Business Segments

12 Months Ended

Dec. 31, 2023

Segment Reporting [Abstract]

Business Segments

Business Segments

We have distinct businesses, which are aligned with HSBC's global business strategy: Wealth and Personal Banking ("WPB"), Commercial Banking ("CMB") and Global Banking and Markets ("GBM"). These businesses and a Corporate Center ("CC") serve as our reportable segments with the exception of GBM. Our GBM business is comprised of three distinct operating segments: Global Banking ("GB"), Markets and Securities Services ("MSS"), and Global Banking and Markets Other ("GBM Other"), which are separately reported. There have been no changes in the basis of our segmentation as compared with the presentation in our Annual Report on Form 10-K for the year ended December 31, 2022 ("2022 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 that includes both interest rate and liquidity components. 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 that incorporate both repricing (interest rate risk) and tenor (liquidity) characteristics. The objective of these charges/credits is to transfer interest rate risk to one centralized unit in Markets Treasury. Markets Treasury income statement and balance sheet results are allocated to each of the global businesses based upon tangible equity levels and levels of any surplus liabilities.

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 have not been eliminated, and we generally account for them 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. 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.

During the second quarter of 2023, we implemented a change to our internal management reporting to report net funding charges associated with MSS trading activities within other operating income (expense) to better align with the trading revenue generated by such activities. Historically, these funding charges were reported within net interest income (expense). There was no impact to consolidated net interest income (expense) or other operating income (expense) as these net funding charges are reversed back into net interest income (expense) in the CC. As a result, we have aligned our segment reporting for MSS and CC to reflect this change for all periods presented. The following table summarizes the impact of this change on reported segment net interest income (expense) and other operating income (expense) for the years ended December 31, 2022 and 2021:

	Year Ended December 31, 2022				Year Ended December 31, 2021
	As Previously Reported		After Reporting Changes		As Previously Reported		After Reporting Changes
	(in millions)
Segment net interest income (expense):
MSS	$	(108)	$	41	$	47	$	31
CC	(29)		(178)		(6)		10
Total HUSI Consolidated	2,060		2,060		1,904		1,904
Segment other operating income (expense):
MSS	$	567	$	418	$	318	$	334
CC	33		182		3		(13)
Total HUSI Consolidated	1,610		1,610		1,430		1,430

There have been no other changes in the measurement of segment profit as compared with the presentation in our 2022 Form 10-K.

A summary of significant differences between U.S. GAAP and the Group Reporting Basis as they impact our results is presented below:

Net Interest Income

Loan origination - The scope of loan origination costs deferred is more stringent under the Group Reporting Basis and generally results in lower costs being deferred than permitted under U.S. GAAP. In addition, deferred loan origination fees, costs and loan premiums are generally amortized to earnings 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 are generally amortized to earnings based on either a contractual or expected life basis. In the case of credit cards, while under the Group Reporting Basis deferred costs are amortized over the expected life of the credit card relationship, they are amortized over a shorter period of one year under U.S. GAAP.

Leases - Under the Group Reporting Basis, all leases are recognized as financing arrangements with interest expense on the lease liability recognized separately from depreciation of the ROU asset, which generally results in a front-loaded pattern of total lease expense. Under U.S. GAAP, expense on operating leases is generally recognized on a straight-line basis in operating expenses.

Deposit incentives - Under the Group Reporting Basis, costs associated with cash back incentives offered on customer deposits are deferred and amortized to interest expense over the incentive period, while under U.S. GAAP, such costs are recognized immediately in operating expenses.

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 credit losses continue to be measured in accordance with IFRS 9, "Financial Instruments," 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 measured at the lower of amortized cost or fair value. The existing allowance for credit losses at the time of transfer is recognized as a charge-off to the extent fair value is less than amortized cost and attributable to credit, with any remaining allowance for credit losses released to the provision for credit losses. 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 provision for credit losses while the component related to interest rates and liquidity factors is recorded in other revenues. Changes in the lower of amortized cost or fair value after the initial transfer to held for sale are recorded in other revenues to the extent permissible.

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 gains and losses 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 to the extent permissible.

Renewable energy tax credit investments - Under the Group Reporting Basis, the amortization of our investment balance is presented in income tax expense, while under U.S. GAAP, the amortization of our investment balance is presented in other revenues.

Low income housing tax credit investments - Under the Group Reporting Basis, the amortization of our investment balance and associated tax benefits are presented net in other operating income, while under U.S. GAAP, the amortization of our investment balance and associated tax benefits are presented net in income tax expense.

Gain on transfer of precious metals trading client relationships to an affiliate - In September 2023, our MSS business segment entered into an agreement to refer transactions related to all future precious metals trading and financing activities associated with our Global Banking clients to HSBC Bank plc. Under the Group Reporting Basis, a gain on transfer of client relationships is required to be recognized in earnings, regardless of whether the transfer is to a third party or related party. Under U.S. GAAP, when a transfer of client relationships is between affiliates under common control, the gain is reflected as a capital transaction and recorded in common equity as a component of additional paid-in capital.

Expected Credit Losses (Provision for Credit Losses)

Expected credit losses - Under U.S. GAAP, we maintain an allowance for credit losses that reflects our estimate of lifetime ECL. However, under the Group Reporting Basis only financial assets which are considered to have experienced a significant increase in credit risk ("stage 2") or for which there is objective evidence of impairment ("stage 3") require an allowance based on lifetime ECL. Under the Group Reporting Basis, financial assets at initial recognition and which have not experienced a significant increase in credit risk since initial recognition are considered to be in "stage 1" and only require an allowance based on expected credit losses resulting from default events that are possible within the next 12 months ("12-month ECL"). Under the Group Reporting Basis, a majority of our loans are considered to be in stage 1 and only a 12-month ECL is recorded. Primarily as a result of this difference, the allowance for credit losses is higher under U.S. GAAP than under the Group Reporting Basis.

In addition to the differences discussed above, under the Group Reporting Basis, the allowance for credit losses includes estimated ECL arising from expected future draws on unused credit card lines, while under U.S. GAAP, unused credit card lines are considered unconditionally cancellable and expected future draws are not reserved for.

Loans held for sale - As discussed more fully above under "Other Operating Income (Total Other Revenues)," under U.S. GAAP for loans that are transferred to held for sale, the existing allowance for credit losses at the time of transfer is recognized as a charge-off or released to the provision for credit losses. There is no similar requirement under the Group Reporting Basis. In addition, during 2022, we sold certain previously charged-off credit card and other consumer loans which resulted in a $9 million recovery under the Group Reporting Basis. This transaction did not qualify as a sale under U.S. GAAP and, as a result, the recovery is being deferred and amortized over the estimated collection period.

Operating Expenses

Other long-lived assets - A long-lived asset group is tested for impairment when events or changes in circumstances indicate that the carrying amount of a long-lived asset group might not be recoverable. Under U.S. GAAP, if the estimated undiscounted cash flows of the long-lived asset group exceed its carrying amount, an impairment is not recognized. However, if the estimated undiscounted cash flows are less than the carrying amount of the long-lived asset group, a second step is performed to determine fair value and an impairment loss is required if the carrying amount of the long-lived asset group exceeds fair value. Under the Group Reporting Basis, there is no separate undiscounted cash flow test and an impairment loss is recognized if the carrying amount of the cash generating unit exceeds the higher of its value in use or fair value less costs to sell. In 2020, we recorded an impairment charge under the Group Reporting Basis related to the write-off of all the capitalized software and a portion of the leasehold improvements associated with our WPB business segment. Under U.S. GAAP, the estimated undiscounted cash flows of the long-lived asset group exceeded its carrying amount and no impairment charge was required. Subsequent to recognition of the impairment charge in 2020, expenditures for software development and newly completed leasehold improvements in our WPB business segment were capitalized and amortized over their useful lives under U.S. GAAP, but not under the Group Reporting Basis. Consequently, the carrying amounts of capitalized software and leasehold improvements were higher under U.S. GAAP than under the Group Reporting Basis and, as a result, corresponding amortization expense was higher under U.S. GAAP. In addition, during 2021, we determined we would exit certain branches as part of our Restructuring Plan and, as a result, we recorded an impairment charge of $18 million under U.S. GAAP to write-off

the leasehold improvements associated with these branches. These leasehold improvements were previously written-off under the Group Reporting Basis.

In 2023, we recorded a reversal of $149 million of impairment charges under the Group Reporting Basis related to capitalized software and leasehold improvements primarily associated with our WPB business segment which were previously written-off as discussed above. During the second quarter of 2023, we determined that the cash generating unit was no longer impaired under the Group Reporting Basis and that its estimated fair value exceeded its carrying value, which resulted in the re-establishment of these assets at their recoverable amount net of amortization that would have been recorded had no impairment loss been recognized and excluding any assets that have since been sold. During 2023, we also recorded $22 million of lease related impairment charges under U.S. GAAP primarily associated with the exit of certain office space, while under the Group Reporting Basis, impairment was recognized when we committed to vacate the space in the fourth quarter of 2022.

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.

Leases - As discussed more fully above under "Net Interest Income," all leases are recognized as financing arrangements under the Group Reporting Basis with interest expense on the lease liability recognized separately from depreciation of the ROU asset. Under U.S. GAAP, expense on operating leases is generally recognized on a straight-line basis in operating expenses.

Deposit incentives - As discussed more fully above under "Net Interest Income," incentive costs on customer deposits are deferred and amortized to interest expense under the Group Reporting Basis, while under U.S. GAAP, such costs are recognized immediately in operating expenses.

Pension and other postretirement benefit costs - Under U.S. GAAP, pension expense reflects the expected return on plan assets based on the fair value of plan assets, offset by the interest cost on our projected benefit obligation. Additionally, under U.S. GAAP, pension expense includes the amortization of the amount by which actuarial losses or gains exceed the higher of 10 percent of the projected benefit obligation or fair value of plan assets (the corridor). 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.

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 may create 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.

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.

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. In addition, 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 than 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 interest is accrued, 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 allowance - As discussed more fully above under "Expected Credit Losses (Provision for Credit Losses)," under U.S. GAAP, the allowance for credit losses is recognized based on lifetime ECL, while under the Group Reporting Basis, financial assets at initial recognition and which have not experienced a significant increase in credit risk since initial recognition only require an allowance based on 12-month ECL.

Other long-lived assets - As discussed more fully above under "Operating Expenses," we previously recorded impairment charges under the Group Reporting Basis and, as a result, the carrying amounts of capitalized software and leasehold improvements were higher under U.S. GAAP than under the Group Reporting Basis. Under the Group Reporting Basis, an impairment loss is recognized if the carrying amount of the cash generating unit exceeds the higher of its value in use or fair value less costs to sell, while under U.S. GAAP, if the estimated undiscounted cash flows of the long-lived asset group exceed

its carrying amount, an impairment is not recognized. During 2023, we determined that the cash generating unit was no longer impaired under the Group Reporting Basis, which resulted in the re-establishment of these assets at their recoverable amount.

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. Methods, assumptions and reporting groups used to calculate impairment under the Group Reporting Basis may differ locally from that utilized by HSBC.

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
					GBM
	WPB		CMB		GB		MSS		GBM Other		CC		Total		Group Reporting Basis Adjust- ments(1)		Group Reporting Basis Reclassi- fications(2)		U.S. GAAP Consolidated Totals
	(in millions)
Year Ended December 31, 2023
Net interest income (expense)	$	757	$	1,144	$	497	$	44	$	(14)	$	(506)	$	1,922	$	9	$	(226)	$	1,705
Other operating income (expense)	118		184		282		336		(24)		503		1,399		(25)		278		1,652
Total operating income (expense)	875		1,328		779		380		(38)		(3)		3,321		(16)		52		3,357
Expected credit losses / provision for credit losses	3		63		29		—		(1)		—		94		(49)		—		45
	872		1,265		750		380		(37)		(3)		3,227		33		52		3,312
Operating expenses	602		675		574		280		74		364		2,569		203		52		2,824
Profit (loss) before income tax	$	270	$	590	$	176	$	100	$	(111)	$	(367)	$	658	$	(170)	$	—	$	488
Balances at end of period:
Total assets	$	44,031	$	52,484	$	10,231	$	38,811	$	37,158	$	2,863	$	185,578	$	(17,340)	$	—	$	168,238
Total loans, net	23,894		23,076		9,796		64		130		—		56,960		(1,056)		2,492		58,396
Goodwill	—		358		—		—		—		—		358		100		—		458
Total deposits	29,611		43,667		40,166		767		2,681		—		116,892		(1,799)		6,190		121,283
Year Ended December 31, 2022
Net interest income (expense)	$	782	$	941	$	467	$	41	$	7	$	(178)	$	2,060	$	4	$	5	$	2,069
Other operating income	298		287		339		418		86		182		1,610		(56)		41		1,595
Total operating income	1,080		1,228		806		459		93		4		3,670		(52)		46		3,664
Expected credit losses / provision for credit losses	(35)		22		31		—		2		—		20		134		—		154
	1,115		1,206		775		459		91		4		3,650		(186)		46		3,510
Operating expenses	863		586		483		286		111		396		2,725		14		46		2,785
Profit (loss) before income tax	$	252	$	620	$	292	$	173	$	(20)	$	(392)	$	925	$	(200)	$	—	$	725
Balances at end of period:
Total assets	$	42,141	$	49,020	$	10,102	$	43,410	$	37,170	$	2,628	$	184,471	$	(19,816)	$	—	$	164,655
Total loans, net	22,647		24,565		9,498		203		278		—		57,191		(1,059)		2,664		58,796
Goodwill	—		358		—		—		—		—		358		100		—		458
Total deposits	32,542		41,268		40,865		1,131		1,627		—		117,433		(2,665)		8,455		123,223
Year Ended December 31, 2021
Net interest income (expense)	$	801	$	771	$	315	$	31	$	(24)	$	10	$	1,904	$	19	$	160	$	2,083
Other operating income (expense)	303		297		409		334		100		(13)		1,430		(51)		(142)		1,237
Total operating income (expense)	1,104		1,068		724		365		76		(3)		3,334		(32)		18		3,320
Expected credit losses / provision for credit losses	(21)		(26)		(157)		—		(1)		—		(205)		(365)		—		(570)
	1,125		1,094		881		365		77		(3)		3,539		333		18		3,890
Operating expenses	1,221		581		407		275		98		316		2,898		62		18		2,978
Profit (loss) before income tax	$	(96)	$	513	$	474	$	90	$	(21)	$	(319)	$	641	$	271	$	—	$	912
Balances at end of period:
Total assets	$	62,904	$	43,052	$	10,486	$	43,007	$	44,151	$	1,746	$	205,346	$	(16,114)	$	—	$	189,232
Total loans, net	22,285		21,971		9,930		178		881		—		55,245		(1,991)		2,163		55,417
Goodwill	—		358		—		—		—		—		358		100		—		458
Total deposits	40,232		45,082		41,343		1,298		981		—		128,936		(2,889)		16,985		143,032

(1)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 Before  Income Tax		Total Assets
	(in millions)
December 31, 2023
Deposit incentives	$	6	$	—	$	—	$	—	$	6	$	2
Derivatives	—		—		—		—		—		(17,485)
Expected credit losses	—		—		(45)		—		45		(224)
Gain on transfer of precious metals trading client relationships to an affiliate	—		(10)		—		—		(10)		—
Goodwill	—		—		—		—		—		100
Leases	5		—		—		8		(3)		8
Loan origination	(7)		—		—		(10)		3		24
Loans held for sale	4		(3)		(4)		—		5		26
Other long-lived assets	—		—		—		202		(202)		(15)
Renewable energy tax credit investments	—		(12)		—		—		(12)		—
Other	1		—		—		3		(2)		(17)
Total adjustments	$	9	$	(25)	$	(49)	$	203	$	(170)	$	(17,581)
December 31, 2022
Deposit incentives	$	7	$	—	$	—	$	2	$	5	$	3
Derivatives	—		—		—		—		—		(19,842)
Expected credit losses	—		—		153		—		(153)		(258)
Goodwill	—		—		—		—		—		100
Leases	5		—		—		9		(4)		10
Loan origination	(14)		—		—		(12)		(2)		22
Loans held for sale	5		(40)		(19)		9		(25)		35
Other long-lived assets	—		—		—		(8)		8		131
Pension and other postretirement benefit costs	—		—		—		6		(6)		—
Renewable energy tax credit investments	—		(25)		—		—		(25)		—
Other	1		9		—		8		2		(17)
Total adjustments	$	4	$	(56)	$	134	$	14	$	(200)	$	(19,816)
December 31, 2021
Deposit incentives	$	13	$	—	$	—	$	9	$	4	$	(25)
Derivatives	—		—		—		—		—		(16,172)
Expected credit losses	—		—		(272)		—		272		(148)
Goodwill	—		—		—		—		—		100
Leases	16		—		—		22		(6)		13
Loan origination	(11)		—		—		(20)		9		23
Loans held for sale	—		(31)		(93)		—		62		(31)
Other long-lived assets	—		—		—		61		(61)		152
Pension and other postretirement benefit costs	—		—		—		(10)		10		—
Renewable energy tax credit investments	—		(21)		—		—		(21)		3
Other	1		1		—		—		2		(29)
Total adjustments	$	19	$	(51)	$	(365)	$	62	$	271	$	(16,114)

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