including as a result of data and model limitations and changes in methodologies), which may affect our ability to achieve our ESG targets, commitments and ambitions, including our net zero ambition, our targets to reduce our on-balance sheet financed emissions and, where applicable, facilitated emissions in our portfolio of selected high-emitting sectors and the positions set forth in our thermal coal phase-out policy and energy policy, and increase the risk of greenwashing. Any forward-looking statements made by or on behalf of HSBC speak only as of the date they are made. HSBC expressly disclaims any obligation to revise or update these ESG forward-looking statements, other than as expressly required by applicable law. Written and/or oral ESG-related forward-looking statements may also be made in our periodic reports to the US Securities and Exchange Commission, summary financial statements to shareholders, proxy statements, offering circulars and prospectuses, press releases and other written materials, and in oral statements made by HSBC’s Directors, officers or employees to third parties, including financial analysts. Our data dictionaries and methodologies for preparing the above ESG- related metrics and third-party limited assurance reports can be found on: www.hsbc.com/who-we-are/esg-and-responsible-business/esg- reporting-centre. Certain defined terms Unless the context requires otherwise, ‘HSBC Holdings’ means HSBC Holdings plc and ‘HSBC’, the ‘Group’, ‘we’, ‘us’ and ‘our’ refer to HSBC Holdings together with its subsidiaries. Within this document the Hong Kong Special Administrative Region of the People’s Republic of China is referred to as ‘Hong Kong’. When used in the terms ‘shareholders’ equity’ and ‘total shareholders’ equity’, ‘shareholders’ means holders of HSBC Holdings ordinary shares and those preference shares and capital securities issued by HSBC Holdings classified as equity. The abbreviations ‘$m’, ‘$bn’ and ‘$tn’ represent millions, billions (thousands of millions) and trillions of US dollars, respectively. HSBC Holdings plc Annual Report and Accounts 2023 443 Additional information Abbreviations Currencies £ British pound sterling CA$ Canadian dollar € Euro HK$ Hong Kong dollar MXN Mexican peso RMB Chinese renminbi SGD Singapore dollar $ United States dollar A ABS¹ Asset-backed security ADR American Depositary Receipt ADS American Depositary Share AGM Annual General Meeting AI Artificial intelligence AIEA Average interest-earning assets ALCO Asset and Liability Management Committee AML Anti-money laundering AML DPA Five-year deferred prosecution agreement with the US Department of Justice, entered into in December 2012 ANP Annualised new business premium ASEAN Association of Southeast Asian Nations AT1 Additional tier 1 B Basel Committee Basel Committee on Banking Supervision Basel II¹ 2006 Basel Capital Accord Basel III¹ Basel Committee’s reforms to strengthen global capital and liquidity rules Basel 3.1 Outstanding measures to be implemented from the Basel III reforms BEPS Base Erosion and Profit Shifting BGF Business Growth Fund, an investment firm that provides growth capital for small and mid-sized businesses in the UK and Ireland BoCom Bank of Communications Co., Limited, one of China’s largest banks BoE Bank of England Bps¹ Basis points. One basis point is equal to one-hundredth of a percentage point BVI British Virgin Islands C CAPM Capital asset pricing model CDS¹ Credit default swap CEA Commodity Exchange Act (US) CET1¹ Common equity tier 1 CGUs Cash-generating units CMB Commercial Banking, a global business CMC Capital maintenance charge CODM Chief Operating Decision Maker COSO 2013 Committee of Sponsoring Organizations of the Treadway Commission (US) Corporate Centre Corporate Centre comprises Central Treasury, our legacy businesses, interests in our associates and joint ventures, central stewardship costs and consolidation adjustments CP¹ Commercial paper CRD IV¹ Capital Requirements Regulation and Directive CRR¹ Customer risk rating CRR II¹ The regulatory requirements of the Capital Requirements Regulation and Directive, the CRR II regulation and the PRA Rulebook CSA Credit support annex CSM Contractual service margin CVA¹ Credit valuation adjustment D Deferred shares Awards of deferred shares define the number of HSBC Holdings ordinary shares to which the employee will become entitled, generally between one and seven years from the date of the award, and normally subject to the individual remaining in employment DPD Days past due DPF Discretionary participation feature of insurance and investment contracts DVA¹ Debit valuation adjustment E EAD¹ Exposure at default EBA European Banking Authority EC European Commission ECB European Central Bank ECL Expected credit losses. In the income statement, ECL is recorded as a change in expected credit losses and other credit impairment charges. In the balance sheet, ECL is recorded as an allowance for financial instruments to which only the impairment requirements in IFRS 9 are applied EEA European Economic Area Eonia Euro Overnight Index Average EPC Energy performance certificate EPS Earnings per ordinary share ESG Environmental, social and governance EU European Union Euribor Euro interbank offered rate EVE Economic value of equity F FAST-Infra Finance to Accelerate the Sustainable Transition- Infrastructure FCA Financial Conduct Authority (UK) FDIC Federal Deposit Insurance Corporation FFVA Funding fair value adjustment estimation methodology on derivative contracts FPA Fixed pay allowance FRB Federal Reserve Board (US) FRC Financial Reporting Council FSCS Financial Services Compensation Scheme FTE Full-time equivalent staff FTSE Financial Times Stock Exchange index FVOCI¹ Fair value through other comprehensive income FX Foreign exchange G GAAP Generally accepted accounting principles GAC Group Audit Committee GBM Global Banking and Markets, a global business GDP Gross domestic product GEC Group Executive Committee GFANZ Glasgow Financial Alliance for Net Zero GMP Guaranteed minimum pension GPS Global Payments Solutions, the business formerly known as Global Liquidity and Cash Management GPSP Group Performance Share Plan GRC Group Risk Committee Group HSBC Holdings together with its subsidiary undertakings GTRF Global Trade and Receivables Finance H Hang Seng Bank Hang Seng Bank Limited, one of Hong Kong’s largest banks HKEx The Stock Exchange of Hong Kong Limited HKMA Hong Kong Monetary Authority HMRC HM Revenue and Customs Holdings ALCO HSBC Holdings Asset and Liability Management Committee Hong Kong Hong Kong Special Administrative Region of the People’s Republic of China HQLA High-quality liquid assets HSBC HSBC Holdings together with its subsidiary undertakings HSBC Bank plc HSBC Bank plc, also known as the non-ring-fenced bank HSBC Bank Middle East HSBC Bank Middle East Limited HSBC Bank USA HSBC Bank USA, N.A., HSBC’s retail bank in the US HSBC Canada The sub-group, HSBC Bank Canada, HSBC Trust Company Canada, HSBC Mortgage Corporation Canada and HSBC Securities Canada, consolidated for liquidity purposes Additional information 444 HSBC Holdings plc Annual Report and Accounts 2023 HSBC Continental Europe HSBC Continental Europe HSBC Finance HSBC Finance Corporation, the US consumer finance company (formerly Household International, Inc.) HSBC Holdings HSBC Holdings plc, the parent company of HSBC HSBC Private Bank (Suisse) HSBC Private Bank (Suisse) SA, HSBC’s private bank in Switzerland HSBC UK HSBC UK Bank plc, also known as the ring-fenced bank HSBC USA The sub-group, HSBC USA Inc (the holding company of HSBC Bank USA) and HSBC Bank USA, consolidated for liquidity purposes HSI HSBC Securities (USA) Inc. HSSL HSBC Securities Services (Luxembourg) I IAS International Accounting Standards IASB International Accounting Standards Board IBE Independent Board Evaluation Ibor Interbank offered rate ICAAP Internal capital adequacy assessment process ICMA International Capital Market Association IEA International Energy Agency IFRS Accounting Standards International Financial Reporting Standards as issued by the International Accounting Standards Board ILAAP Internal liquidity adequacy assessment process IMA Internal model approach IMM Internal model method IRB¹ Internal ratings-based ISDA International Swaps and Derivatives Association ISSB International Sustainability Standard Board JV Joint venture K KMP Key Management Personnel L LCR Liquidity coverage ratio LGBTQ+ Lesbian, gay, bisexual, transgender and queer. The plus sign denotes other non-mainstream groups on the spectrums of sexual orientation and gender identity LGD¹ Loss given default Libor London interbank offered rate Long term For our financial targets, we define long term as five to six years, commencing 1 January 2024 LTI Long-term incentive LTV¹ Loan to value M Mainland China People’s Republic of China excluding Hong Kong and Macau Medium term For our financial targets, we define medium term as three to four years, commencing 1 January 2024 MENAT Middle East, North Africa and Türkiye MREL Minimum requirement for own funds and eligible liabilities MRT¹ Material Risk Taker MSS Markets and Securities Services, HSBC’s capital markets and securities services businesses in Global Banking and Markets N Net operating income Net operating income before change in expected credit losses and other credit impairment charges NGO Non-governmental organisation NII Net interest income NIM Net interest margin NPS Net promoter score NSFR Net stable funding ratio NYSE New York Stock Exchange NZBA Net-Zero Banking Alliance O OCI Other comprehensive income OECD Organisation of Economic Co-operation and Development OTC¹ Over-the-counter P PBT Profit before tax PCAF Partnership for Carbon Accounting Financials PD¹ Probability of default Performance shares¹ Awards of HSBC Holdings ordinary shares under employee share plans that are subject to corporate performance conditions Ping An Ping An Insurance (Group) Company of China, Ltd, the second-largest life insurer in the PRC POCI Purchased or originated credit-impaired financial assets PRA Prudential Regulation Authority (UK) PRC People’s Republic of China Principal plan HSBC Bank (UK) Pension Scheme PVIF Present value of in-force long-term insurance business and long-term investment contracts with DPF PwC The member firms of the PwC network, including PricewaterhouseCoopers LLP R RAS Risk appetite statement Repo¹ Sale and repurchase transaction Revenue Net operating income before ECL Reverse repo Security purchased under commitments to sell RNIV Risk not in VaR RoE Return on average ordinary shareholders’ equity RoTE Return on average tangible equity RWA¹ Risk-weighted asset S SAB Saudi Awwal Bank SAPS Self-administered pension scheme SASB Sustainability Accounting Standards Board SBTi Science Based Targets initiative SDG United Nation’s Sustainable Development Goals SEC Securities and Exchange Commission (US) ServCo group Separately incorporated group of service companies established in response to UK ring-fencing requirements Sibor Singapore interbank offered rate SIC Securities investment conduit SME Small and medium-sized enterprise Solitaire Solitaire Funding Limited, a special purpose entity managed by HSBC SPE¹ Special purpose entity SVB UK Silicon Valley Bank UK Limited, now HSBC Innovation Bank Limited T TCFD¹ Task Force on Climate-related Financial Disclosures THBFIX Thai Baht Interest Rate Fixing TNFD Taskforce on Nature-related Financial Disclosures TSR¹ Total shareholder return U UAE United Arab Emirates UK United Kingdom UN United Nations US United States of America V VaR¹ Value at risk VIU Value in use W WEF World Economic Forum WPB Wealth and Personal Banking, a global business 1 A full definition is included in the glossary to the Annual Report and Accounts 2023 which is available at www.hsbc.com/investors. HSBC Holdings plc Annual Report and Accounts 2023 445 Additional information HSBC Holdings plc Incorporated in England on 1 January 1959 with limited liability under the UK Companies Act Registered in England: number 617987 Registered Office and Group Head Office 8 Canada Square London E14 5HQ United Kingdom Telephone: 44 020 7991 8888 Facsimile: 44 020 7992 4880 Web: www.hsbc.com Corporate Brokers Morgan Stanley & Co. International plc 25 Cabot Square London E14 4QA United Kingdom Bank of America Securities 2 King Edward Street London EC1A 1HQ United Kingdom HSBC Bank plc 8 Canada Square London E14 5HQ United Kingdom Additional information 446 HSBC Holdings plc Annual Report and Accounts 2023 Printed by Park Communications Limited, London, on Nautilus SuperWhite board and paper using vegetable oil-based inks. Made in Austria, the stocks comprise 100% de-inked post-consumer waste. Pulps used are totally chlorine-free. The FSC® recycled logo identifies a paper which contains 100% post-consumer recycled fibre certified in accordance with the rules of the Forest Stewardship Council®. © Copyright HSBC Holdings plc 2024 All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of HSBC Holdings plc Published by Global Finance, HSBC Holdings plc, London Designed by Design Bridge and Partners, London (Strategic Report and ESG review) and by Global Finance with Design Bridge and Partners (rest of Annual Report and Accounts) HSBC Holdings plc 8 Canada Square London E14 5HQ United Kingdom T: +44 (0)20 7991 8888 www.hsbc.com