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"), Private Banking ("PB") and a Corporate Center ("CC"). There have been no changes in the basis of our segmentation as compared with the presentation in our 2017 Form 10-K.

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.

As discussed more fully below, during the first quarter of 2018, we adopted new accounting guidance under the Group Reporting Basis for the requirements of IFRS 9, "Financial Instruments" ("IFRS 9"), and we also implemented a change in accounting policy under the Group Reporting Basis to classify structured notes and deposits as liabilities designated under the fair value option. There have been no additional changes in the measurement of segment profit as compared with the presentation in our 2017 Form 10-K.

A summary of differences between U.S. GAAP and the Group Reporting Basis as they impact our results are presented in Note 22, "Business Segments," in our 2017 Form 10-K. Other than the changes discussed below, there have been no other significant changes since December 31, 2017 in the differences between U.S. GAAP and the Group Reporting Basis impacting our results.

Expected credit losses / loan impairment - In January 2018, we adopted new accounting guidance under the Group Reporting Basis in conjunction with HSBC’s adoption of the requirements of IFRS 9 on January 1, 2018 with the exception of the provisions relating to the presentation of gains and losses on financial instruments designated at fair value which were previously adopted in 2017.

Under IFRS 9, expected credit losses ("ECL") are recognized for a) financial assets measured at amortized cost, including loans, securities purchased under agreements to resell and certain debt securities; b) financial assets measured at fair value with changes in fair value recorded through other comprehensive income (loss), primarily debt securities; and c) certain loan commitments and financial guarantee contracts. Financial assets which have not experienced a significant increase in credit risk since initial recognition are considered to be in ‘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 so are considered to be in default or otherwise credit-impaired are in ‘stage 3’. At initial recognition and for financial assets that remain in stage 1, an allowance (or provision in the case of some loan commitments and financial guarantees) is required for ECL resulting from default events that are possible within the next 12 months ('12-month ECL'). In the event of a significant increase in credit risk, an allowance (or provision) is required for ECL resulting from all possible default events over the expected life of the financial instrument ('lifetime ECL') and financial assets are moved to stage 2 or stage 3.

The adoption of the new accounting guidance on January 1, 2018 on our customer loan portfolio resulted in an increase to our customer loan allowance for ECL of approximately $60 million with a corresponding charge to equity under the Group Reporting Basis. The impact of adoption on the allowance for other financial assets was not significant.

Structured notes and deposits - Structured notes and deposits have historically been classified as trading liabilities under the Group Reporting Basis and carried at fair value with changes in fair value recorded in earnings. Beginning January 1, 2018, HSBC concluded that a change in accounting policy and presentation from trading liabilities to liabilities designated under the fair value option for structured notes and deposits under the Group Reporting Basis would be appropriate since it would better align with the presentation of similar financial instruments by peers under IFRSs and therefore provide more relevant information about the effect of these financial liabilities on reported financial position and performance. As a result, the fair value movement on structured notes and deposits attributable to our own credit spread is now being recorded in other comprehensive income (loss) under the Group Reporting Basis, consistent with U.S. GAAP. During the three and nine months ended September 30, 2017, total other revenues under the Group Reporting Basis in GB&M included losses of $46 million and $69 million, respectively, from the fair value movement on structured notes and deposits attributable to our own credit spread.

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⁽⁵⁾			Group Reporting Basis Reclassi- fications⁽⁶⁾			U.S. GAAP Consolidated Totals
	(in millions)
Three Months Ended September 30, 2018
Net interest income⁽¹⁾	$	223		$	206		$	157		$	42		$	17		$	—	$	645		$	(2	)	$	(84	)	$	559
Other operating income	75			56			195			17			70			—		413			(15		)	88			486
Total operating income	298			262			352			59			87			—		1,058			(17		)	4			1,045
Expected credit losses / provision for credit losses	10			(4		)	(30		)	(1		)	(1		)	—		(26		)	47			(1		)	20
	288			266			382			60			88			—		1,084			(64		)	5			1,025
Operating expenses⁽²⁾	317			150			203			59			55			—		784			1			5			790
Profit (loss) before income tax expense	$	(29	)	$	116		$	179		$	1		$	33		$	—	$	300		$	(65	)	$	—		$	235

Three Months Ended September 30, 2017
Net interest income⁽¹⁾	$	231		$	187		$	131		$	56		$	(10	)	$	—	$	595		$	(9	)	$	(26	)	$	560
Other operating income⁽³⁾	65			55			125			31			33			—		309			61			23			393
Total operating income	296			242			256			87			23			—		904			52			(3		)	953
Loan impairment charges / provision for credit losses	11			(8		)	(18		)	(2		)	1			—		(16		)	1			(7		)	(22		)
	285			250			274			89			22			—		920			51			4			975
Operating expenses⁽²⁾⁽³⁾	292			142			214			67			103			—		818			(2		)	4			820
Profit (loss) before income tax expense	$	(7	)	$	108		$	60		$	22		$	(81	)	$	—	$	102		$	53		$	—		$	155

Nine Months Ended September 30, 2018
Net interest income⁽¹⁾	$	664		$	587		$	457		$	132		$	50		$	—	$	1,890		$	12		$	(236	)	$	1,666
Other operating income	239			169			644			53			225			—		1,330			(35		)	241			1,536
Total operating income	903			756			1,101			185			275			—		3,220			(23		)	5			3,202
Expected credit losses / provision for credit losses	16			(50		)	(187		)	(4		)	3			—		(222		)	114			12			(96		)
	887			806			1,288			189			272			—		3,442			(137		)	(7		)	3,298
Operating expenses⁽²⁾	983			440			628			181			641			—		2,873			(8		)	(7		)	2,858
Profit (loss) before income tax expense	$	(96	)	$	366		$	660		$	8		$	(369	)	$	—	$	569		$	(129	)	$	—		$	440
Balances at end of period:
Total assets	$	18,977		$	25,289		$	76,194		$	6,742		$	78,421		$	—	$	205,623		$	(31,621	)	$	—		$	174,002
Total loans, net⁽⁴⁾	16,814			24,126			17,464			5,656			1,306			—		65,366			(829		)	1,684			66,221
Goodwill	581			358			—			321			—			—		1,260			347			—			1,607
Total deposits⁽⁴⁾	32,051			22,440			29,777			8,167			5,211			—		97,646			(3,441		)	17,885			112,090



	Group Reporting Basis Consolidated Amounts
	RBWM		CMB			GB&M			PB		CC			Adjustments/ Reconciling Items		Total			Group Reporting Basis Adjustments⁽⁵⁾			Group Reporting Basis Reclassi- fications⁽⁶⁾			U.S. GAAP Consolidated Totals
	(in millions)
Nine Months Ended September 30, 2017
Net interest income⁽¹⁾	$	665	$	548		$	439		$	165	$	(9	)	$	—	$	1,808		$	(38	)	$	(31	)	$	1,739
Other operating income⁽³⁾	451		159			436			73		205			—		1,324			190			30			1,544
Total operating income	1,116		707			875			238		196			—		3,132			152			(1		)	3,283
Loan impairment charges / provision for credit losses	17		(49		)	(55		)	1		—			—		(86		)	(47		)	13			(120		)
	1,099		756			930			237		196			—		3,218			199			(14		)	3,403
Operating expenses⁽²⁾⁽³⁾	865		422			686			191		338			—		2,502			—			(14		)	2,488
Profit (loss) before income tax expense	$	234	$	334		$	244		$	46	$	(142	)	$	—	$	716		$	199		$	—		$	915
Balances at end of period:
Total assets	$	18,968	$	24,154		$	90,779		$	7,684	$	90,262		$	—	$	231,847		$	(33,961	)	$	—		$	197,886
Total loans, net	16,781		22,959			18,843			5,900		3,751			—		68,234			(1,039		)	(401		)	66,794
Goodwill	581		358			—			321		—			—		1,260			347			—			1,607
Total deposits	34,275		23,919			21,628			9,737		8,394			—		97,953			(3,874		)	27,761			121,840

⁽¹⁾

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.


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

⁽³⁾

During the fourth quarter of 2017, we changed our presentation for certain cost reimbursements that were previously netted as an offset to affiliate expense and began presenting these reimbursements gross in affiliate income. As a result, we have reclassified prior period amounts in order to conform to the current year presentation, which increased both RBWM other operating income and RBWM operating expenses $11 million and $35 million and also increased both GB&M other operating income and GB&M operating expenses $14 million and $51 million during the three and nine months ended September 30, 2017, respectively. See Note 14, "Related Party Transactions," for additional information.

⁽⁴⁾

In addition to the changes discussed above, in conjunction with HSBC's adoption of the requirements of IFRS 9 we also adopted changes in presentation under the Group Reporting Basis related to affiliate loans and deposits as well as cash collateral posted and received. Beginning January 1, 2018, affiliate loans have been reclassified from other assets to loans, affiliate deposits have been reclassified from other liabilities to deposits, cash collateral posted has been reclassified from loans to other assets and cash collateral received has been reclassified from deposits to other liabilities. As a result of these changes, total loans, net and total deposits in the GB&M segment increased $0.2 billion and $8.6 billion, respectively, and total loans, net and total deposits in the CC segment decreased $2.0 billion and $1.5 billion, respectively, at September 30, 2018.


⁽⁵⁾	Represents adjustments associated with differences between U.S. GAAP and the Group Reporting Basis.


⁽⁶⁾	Represents differences in financial statement presentation between U.S. GAAP and the Group Reporting Basis.