AmazonScience/document-haystack

1Strategic report2Managing risk3The global economy proved more resilient in 42023 than had been expected, supported by 5strong growth in the US, and a stabilisation in 6China’s economy, although there continues 7to be uncertainty and weakness in Europe. In 8most key markets, a fall in energy prices and 9other commodity prices facilitated a decrease 10in inflation. Central banks in most developed 11markets are expected to have concluded 12monetary policy tightening in the second half 13of 2023 and to start reducing interest rates in 142024. Certain emerging market central banks 15began reducing interest rates during 2023. 16However, interest rates in the medium term 17are likely to remain materially higher than in 18recent years.  19Geopolitical tensions are a source of 20significant risk, including the ongoing Russia-21Ukraine and Israel-Hamas wars. Both could 22have significant global economic and political 23consequences. The Israel-Hamas war has 24led to renewed volatility in energy prices, and 25recent attacks on commercial shipping in the 26Red Sea and the counter-measures taken to 27improve security have begun to disrupt supply 28chains. These developments have the potential 29to halt or reverse the recent decline in inflation 30especially in Europe and North America.31Sanctions and trade restrictions are complex, 32novel and evolving. In particular, the US, the 33UK and the EU, as well as other countries, 34have imposed significant sanctions and trade 35restrictions against Russia. In December 2023, 36the US established a new secondary sanctions 37regime, providing itself broad discretion to 38impose severe sanctions on non-US banks 39that are knowingly or even unknowingly 40engaged in certain transactions or services 41involving Russia’s military-industrial base. 42This creates challenges associated with the 43detection or prevention of third-party activities 44beyond HSBC’s control. The imposition of 45such sanctions against any non-US HSBC 46entity could result in significant adverse 47commercial, operational and reputational 48consequences for HSBC. 49The relationships between China and 50several other countries, including the US 51and the UK, remain complex. Supply chains 52remain vulnerable to a deterioration in these 53relationships and this has resulted in efforts 54to de-risk certain sectors by reshoring 55manufacturing activities. The US, the UK, the 56EU and other countries have imposed various 57sanctions and trade restrictions on Chinese 58Active risk management helps us to achieve our strategy, 59serve our customers and communities and grow our 60business safely.61Key risk appetite metrics 62Component Measure63Risk 64appetite 202365Capital CET1 ratio – end point basis ≥13.0% 14.8%66Change in 67expected credit 68losses and  69other credit 70impairment 71charges72Change in expected credit losses and other credit 73impairment charges as a % of advances: (WPB) 74≤0.50% 0.21%75Change in expected credit losses and other credit 76impairment charges as a % of advances: 77wholesale (GBM, CMB)78≤0.45% 0.40%79persons and companies. The approach 80of countries to strategic competition and 81engagement with China continues to develop. 82In response, China has imposed sanctions, 83trade restrictions and law enforcement 84measures. Further sanctions or counter-85sanctions may adversely affect the Group,  86its customers and various markets.87Fiscal deficits are expected to remain large 88in both developed and emerging markets, as 89public spending on social welfare, defence 90and climate transition initiatives is expected 91to remain high. In many countries, the fiscal 92response to the Covid-19 pandemic has also 93left a very high public debt burden. Against 94a backdrop of slower economic growth and 95high interest rates, elevated borrowing costs 96could increase the strains on highly  97indebted sovereigns. 98Political changes may also have implications 99for policy. Many countries are expected to 100hold elections in 2024. This may result in 101uncertainty in some markets in response to 102domestic political priorities.103Sectoral risks are also a focus, and the real 104estate sector in particular faces challenges in 105many of our major markets. In mainland China, 106commercial real estate conditions remain 107distressed and signs of a material or sustained 108recovery are yet to emerge. Market data 109continues to reflect reduced investment and 110weak sentiment in the short term, although 111authorities are expanding fiscal and monetary 112support to the economy including specific 113measures to support developers and stimulate 114housing demand. We continue to closely 115monitor this sector, and take action to manage 116our commercial real estate portfolio risk.117The impact of the rising cost of living on retail 118customers is a key risk for our society. Our 119primary concern is to ensure that we offer 120the right support to customers in line with 121regulatory, government and wider stakeholder 122expectations. This follows our adoption of the 123UK government’s Mortgage Charter released 124in June 2023.125We engage closely with regulators to help 126ensure that we continue to meet their 127expectations regarding financial institutions’ 128activities to support economies during times 129of market volatility.130Our approach to macroeconomic scenarios 131in relation to IFRS 9 ‘Financial Instruments’ 132remained unchanged in the fourth quarter 133of 2023 compared with the corresponding 134period in 2022. Adjustments to the design 135and narrative of the most severe downside 136scenario were made to reflect increased 137geopolitical risks.138In addition, management adjustments to ECL 139were applied to reflect persisting uncertainty 140in certain sectors, driven by inflation, interest 141rate sensitivity and other macroeconomic 142risks, which were not fully captured by  143our models.144We continue to monitor, and seek to manage, 145the potential implications of all the above 146developments on our customers and our 147business. While the financial performance 148of our operations varies by geography, our 149balance sheet and liquidity remained strong.150 For further details of our Central and other 151scenarios, see ‘Measurement uncertainty  152and sensitivity analysis of ECL estimates’  153on page 156.154Risk overview155HSBC Holdings plc Annual Report and Accounts 2023 37156Risk overview