Business Segments

We have five distinct business segments that we utilize for management reporting and analysis purposes, which are aligned with HSBC's global business strategy: Retail Banking and Wealth Management ("RBWM"), Commercial Banking ("CMB"), Global Banking and Markets ("GB&M") and Private Banking ("PB") and a Corporate Center ("CC") which was created in 2017 and is discussed further below.

We previously announced that we made the decision to implement changes to our internal management reporting for certain activities and functions and report them within a new CC segment beginning in January 2017. These activities and functions include Balance Sheet Management and our legacy structured credit products which historically were both reported in GB&M, as well as a portfolio of residential mortgage loans previously purchased from HSBC Finance, including certain loan servicing activities performed on behalf of HSBC Finance, which were historically reported in RBWM. In addition, we have reviewed central costs historically reported in the Other segment and have reallocated these costs to the global businesses where appropriate. Remaining residual costs are reported in the CC along with all other remaining items historically reported in the Other segment. As a result, beginning in the first quarter of 2017, we aligned our segment reporting with the changes made to our internal management reporting and are reporting these changes as part of the newly created CC segment for the periods presented.

The following table summarizes the impact on reported segment profit before tax, total assets and total deposits as of and for the years ended December 31, 2016 and 2015:



	2016			2015
	(in millions)
Increase (decrease) in segment profit before tax during the year ended December 31:
RBWM	$	7		$	(4	)
CMB	13			8
GB&M	(192		)	(144		)
PB	5			4
CC (as compared with previously reported Other)	167			136

Increase (decrease) in segment total assets at December 31:
RBWM	$	(585	)	$	(696	)
CMB	—			—
GB&M	(107,780		)	(78,783		)
PB	—			—
CC (as compared with previously reported Other)	108,365			79,479

Increase (decrease) in segment total deposits at December 31:
RBWM	$	—		$	—
CMB	—			—
GB&M	(6,989		)	(5,011		)
PB	—			—
CC (as compared with previously reported Other)	6,989			5,011

During 2017, we adopted new accounting guidance under the Group Reporting Basis which, for financial liabilities measured under the fair value option, requires recognizing the change in fair value attributable to our own credit spread in other comprehensive income (loss) consistent with the new accounting guidance also adopted under U.S. GAAP. The adoption of this guidance did not require periods prior to 2017 to be restated. During 2016 and 2015, total other revenues under the Group Reporting Basis included a loss of $3 million and a gain of $194 million, respectively, from the change in fair value of our own debt attributable to our own credit spread for which we have elected fair value option accounting.

There have been no additional changes in the basis of our segmentation or measurement of segment profit as compared with the presentation in our 2016 Form 10-K.

Net interest income of each segment represents the difference between actual interest earned on assets and interest incurred on liabilities of the segment, adjusted for a funding charge or credit. Segments are charged a cost to fund assets (e.g. customer loans) and receive a funding credit for funds provided (e.g. customer deposits) based on equivalent market rates. The objective of these charges/credits is to transfer interest rate risk from the segments to one centralized unit in Balance Sheet Management and more appropriately reflect the profitability of the segments.

Certain other revenue and operating expense amounts are also apportioned among the business segments based upon the benefits derived from this activity or the relationship of this activity to other segment activity. These inter-segment transactions are accounted for as if they were with third parties.

Our segment results are presented in accordance with HSBC Group accounting and reporting policies, which apply IFRSs as issued by the IASB and endorsed by the EU, and, as a result, our segment results are prepared and presented using financial information prepared on the Group Reporting Basis as operating results are monitored and reviewed, trends are evaluated and decisions about allocating resources, such as employees, are primarily made on this basis. We continue, however, to monitor capital adequacy and report to regulatory agencies on a U.S. GAAP basis.

A summary of differences between U.S. GAAP and the Group Reporting Basis as they impact our results is presented below, including a new difference related to structured notes and deposits:

Net Interest Income

Loan impairment - As discussed more fully below under "Loan Impairment Charges (Provision for Credit Losses)," the Group Reporting Basis requires a discounted cash flow methodology for estimating impairment on pools of homogeneous customer loans. The amount of impairment relating to the discounting of future cash flows unwinds with the passage of time and is recognized in interest income. Under U.S. GAAP, a discounted cash flow methodology on pools of homogeneous loans is applied only to the extent loans are considered TDR Loans.

Loan origination - Certain loan fees and incremental direct loan costs, which would not have been incurred but for the origination of the loans, are deferred and amortized to earnings over the life of the loan under the Group Reporting Basis. Certain loan fees and direct incremental loan origination costs, including internal costs directly attributable to the origination of loans in addition to direct salaries, are deferred and amortized to earnings over the life of the loan under U.S. GAAP. Loan origination cost deferrals are more stringent under the Group Reporting Basis and generally result in lower costs being deferred than permitted under U.S. GAAP. In addition, all deferred loan origination fees, costs and loan premiums must be recognized based on the expected life of the loan under the Group Reporting Basis as part of the effective interest calculation while under U.S. GAAP they may be recognized on either a contractual or expected life basis.

Other Operating Income (Total Other Revenues)

Loans held for sale - For loans transferred to held for sale subsequent to origination, the Group Reporting Basis requires these loans to be reported separately on the balance sheet when certain criteria are met which are generally more stringent than those under U.S. GAAP, but does not change the recognition and measurement criteria. Accordingly, for the Group Reporting Basis, such loans continue to be accounted for and impairment continues to be measured in accordance with IAS 39, "Financial Instruments: Recognition and Measurement" ("IAS 39"), with any gain or loss recorded at the time of sale. U.S. GAAP requires loans that meet the held for sale classification requirements be transferred to a held for sale category and subsequently be measured at the lower of amortized cost or fair value. Under U.S. GAAP, the component of the lower of amortized cost or fair value adjustment upon transfer to held for sale related to credit risk is recorded in the statement of income (loss) as provision for credit losses while the component related to interest rates and liquidity factors is reported in the statement of income (loss) in other revenues. Changes in the lower of amortized cost or fair value after the initial transfer to held for sale are reported in the statement of income (loss) in other revenues.

For loans originated with the intent to sell, the Group Reporting Basis requires these loans to be classified as trading assets and recorded at their fair value, with income recorded in trading revenue. Under U.S. GAAP, such loans are classified as loans held for sale and, with the exception of certain loans accounted for under FVO accounting, are recorded at the lower of amortized cost or fair value, with changes in the lower of amortized cost or fair value adjustment recorded in other revenues.

Structured notes and deposits - Structured notes and deposits are classified as trading liabilities under the Group Reporting Basis and are carried at fair value with changes in fair value recorded in earnings. We elected to apply fair value option accounting to these structured notes and deposits under U.S. GAAP. Beginning January 1, 2017, the adoption of new accounting guidance under U.S. GAAP requires the fair value movement on fair value option liabilities, including structured notes and deposits, attributable to our own credit spread to be recorded in other comprehensive income (loss).

Low income housing tax credit investments - Under the Group Reporting Basis, given the inter-relationship between the tax benefits obtained from our investment in low income housing tax credit investments and the amortization of our investment balance, such amounts are presented net in other operating income. Under U.S. GAAP, such amounts are presented net in income tax expense.

Servicing assets – Under the Group Reporting Basis, servicing assets are initially recorded on the balance sheet at cost and amortized over the projected life of the assets. Servicing assets are periodically tested for impairment with impairment adjustments charged against current earnings. Under U.S. GAAP, servicing assets are initially recorded on the balance sheet at fair value. All subsequent adjustments to fair value are reflected in other revenues. During the fourth quarter of 2016, we sold our remaining MSRs portfolio.

Renewable energy tax credit investments - Renewable energy tax credit investments are reported as available-for-sale securities and measured at fair value under the Group Reporting Basis, with changes in fair value recognized in equity. Under U.S. GAAP, these investments are accounted for under the equity method, with the amortization of our investment balance presented in other revenues and the tax benefits obtained presented in income tax expense.

Reclassification of fair value measured financial assets during 2008 - Certain securities were reclassified from trading assets to loans and receivables under the Group Reporting Basis in 2008 pursuant to an amendment to IAS 39, and are no longer marked to market under the Group Reporting Basis. These securities continue to be classified as trading assets and are carried at fair value under U.S. GAAP.

Derivatives - Under the Group Reporting Basis, the up-front recognition of the difference between transaction price and fair value in the consolidated statement of income (loss) is permissible only if the inputs used in calculating fair value are based on observable inputs. If the inputs are not observable, profit and loss is deferred and is recognized (1) over the period of contract, (2) when the data becomes observable, or (3) when the contract is settled. There is no similar observability requirement under U.S. GAAP.

REO expense - Other revenues under the Group Reporting Basis include losses on sale and the lower of amortized cost or fair value of the collateral less cost to sell adjustments on REO properties which are classified as other expense under U.S. GAAP.

Loan Impairment Charges (Provision for Credit Losses)

Loan impairment - The Group Reporting Basis requires a discounted cash flow methodology for estimating impairment on pools of homogeneous customer loans which requires the discounting of cash flows including recovery estimates at the original effective interest rate of the pool of customer loans. The amount of impairment relating to the discounting of future cash flows unwinds with the passage of time and is recognized in interest income. Under U.S. GAAP, a discounted cash flow methodology on pools of homogeneous loans is applied only to the extent loans are considered TDR Loans. Also under the Group Reporting Basis, if the fair value on secured loans previously written down increases because collateral values have improved and the improvement can be related objectively to an event occurring after recognition of the write-down, such write-down is reversed, which is not permitted under U.S. GAAP. Additionally under the Group Reporting Basis, future recoveries on charged-off loans or loans written down to fair value less cost to obtain title and sell are accrued for on a discounted basis and a recovery asset is recorded. Subsequent recoveries are recorded to earnings under U.S. GAAP, but are adjusted against the recovery asset under the Group Reporting Basis. Under the Group Reporting Basis, interest on impaired loans is recorded at the effective interest rate on the customer loan balance net of impairment allowances.

For commercial loans collectively evaluated for impairment, we utilize different loss emergence periods for calculating the allowance for credit losses under U.S. GAAP and the Group Reporting Basis. On an annual basis, we conduct reviews of our loss emergence period estimate used for U.S. GAAP reporting purposes based upon regulatory guidance and bank industry practice in the United States and, separately, the loss emergence period estimate under the Group Reporting Basis. These reviews have resulted in a longer emergence period under U.S. GAAP than under the Group Reporting Basis and, therefore, the allowance for credit losses for commercial loans collectively evaluated for impairment is higher under U.S. GAAP than under the Group Reporting Basis. This difference in loss emergence period is primarily attributable to the different approaches used for U.S. GAAP and the Group Reporting Basis. We have determined that, based on the judgment involved and the practice which has evolved in different jurisdictions, both approaches for estimating loss emergence periods result in an appropriate allowance for credit losses under the reporting basis to which each is being applied.

Loans held for sale - As discussed more fully above under "Other Operating Income (Total Other Revenues)," under U.S. GAAP, the credit risk component of the lower of amortized cost of fair value adjustment related to the transfer of loans to held for sale is reported in the consolidated statement of income (loss) as provision for credit losses. There is no similar requirement under the Group Reporting Basis.

Operating Expenses

Property - The sale and leaseback of our 452 Fifth Avenue property, including the 1 W. 39th Street building, in 2010 resulted in the recognition of a gain under the Group Reporting Basis while under U.S. GAAP such gain is deferred and was being recognized over the lease term (which was ten years) due to our continuing involvement. During 2017, we extended the lease for an additional five years as well as the amortization of the deferred gain to reflect the new lease term.

Pension and other postretirement benefit costs - Pension expense under U.S. GAAP is generally higher than under the Group Reporting Basis as a result of the amortization of the amount by which actuarial losses exceeds the higher of 10 percent of the projected benefit obligation or fair value of plan assets (the corridor). In addition, under the Group Reporting Basis, pension expense is determined using a finance cost component comprising the net interest on the net defined benefit liability which does not reflect the benefit from the expectation of higher returns on plan assets. In 2017, pension expense was higher under U.S. GAAP due primarily to the impact of HSBC North America completing a limited-time lump sum offer to former vested HSBC North America Pension Plan employees during the fourth quarter of 2017. Under the Group Reporting Basis, completion of the offer resulted in a benefit from reducing HSBC North America’s net under-funded status while under U.S. GAAP this benefit was more than offset by expense from an acceleration of a portion of the Plan’s actuarial losses which had been reflected in HSBC North America’s accumulated other comprehensive income. Under the Group Reporting Basis, these actuarial losses are recorded directly to retained earnings.

Loan origination - As discussed more fully above under "Net interest income," loan origination cost deferrals are more stringent under the Group Reporting Basis and generally result in lower costs being deferred than permitted under U.S. GAAP.

Litigation expense - Under U.S. GAAP, litigation accruals are recorded when it is probable a liability has been incurred and the amount is reasonably estimable. Under the Group Reporting Basis, a present obligation and a probable outflow of economic benefits must exist for an accrual to be recorded. This creates differences in the timing of accrual recognition between the Group Reporting Basis and U.S. GAAP. Additionally, under the Group Reporting Basis, legal costs to defend litigation are accrued at the time that a liability is recorded for the related litigation while under U.S. GAAP these costs are recognized as services are performed.

Share-based payments - Under the Group Reporting Basis, the recognition of compensation expense related to share-based bonuses begins on January 1 of the current year for awards expected to be granted in the first quarter of the following year. Under U.S. GAAP, the recognition of compensation expense related to share-based bonuses does not begin until the date the awards are granted.

Assets

Derivatives - Under U.S. GAAP, derivative receivables and payables with the same counterparty may be reported on a net basis in the balance sheet when there is a legally enforceable netting agreement in place. In addition, under U.S. GAAP, fair value amounts recognized for the obligation to return cash collateral received or the right to reclaim cash collateral paid are offset against the fair value of derivative instruments. Under the Group Reporting Basis, these agreements do not necessarily meet the requirements for offset, and therefore such derivative receivables and payables are presented gross on the balance sheet.

Unquoted equity securities – Under the Group Reporting Basis, equity securities which are not quoted on a recognized exchange, but for which fair value can be reliably measured, are required to be measured at fair value. Securities measured at fair value under the Group Reporting Basis are classified as either available-for-sale securities, with changes in fair value recognized in equity, or as trading securities, with changes in fair value recognized in income. Under U.S. GAAP, equity securities that are not quoted on a recognized exchange are not considered to have a readily determinable fair value and are required to be measured at cost, less any provisions for known impairment, and classified in other assets.

Loans - As discussed more fully above under "Other Operating Income (Total Other Revenues)," on a Group Reporting Basis, loans designated as held for sale at the time of origination and accrued interest are classified as trading assets. However, the accounting requirements governing when loans previously held for investment are transferred to a held for sale category are more stringent under the Group Reporting Basis than under U.S. GAAP which results in loans generally being reported as held for sale later then under U.S. GAAP.

Precious metal loans - Under U.S. GAAP, precious metals leased or loaned to customers are reclassified from trading precious metals into loans and are carried at amortized cost, while under the Group Reporting Basis, precious metals leased or loaned to customers continue to be part of the precious metal inventory recorded in other assets and are carried at fair value.

Loan impairment - As discussed more fully above under "Loan Impairment Charges (Provision for Credit Losses)," for commercial loans collectively evaluated for impairment, we utilize different loss emergence periods for U.S. GAAP and the Group Reporting Basis which has resulted in a higher allowance for credit losses under U.S. GAAP than under the Group Reporting Basis.

Goodwill - The Group Reporting Basis and U.S. GAAP require goodwill to be tested for impairment at least annually, or more frequently if circumstances indicate that goodwill may be impaired. Under the Group Reporting Basis, goodwill was amortized until 2005, however goodwill was amortized under U.S. GAAP until 2002, which resulted in a lower carrying amount of goodwill under the Group Reporting Basis.

The following table summarizes the results for each segment on a Group Reporting Basis, as well as provides a reconciliation of total results under the Group Reporting Basis to U.S. GAAP consolidated totals:



	Group Reporting Basis Consolidated Amounts
	RBWM			CMB			GB&M			PB			CC			Adjustments/ Reconciling Items			Total			Group Reporting Basis Adjustments⁽⁴⁾			Group Reporting Basis Reclassi- fications⁽⁵⁾			U.S. GAAP Consolidated Totals
	(in millions)
Year Ended December 31, 2017
Net interest income⁽¹⁾	$	886		$	739		$	585		$	217		$	(40	)	$	—		$	2,387		$	(48	)	$	(66	)	$	2,273
Other operating income⁽²⁾	526			216			617			94			274			—			1,727			200			75			2,002
Total operating income	1,412			955			1,202			311			234			—			4,114			152			9			4,275
Loan impairment charges	25			(52		)	(94		)	2			—			—			(119		)	(72		)	26			(165		)
	1,387			1,007			1,296			309			234			—			4,233			224			(17		)	4,440
Operating expenses⁽²⁾	1,185			558			881			244			465			—			3,333			75			(17		)	3,391
Profit (loss) before income tax expense	$	202		$	449		$	415		$	65		$	(231	)	$	—		$	900		$	149		$	—		$	1,049
Balances at end of period:
Total assets	$	18,707		$	23,644		$	72,734		$	8,190		$	97,038		$	—		$	220,313		$	(33,078	)	$	—		$	187,235
Total loans, net	16,685			22,444			19,125			6,405			3,556			—			68,215			(1,397		)	5,064			71,882
Goodwill	581			358			—			321			—			—			1,260			347			—			1,607
Total deposits	34,186			24,239			25,476			8,470			4,923			—			97,294			(3,261		)	24,669			118,702

Year Ended December 31, 2016
Net interest income⁽¹⁾	$	818		$	749		$	567		$	207		$	132		$	(2	)	$	2,471		$	(76	)	$	89		$	2,484
Other operating income⁽²⁾	363			229			785			89			127			2			1,595			(104		)	(87		)	1,404
Total operating income	1,181			978			1,352			296			259			—			4,066			(180		)	2			3,888
Loan impairment charges	70			50			383			—			(9		)	—			494			(78		)	(44		)	372
	1,111			928			969			296			268			—			3,572			(102		)	46			3,516
Operating expenses⁽²⁾⁽³⁾	1,131			591			986			232			338			—			3,278			(26		)	46			3,298
Profit (loss) before income tax expense	$	(20	)	$	337		$	(17	)	$	64		$	(70	)	$	—		$	294		$	(76	)	$	—		$	218
Balances at end of period:
Total assets	$	19,618		$	25,082		$	85,215		$	7,714		$	108,877		$	—		$	246,506		$	(45,234	)	$	29		$	201,301
Total loans, net	16,889			24,125			21,914			6,024			3,512			—			72,464			(405		)	799			72,858
Goodwill	581			358			—			325			—			—			1,264			348			—			1,612
Total deposits	32,472			22,005			22,260			11,618			6,989			—			95,344			(4,379		)	38,283			129,248

Year Ended December 31, 2015
Net interest income⁽¹⁾	$	787		$	747		$	409		$	205		$	181		$	(12	)	$	2,317		$	(78	)	$	231		$	2,470
Other operating income⁽²⁾	308			243			1,047			99			301			12			2,010			(39		)	(236		)	1,735
Total operating income	1,095			990			1,456			304			482			—			4,327			(117		)	(5		)	4,205
Loan impairment charges	68			140			65			(5		)	(4		)	—			264			130			(33		)	361
	1,027			850			1,391			309			486			—			4,063			(247		)	28			3,844
Operating expenses⁽²⁾⁽³⁾	1,152			609			1,017			245			285			—			3,308			(52		)	28			3,284
Profit (loss) before income tax expense	$	(125	)	$	241		$	374		$	64		$	201		$	—		$	755		$	(195	)	$	—		$	560
Balances at end of period:
Total assets	$	19,700		$	26,763		$	99,360		$	8,428		$	80,279		$	—		$	234,530		$	(46,569	)	$	317		$	188,278
Total loans, net	16,696			23,538			29,589			6,715			1,676			—			78,214			317			3,474			82,005
Goodwill	581			358			—			325			—			—			1,264			348			—			1,612
Total deposits	31,814			20,599			22,910			13,811			5,011			—			94,145			(4,097		)	28,531			118,579

⁽¹⁾

Net interest income of each segment represents the difference between actual interest earned on assets and interest paid on liabilities of the segment adjusted for a funding charge or credit. Segments are charged a cost to fund assets (e.g. customer loans) and receive a funding credit for funds provided (e.g. customer deposits) based on equivalent market rates. The objective of these charges/credits is to transfer interest rate risk from the segments to one centralized unit in Balance Sheet Management and more appropriately reflect the profitability of the segments.


⁽²⁾	Expenses for the segments include fully apportioned corporate overhead expenses.

⁽³⁾

In 2017, we changed our presentation for certain cost reimbursements that were previously netted as an offset to affiliate expense. We now present these reimbursements gross in affiliate income. As a result, we have reclassified prior year amounts in order to conform to the current year presentation, which increased both RBWM other operating income and RBWM operating expenses $11 million during the year ended December 31, 2016 and also increased both GB&M other operating income and GB&M operating expenses $61 million and $63 million during the years ended December 31, 2016 and 2015, respectively. See Note 21, "Related Party Transactions," in the accompanying consolidated financial statements for additional information.


⁽⁴⁾	Represents adjustments associated with differences between U.S. GAAP and the Group Reporting Basis. These adjustments, which are more fully described above, consist of the following:



	Net Interest Income			Other Revenues			Provision for Credit Losses			Operating Expenses			Profit (Loss) before Income Tax Expense			Total Assets
	(in millions)
December 31, 2017
Derivatives	$	—		$	—		$	—		$	—		$	—		$	(32,900	)
Goodwill	—			(1		)	—			—			(1		)	347
Litigation	—			—			—			8			(8		)	—
Loan impairment	(43		)	—			(72		)	—			29			(332		)
Loan origination	(19		)	—			—			(14		)	(5		)	42
Loans held for sale	9			141			—			—			150			21
Low income housing tax credit investments	—			(7		)	—			—			(7		)	—
Pension and other postretirement benefit costs	—			—			—			94			(94		)	(263		)
Property	—			—			—			(11		)	11			8
Structured notes and deposits	—			85			—			—			85			—
Other	5			(18		)	—			(2		)	(11		)	(1		)
Total adjustments	$	(48	)	$	200		$	(72	)	$	75		$	149		$	(33,078	)

December 31, 2016
Derivatives	$	—		$	—		$	—		$	—		$	—		$	(44,911	)
Goodwill	—			—			—			—			—			348
Litigation	—			—			—			(8		)	8			(3		)
Loan impairment	(57		)	7			(58		)	1			7			(326		)
Loan origination	(21		)	—			—			(19		)	(2		)	35
Loans held for sale	—			(80		)	(20		)	—			(60		)	(31		)
Low income housing tax credit investments	—			(9		)	—			—			(9		)	—
Pension and other postretirement benefit costs	—			—			—			19			(19		)	(191		)
Property	—			—			—			(19		)	19			16
Unquoted equity securities	—			—			—			—			—			(163		)
Other	2			(22		)	—			—			(20		)	(8		)
Total adjustments	$	(76	)	$	(104	)	$	(78	)	$	(26	)	$	(76	)	$	(45,234	)

December 31, 2015
Derivatives	$	—		$	(3	)	$	—		$	—		$	(3	)	$	(46,245	)
Goodwill	—			—			—			—			—			348
Litigation	—			—			—			(2		)	2			—
Loan impairment	(61		)	3			132			1			(191		)	(329		)
Loan origination	(22		)	(3		)	—			(47		)	22			49
Loans held for sale	—			(16		)	(2		)	—			(14		)	(4		)
Low income housing tax credit investments	—			(12		)	—			—			(12		)	—
Pension and other postretirement benefit costs	—			—			—			15			(15		)	(177		)
Property	—			—			—			(19		)	19			21
Unquoted equity securities	—			—			—			—			—			(228		)
Other	5			(8		)	—			—			(3		)	(4		)
Total adjustments	$	(78	)	$	(39	)	$	130		$	(52	)	$	(195	)	$	(46,569	)


⁽⁵⁾	Represents differences in financial statement presentation between U.S. GAAP and the Group Reporting Basis.