董事會報告書及 directors’ report and 綜合財務報表 ......2013/04/16 · 2012 2011...

Standard Chartered Bank (Hong Kong) Limited

For the year ended 31 December 2012

Directors’ Report andConsolidated FinancialStatements

渣打銀行（香港）有限公司

截至二零一二年十二月三十一日止年度

董事會報告書及綜合財務報表

C M Y K

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Process Cyan

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Standard C

hartered Bank (H

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irectors’ Report and C

onsolidated F

inancial Sta

tements 2012

渣打銀行(香港)有限公司

二零一二年度董事會報告書及綜合財務報表

Standard Chartered Bank (Hong Kong) LimitedContents

Page

Report of the directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Independent auditor’s report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Consolidated income statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Consolidated statement of comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Consolidated balance sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Balance sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Consolidated statement of changes in equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Statement of changes in equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Consolidated cash flow statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Notes to the financial statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Unaudited supplementary financial information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126

Standard Chartered Bank (Hong Kong) Limited 1

Report of the directors

Thedirectorshavepleasureinsubmittingtheirannualreporttogetherwiththeauditedfinancialstatementsfortheyearended31December2012.

Principal place of business

StandardCharteredBank(HongKong)Limited(the“Bank”)isabankincorporatedanddomiciledinHongKongandhasitsregisteredofficeat32/F.,4–4ADesVoeuxRoadCentral,HongKong.

Principal activities

TheBankisalicensedbankregisteredundertheHongKongBankingOrdinance.TheBank’sprincipalactivitiesaretheprovisionofbankingandrelatedfinancialservices.TheprincipalactivitiesandotherparticularsoftheBank’sprincipalsubsidiariesaresetoutinnote19tothefinancialstatements.

Financial statements

TheprofitoftheBankanditssubsidiariesfortheyearended31December2012andthestateoftheBank’sanditssubsidiaries’affairsasatthatdatearesetoutinthefinancialstatementsonpages5to125.

During theyearended31December2012, thedirectorshaddeclaredandpaidanordinarydividendofHK$1.6005(2011:HK$3.0114)pereach“A”and“B”ordinarysharetotallingHK$3,100million(2011:HK$5,833million).

Detailsofthemovementsinreservesaresetoutintheconsolidatedstatementofchangesinequity.

Charitable donations

Charitable donations made by the Bank and its subsidiaries during the year amounted to HK$8 million(2011:HK$10million).

Fixed assets

Detailsofthemovementsinfixedassetsaresetoutinnote21tothefinancialstatements.

Share capital

TherewerenomovementsintheBank’ssharecapitalduringtheyear.

Directors

Thedirectorsduringtheyearanduptothedateofthisreportare:

Executive directorsBenjaminHungPiChengLingFouTsong(appointedon24April2012)TanSiewBoiSaleemRazvi(resignedon2April2012)


Report of the directors (continued)

Non-executive directorsKatherineTsangKingSuen,ChairpersonJaspalSinghBindraJulianFongLoongChoonJanardhanParthasarathiCadambi(appointedon5April2012)MaXuezheng*NormanLyle*ChanWingKin*RaymondKwokPingLuen*(resignedon27July2012)

* Independent non-executive directors

MrLingFouTsongandMrJanardhanParthasarathiCadambiwerere-electedatthe2012annualgeneralmeetinginaccordancewithArticle109oftheBank’sArticlesofAssociation.

Directors’ service contracts

Themaximumtermofappointmentofindependentnon-executivedirectorsis2years.Theirremunerationisdeterminedbytheshareholdersattheannualgeneralmeeting.

Directors’ interests in Share Option Schemes

CertaindirectorsoftheBankhavebeengrantedoptionsundervariousshareoptionschemesofStandardCharteredPLC,theultimateholdingcompanyoftheBank.Duringtheyear,JaspalSinghBindra,KatherineTsangKingSuen,BenjaminHungPiCheng,JulianFongLoongChoon,SaleemRazvi,LingFouTsong,TanSiewBoiandJanardhanParthasarathiCadambiweregrantedoptionsundertheseschemes.

Directors’ rights to acquire shares

AtnotimeduringtheyearwastheBank,anyofitsholdingcompanies,subsidiaries,orfellowsubsidiaries,apartytoanyotherarrangementtoenablethedirectorsoftheBanktoacquirebenefitsbymeansoftheacquisitionofsharesinordebenturesoftheBankoranyotherbodycorporate.

Directors’ interests in contracts

NocontractofsignificancetowhichtheBank,itsholdingcompanies,subsidiariesorfellowsubsidiarieswasapartyandinwhichadirectoroftheBankhadamaterialinterest,subsistedattheendoftheyearoratanytimeduringtheyear.


Report of the directors (continued)

Auditor

ThefinancialstatementshavebeenauditedbyKPMGwhowillretireand,beingeligible,offerthemselvesforre-appointment.Aresolutionforthere-appointmentofKPMGastheauditoroftheBankistobeproposedattheforthcomingannualgeneralmeeting.

OnbehalfoftheBoard

KatherineTsangKingSuenChairperson

HongKong,5March2013


Independent auditor’s report to the shareholders ofStandard Chartered Bank (Hong Kong) Limited(Incorporated in Hong Kong SAR with limited liability)

WehaveauditedtheconsolidatedfinancialstatementsofStandardCharteredBank(HongKong)Limited(the“Bank”)and itssubsidiaries (together “theBankand itssubsidiaries”)setoutonpages5 to125,whichcomprisetheconsolidatedandthebankbalancesheetsasat31December2012,theconsolidatedincomestatement,theconsolidatedstatementofcomprehensiveincome,theconsolidatedandthebankstatementsofchangesinequityandtheconsolidatedcashflowstatementfortheyearthenendedandasummaryofsignificantaccountingpoliciesandotherexplanatoryinformation.

Directors’ responsibility for the financial statements

ThedirectorsoftheBankareresponsibleforthepreparationoftheconsolidatedfinancialstatementsthatgive a true and fair view in accordance with International Financial Reporting Standards issued by theInternationalAccountingStandardsBoardandwithHongKongFinancialReportingStandardsissuedbytheHongKongInstituteofCertifiedPublicAccountantsandtheHongKongCompaniesOrdinanceandforsuchinternalcontrolasthedirectorsdetermineisnecessarytoenablethepreparationofconsolidatedfinancialstatementsthatarefreefrommaterialmisstatements,whetherduetofraudorerror.

Auditor’s responsibility

Ourresponsibilityistoexpressanopinionontheseconsolidatedfinancialstatementsbasedonouraudit.Thisreportismadesolelytoyou,asabody,inaccordancewithsection141oftheHongKongCompaniesOrdinance,andfornootherpurpose.Wedonotassumeresponsibilitytowardsoracceptliabilitytoanyotherpersonforthecontentsofthisreport.

WeconductedourauditinaccordancewithHongKongStandardsonAuditingissuedbytheHongKongInstituteofCertifiedPublicAccountants.Thosestandardsrequirethatwecomplywithethicalrequirementsandplanandperformtheaudittoobtainreasonableassuranceaboutwhethertheconsolidatedfinancialstatementsarefreefrommaterialmisstatement.

Anauditinvolvesperformingprocedurestoobtainauditevidenceabouttheamountsanddisclosuresintheconsolidatedfinancialstatements.Theproceduresselecteddependontheauditor’sjudgement,includingtheassessmentoftherisksofmaterialmisstatementoftheconsolidatedfinancialstatements,whetherduetofraudorerror. Inmakingthoseriskassessments, theauditorconsiders internalcontrol relevanttotheentity’spreparationoftheconsolidatedfinancialstatementsthatgiveatrueandfairviewinordertodesignauditproceduresthatareappropriateinthecircumstances,butnotforthepurposeofexpressinganopinionontheeffectivenessoftheentity’sinternalcontrol.Anauditalsoincludesevaluatingtheappropriatenessofaccountingpoliciesusedandthereasonablenessofaccountingestimatesmadebythedirectors,aswellasevaluatingtheoverallpresentationoftheconsolidatedfinancialstatements.

Webelievethattheauditevidencewehaveobtainedissufficientandappropriatetoprovideabasisforourauditopinion.

Opinion

Inouropinion,theconsolidatedfinancialstatementsgiveatrueandfairviewofthestateofaffairsoftheBankandoftheBankanditssubsidiariesasat31December2012andoftheBankanditssubsidiaries’profitandcashflowsfortheyearthenendedinaccordancewithInternationalFinancialReportingStandardsandwithHongKongFinancialReportingStandardsandhavebeenproperlypreparedinaccordancewiththeHongKongCompaniesOrdinance.

KPMGCertifiedPublicAccountants

8thFloor,Prince’sBuilding10ChaterRoadCentral,HongKong

5March2013


Consolidated income statementFor the year ended 31 December 2012(Expressed in millions of Hong Kong dollars)

Note 2012 2011

HK$’M HK$’M

Interestincome 4(a) 18,349 15,200Interestexpense 4(b) (6,052) (3,477)

Net interest income 12,297 11,723

Feeandcommissionincome 7,480 7,067Feeandcommissionexpense (702) (654)

Netfeeandcommissionincome 4(c) 6,778 6,413Nettradingincome 4(d) 3,079 2,631Netgains/(losses)fromfinancialinstrumentsdesignated

atfairvaluethroughprofitorloss 4(e) 188 (30)Netgainsfromdisposalofavailable-for-salesecurities 5 149 307Otheroperatingincome 4(f) 1,162 450

11,356 9,771

Total operating income 23,653 21,494

Staffcosts (6,693) (6,272)Premisesandequipment (1,862) (1,343)Others (4,398) (3,753)

Operatingexpenses 4(g) (12,953) (11,368)

Operating profit before impairment 10,700 10,126

Impairmentchargesonadvancestobanksandcustomers 6(a) (789) (592)Otherimpairmentcharges 6(b) (1,043) (141)

Operating profit after impairment 8,868 9,393Shareofprofitofassociates 893 570

Profit before taxation 9,761 9,963Taxation 7(a) (1,523) (1,619)

Profit after taxation 8,238 8,344

Attributableto:EquityshareholdersoftheBank 8,221 8,324Non-controllinginterests 17 20


Thenotesonpages13to125formpartofthesefinancialstatements.


Consolidated statement of comprehensive incomeFor the year ended 31 December 2012(Expressed in millions of Hong Kong dollars)

2012 2011

HK$’M HK$’M


Other comprehensive income/(losses):Definedbenefitplans:

–Actuariallosses (61) (399)–Relatedtaxeffect 10 65

Available-for-salesecurities:–Changesinfairvaluerecognisedduringtheyear 1,115 (365)–Changesinfairvaluetransferredtotheincomestatementondisposal (149) (307)–Transfertotheincomestatementonfairvaluehedgeditems

attributabletohedgedrisk 213 (421)–Relatedtaxeffect (207) 178

Cashflowhedges:–Changesinfairvaluerecognisedduringtheyear 94 113–Transfertotheincomestatementontermination

ofhedgingderivatives (16) 31–Relatedtaxeffect (13) (24)

Netchangesinshareoptionequityreserve 76 10Surplusonrevaluationofbuildingsandleaseholdlandheldforownuse 2 –Exchangedifference 121 99

Othercomprehensiveincome/(losses)fortheyear,netoftax 1,185 (1,020)

Total comprehensive income for the year 9,423 7,324

Attributable to:ShareholdersoftheBank 9,406 7,304Non-controllinginterests 17 20

9,423 7,324



Consolidated balance sheet as at 31 December 2012(Expressed in millions of Hong Kong dollars)

Note 2012 2011HK$’M HK$’M

Assets

Cashandbalanceswithbanks,centralbanksandotherfinancialinstitutions 10 20,492 21,777

Placementswithbanksandotherfinancialinstitutions 11(a) 143,581 136,513HongKongSARGovernmentcertificatesofindebtedness 12 32,481 31,401Tradingassets 13 28,414 35,377Financialassetsdesignatedatfairvalue 14 3,216 4,275Investmentsecurities 17 174,379 135,090Advancestocustomers 15(a) 408,018 389,763Amountsduefromimmediateholdingcompany 18 58,731 50,957Amountsduefromfellowsubsidiaries 18 20,591 17,531Interestinassociates 20 7,101 6,619Fixedassets 21 23,746 10,522Goodwillandintangibleassets 22 1,821 1,741Currenttaxassets 13 3Deferredtaxassets 27 89 319Otherassets 23 17,001 11,966

939,674 853,854

Liabilities

HongKongSARcurrencynotesincirculation 12 32,481 31,401Depositsandbalancesofbanksandotherfinancialinstitutions 12,281 15,729Depositsfromcustomers 24 756,589 672,940Tradingliabilities 28 23,068 24,638Financialliabilitiesdesignatedatfairvalue 26 3,612 3,487Debtsecuritiesinissue 25 10,006 13,265Amountsduetoimmediateholdingcompany 18 19,606 13,023Amountsduetofellowsubsidiaries 18 5,117 5,073Currenttaxliabilities 629 917Deferredtaxliabilities 27 43 5Otherliabilities 29 18,204 19,775Subordinatedliabilities 31 11,267 13,100

892,903 813,353

Equity

Sharecapital 32 97 97Reserves 33 46,652 40,346

Shareholders’equity 46,749 40,443Non-controllinginterests 22 58

46,771 40,501

939,674 853,854

ApprovedandauthorisedforissuebytheBoardofDirectorson5March2013.

Tsang King Suen Katherine Hung Pi Cheng Benjamin Chairperson Director

Ling Fou Tsong Wang Wei MinDirector CompanySecretary



Balance sheet as at 31 December 2012(Expressed in millions of Hong Kong dollars)

Note 2012 2011HK$’M HK$’M

Assets

Cashandbalanceswithbanks,centralbanksandotherfinancialinstitutions 10 20,331 21,676

Placementswithbanksandotherfinancialinstitutions 11(a) 143,571 136,477HongKongSARGovernmentcertificatesofindebtedness 12 32,481 31,401Tradingassets 13 28,410 35,377Financialassetsdesignatedatfairvalue 14 3,216 4,275Investmentsecurities 17 174,312 133,263Advancestocustomers 15(a) 395,386 377,477Amountsduefromimmediateholdingcompany 18 57,746 50,279Amountsduefromfellowsubsidiaries 18 20,460 17,370AmountsduefromsubsidiariesoftheBank 18 33,693 19,181InvestmentsinsubsidiariesoftheBank 19 1,100 1,096Interestinassociates 20 4,059 4,814Fixedassets 21 2,830 2,919Goodwillandintangibleassets 22 1,011 921Deferredtaxassets 27 38 275Otherassets 23 14,406 10,978

933,050 847,779

Liabilities

HongKongSARcurrencynotesincirculation 12 32,481 31,401Depositsandbalancesofbanksandotherfinancialinstitutions 11,356 14,734Depositsfromcustomers 24 755,487 672,425Tradingliabilities 28 23,065 24,638Financialliabilitiesdesignatedatfairvalue 26 3,612 3,487Debtsecuritiesinissue 25 10,006 13,265Amountsduetoimmediateholdingcompany 18 19,124 12,366Amountsduetofellowsubsidiaries 18 5,008 3,602AmountsduetosubsidiariesoftheBank 18 2,017 1,891Currenttaxliabilities 596 762Otherliabilities 29 17,205 18,987Subordinatedliabilities 31 11,267 13,100

891,224 810,658

Equity

Sharecapital 32 97 97Reserves 33 41,729 37,024

Shareholders’equity 41,826 37,121

933,050 847,779

ApprovedandauthorisedforissuebytheBoardofDirectorson5March2013.

Tsang King Suen Katherine Hung Pi Cheng Benjamin Chairperson Director

Ling Fou Tsong Wang Wei MinDirector CompanySecretary



Consolidated statement of changes in equityFor the year ended 31 December 2012(Expressed in millions of Hong Kong dollars)

Attributable to equity shareholders of the Bank

Sharecapital

Sharepremium

Capitalredemption

reserve

Cash flowhedge

reserve

Available-for-sale

investmentreserve

Revaluationreserve

Pensionreserve

Exchangereserve

Propertyrevaluation

reserveRetained

profits

Shareoptionequity

reserve Total

Non-controlling

interests TotalHK$’M HK$’M HK$’M HK$’M HK$’M HK$’M HK$’M HK$’M HK$’M HK$’M HK$’M HK$’M HK$’M HK$’M

At1January2011 97 12,477 3,804 (121) 45 146 (110) 150 – 22,190 294 38,972 69 39,041Totalcomprehensive

income – – – 120 (915) – (334) 99 – 8,324 10 7,304 20 7,324Dividendpaid – – – – – – – – – (5,833) – (5,833) (31) (5,864)Transfertoretained

profits – – – – – – (15) – – 15 – – – –

At31December2011 97 12,477 3,804 (1) (870) 146 (459) 249 – 24,696 304 40,443 58 40,501Totalcomprehensive

income – – – 65 972 – (51) 121 2 8,221 76 9,406 17 9,423Dividendpaid – – – – – – – – – (3,100) – (3,100) (53) (3,153)

At31December2012 97 12,477 3,804 64 102 146 (510) 370 2 29,817 380 46,749 22 46,771



Statement of changes in equityFor the year ended 31 December 2012(Expressed in millions of Hong Kong dollars)

Sharecapital

Sharepremium

Capitalredemption

reserve

Cash flowhedge

reserve

Available-for-sale

investmentreserve

Pensionreserve

Retainedprofits

Shareoption equity

reserve TotalHK$’M HK$’M HK$’M HK$’M HK$’M HK$’M HK$’M HK$’M HK$’M

At1January2011 97 12,477 3,804 (115) 51 (143) 20,027 294 36,492Totalcomprehensiveincome – – – 114 (923) (316) 7,624 (37) 6,462Dividendpaid – – – – – – (5,833) – (5,833)

At31December2011 97 12,477 3,804 (1) (872) (459) 21,818 257 37,121Totalcomprehensiveincome – – – 65 983 (51) 6,762 46 7,805Dividendpaid – – – – – – (3,100) – (3,100)

At31December2012 97 12,477 3,804 64 111 (510) 25,480 303 41,826

During theyearended31December2012, thedirectorshaddeclaredandpaidanordinarydividendofHK$1.6005(2011:HK$3.0114)pereach‘A’and‘B’ordinarysharetotallingHK$3,100million(2011:HK$5,833million).



Consolidated cash flow statementFor the year ended 31 December 2012(Expressed in millions of Hong Kong dollars)

Note 2012 2011

HK$’M HK$’M

Operating activities

Profitbeforetaxation 9,761 9,963

Adjustmentsfor:Impairmentchargesonadvancestobanksandcustomers 789 592Advanceswrittenoffnetofrecoveries (845) (682)Unwindingofdiscountonloanimpairmentcharges (19) (23)Otherimpairmentcharges 1,043 141Depreciation 753 315Amortisationofintangibleassets 85 93Gainsondisposaloffixedassets (3) (20)Netlosses/(gains)onrevaluationofinvestmentproperties 30 (5)Shareofprofitofassociates (893) (570)Interestexpenseonsubordinatedliabilities 355 410Fairvalue(gains)/lossestransferredfromreserveson cashflowhedges (16) 31Exchangetranslationonsubordinatedliabilities 149 (6)

11,189 10,239(Increase)/decreaseinoperatingassets:

Placementswithbanksandotherfinancialinstitutionswithoriginalmaturitybeyondthreemonths (14,097) (5,764)

Tradingassets (5,296) 9,695Financialassetsdesignatedatfairvalue 1,059 2,285Investmentsecurities (28,176) (1,235)Grossadvancestocustomers (18,232) (54,446)Amountsduefromimmediateholdingcompanyandfellowsubsidiaries (2,032) (10,996)Otherassets (5,775) (3,239)

Increase/(decrease)inoperatingliabilities:Depositsandbalancesofbanksandotherfinancialinstitutions (3,524) (4,047)Depositsfromcustomers 83,638 99,668Debtsecuritiesinissue (3,259) 13,265Financialliabilitiesdesignatedatfairvalue 125 435Amountsduetoimmediateholdingcompanyandfellowsubsidiaries 2,013 (13,194)Tradingliabilities (1,569) (11,808)Otherliabilities (2,452) 3,324

Cash generated from operations 13,612 34,182

Incometaxpaid (1,756) (827)

Net cash generated from operating activities 11,856 33,355


Consolidated cash flow statement (continued)For the year ended 31 December 2012(Expressed in millions of Hong Kong dollars)

Note 2012 2011

HK$’M HK$’M

Investing activities

Dividendreceivedfromassociates 104 70Paymentforpurchaseofanassociate (54) –Paymentforadditionalinvestmentinassociates – (1,507)Proceedsfromdisposalofasubsidiary 158 –Paymentforpurchaseoffixedassets (14,036) (7,799)Paymentforpurchaseofintangibleassets (165) (115)Proceedsfromdisposaloffixedassets 34 90Proceedsfromdisposalofintangibleassets – 2

Net cash used in investing activities (13,959) (9,259)

Financing activities

Paymentforredemptionofsubordinatedliabilities (2,335) –Proceedsfromissuanceofsubordinatedliabilities – 4,597Interestpaidonsubordinatedliabilities (345) (350)DividendpaidtoshareholdersoftheBank (3,100) (5,833)Dividendpaidtonon-controllinginterests (53) (31)

Net cash used in financing activities (5,833) (1,617)

Net (decrease)/increase in cash and cash equivalents (7,936) 22,479

Cash and cash equivalents at 1 January 148,525 124,308Effectofforeignexchange 559 1,738

Cash and cash equivalents at 31 December 34 141,148 148,525

Cashflowsfromoperatingactivitiesinclude:Interestreceived 17,318 14,500Interestpaid 5,184 2,731Dividendsreceived 25 19



Notes to the financial statements(Expressed in millions of Hong Kong dollars)

1 Principal activities

TheprincipalactivitiesofStandardCharteredBank(HongKong)Limited(the“Bank”)anditssubsidiaries(togetherreferredtoasthe“Bankanditssubsidiaries”)aretheprovisionofbankingandrelatedfinancialservices.

2 Significant accounting policies

(a) Statementofcompliance

ThesefinancialstatementshavebeenpreparedinaccordancewithallapplicableHongKongFinancialReportingStandards(“HKFRSs”),whichcollectivetermincludesallapplicableHongKongFinancialReportingStandards,HongKongAccountingStandards(“HKASs”)andInterpretationsissuedbytheHongKongInstituteofCertifiedPublicAccountants(“HKICPA”),accountingprinciplesgenerallyacceptedinHongKongandtherequirementsoftheHongKongCompaniesOrdinance.AsHKFRSsareconsistentwithInternationalFinancialReportingStandards(“IFRSs”),whichcollectivetermincludesallapplicableindividual International Financial Reporting Standards, International Accounting Standards andInterpretations issued by the International Accounting Standards Board (“IASB”), these financialstatementsalsocomplywithIFRSs.

(b) Basisofpreparationofthefinancialstatements

(i) BasisofPreparation

The consolidated financial statements comprise the financial statements of the Bank and itssubsidiariesmadeupto31December2012.

TheconsolidatedandtheBank’sfinancialstatementshavebeenpreparedunderthehistoricalcostconvention,asmodifiedbytherevaluationofinvestmentproperties,available-for-saleassets,andfinancialassetsandliabilities(includingderivatives)atfairvaluethroughprofitorloss.

ThepreparationoffinancialstatementsinconformitywithadoptedHKFRS/IFRSrequirestheuseofcertaincriticalaccountingestimates.ItalsorequiresmanagementtoexerciseitsjudgementintheprocessofapplyingtheBankanditssubsidiaries’accountingpolicies.Actualresultsmaydifferfromtheseestimates.Thesignificantjudgementsmadebymanagementinapplyingtheaccountingpoliciesandkeysourcesofuncertaintywerethesameasthoseappliedtotheconsolidatedfinancialstatementsasatandfortheyearended31December2011.

TheaccountingpoliciessetoutbelowhavebeenappliedconsistentlyacrosstheBankanditssubsidiariesandtoallperiodspresentedinthesefinancialstatements.

(ii) ConsolidatedFinancialStatements

Duringtheyear,theBankhadsubordinateddebtsinissue.Thesesubordinateddebtswereissuedunder a note issuance programme which is listed on the Stock Exchange of Hong Kong.Consequently,theBankisrequiredtoproduceconsolidatedfinancialstatementsinaccordancewithHKAS27/IAS27“ConsolidatedandSeparateFinancialStatements”.


Notes to the financial statements (continued)(Expressed in millions of Hong Kong dollars)

2 Significant accounting policies (continued)

(c) Subsidiariesandnon-controllinginterests

SubsidiariesareentitiescontrolledbytheBankanditssubsidiaries.ControlexistswhentheBankanditssubsidiarieshavethepowertodirectlyorindirectlygovernthefinancialandoperatingpoliciessoasto obtain benefits from its activities. In assessing control, potential voting rights that presently areexercisablearetakenintoaccount.

Aninvestmentinasubsidiaryisconsolidatedintotheconsolidatedfinancialstatementsfromthedatethatcontrolcommencesuntilthedatethatcontrolceases.Intra-groupbalancesandtransactionsandany unrealised profits arising from intra-group transactions are eliminated in full in preparing theconsolidatedfinancialstatements.Unrealisedlossesresultingfromintra-grouptransactionsareeliminatedinthesamewayasunrealisedgainsbutonlytotheextentthatthereisnoevidenceofimpairment.

Non-controllinginterestsrepresenttheportionofthenetassetsofsubsidiariesattributabletointereststhatarenotownedbytheBank,whetherdirectlyorindirectlythroughsubsidiaries,andinrespectofwhichtheBankanditssubsidiarieshavenotagreedanyadditionaltermswiththeholdersofthoseinterestswhichwouldresultintheBankanditssubsidiariesasawholehavingacontractualobligationinrespectofthoseintereststhatmeetthedefinitionofafinancialliability.Non-controllinginterestsarepresentedintheconsolidatedbalancesheetwithinequity,separatelyfromequityattributabletotheequityshareholdersoftheBank.Non-controllinginterestsarepresentedonthefaceoftheconsolidatedincomestatementandtheconsolidatedstatementofcomprehensiveincomeasanallocationofthetotalprofitorlossandtotalcomprehensiveincomefortheyearbetweennon-controllinginterestsandtheequityshareholdersoftheBank.

Wherelossesapplicabletothenon-controllinginterestexceeditsinterestintheequityofasubsidiary,theexcess,andanyfurtherlossesapplicabletothenon-controllinginterest,arechargedagainsttheBankanditssubsidiaries’interestexcepttotheextentthatthenon-controllinginteresthasabindingobligationto,andisableto,makeadditionalinvestmenttocoverthelosses.Ifthesubsidiarysubsequentlyreportsprofits, theBankand itssubsidiaries’areallocatedall suchprofitsuntil thenon-controllinginterest’sshareoflossespreviouslyabsorbedbytheBankanditssubsidiarieshavebeenrecovered.

IntheBank’sbalancesheet,itsinvestmentsinsubsidiariesarestatedatcostlessimpairmentlosses,ifany.

(d) Associates

AssociatesareentitiesinrespectofwhichtheBankhassignificantinfluence,butnotcontrol,overthefinancialandoperatingpoliciesandprocedures.Investmentsinassociatesareaccountedforusingtheequitymethodofaccountingintheconsolidatedfinancialstatementsandareinitiallyrecognisedatcost.TheBankanditssubsidiaries’investmentinassociatesincludesgoodwillidentifiedonacquisitionandaccumulatedimpairmentloss.

TheBankanditssubsidiaries’shareofitsassociates’post-acquisitionprofitsorlossesarerecognisedintheincomestatement,andtheshareofpost-acquisitionmovementsinothercomprehensiveincomearerecognisedinreserves.Thecumulativepost-acquisitionmovementsareadjustedagainstthecarryingamountoftheinvestmentintheconsolidatedbalancesheet.WhentheBankanditssubsidiaries’shareoflossesinanassociateisequaltoorexceedsitsinterestintheassociate,includinganyotherunsecuredreceivables,theBankanditssubsidiariesdonotrecognisefurtherlosses,unlesstheyhaveincurredobligationsormadepaymentsonbehalfoftheassociate.




(d) Associates(continued)

UnrealisedgainsandlossesontransactionsbetweentheBankanditsassociatesareeliminatedtotheextentoftheBankanditssubsidiaries’interestintheassociates.

IntheBank’sbalancesheet,investmentinassociatesarestatedatcostlessimpairmentlossesanddividendsfrompre-acquisitionprofitsreceivedpriorto1January2009,ifany.

(e) Intangibleassets

(i) Goodwill

GoodwillrepresentstheexcessofthecostofanacquisitionoverthefairvalueoftheBankanditssubsidiaries’shareofthenetidentifiableassetsandcontingentliabilitiesoftheacquiredsubsidiary/associateatthedateofacquisition.Goodwillonacquisitionsofsubsidiariesisincludedin“Goodwillandintangibleassets”.Goodwillonacquisitionsofassociatesisincludedin“Interestinassociates”.

Goodwillincludedin“Goodwillandintangibleassets”istestedannuallyforimpairmentandcarriedatcostlessanyaccumulatedimpairmentlosses.Goodwillisallocatedtocash-generatingunitsforthepurposeofimpairmenttesting.

(ii) Acquiredintangibles

Atthedateofacquisitionofasubsidiaryorassociate,intangibleassetswhicharedeemedseparableandthatarisefromcontractualorotherlegalrightsarecapitalisedandincludedwithinthenetidentifiableassetsacquired.These intangibleassetsare initiallymeasuredat fair value,whichreflectsmarketexpectationsoftheprobabilitythatthefutureeconomicbenefitsembodiedintheassetwillflowtotheentity,andareamortisedonthebasisoftheirexpectedusefullives(4to16years).Ateachbalancesheetdate,theseassetsareassessedforindicatorsofimpairment.Intheeventthatanasset’scarryingamountisdeterminedtobegreaterthanitsrecoverableamount,theassetiswrittendownimmediately.

(iii) Computersoftware

Acquiredcomputersoftwarelicensesarecapitalisedonthebasisofthecostsincurredtoacquireandbringtousethespecificsoftware.Costsassociatedwiththedevelopmentofsoftwarearecapitalisedwhereitisprobablethatitwillgeneratefutureeconomicbenefitsinexcessofitscost.Computersoftwarecostsareamortisedonthebasisofexpectedusefullife(3to5years).Costsassociatedwithmaintainingsoftwarearerecognisedasanexpenseasincurred.Ateachbalancesheetdate,theseassetsareassessedforindicatorsofimpairment.Intheeventthatanasset’scarryingamountisdeterminedtobegreaterthanitsrecoverableamount,theassetiswrittendownimmediately.

(f) Investmentproperties

Investmentpropertiesarelandandbuildingswhichareownedeithertoearnrentalincomeorforlongterminvestmentsorforboth.Investmentpropertiesarestatedinthebalancesheetatfairvalue.Anygainsorlossesarisingfromachangeinfairvalueorfromthedisposalofaninvestmentpropertyisrecognisedintheincomestatement.




(g) Otherproperty,plantandequipment

Property,plantandequipmentisstatedatcostlessaccumulateddepreciationandimpairment,ifany.Costincludesexpenditurethatisdirectlyattributabletotheacquisitionoftheitems.Subsequentcostsareincludedintheasset’scarryingamountorarerecognisedasaseparateasset,asappropriate,onlywhenitisprobablethatfutureeconomicbenefitsassociatedwiththeitemwillflowtotheBankandthecostoftheitemcanbemeasuredreliably.Allotherrepairsandmaintenancearechargedtotheincomestatementduringthefinancialperiodinwhichtheyareincurred.

Depreciationonfixedassetsiscalculatedusingthestraight-linemethodtoallocatetheircosttotheirresidualvaluesovertheirestimatedusefullives,asfollows:

– Buildings,leaseholdlandandleaseholdimprovements,aredepreciatedovertheshorteroftheirestimatedusefullives,being50yearsfromthedateofcompletion,andtheunexpiredtermsofthelease.

– Equipmentandmotorvehicles,aredepreciatedover3to15years.

– Aircraftandvessels,aredepreciatedover25years.

Theassets’residualvaluesandusefullivesarereviewed,andadjustedifappropriate,ateachbalancesheetdate.Ateachbalancesheetdate,theseassetsareassessedforindicatorsofimpairment.Intheeventthatanasset’scarryingamountisdeterminedtobegreaterthanitsrecoverableamount,theassetiswrittendownimmediately.

Gainsandlossesondisposalsareincludedintheincomestatement.

(h) Leases

Where the Bank and its subsidiaries are the lessees

TheleasesenteredintobytheBankanditssubsidiariesareprimarilyoperatingleases.Thetotalpaymentsmadeunderoperatingleasesarechargedtotheincomestatementonastraight-linebasisovertheperiodoftheleases.

Where the Bank and its subsidiaries are the lessors

Whenassetsareleasedtocustomersunderfinanceleases,thepresentvalueoftheleasepaymentsisrecognisedasareceivable.Thedifferencebetweenthegrossreceivableandthepresentvalueofthereceivableisrecognisedasunearnedfinanceincome.Leaseincomeisrecognisedoverthetermoftheleaseusingthenetinvestmentmethod(beforetax),whichreflectsaconstantperiodicrateofreturnignoringtaxcashflows.

AssetsleasedtocustomersunderoperatingleasesareincludedwithinFixedassetsanddepreciatedovertheirestimateduseful lives.Rental incomeontheseleasedassetsisrecognisedintheincomestatementonastraight-linebasisunlessanothersystematicbasisismorerepresentative.




(i) Financialassetsandliabilities(excludingderivatives)

Financialassetsareclassifiedintothefollowingcategories:financialassetsheldatfairvaluethroughprofit or loss, loans and receivables, and available-for-sale financial assets. Financial liabilities areclassifiedaseitherheldatfairvaluethroughprofitorloss,oratamortisedcost.Managementdeterminestheclassificationofthefinancialassetsandliabilitiesoninitialrecognitionor,whereappropriate,atthetimeofreclassification.

(i) Financial assets and liabilities held at fair value through profit or loss

Thiscategoryhastwosub-categories:financialassetsandliabilitiesheldfortrading,andthosedesignatedatfairvaluethroughprofitorlossatinception.Afinancialassetorliabilityisclassifiedastradingifacquiredprincipallyforthepurposeofsellingorrepurchasingintheshorttermorispartofaportfolioofidentifiedfinancialinstrumentsthataremanagedtogetherandforwhichthereisevidenceofarecentactualpatternofshort-termprofittaking.

Financialassetsandliabilitiesmaybedesignatedatfairvaluethroughprofitorlosswhen:

– thedesignationeliminatesorsignificantlyreducesameasurementorrecognitioninconsistencythatwouldotherwisearisefrommeasuringassetsorliabilitiesonadifferentbasis,or

– agroupoffinancialassetsand/orliabilitiesismanagedanditsperformanceevaluatedonafairvaluebasis,or

– assetsorliabilitiesincludeembeddedderivativesandsuchderivativesarenotrecognisedseparately.

(ii) Loans and receivables

Loansandreceivablesarenon-derivativefinancialassetswithfixedordeterminablepaymentsthatarenotquotedinanactivemarketanditisexpectedthatsubstantiallyalloftheinitialinvestmentwillberecovered,otherthanbecauseofcreditdeterioration.

(iii) Available-for-sale assets

Available-for-sale assets are those non-derivative financial assets intended to be held for anindefiniteperiodoftime,whichmaybesoldinresponsetoliquidityrequirementsorchangesininterestrates,exchangeratesorequityprices.

(iv) Financial liabilities held at amortised cost

Financialliabilities,whichincludeborrowings,notclassifiedasheldatfairvaluethroughprofitorlossareclassifiedasamortisedcostinstruments.

Initial recognition

Purchasesandsalesoffinancialassetsandliabilitiesheldatfairvaluethroughprofitorlossorwhichareavailable-for-saleareinitiallyrecognisedusingtradedateaccounting(thedateonwhichtheBankanditssubsidiariescommittopurchaseorselltheasset).Loansandreceivablesarerecognisedwhencashisadvancedtotheborrowers.Otherfinancialassetsandfinancialliabilitiesareinitiallyrecognisedonvaluedateatfairvalueplusdirectlyattributabletransactioncosts.




(i) Financialassetsandliabilities(excludingderivatives)(continued)

Subsequent measurement

Financialassetsandliabilitiesheldatfairvaluethroughprofitorlossaresubsequentlycarriedatfairvalue,withgainsandlossesarisingfromchangesinfairvaluetakendirectlytotheincomestatement.

Available-for-salefinancialassetsaresubsequentlycarriedatfairvalue,withgainsandlossesarisingfromchangesinfairvaluetakentoaseparatecomponentofequityuntiltheassetissold,orisimpaired,whenthecumulativegainorlossistransferredtotheincomestatement.

Loansandreceivablesaresubsequentlycarriedatamortisedcostusingtheeffectiveinterestmethod.

Financialliabilitiesotherthanthoseheldatfairvaluethroughprofitorlossaresubsequentlystatedatamortisedcost,withanydifferencebetweenproceedsnetofdirectlyattributabletransactioncostsandtheredemptionvaluerecognisedintheincomestatementovertheperiodoftheborrowingsusingtheeffectiveinterestmethod.

Inadditiontotheseinstruments,thecarryingvalueofafinancialinstrumentcarriedatamortisedcostthatisthehedgediteminaqualifyingfairvaluehedgerelationshipisadjustedbythefairvaluegainorlossattributabletothehedgedrisk.

Fair value of financial assets and liabilities

Fair value is the amount for which an asset could be exchanged, or a liability settled, betweenknowledgeable,willingpartiesinanarm’slengthtransaction.

Thefairvaluesofquotedfinancialassetsorfinancialliabilitiesinactivemarketsarebasedoncurrentprices.Ifthemarketforafinancialassetorfinancialliabilityisnotactive,andforunlistedsecurities,theBankanditssubsidiariesestablishfairvaluebyusingvaluationtechniques.Theseincludetheuseofrecentarm’slengthtransactions,discountedcashflowanalysis,optionpricingmodelsandothervaluationtechniquescommonlyusedbymarketparticipants.

Reclassifications

Reclassificationsoffinancialassets,otherthanasdisclosedbelow,oroffinancialliabilitiesbetweenmeasurementcategoriesarenotpermittedfollowingtheirinitialrecognition.

Heldfortradingnon-derivativefinancialassetscanonlybetransferredoutoftheheldatfairvaluethroughprofitor losscategory inthefollowingcircumstances: (i) totheavailable-for-salecategory,where, inrarecircumstances,theyarenolongerheldforthepurposeofsellingorrepurchasinginthenearterm;or(ii)totheloansandreceivablescategory,wheretheyarenolongerheldforthepurposeofsellingorrepurchasingintheneartermandtheywouldhavemetthedefinitionofaloanandreceivableoninitialrecognitionandtheBankanditssubsidiarieshavetheintentandabilitytoholdtheassetsfortheforeseeablefutureoruntilmaturity.

Financialassetscanonlybetransferredoutoftheavailable-for-salecategorytotheloansandreceivablescategory,wheretheywouldhavemetthedefinitionofaloanandreceivableoninitialrecognitionandtheBankanditssubsidiarieshavetheintentandabilitytoholdtheassetsfortheforeseeablefutureoruntilmaturity.

Financialassetsarereclassifiedattheirfairvalueonthedateofreclassification.Forfinancialassetsreclassifiedoutoftheavailable-for-salecategoryintoloansandreceivables,anygainorlossonthoseassetsrecognisedinshareholders’equitypriortothedateofreclassificationisamortisedtotheincomestatementovertheremaininglifeofthefinancialasset,usingtheeffectiveinterestmethod.




(i) Financialassetsandliabilities(excludingderivatives)(continued)

Renegotiated loans

Loansandreceivableswithrenegotiatedtermsareloansthathavebeenrestructuredduetodeteriorationintheborrower’sfinancialpositionandwheretheBankanditssubsidiarieshavemadeconcessionsthat theywouldnototherwiseconsider.Renegotiated loansandreceivablesaresubject toongoingmonitoringtodeterminewhethertheyremainimpairedorpastdue.

Derecognition

FinancialassetsarederecognisedwhentherightstoreceivecashflowsfromthefinancialassetshaveexpiredorwheretheBankanditssubsidiarieshavetransferredsubstantiallyallrisksandrewardsofownership.Financialliabilitiesarederecognisedwhentheyareextinguished,i.e.whentheobligationisdischarged,cancelledorexpires.

(j) Derivativefinancialinstrumentsandhedgeaccounting

Derivativesarecategorisedastradingunlesstheyaredesignatedashedginginstruments.

Derivativecontractsareinitiallyrecognisedatfairvalueonthedateonwhichtheyareenteredintoandaresubsequentlyre-measuredattheirfairvalue.Fairvaluesareobtainedfrommarketpricesinactivemarkets, includingrecentmarkettransactions,andvaluationtechniques, includingdiscountedcashflowmodelsandoptionpricingmodels,asappropriate.Allderivativesarecarriedasassetswhentheirfairvaluesarepositiveandasliabilitieswhentheirfairvaluesarenegative.

Certainderivativesembeddedinotherfinancialinstrumentsaretreatedasseparatederivativeswhentheireconomiccharacteristicsandrisksarenotcloselyrelatedtothoseofthehostcontractandthehostcontractisnotcarriedatfairvaluethroughprofitorloss.Theseembeddedderivativesaremeasuredatfairvaluewithchangesinfairvaluerecognisedintheincomestatement.

Themethodofrecognisingtheresultingfairvaluegainorlossdependsonwhetherthederivativeisdesignatedasahedginginstrument,andifso,thenatureoftheitembeinghedged.TheBankanditssubsidiariesdesignatecertainderivativesaseither:(1)hedgesofthefairvalueofrecognisedassetsorliabilities,orcommitments(fairvaluehedge);or,(2)hedgesofhighlyprobablefuturecashflowsattributabletoarecognisedassetorliability,oraforecastedtransaction(cashflowhedge).Hedgeaccountingisusedforderivativesdesignatedinthiswayprovidedcertaincriteriaaremet.

TheBankanditssubsidiariesdocument,attheinceptionofthetransaction,therelationshipbetweenhedging instruments and hedged items, as well as its risk management objective and strategy forundertakingvarioushedgetransactions.TheBankanditssubsidiariesalsodocumenttheassessment,bothathedgeinceptionandonanongoingbasis,ofwhetherthederivativesthatareusedinhedgingtransactionsarehighlyeffectiveinoffsettingchangesinfairvaluesorcashflowsofhedgeditems.

(i) Fair value hedge

Changesinthefairvalueofderivativesthataredesignatedandthatqualifyasfairvaluehedginginstrumentsarerecordedintheincomestatement,togetherwithanychangesinthefairvalueofthehedgedassetorliabilitythatareattributabletothehedgedrisk.Ifthehedgenolongermeetsthecriteriaforhedgeaccounting,theadjustmenttothecarryingamountofahedgeditemforwhichtheeffective interestmethod isused isamortised to the incomestatementover theperiod tomaturityorderecognition.




(j) Derivativefinancialinstrumentsandhedgeaccounting(continued)

(ii) Cash flow hedge

Theeffectiveportionofchangesinthefairvalueofderivativesthataredesignatedandqualifyascashflowhedginginstrumentsarerecognisedinequity.Thegainorlossrelatingtotheineffectiveportionisrecognisedimmediatelyintheincomestatement.

Amountsaccumulatedinequityarerecycledtotheincomestatementintheperiodsinwhichthehedgeditemaffectsprofitorloss.

Whenahedginginstrumentexpiresorissold,orwhenahedgenolongermeetsthecriteriaforhedgeaccounting,anycumulativegainorlossexistinginequityatthattimeremainsinequityandis recognisedwhen the forecast transaction isultimately recognised in the incomestatement.Whenaforecasttransactionisnolongerexpectedtooccur,thecumulativegainorlossthatwasreportedinequityisimmediatelytransferredtotheincomestatement.

Derivatives that do not qualify for hedge accounting

Certainderivativetransactionsdonotqualifyforhedgeaccounting.Changesinthefairvalueofanyderivativeinstrumentsthatdonotqualifyforhedgeaccountingarerecognisedimmediatelyintheincomestatement.

(k) Impairmentoffinancialassets

TheBankanditssubsidiariesassessateachbalancesheetdatewhetherthereisobjectiveevidencethatafinancialassetorgroupoffinancialassetsisimpaired.Afinancialassetoragroupoffinancialassets is impairedand impairment lossesare incurred if,andonly if, there isobjectiveevidenceofimpairmentasaresultofoneormoreeventsthatoccurredaftertheinitialrecognitionoftheasset(a‘lossevent’)andthatlossevent(orevents)hasanimpactontheestimatedfuturecashflowsofthefinancialassetorgroupoffinancialassetsthatcanbereliablyestimated.

Thefollowingfactorsareconsideredinassessingobjectiveevidenceofimpairment:

– whetherthecounterpartyisindefaultofprincipalorinterestpayments;

– acounterpartyfilesforbankruptcyprotection(orthelocalequivalent)wherethiswouldavoidordelayrepaymentofitsobligation;

– theBankanditssubsidiariesfiletohavethecounterpartydeclaredbankruptorfileasimilarorderinrespectofacreditobligation;

– theBankanditssubsidiariesconsenttoarestructuringoftheobligation,resultinginadiminishedfinancialobligation,demonstratedbyamaterialforgivenessofdebtorpostponementofscheduledpayments;

– theBankanditssubsidiariessellacreditobligationatamaterialcredit-relatedeconomicloss;or




(k) Impairmentoffinancialassets(continued)

– thereisobservabledataindicatingthatthereisameasurabledecreaseintheestimatedfuturecashflowsofagroupoffinancialassets,although thedecreasecannotyetbe identifiedwithspecificindividualfinancialassets.

Assets carried at amortised cost

TheBankanditssubsidiariesfirstassesswhetherobjectiveevidenceofimpairmentexistsindividuallyforfinancialassetsthatareindividuallysignificant,andindividuallyorcollectivelyforfinancialassetsthatarenotindividuallysignificant.IftheBankanditssubsidiariesdeterminethatnoobjectiveevidenceofimpairmentexistsforanindividuallyassessedfinancialasset,whethersignificantornot,itincludestheassetinagroupoffinancialassetswithsimilarcreditriskcharacteristicsandcollectivelyassessesthemforimpairment.Assetsthatareindividuallyassessedforimpairmentandforwhichanimpairmentlossisorcontinuestoberecognisedarenotincludedinacollectiveassessmentofimpairment.

Ifthereisobjectiveevidencethatanimpairmentlossonloansandreceivablescarriedatamortisedcosthasbeenincurred,theamountofthelossismeasuredasthedifferencebetweentheasset’scarryingamountandthepresentvalueofestimatedfuturecashflows(excludingfuturecreditlossesthathavenotbeenincurred)discountedatthefinancialasset’soriginaleffectiveinterestrate.Thecarryingamountoftheassetisreducedthroughtheuseofanallowanceaccountandtheamountofthelossisrecognisedin the incomestatement. Ifa loanhasavariable interest rate, thediscount rate formeasuringanyimpairment loss is the current effective interest rate determined under the contract. As a practicalexpedient,theBankanditssubsidiariesmaymeasureimpairmentonthebasisofaninstrument’sfairvalueusingobservablemarketprice.

Thecalculationofthepresentvalueoftheestimatedfuturecashflowsofacollateralisedfinancialassetreflectsthecashflowsthatmayresultfromforeclosurelesscostsforobtainingandsellingthecollateral,whetherornotforeclosureisprobable.Forthepurposesofacollectiveevaluationofimpairment,financialassetsaregroupedonthebasisofsimilarcreditriskcharacteristics (i.e.onthebasisoftheBank’sgradingprocessthatconsidersassettype, industry,geographical location,collateraltype,past-duestatusandotherrelevantfactors).Thosecharacteristicsarerelevanttotheestimationoffuturecashflowsforgroupsofsuchassetsbybeingindicativeofthedebtors’abilitytopayallamountsdueaccordingtothecontractualtermsoftheassetsbeingevaluated.

Futurecashflowsinagroupoffinancialassetsthatarecollectivelyevaluatedforimpairmentarebasedontheprobabilityofdefaultinherentwithintheportfolioofimpairedloansorreceivablesandthehistoricallossexperienceforassetswithcreditriskcharacteristicssimilartothoseinthegroup.Historicallossexperienceisadjustedonthebasisofcurrentobservabledatatoreflecttheeffectsofcurrentconditionsthatdidnotaffecttheperiodonwhichthehistoricallossexperienceisbasedandtoremovetheeffectsofconditionsinthehistoricalperiodthatdonotcurrentlyexist.

Totheextentaloanisirrecoverable,itiswrittenoffagainsttherelatedprovisionforloanimpairment.Suchloansarewrittenoffafterallthenecessaryprocedureshavebeencompletedandtheamountofthelosshasbeendetermined.Subsequentrecoveriesofamountspreviouslywrittenoffarecreditedtotheincomestatement.

If,inasubsequentperiod,theamountoftheimpairmentlossdecreasesandthedecreasecanberelatedobjectivelytoaneventoccurringaftertheimpairmentwasrecognised(suchasanimprovementinthedebtor’screditrating),thepreviouslyrecognisedimpairmentlossisreversedbyadjustingtheallowanceaccount.Theamountofthereversalisrecognisedintheincomestatement.




(k) Impairmentoffinancialassets(continued)

Available-for-sale assets

Asignificantorprolongeddeclineinthefairvalueofanequitysecuritybelowitscostisconsidered,amongstotherfactorsindeterminingwhethertheequitysecurityisimpaired.Whereobjectiveevidenceofimpairmentexistsforavailable-for-salefinancialassets,thecumulativeloss(measuredasthedifferencebetweentheacquisitioncostandthecurrentfairvalue,lessanyimpairmentlossonthatfinancialassetpreviouslyrecognisedintheincomestatement)isremovedfromequityandrecognisedintheincomestatement.If,inasubsequentperiod,thefairvalueofadebtinstrumentclassifiedasavailable-for-saleincreasesandtheincreasecanbeobjectivelyrelatedtoaneventoccurringaftertheimpairmentlosswasrecognisedintheincomestatement,theimpairmentlossisreversedthroughtheincomestatement.Impairmentlossesrecognisedintheincomestatementonequityinstrumentsarenotreversedthroughtheincomestatement.

(l) Offsettingfinancialtransactions

Financialassetsandliabilitiesareoffsetandthenetamountreportedinthebalancesheetwhenthereisalegallyenforceablerighttooffsettherecognisedamountsandthereisanintentiontosettleonanetbasis,ortorealisetheassetandsettletheliabilitysimultaneously.

(m) Fiduciaryactivities

TheBankanditssubsidiariescommonlyactastrusteeandinotherfiduciarycapacitiesthatresultintheholdingorplacingof assetsonbehalf of individuals, trusts, retirementbenefitplansandotherinstitutions.Theassetsandincomearisingthereonareexcludedfromthesefinancialstatements,astheyarenotassetsandincomeoftheBankanditssubsidiaries.

(n) Cashandcashequivalents

Forthepurposesofthecashflowstatement,cashandcashequivalentscomprisebalanceswithlessthan threemonths’maturity fromthedateofacquisition, including:cashandbalanceswithbanks,centralbanksandotherfinancialinstitutions,tradingassets,placementswithbanksandotherfinancialinstitutions,andamountsduefromimmediateholdingcompanyandfellowsubsidiaries.

(o) Revenuerecognition

(i) Interest income and expense

Interest incomeandexpenseonavailable-for-saleassets, financial assetsor liabilitiesheldatamortisedcostandfinancialassetsandliabilitiesheldatfairvaluethroughprofitorlossexcludingderivativesisrecognisedintheincomestatementusingtheeffectiveinterestratemethod.

Theeffectiveinterestratemethodisamethodofcalculatingtheamortisedcostofafinancialassetorafinancialliabilityandofallocatingtheinterestincomeorinterestexpenseovertherelevantperiod.Theeffectiveinterestrateistheratethatdiscountsestimatedfuturecashpaymentsorreceiptsthroughtheexpectedlifeofthefinancialinstrumentor,whenappropriate,ashorterperiod,tothenetcarryingamountofthefinancialassetorfinancialliability.Whencalculatingtheeffectiveinterestrate,theBankanditssubsidiariesestimatecashflowsconsideringallcontractualtermsofthefinancialinstrument(forexample,prepaymentoptions)butdoesnotconsiderfuturecreditlosses.Thecalculationincludesallamountspaidorreceivedbetweenpartiestothecontractthatareanintegralpartoftheeffectiveinterestrate,includingtransactioncostsandallotherpremiumsordiscounts.




(o) Revenuerecognition(continued)

(i) Interest income and expense (continued)

Onceafinancialassetoragroupofsimilarfinancialassetshasbeenwrittendownasaresultofanimpairmentloss,interestincomeisrecognisedattheoriginaleffectiveinterestrateofthefinancialassetappliedtotheimpairedcarryingamount.

(ii) Fees and commissions

Feesandcommissionsaregenerallyrecognisedonanaccrualbasiswhentheservicehasbeenprovidedorsignificantactperformed.LoansyndicationfeesarerecognisedasrevenuewhenthesyndicationhasbeencompletedandtheBankanditssubsidiarieshaveretainednopartoftheloanpackageforitselforhaveretainedapartatthesameeffectiveinterestrateasfortheotherparticipants.Portfolioandothermanagementadvisoryandservicefeesarerecognisedbasedontheapplicableservicecontracts,usuallyonatime-apportionedbasis.

(iii) Other income from financial assets and liabilities

Gainsandlossesarisingfromchangesinthefairvalueoffinancialassetsandliabilitiesheldatfairvaluethroughprofitorloss,aswellasanyinterestreceivableorpayable,areincludedintheincomestatementintheperiodinwhichtheyarise.

Gainsandlossesarisingfromchangesinthefairvalueofavailable-for-salefinancialassetsotherthanforeignexchangegainsandlossesfrommonetaryitems,arerecogniseddirectlyinequity,until thefinancialasset isderecognisedor impairedatwhich timethecumulativegainor losspreviouslyrecognisedinequityisrecognisedintheincomestatement.

DividendsonequityinstrumentsarerecognisedintheincomestatementwhentheBankanditssubsidiaries’righttoreceivepaymentisestablished.

(p) Incometax

Incometaxpayableonprofits,basedontheapplicabletaxlawineachjurisdiction,isrecognisedasanexpenseintheperiodinwhichprofitsarise.Thetaxeffectsof incometaxlossesavailableforcarryforwardarerecognisedasanassetwhenitisprobablethatfuturetaxableprofitswillbeavailableagainstwhichtheselossescanbeutilised.

Deferredtaxisprovidedinfull,usingtheliabilitymethod,ontemporarydifferencesarisingbetweenthetaxbasesofassetsandliabilitiesandtheircarryingamountsintheconsolidatedfinancialstatements.Deferredincometaxisdeterminedusingtaxratesandlawsthathavebeenenactedorsubstantiallyenactedbythebalancesheetdateandthatareexpectedtoapplywhentherelateddeferredincometaxassetisrealisedorthedeferredincometaxliabilityissettled.

Deferredtaxassetsarerecognisedwhereitisprobablethatfuturetaxableprofitswillbeavailableagainstwhichthetemporarydifferencescanbeutilised.

Currentanddeferredtaxrelatingtoitemswhicharechargedorcrediteddirectlytoequity,arecreditedorchargeddirectlytoequityandaresubsequentlyrecognisedintheincomestatementtogetherwiththecurrentordeferredgainorloss.




(p) Incometax(continued)

Currenttaxbalancesanddeferredtaxbalances,andmovementstherein,arepresentedseparatelyfromeachotherandarenotoffset.Currenttaxassetsareoffsetagainstcurrenttaxliabilities,anddeferredtaxassetsagainstdeferredtaxliabilitiesiftheBankanditssubsidiarieshavealegallyenforceablerighttosetoffcurrenttaxassetsagainstcurrenttaxliabilitiesandthefollowingadditionalconditionsaremet:

– inthecaseofcurrenttaxassetsandliabilities,theBankoritssubsidiariesintendeithertosettleonanetbasis,ortorealisetheassetandsettletheliabilitysimultaneously;or

– inthecaseofdeferredtaxassetsandliabilities,iftheyrelatetoincometaxesleviedbythesametaxationauthorityoneitherthesametaxableentityordifferenttaxableentitiesforwhichalegalrightofsetoffexists.

(q) Provisions

ProvisionsforrestructuringcostsandlegalclaimsarerecognisedwhentheBankanditssubsidiarieshaveapresentlegalorconstructiveobligationasaresultofpastevents;itismorelikelythannotthatanoutflowofresourceswillberequiredtosettletheobligationandtheamountcanbereliablyestimated.

(r) Employeebenefits

(i) Short term employee benefits

Salaries,annualbonuses,andthecostofnon-monetarybenefitsareaccruedintheyearinwhichtheassociatedservicesarerenderedbyemployees.

(ii) Pension obligations

TheBankanditssubsidiariesoperateanumberofdefinedcontributionanddefinedbenefitplans.

Fordefinedcontributionplans,theBankanditssubsidiariespaycontributionstopubliclyorprivatelyadministeredpensioninsuranceplansonamandatory,contractualorvoluntarybasis,andsuchamountsarechargedtooperatingexpenses.TheBankanditssubsidiarieshavenofurtherpaymentobligationsoncethecontributionshavebeenpaid.

Forfundeddefinedbenefitplans,thenetliabilityrecognisedinthebalancesheetrepresentsthepresentvalueofthedefinedbenefitobligationsatthebalancesheetdatelessthefairvalueofplanassets.Thedefinedbenefitobligationsarecalculatedannuallybyindependentactuariesusingtheprojected unit method. The present value of the defined benefit obligations is determined bydiscountingtheestimatedfuturecashoutflowsusinganinterestrateequaltotheyieldonhigh-qualitycorporatebondsthataredenominatedinthecurrencyinwhichthebenefitswillbepaid,andthathaveatermtomaturityapproximatingtothetermoftherelatedpensionliability.

Actuarialgainsandlossesthatarisearerecognisedinshareholders’equityandpresentedintheconsolidatedstatementofothercomprehensiveincomeintheperiodtheyarise.Pastservicecostsarerecognisedimmediatelytotheextentthatbenefitsarevestedandareotherwiserecognisedovertheaverageperioduntilbenefitsarevestedonastraight-linebasis.Currentservicecostsandanypastservicecosts,togetherwiththeunwindingofthediscountonplanliabilities,offsetbytheexpectedreturnonplanassetswhereapplicable,arechargedtooperatingexpenses.




(r) Employeebenefits(continued)

(iii) Share-based compensation

TheGroupoperatesequity-settledshare-basedcompensationplansinwhichtheBankanditssubsidiaries’employeesparticipate.Thefairvalueoftheemployeeservicesreceivedinexchangeforthegrantoftheoptionsisrecognisedasanexpense.Fordeferredshareawardsgrantedaspartofanannualperformanceaward,theexpenseisrecognisedovertheperiodfromthestartoftheperformanceperiodtothevestingdate.Forallotherawardstheexpenseisrecognisedovertheperiodfromthestartofthedateofgranttothevestingdate.

Forequity-settledawards,thetotalamounttobeexpensedoverthevestingperiodisdeterminedbyreferencetothefairvalueoftheoptionsgranted,excludingtheimpactofanynon-marketvestingconditions(forexample,profitabilityandgrowthtargets).Thefairvalueofequityinstrumentsgrantedisbasedonmarketprices,ifavailable,atthedateofgrant.Intheabsenceofmarketprices,thefairvalueof the instruments isestimatedusinganappropriatevaluation technique,suchasabinomialoptionpricingmodel.

Non-marketvestingconditionsareincludedinassumptionsaboutthenumberofoptionsthatareexpectedtovest.Ateachbalancesheetdate,theBankanditssubsidiariesreviseitsestimatesofthenumberofoptionsthatareexpectedtovest. Itrecognisesthe impactoftherevisionoforiginalestimates,ifany,intheincomestatement,andacorrespondingadjustmenttoequityovertheremainingvestingperiod.Forfeiturespriortovestingattributabletofactorsotherthanthefailuretosatisfyanon-marketvestingconditionaretreatedasacancellationandtheremainingunamortisedchargeisdebitedtotheincomestatementatthetimeofcancellation.

(s) Translationofforeigncurrencies

ForeigncurrencytransactionsaretranslatedintoHongKongdollarsusingtheexchangeratesprevailingatthedatesofthetransactions.Foreignexchangegainsandlossesresultingfromthesettlementofsuchtransactions,andfromthetranslationatyear-endexchangeratesofmonetaryassetsandliabilitiesdenominatedinforeigncurrencies,arerecognisedintheincomestatement.

Non-monetaryassetsandliabilitiesaretranslatedathistoricalexchangeratesifheldathistoricalcostoryear-endexchangeratesifheldatfairvalue,andtheresultingforeignexchangegainsandlossesarerecognisedineithertheincomestatementorshareholders’equitydependingonthetreatmentofthegainorlossontheassetorliability.

TheresultsandfinancialpositionofallforeignoperationsthathaveafunctionalcurrencydifferentfromtheBank’spresentationcurrencyareaccountedforasfollows:

– assetsandliabilitiesforeachbalancesheetpresentedaretranslatedattheclosingrateatthebalancesheetdate.

– incomeandexpensesforeachincomestatementaretranslatedataverageexchangeratesoratratesonthedateofthetransactionwhereexchangeratesfluctuatesignificantly;and

– allresultingexchangedifferencesarerecognisedasaseparatecomponentofequity.

Onconsolidation,exchangedifferencesarising fromthe translationof thenet investment in foreignentities,andofborrowingsandothercurrencyinstrumentsdesignatedashedgesofsuchinvestments,aretakentoothercomprehensiveincome.Whenaforeignoperationissold,theexchangedifferencesarerecognisedintheincomestatementaspartofthegainorlossondisposal.




(t) Relatedparties

Forthepurposesofthesefinancialstatements,partiesareconsideredtoberelatedtotheBankanditssubsidiariesiftheBankanditssubsidiarieshavetheability,directlyorindirectly,tocontrolthepartyorexercisesignificantinfluenceoverthepartyinmakingfinancialandoperatingdecisions,orviceversa,orwheretheBankanditssubsidiariesandthepartyaresubjecttocommoncontrolorcommonsignificantinfluence.Relatedpartiesmaybeindividuals(beingmembersofkeymanagementpersonnel,significantshareholdersand/ortheirclosefamilymembers)orotherentitiesandinclude(i)associatesandjointventuresoftheGroup,(ii)entitieswhichareunderthesignificantinfluenceofrelatedpartiesoftheBankwherethosepartiesareindividuals,and(iii)post-employmentbenefitplanswhichareforthebenefitofemployeesoftheBankorofanyentitythatisarelatedpartyoftheBank.

(u) Segmentreporting

Operatingsegments,andtheamountsofeachsegmentitemreportedinthefinancialstatements,areidentifiedfromthefinancialinformationprovidedregularlytotheBankanditssubsidiaries’mostseniorexecutivemanagementforthepurposesofallocatingresourcesto,andassessingtheperformanceof,theBankanditssubsidiaries’variouslinesofbusinessandgeographicallocations.

(v) Saleandrepurchaseagreements

Wheresecuritiesaresoldsubjecttoacommitmenttorepurchasethematapredeterminedprice(‘repos’),theyremainonthebalancesheetandaliabilityisrecordedinrespectoftheconsiderationreceived.Securitiespurchasedundercommitmentstore-sell(‘reverserepos’)arenotrecognisedonthebalancesheetandtheconsiderationpaidisrecordedin‘Advancestocustomers’or‘Placementswithbanksandotherfinancialinstitutions’asappropriate.Thedifferencebetweenthesaleandrepurchasepriceistreatedasinterestandrecognisedoverthelifeoftheagreement.

Securitiesborrowedarenotrecognisedinthefinancialstatements,unlessthesearesoldtothirdparties,inwhichcasethepurchaseandsalearerecordedwiththegainorlossincludedintradingincome.

3 Changes in accounting policies

Amendments to HKFRSs/IFRSs and new Interpretations

TheHKICPA/IASBhas issuedseveralamendments toHKFRSs/IFRSs thatarefirsteffective for thecurrentaccountingperiodcommencing1January2012.

TheBankanditssubsidiariesadoptedthefollowingamendmentstoexistingaccountingstandardsfrom1January2012.

AmendmentstoHKFRS7/IFRS 7 Financial instruments: Disclosurerequiresadditionaldisclosureswhenanassetistransferredbutisnotderecognised.Theseamendmentsalsorequiredisclosureofassetsthatarederecognisedbutwheretheentitycontinuestohaveacontinuingexposuretotheassetaftersale.Note38(c)providesthedisclosurewithrespecttotransferredassets.

None of the other amendments had a material impact on the Bank and its subsidiaries’ financialstatements.



4 Operating profit

Theoperatingprofitfortheyearisstatedaftertakingintoaccountthefollowing:

2012 2011

HK$’M HK$’M

(a) InterestincomeInterestincomeonlistedsecurities 497 457Interestincomeonunlistedsecurities 2,240 2,501Otherinterestincome 15,612 12,242

Amountshownintheincomestatement 18,349 15,200

Less:interestincomearisingfromtradingassets (265) (194)Less:interestincomeonfinancialassetsdesignatedatfairvalue (161) (166)

Totalinterestincomeonfinancialassetsthatarenotmeasuredatfairvaluethroughprofitorloss 17,923 14,840

OtherinterestincomeincludesinterestincomeonunwindingofdiscountsonloanimpairmentchargesofHK$19million(note16)(2011:HK$23million),andfairvaluegainsofHK$16milliontransferredfromreservesoncashflowhedges(2011:fairvaluelossesofHK$31million).

2012 2011

HK$’M HK$’M

(b) InterestexpenseInterestexpenseoncustomerdeposits,depositsofbanks,

certificatesofdepositissued,debtsecuritiesissued,tradingliabilitiesandfinancialliabilitiesdesignatedatfairvalue 5,697 3,067

Interestexpenseonsubordinatedliabilities 355 410


Less:interestexpensearisingfromtradingliabilities (130) (14)Less:interestexpensearisingfromfinancialliabilitiesdesignated

atfairvalue (38) (7)

Totalinterestexpenseonfinancialliabilitiesthatarenotmeasuredatfairvaluethroughprofitorloss 5,884 3,456



4 Operating profit (continued)

2012 2011

HK$’M HK$’M

(c) NetfeeandcommissionincomeNetfeeandcommissionincome(otherthanamounts

includedindeterminingtheeffectiveinterestrate)arisingfromfinancialassetsorfinancialliabilitiesthatarenotheldfortradingordesignatedatfairvalue–feeandcommissionincome 2,975 2,866–feeandcommissionexpense 173 285

NetfeeandcommissionincomefromtrustandotherfiduciaryactivitieswheretheBankanditssubsidiariesholdorinvestassetsonbehalfofitscustomers–feeandcommissionincome 441 471–feeandcommissionexpense 117 128

2012 2011

HK$’M HK$’M

(d) NettradingincomeGainslesslossesfromdealinginforeigncurrencies 2,209 2,293Gainslesslossesfromtradingsecurities 49 147Gainslesslossesfromotherdealingactivities 821 191


Add:interestincomearisingfromtradingassets 265 194Less:interestexpensearisingfromtradingliabilities (130) (14)

Netincomefromtradinginstruments 3,214 2,811

2012 2011

HK$’M HK$’M

(e) Netgains/(losses)fromfinancialinstrumentsdesignatedatfairvalueNetgains/(losses)asshownintheincomestatement 188 (30)Add:interestincomearisingfromfinancialassetsdesignatedatfairvalue 161 166Less:interestexpensearisingfromfinancialliabilitiesdesignated

atfairvalue (38) (7)

311 129



4 Operating profit (continued)

2012 2011

HK$’M HK$’M

(f) OtheroperatingincomeRentalincomefromoperatingleaseassets 1,070 229Dividendincomefromlistedavailable-for-salesecurities 1 1Dividendincomefromunlistedavailable-for-salesecurities 24 18Gainsondisposaloffixedassets 3 20Net(losses)/gainsondisposaloffinancialinstruments

measuredatamortisedcost (17) 109Net(losses)/gainsonrevaluationofinvestmentproperties(note21) (30) 5Others 111 68

1,162 450

Restated

2012 2011

HK$’M HK$’M

(g) OperatingexpensesStaffcosts–contributionstodefinedcontributionplans 188 166–expenseinrespectofthedefinedbenefitsplans(note30(d)) 17 24–equity-settledshare-basedpaymentexpenses 457 501–salariesandotherstaffcosts 6,031 5,581Depreciation(note21) 753 315Premisesandequipmentexpense,excludingdepreciation–rentalofpremises 713 680–others 396 348Amortisation–otherintangibleassets(note22) 85 93Auditor’sremuneration 17 16Others 4,296 3,644

12,953 11,368

5 Net gains from disposal of available-for-sale securities

2012 2011

HK$’M HK$’M

Netgainstransferredfromreserves 149 307



6 Impairment charges

2012 2011

HK$’M HK$’M

(a) ImpairmentchargesonadvancestobanksandcustomersIndividualimpairmentprovisions(note16)–additions 1,196 803–releases (76) (81)–recoveries (344) (211)

776 511

Portfolioimpairmentcharges(note16) 13 81

789 592

(b) OtherimpairmentchargesChargesforaninterestinanassociate 465 –Chargesforriskparticipationtransactions 583 –Releasesforcontingentliabilities – (7)(Releases)/chargesrelatingtodebtsecuritiesclassifiedasloansand

receivables (5) 148

1,043 141

7 Taxation in the consolidated income statement

(a) Taxationintheconsolidatedincomestatementrepresents:

2012 2011

HK$’M HK$’M

Current taxHongKongprofitstax 1,465 1,321Overseastaxation 46 102Over-provisioninrespectofprioryears (46) (39)

1,465 1,384

Deferred tax (note 27)Origination/reversaloftemporarydifferences 65 190(Over)/under-provisioninrespectofprioryears (7) 45

58 235

1,523 1,619

TheprovisionforHongKongprofitstaxfor2012iscalculatedat16.5%(2011:16.5%)oftheestimatedassessableprofitsfortheyear.Taxationforoverseassubsidiariesischargedattheappropriatecurrentratesoftaxationrulingintherelevantcountries.



7 Taxation in the consolidated income statement (continued)

(b) Reconciliationbetweentaxexpensesandaccountingprofitatapplicabletaxrates:

2012 2011

HK$’M HK$’M


Notionaltaxonprofitbeforetaxation,calculatedatHongKongprofitstaxrateof16.5% 1,610 1,644

Taxeffectofnon-deductibleexpenses 165 86Taxeffectofnon-taxablerevenue (209) (154)(Over)/under-provisioninprioryears (53) 6Taxeffectofdifferenttaxratesofsubsidiariesoperating

inotherjurisdictions 8 32Others 2 5

Actualtaxexpense 1,523 1,619

8 Directors’ remuneration

Directors’remunerationdisclosedpursuanttosection161oftheHongKongCompaniesOrdinanceisasfollows:

Bank

Restated

2012 2011

HK$’M HK$’M

Fees 1 1Salariesandotheremoluments 115 87

116 88

9 Segmental reporting

TheBankanditssubsidiariesmanageitsbusinessesusingtwomainbusinesssegments:

• ConsumerBankingwhichprovidesfinancialservicestocustomersincludinglendinganddeposittakingactivities,creditcardfacilitiesandinvestmentservices;and

• WholesaleBankingwhichprovidesfinancialservicestocorporationsandinstitutions,includinglending and deposit taking activities, structured finance products, syndicated loans, cashmanagement, investmentadvice,distributingfixed incomeandequity investments,brokerageservices,interbankandcapitalmarketactivitiesandproprietarytrading.

Inaddition,certainitemswhichdonotfallwithinthetwomainbusinesssegments,includingunallocatedcentralcostsarereportedin“OtherBanking”.FinancialinformationispresentedinternallytotheBank’sseniormanagementusingthesethreebusinesssegments.



9 Segmental reporting (continued)

TheBankanditssubsidiariescompriseonlyonegeographicalsegmentasover90%ofthebusinessisbasedinHongKong.Geographicalsegmentisclassifiedbythelocationoftheprincipaloperationsofthesubsidiaryor,inthecaseoftheBank,thelocationofthebranchresponsibleforreportingtheresultsoradvancingthefunds.

(a) Segmentresults,assetsandliabilities

Revenueandexpensesareallocatedtothereportablesegmentswithreferencetoincomegeneratedbythosesegmentsandtheexpensesincurredbythosesegmentsorwhichotherwisearisefromthedepreciationoramortisationofassetsattributabletothosesegments.

Consumer

banking

Wholesale

banking

Other

banking

Inter-segment

eliminations

Consolidated

Total

2012 2011 2012 2011 2012 2011 2012 2011 2012 2011

HK$’M HK$’M HK$’M HK$’M HK$’M HK$’M HK$’M HK$’M HK$’M HK$’M

Operating income–Netinterestincome 6,685 5,961 6,673 6,038 (619) (76) 12,739 11,923–Otheroperatingincome 4,175 4,227 8,405 7,071 (6) (17) 12,574 11,281

10,860 10,188 15,078 13,109 (625) (93) 25,313 23,204Operatingexpenses (5,951) (5,442) (6,234) (5,502) 29 53 (12,156) (10,891)

Operatingprofitbeforeimpairment 4,909 4,746 8,844 7,607 (596) (40) 13,157 12,313

Impairmentcharges (739) (552) (168) (250) – (1) (907) (803)

Profitbeforetaxation 4,170 4,194 8,676 7,357 (596) (41) 12,250 11,510

Totalassets 253,230 217,638 683,632 621,646 92,329 85,107 (46,660) (42,112) 982,531 882,279

Segmentliabilities 367,457 323,749 544,964 497,985 69,237 62,473 (46,660) (42,112) 934,998 842,095

(b) Reconciliationofreportablesegmentrevenues,profitbeforetaxation,assetsandliabilities

Revenue

Consolidated

2012 2011

HK$’M HK$’M

Reportablesegmentrevenue 25,313 23,204IncomerelatingtoFinancialMarketproducts (1,521) (1,025)Costoffreefunds 208 203Others (347) (888)

Totaloperatingincome 23,653 21,494



9 Segmental reporting (continued)

(b) Reconciliation of reportable segment revenues, profit before taxation, assets and liabilities(continued)

Consolidated

2012 2011

HK$’M HK$’M

Profit before taxationReportablesegmentprofitbeforetaxation 12,250 11,510IncomerelatingtoFinancialMarketproducts (1,521) (1,025)Costoffreefunds 208 203Reallocationsofimpairmentcharges (947) (55)Others (229) (670)


Consolidated

2012 2011

HK$’M HK$’M

AssetsReportablesegmentassets 982,531 882,279Assetsofgroupcompaniesnotincludedinconsolidatedtotalassets (2,221) (3,264)Others (40,636) (25,161)

Totalassets 939,674 853,854

Consolidated

2012 2011

HK$’M HK$’M

LiabilitiesReportablesegmentliabilities 934,998 842,095Liabilitiesofgroupcompaniesnotincludedinconsolidatedtotalliabilities (1,928) (2,701)Others (40,167) (26,041)

Totalliabilities 892,903 813,353

Incomeandprofitbeforetaxationrecognisedintheconsolidatedfinancialstatementsrepresentanarm’slengthcompensation for theservicesprovidedand risksborne.For internalmanagement reportingpurposes,incomeandprofitbeforetaxationareallocatedonaglobalperspective.Inaddition,forinternalmanagementreportingpurposes,achargeisallocatedtoreportablesegmentsfortheuseofinterest-freefunds.

Reportablesegmentassetsandliabilities includeassetsandliabilitieswhicharenotbookedontheBankanditssubsidiaries’balancesheetsbutwhichcontributetothereportablesegment’sincomeandprofitbeforetaxation.



10 Cash and balances with banks, central banks and other financial institutions

Consolidated Bank

2012 2011 2012 2011

HK$’M HK$’M HK$’M HK$’M

Cashinhand 1,833 1,737 1,821 1,714Balanceswithcentralbanks 12,600 9,036 12,600 9,036Balanceswithbanksandother

financialinstitutions 6,059 11,004 5,910 10,926

20,492 21,777 20,331 21,676

11 Placements with banks and other financial institutions

(a) Placementswithbanksandotherfinancialinstitutions

Consolidated Bank

2012 2011 2012 2011


Grossplacementswithbanksandotherfinancialinstitutions–maturingwithinonemonth 47,206 53,814 47,197 53,778–maturingbetweenonemonthtooneyear 95,154 81,198 95,153 81,198–maturingbetweenoneyeartofiveyears 1,222 1,504 1,222 1,504

143,582 136,516 143,572 136,480Less:impairmentchargesindividuallyassessed

(note16(b)) (1) (3) (1) (3)

143,581 136,513 143,571 136,477

Ofwhich:

Balancesundercollateralisedreverserepurchaseagreements 2,362 10,771 2,362 10,771

(b) Impairedplacementswithbanksandotherfinancialinstitutions

Consolidated and Bank

2012 2011

HK$’M HK$’M

Grossimpairedadvancestobanks 44 64Impairmentcharges–individuallyassessed (1) (3)

43 61

Grossimpairedadvancestobanksasa%ofgrossadvancestobanks 0.03% 0.05%

Thereisnocollateralheldagainstimpairedadvancestobanks.



12 Hong Kong SAR Government certificates of indebtedness and currency notes in circulation

TheHongKongSpecialAdministrativeRegioncurrencynotesincirculationaresecuredbythedepositoffundsinrespectofwhichtheGovernmentofHongKongSpecialAdministrativeRegioncertificatesofindebtednessareheld.

13 Trading assets

Consolidated Bank

2012 2011 2012 2011


Tradingsecurities 27,651 34,381 27,651 34,381Placementswithbanksandotherfinancial

institutions – 21 – 21Advancestocustomers 186 185 186 185Positivefairvaluesoftradingderivatives 577 790 573 790

28,414 35,377 28,410 35,377


2012 2011

HK$’M HK$’M

Tradingsecurities:Treasurybills(includingExchangeFundBills) 8,702 13,738Certificatesofdepositheld 1,079 2,120Debtsecurities 17,369 18,513Equitysecurities 501 10

27,651 34,381

Issuedby:Centralgovernmentsandcentralbanks 24,270 30,360Publicsectorentities 16 71Banksandotherfinancialinstitutions 1,446 2,956Corporateentities 1,919 994

27,651 34,381

Byplaceoflisting:ListedinHongKong 14,563 13,827ListedoutsideHongKong 3,591 2,999

18,154 16,826Unlisted 9,497 17,555

27,651 34,381



14 Financial assets designated at fair value


2012 2011

HK$’M HK$’M

Debtsecurities 3,216 4,275

Issuedby:Corporateentities 3,216 4,275

Byplaceoflisting:ListedoutsideHongKong 2,268 3,216Unlisted 948 1,059

3,216 4,275

Theabovefinancialassetsdesignatedatfairvaluerepresentcertaindebtsecuritieswithembeddedderivativesthatarenotseparatelyrecognised.

15 Advances to customers

(a) Advancestocustomers

Consolidated

2012 2011

HK$’M HK$’M

Grossadvancestocustomers 406,222 379,110Tradebills 2,857 11,787

409,079 390,897Less:Impairmentcharges

–individuallyassessed(note16(a)) (494) (580)–collectivelyassessed(note16(a)) (567) (554)

408,018 389,763

Ofwhich:

Balancesundercollateralisedreverserepurchaseagreementsandsecuritiesborrowingtransactions 1,072 2,327



15 Advances to customers (continued)

(a) Advancestocustomers(continued)

Bank

2012 2011

HK$’M HK$’M

Grossadvancestocustomers 393,472 366,712Tradebills 2,857 11,787

396,329 378,499Less:Impairmentcharges

–individuallyassessed(note16(a)) (489) (578)–collectivelyassessed(note16(a)) (454) (444)

395,386 377,477

Ofwhich:

Balancesundercollateralisedreverserepurchaseagreementsandsecuritiesborrowingtransactions 1,072 2,327

(b) Impairedadvancestocustomers

Consolidated

2012 2011

HK$’M HK$’M

Grossimpairedadvancestocustomers 1,352 971Impairmentcharges–individuallyassessed (494) (580)

858 391

Grossimpairedadvancestocustomersasa%ofgrossadvancestocustomers 0.33% 0.25%

Fairvalueofcollateralheldagainstthecoveredportionofimpairedadvancestocustomers 749 577

Coveredportionofimpairedadvancestocustomers 307 249Uncoveredportionofimpairedadvancestocustomers 1,045 722




(b) Impairedadvancestocustomers(continued)

Bank

2012 2011

HK$’M HK$’M

Grossimpairedadvancestocustomers 1,325 962Impairmentcharges–individuallyassessed (489) (578)

836 384

Grossimpairedadvancestocustomersasa%ofgrossadvancestocustomers 0.33% 0.25%

Fairvalueofcollateralheldagainstthecoveredportionofimpairedadvancestocustomers 729 577

Coveredportionofimpairedadvancestocustomers 298 249Uncoveredportionofimpairedadvancestocustomers 1,027 713

Thecoveredportionofimpairedadvancestocustomersrepresentstheamountofcollateralheldagainstoutstandingbalances.Itdoesnotincludeanycollateralheldoverandaboveoutstandingexposures.




(c) Netinvestmentinfinanceleases

Advancestocustomersincludethenetinvestmentinequipmentleasedtocustomersunderfinanceleases.Thetotalminimumleasepaymentsreceivableunderfinanceleasesandtheirpresentvaluesattheyearend,areasfollows:

Consolidated

2012 2011

Present

value of

the minimum

lease

payments

receivable

Interest

income

relating

to future

periods

Total

minimum

lease

payments

Present

value of

the minimum

lease

payments

receivable

Interest

income

relating

to future

periods

Total

minimum

lease

payments

HK$’M HK$’M HK$’M HK$’M HK$’M HK$’M

Within1year 7 – 7 58 2 60After1yearbutwithin5years – – – 12 1 13After5years – – – 1 – 1

7 – 7 71 3 74

Impairmentcharges:–individuallyassessed – –

Netinvestmentinfinanceleases 7 71

Bank

2012 2011

Present

value of

the minimum

lease

payments

receivable

Interest

income

relating

to future

periods

Total

minimum

lease

payments

Present

value of

the minimum

lease

payments

receivable

Interest

income

relating

to future

periods

Total

minimum

lease

payments


Within1year – – – 1 – 1After1yearbutwithin5years – – – – – –After5years – – – – – –

– – – 1 – 1

Impairmentcharges:–individuallyassessed – –

Netinvestmentinfinanceleases – 1



16 Movement in impairment charges on advances to banks and customers

(a) Advancestocustomers

Consolidated

2012

Individually

assessed

Collectively

assessed Total

HK$’M HK$’M HK$’M

At1January2012 580 554 1,134Amountswrittenoff (1,189) – (1,189)Recoveriesofadvanceswrittenoffinpreviousyears 344 – 344Netchargetotheincomestatement(note6(a)) 776 13 789Unwindofdiscountonloanimpairmentcharges(note4(a)) (17) – (17)

At31December2012(note15(a)) 494 567 1,061

2011

Individually

assessed

Collectively

assessed Total


At1January2011 775 473 1,248Amountswrittenoff (893) – (893)Recoveriesofadvanceswrittenoffinpreviousyears 211 – 211Netchargetotheincomestatement(note6(a)) 508 81 589Unwindofdiscountonloanimpairmentcharges(note4(a)) (21) – (21)




16 Movement in impairment charges on advances to banks and customers (continued)

(a) Advancestocustomers(continued)

Bank

2012

Individually

assessed

Collectively

assessed Total


At1January2012 578 444 1,022Amountswrittenoff (889) – (889)Recoveriesofadvanceswrittenoffinpreviousyears 294 – 294Netchargetotheincomestatement 523 10 533Unwindofdiscountonloanimpairmentcharges (17) – (17)

At31December2012(note15(a)) 489 454 943

2011

Individually

assessed

Collectively

assessed Total


At1January2011 774 374 1,148Amountswrittenoff (688) – (688)Recoveriesofadvanceswrittenoffinpreviousyears 180 – 180Netchargetotheincomestatement 333 70 403Unwindofdiscountonloanimpairmentcharges (21) – (21)


(b) Placementswithbanksandotherfinancialinstitutions

ConsolidatedandBank

Individually assessed

2012 2011

HK$’M HK$’M

At1January 3 2Chargetotheincomestatement(note6(a)) – 3Unwindofdiscountonloanimpairmentcharges(note4(a)) (2) (2)

At31December(note11(a)) 1 3



17 Investment securities

Consolidated Bank

2012 2011 2012 2011


Available-for-salesecuritiesTreasurybills(includingExchangeFundBills) 33,507 34,516 33,507 34,516Certificatesofdepositheld 31,756 23,787 31,756 23,787Debtsecurities 99,706 66,320 99,706 66,320Equityshares 526 423 526 423Less:impairmentcharges (6) (6) (6) (6)

165,489 125,040 165,489 125,040

Loansandreceivables–Debtsecurities 8,916 10,084 8,849 8,253Less:impairmentcharges (26) (34) (26) (30)

8,890 10,050 8,823 8,223

174,379 135,090 174,312 133,263

Issuedby:Available-for-salesecurities

Centralgovernmentsandcentralbanks 56,040 42,689 56,040 42,689Publicsectorentities 3,162 3,143 3,162 3,143Banksandotherfinancialinstitutions 88,744 71,042 88,744 71,042Corporateentities 17,543 8,166 17,543 8,166

165,489 125,040 165,489 125,040

Loansandreceivables–DebtsecuritiesBanksandotherfinancialinstitutions – 1,715 – 1,715Corporateentities 8,890 8,335 8,823 6,508

8,890 10,050 8,823 8,223

174,379 135,090 174,312 133,263



17 Investment securities (continued)

Consolidated Bank

2012 2011 2012 2011


Byplaceoflisting:Available-for-salesecurities

ListedinHongKong 4,581 2,540 4,581 2,540ListedoutsideHongKong 66,327 34,104 66,327 34,104

70,908 36,644 70,908 36,644Unlisted 94,581 88,396 94,581 88,396

165,489 125,040 165,489 125,040

Loansandreceivables–DebtsecuritiesListedoutsideHongKong 1,519 – 1,519 –Unlisted 7,371 10,050 7,304 8,223

8,890 10,050 8,823 8,223

174,379 135,090 174,312 133,263

18 Amounts due from/to immediate holding company, fellow subsidiaries and subsidiaries of the Bank

Duringtheyear,theBankanditssubsidiariesenteredintotransactionswithrelatedpartiesintheordinarycourseofitsbankingbusinessincludinglending,acceptanceandplacementofinter-bankdeposits,correspondentbankingtransactions,bankingoperation/outsourcingactivitiesandoff-balancesheettransactions.

TheBankhasenteredintovariousriskparticipationtransactionswithrelatedcompanies.Forfundedriskparticipationtransactions,theBankundertakestodepositanamountequaltotheparticipatingbalanceswiththerelatedcompanies. Whenthere isadefault,undertheundertakingclauseoftheagreement,theBankisobligatedtohonortheriskparticipationbytransferringsuchdepositstotherelatedcompanies.

Duringtheyear,HK$583millionofsuchdepositshasbeentransferredtotherelatedcompanies.Asat31December2012,theamountduefromgroupcompaniesshownonthebalancesheetisstatednetofHK$1,585millioninrespectofsuchobligations.



18 Amounts due from/to immediate holding company, fellow subsidiaries and subsidiaries of the Bank (continued)

Consolidated

Theamountsofmaterialtransactionsduringtheyeararesetoutbelow:

Immediate holding

company Fellow subsidiaries

2012

Restated

2011 2012

Restated

2011


Operatingincome 560 655 214 172

Operatingexpenses 1,583 1,163 569 538

Theamountsduefrom/toimmediateholdingcompanyandfellowsubsidiariesstatedontheconsolidatedbalancesheetincludedthefollowing:

2012 2011

Immediate

holding

company

Fellow

subsidiaries

Immediate

holding

company

Fellow

subsidiaries


Amounts due from:Cashandbalanceswithbanksandother

financialinstitutions 2,156 4,271 3,712 3,148Placementswithbanksandotherfinancial

institutions 45,952 14,585 37,190 11,708Tradingassets

–Unlisteddebtsecurities – – 17 ––Positivefairvaluesoftradingderivatives 6,097 81 2,569 103

Financialassetsdesignatedatfairvalue–Listeddebtsecurities – 98 – 221

Investmentsecurities–Listedavailable-for-saledebtsecurities – 1,305 – 2,119

Otherassets–Positivefairvaluesofhedgingderivatives 911 – 802 99–Others 3,615 251 6,667 133

58,731 20,591 50,957 17,531




Consolidated(continued)

2012 2011

Immediate

holding

company

Fellow

subsidiaries

Immediate

holding

company

Fellow

subsidiaries


Amounts due to:Depositsandbalancesofbanksandother

financialinstitutions 9,681 2,995 4,767 2,024Depositsfromcustomers – 5 – 5Tradingliabilities:

–Negativefairvaluesoftradingderivatives 5,642 76 3,377 12Financialliabilitiesdesignatedatfairvalue:

–Structuredcustomerdeposits 186 – – –Debtsecuritiesinissue – 1,144 – 1,084Otherliabilities

–Negativefairvaluesofhedgingderivatives 1,654 264 1,358 16–Others 2,443 633 3,521 1,932

19,606 5,117 13,023 5,073

Thecontractualamountsofcontingentliabilitiesandcommitmentstotheimmediateholdingcompanyandfellowsubsidiariesaresetoutbelow:

2012 2011

Immediate

holding

company

Fellow

subsidiaries

Immediate

holding

company

Fellow

subsidiaries


Financialguaranteesandothercreditrelatedcontingentliabilities 3,529 5 11,943 108

Loancommitmentsandothercreditrelatedcommitments 1,550 50,402 2,004 41,330

Bank

Theamountsofmaterialtransactionsduringtheyeararesetoutbelow:

Immediate holding company Fellow subsidiaries

Subsidiaries of the Bank

2012

Restated

2011 2012

Restated

2011 2012 2011


Operatingincome 551 622 223 218 1,217 1,053

Operatingexpenses 1,583 1,163 569 538 24 –




Bank(continued)

Theamountsduefrom/toimmediateholdingcompany,fellowsubsidiariesandsubsidiariesoftheBankstatedonthebalancesheetincludedthefollowing:

2012 2011Immediate

holdingcompany

Fellowsubsidiaries

Subsidiariesof the Bank

Immediateholding

companyFellow

subsidiariesSubsidiariesof the Bank


Amounts due from:Cashandbalanceswithbanksandother

financialinstitutions 1,255 4,195 – 3,182 3,000 –Placementswithbanksandotherfinancial

institutions 45,952 14,584 7,998 37,190 11,708 7,311Tradingassets

–Unlisteddebtsecurities – – – 17 – ––Positivefairvaluesoftradingderivatives 6,093 81 – 2,566 103 –

Financialassetsdesignatedatfairvalue–Listeddebtsecurities – 98 – – 221 –

Investmentsecurities–Listedavailable-for-saledebtsecurities – 1,305 – – 2,119 –

Advancestocustomers – – 23,168 – – 10,332Otherassets

–Positivefairvaluesofhedgingderivatives 911 – – 802 99 ––Others 3,535 197 2,527 6,522 120 1,538

57,746 20,460 33,693 50,279 17,370 19,181

Amounts due to:Depositsandbalancesofbanksandother

financialinstitutions 9,681 2,995 722 4,767 2,024 442Depositsfromcustomers – 5 171 – 5 325Tradingliabilities:

–Negativefairvaluesoftradingderivatives 5,642 76 – 3,377 12 –Financialliabilitiesdesignatedatfairvalue:

–Structuredcustomerdeposits 186 – – – – –Debtsecuritiesinissue – 1,144 – – 1,084 –Otherliabilities

–Negativefairvaluesofhedgingderivatives 1,654 264 – 1,358 16 ––Others 1,961 524 1,124 2,864 461 1,124

19,124 5,008 2,017 12,366 3,602 1,891

Thecontractualamountsofcontingentliabilitiesandcommitmentstotheimmediateholdingcompany,fellowsubsidiariesandsubsidiariesoftheBankaresetoutbelow:

2012 2011Immediate

holdingcompany

Fellowsubsidiaries

Subsidiariesof the Bank

Immediateholding

companyFellow

subsidiariesSubsidiariesof the Bank


Financialguaranteesandothercreditrelatedcontingentliabilities 3,529 5 83 11,943 108 131

Loancommitmentsandothercreditrelatedcommitments 1,550 50,402 14,748 2,004 41,330 21,479



19 Investments in subsidiaries of the Bank

Bank

2012 2011

HK$’M HK$’M

Unlistedshares,atcostlessimpairmentcharges,ifany 1,100 1,096

The following listcontainsonly theparticularsofsubsidiarieswhichprincipallyaffected the results,assetsorliabilitiesoftheBankanditssubsidiaries.

Name of companyPlace of

incorporation

Particulars of issued and paid up capital

and securities

Proportion ofownership

interest held by the Bank

Principalactivity

StandardCharteredAPRLimited

UnitedKingdom 21,971,715ordinarysharesofUS$1each

100% Investmentholdings

StandardCharteredSecurities(HongKong)Limited

HongKong 1,000,000ordinarysharesofHK$10each

100% Equitycapitalmarkets,

corporatefinanceandinstitutional

brokerage

PrimeCreditLimited(“PCL”)

HongKong 400,000ordinarysharesofHK$100each

100% Provisionofbankingand

relatedfinancialservices

StandardCharteredLeasingGroupLimited

HongKong 30,000ordinarysharesofUS$1each

100% Provisionofleasingservices

20 Interest in associates

Consolidated

2012 2011

HK$’M HK$’M

Shareofnetassets 5,849 4,902Goodwill 1,717 1,717Less:Impairmentlosses (465) –

7,101 6,619

Bank

2012 2011

HK$’M HK$’M

Unlistedinvestments,atcostlessimpairmentlosses,ifany 3,222 3,168Listedinvestment,atcostlessimpairmentlosses,ifany 837 1,646

4,059 4,814



20 Interest in associates (continued)

TheassociatedcompaniesoftheBankanditssubsidiariesare:

Name of associate

Place of establishment and operation

Particulars of issued and

paid up capital

Proportion of ownership

interestPrincipal

activity

AsiaCommercialJointStockBank(“ACB”)

Vietnam 937,696,506ordinarysharesofVND10,000each



ChinaBohaiBankCompanyLimited(“Bohai”)

ThePeople’sRepublicofChina

13,855,000,000ordinarysharesofRMB1each



MerchantSolutionsPrivateLimited(“MS”)

Singapore 560,000“A”sharesand

440,000“B”shares

44% Creditcardmerchantacquiring

business

ShenzhenPrimeCreditLimited

ThePeople’sRepublicofChina

RMB112,660,000ordinaryshares

30% Provisionofconsumerfinancing

services

ShareholdingsinassociatedcompaniesincludealistedinvestmentofHK$2,016million(2011:HK$2,457million).Atthebalancesheetdate,theinvestmentbasedonquotedmarketpriceswasvaluedatHK$862million(2011:HK$1,142million).Impairmenttestingontheinvestmenthasbeencarriedoutusingavalue-in-usemethodologyresultinginanimpairmentchargeofHK$465million.

TheBankanditssubsidiaries’investmentinACBislessthan20%butithasbeenaccountedforasanassociate,astheBankhasrepresentationontheBoardofDirectorsandalsothroughaTechnicalSupportandAssistanceAgreement,whichincludesthesecondmentofstafftoACB,isabletoexercisesignificantinfluenceoverthecompany’smanagement,financialandoperatingpolicies.

Inrespectoftheyearended31December2012,theshareoftheresultsofMSandACBwasincludedinthesefinancialstatementsbasedonaccountsdrawnupto30September2012,buttakingintoaccountanyeventsortransactionsinthesubsequentperiodfrom1October2012to31December2012thatwouldmateriallyaffecttheresults.Bohai’sresultwasincludedinthefinancialstatementsbasedonaccountsdrawnupto30November2012.TheBankanditssubsidiarieshavetakenadvantageoftheprovisioncontainedinHKAS28/IAS28“InvestmentsinAssociates”wherebyitispermittedtoincludetheattributableshareofassociates’resultsbasedonaccountsdrawnuptoanon-coterminousperiodandwherethedifferenceisnotgreaterthanthreemonths.

TheBankanditssubsidiaries’unrecognisedshareofprofitsofassociatesfortheyearisHK$12million(2011:HK$7million).Wherethereareaccumulatedunrecognisedshareofassociates’losses,subsequentprofitsearnedarenotrecogniseduntilpreviouslyunrecognisedlossesareextinguished.TheBankanditssubsidiaries’unrecognisedshareoflossesofassociatesnetofunrecognisedprofitsonacumulativebasisisHK$66million(2011:HK$78million).



20 Interest in associates (continued)

Summary of financial information of associates

Assets Liabilities Equity Revenue ProfitHK$’M HK$’M HK$’M HK$’M HK$’M

2012100percent 615,010 584,891 30,119 20,841 4,690EffectiveinterestoftheBank

anditssubsidiaries 118,905 113,056 5,849 3,689 893

Assets Liabilities Equity Revenue Profit

HK$’M HK$’M HK$’M HK$’M HK$’M

2011100percent 439,969 414,542 25,427 16,501 3,115EffectiveinterestoftheBank

anditssubsidiaries 82,933 78,031 4,902 2,844 570

21 Fixed assets

Consolidated

2012Buildings and

leasehold land held for

own use

Equipment, furniture

& fixtures

Operatinglease

assets Sub-totalInvestment properties

Total fixed assets


Costorvaluation:At1January2012 2,958 488 7,359 10,805 586 11,391Additions 119 67 13,843 14,029 7 14,036Disposalsandwrite-offs (54) (115) – (169) (17) (186)Surplusonrevaluationcredited

topropertyrevaluationreserve 2 – – 2 – 2Reclassifications (79) 73 – (6) 6 –Fairvalueadjustments(note4(f)) – – – – (30) (30)

At31December2012 2,946 513 21,202 24,661 552 25,213

Representing:Cost 2,946 513 21,202 24,661 – 24,661Valuation – – – – 552 552

2,946 513 21,202 24,661 552 25,213

Accumulateddepreciation:At1January2012 535 241 93 869 – 869Chargefortheyear(note4(g)) 96 143 514 753 – 753Attributabletoassetssoldor

writtenoff (40) (115) – (155) – (155)

At31December2012 591 269 607 1,467 – 1,467

Netbookvalue:At31December2012 2,355 244 20,595 23,194 552 23,746



21 Fixed assets (continued)


2011

Buildings and

leasehold

land held for

own use

Equipment,

furniture

& fixtures

Operating

lease

assets Sub-total

Investment

properties

Total

fixed assets


Costorvaluation:At1January2011 2,862 389 – 3,251 541 3,792Additions 150 180 7,359 7,689 110 7,799Disposalsandwrite-offs (52) (83) – (135) (70) (205)Reclassifications (2) 2 – – – –Fairvalueadjustments(note4(f)) – – – – 5 5

At31December2011 2,958 488 7,359 10,805 586 11,391

Representing:Cost 2,958 488 7,359 10,805 – 10,805Valuation – – – – 586 586

2,958 488 7,359 10,805 586 11,391

Accumulateddepreciation:At1January2011 492 197 – 689 – 689Chargefortheyear(note4(g)) 95 127 93 315 – 315Attributabletoassetssoldor

writtenoff (52) (83) – (135) – (135)

At31December2011 535 241 93 869 – 869

Netbookvalue:At31December2011 2,423 247 7,266 9,936 586 10,522




Bank

2012

Buildings and

leasehold

land held for

own use

Equipment,

furniture

& fixtures Sub-total

Investment

properties

Total

fixed assets


Costorvaluation:At1January2012 2,694 456 3,150 531 3,681Additions 116 48 164 – 164Disposalsandwrite-offs (40) (110) (150) – (150)Reclassifications (71) 71 – – –Fairvalueadjustments – – – (28) (28)

At31December2012 2,699 465 3,164 503 3,667

Representing:Cost 2,699 465 3,164 – 3,164Valuation – – – 503 503

2,699 465 3,164 503 3,667

Accumulateddepreciation:At1January2012 527 235 762 – 762Chargefortheyear 91 133 224 – 224Attributabletoassetssoldor

writtenoff (39) (110) (149) – (149)

At31December2012 579 258 837 – 837

Netbookvalue:At31December2012 2,120 207 2,327 503 2,830




Bank(continued)

2011

Buildings and

leasehold

land held for

own use

Equipment,

furniture

& fixtures Sub-total

Investment

properties

Total

fixed assets


Costorvaluation:At1January2011 2,686 372 3,058 541 3,599Additions 42 157 199 106 305Disposalsandwrite-offs (32) (75) (107) (106) (213)Reclassifications (2) 2 – – –Fairvalueadjustments – – – (10) (10)

At31December2011 2,694 456 3,150 531 3,681

Representing:Cost 2,694 456 3,150 – 3,150Valuation – – – 531 531

2,694 456 3,150 531 3,681

Accumulateddepreciation:At1January2011 473 188 661 – 661Chargefortheyear 86 122 208 – 208Attributabletoassetssoldor

writtenoff (32) (75) (107) – (107)

At31December2011 527 235 762 – 762

Netbookvalue:At31December2011 2,167 221 2,388 531 2,919




Buildings and leasehold land held for own use:

Consolidated Bank

2012 2011 2012 2011


LeaseholdinHongKong,atcost–long-termleases 33 33 – ––medium-termleases 2,044 2,114 2,032 2,095–short-termleases 88 72 88 72

2,165 2,219 2,120 2,167

FreeholdoutsideHongKong,atcost 190 204 – –

2,355 2,423 2,120 2,167

Investment properties:

Consolidated Bank

2012 2011 2012 2011


LeaseholdinHongKong,atfairvalue–medium-termlease 8 – – –FreeholdoutsideHongKong,atfairvalue 544 586 503 531

552 586 503 531

Investmentpropertieswere revaluedasat31December2012onanopenmarketvaluebasis.Thevaluationwascarriedoutbyanindependentfirm,CBRELimited,whichhasamongitsstaff,membersoftheRoyalInstituteofCharteredSurveyorswithrecentexperienceinthelocationandcategoryofthepropertybeingvalued.

Operating lease assets:

Assetsleasedtocustomersunderoperatingleasesconsistofcommercialaircraftandvessels.At31December,thetotalfutureminimumleasereceivablesunderoperatingleasesareasfollows:

Consolidated

2012 2011

HK$’M HK$’M

Within1year 2,057 747After1yearbutwithin5years 5,906 2,807After5years 9,992 4,486

17,955 8,040



22 Goodwill and intangible assets

Consolidated

2012

Capitalised

software

and other

intangible assets Goodwill Total


Cost:At1January2012 381 1,507 1,888Additions 165 – 165Disposalsandwrite-offs (65) – (65)

At31December2012 481 1,507 1,988

Accumulatedamortisation:At1January2012 147 – 147Chargefortheyear(note4(g)) 85 – 85Attributabletointangibleassetssoldorwrittenoff (65) – (65)

At31December2012 167 – 167

Carryingamount:At31December2012 314 1,507 1,821

2011

Capitalised

software

and other



Cost:At1January2011 373 1,507 1,880Additions 115 – 115Disposalsandwrite-offs (107) – (107)

At31December2011 381 1,507 1,888

Accumulatedamortisation:At1January2011 159 – 159Chargefortheyear(note4(g)) 93 – 93Attributabletointangibleassetssoldorwrittenoff (105) – (105)

At31December2011 147 – 147

Carryingamount:At31December2011 234 1,507 1,741



22 Goodwill and intangible assets (continued)

Bank

2012

Capitalised

software

and other



Cost:At1January2012 298 729 1,027Additions 165 – 165Disposalsandwrite-offs (65) – (65)

At31December2012 398 729 1,127

Accumulatedamortisation:At1January2012 106 – 106Chargefortheyear 75 – 75Attributabletointangibleassetssoldorwrittenoff (65) – (65)

At31December2012 116 – 116

Carryingamount:At31December2012 282 729 1,011

2011

Capitalised

software

and other



Cost:At1January2011 280 729 1,009Additions 115 – 115Disposalsandwrite-offs (97) – (97)

At31December2011 298 729 1,027

Accumulatedamortisation:At1January2011 123 – 123Chargefortheyear 80 – 80Attributabletointangibleassetssoldorwrittenoff (97) – (97)

At31December2011 106 – 106

Carryingamount:At31December2011 192 729 921



22 Goodwill and intangible assets (continued)

Impairmenttestsforcash-generatingunitscontaininggoodwill

GoodwillisallocatedtotheBankanditssubsidiaries’cash-generatingunits(“CGUs”)asfollows:

Consolidated Bank

2012 2011 2012 2011


Lending 611 611 611 611PrivateBanking 118 118 118 118StandardCharteredSecurities(HongKong)Limited 253 253 – –PrimeCreditLimited(“PCL”) 525 525 – –

1,507 1,507 729 729

Therecoverableamountsof theCGUsaredeterminedbasedonvalue inusecalculations.Thekeyassumptionsandapproachtodeterminingvalueinusecalculations,assetoutbelow,aresolelyestimatesfor the purpose of assessing impairment on acquired goodwill. These calculations use cash flowprojections based on budgets and forecasts approved by management covering one year andextrapolatedforafurther19yearsusingsteadygrowthratesof4.2percent(2011:4.3percent).

Inassessingimpairmentofgoodwill,theBankanditssubsidiariesassumedgrowthatasteadyrateinlinewithlong-termforecastGDPgrowth.Adiscountrateof11.8percent(2011:18.0percent)wasused.

23 Other assets

Consolidated Bank

2012 2011 2012 2011


Prepaymentsandaccruedincome 3,012 2,480 2,921 2,306Sundrydebtors 3,190 2,222 2,965 1,990Acceptancesandendorsements 4,839 4,777 4,839 4,777Positivefairvaluesofhedgingderivatives – 56 – 56Unsettledtradesandothers 5,960 2,431 3,681 1,849

17,001 11,966 14,406 10,978



24 Deposits from customers

Consolidated Bank

2012 2011 2012 2011


Currentaccounts 101,131 96,528 101,131 96,528Savingsaccounts 373,620 318,359 373,620 318,359Time,callandnoticedeposits 257,669 252,626 256,567 252,111Depositsandbalancesofcentralbanks 24,169 5,427 24,169 5,427

756,589 672,940 755,487 672,425

25 Debt securities in issue


2012 2011

HK$’M HK$’M

Certificatesofdeposit,measuredatamortisedcost 10,006 13,265

26 Financial liabilities designated at fair value


2012 2011

HK$’M HK$’M

Structuredcustomerdeposits 3,574 2,615Debtsecuritiesissued 38 872

3,612 3,487

TheBankdesignatescertainfinancialliabilitiesatfairvaluewhereeithertheliabilities:

– havefixedratesofinterestandinterestrateswapsorotherinterestrelatedderivativeshavebeentransactedwiththeintentionofsignificantlyreducinginterestraterisk;or

– areexposedtoequitypriceriskorforeigncurrencyriskandderivativeshavebeentransactedwiththeintentionofsignificantlyreducingexposuretomarketchanges;

At31December2012,thecontractualamountpayableatmaturityofthesefinancialliabilitiesexceededthecarryingamountbyHK$30million(2011:HK$56million).Thischangeisattributabletochangesinmarketrates.



27 Taxation in the balance sheet

Deferredtaxassetsandliabilities:

The components of gross deferred tax (assets)/liabilities recognised in the balance sheet and the movements during the year are as follows:

Consolidated

Depreciation

allowances

in excess

of related

depreciation

Impairment

losses on

financial

assets

Available-

for-sale

securities Others Total


2012

Deferredtaxarisingfrom:At1January2012 53 (103) (167) (97) (314)Charge/(release)toincomestatement

(note7(a)) 168 2 – (112) 58Chargetoreserves – – 207 3 210

At31December2012 221 (101) 40 (206) (46)

2011

At1January2011 (3) (78) 11 (263) (333)Charge/(release)toincomestatement

(note7(a)) 56 (25) – 204 235Releasetoreserves – – (178) (41) (219)Others – – – 3 3

At31December2011 53 (103) (167) (97) (314)



27 Taxation in the balance sheet (continued)

Deferredtaxassetsandliabilities(continued):

The components of gross deferred tax (assets)/liabilities recognised in the balance sheet and themovementsduringtheyearareasfollows:(continued)

Bank

Depreciation

allowances

in excess

of related

depreciation

Impairment

losses on

financial

assets

Available-

for-sale

securities Others Total


2012

Deferredtaxarisingfrom:At1January2012 12 (74) (167) (46) (275)Charge/(release)toincomestatement 17 (1) – 11 27Chargetoreserves – – 207 3 210

At31December2012 29 (75) 40 (32) (38)

2011

At1January2011 (3) (62) 11 (258) (312)Charge/(release)toincomestatement 15 (12) – 252 255Releasetoreserves – – (178) (40) (218)

At31December2011 12 (74) (167) (46) (275)

Consolidated Bank

2012 2011 2012 2011


Analysedby:Netdeferredtaxassetrecognisedonthe

balancesheet (89) (319) (38) (275)Netdeferredtaxliabilityrecognisedonthe

balancesheet 43 5 – –

(46) (314) (38) (275)



28 Trading liabilities

Consolidated Bank

2012 2011 2012 2011


Shortpositionsinsecurities 22,229 23,855 22,229 23,855Negativefairvaluesoftradingderivatives 839 783 836 783

23,068 24,638 23,065 24,638

29 Other liabilities

Consolidated Bank

2012 2011 2012 2011


Accrualsanddeferredincome 5,014 4,372 4,603 3,960Provisionforliabilitiesandcharges 230 1,082 230 1,082Acceptancesandendorsements 4,839 4,777 4,839 4,777Unsettledtradesandothers 8,121 9,544 7,533 9,168

18,204 19,775 17,205 18,987

30 Employee retirement benefits

TheBankanditssubsidiariesmadecontributionstotwodefinedbenefitretirementschemes,namelyStandardCharteredBankHongKongRetirementScheme(“SCBScheme”)andCazenoveHongKongRetirement Scheme (“Cazenove Scheme”) which covered 16% (2011: 18%) of the Bank and itssubsidiaries’employees.Theschemesareadministeredbytrustees,withtheassetsheldseparatelyfromthoseoftheBankanditssubsidiaries.

InDecember2011, theBankclosed theCazenoveScheme.Members’benefitsaccruedunder theCazenoveSchemewere transferred to theSCBScheme inDecember2011.Theassetsunder theCazenoveSchemewereredeemedandalsotransferredtotheSCBSchemeinDecember2011.

(a) Theamountsrecognisedintheconsolidatedbalancesheetareasfollows:

SCB SchemeCazenove Scheme

2012 2011 2011


Fairvalueofplanassets 2,069 1,906 –Presentvalueofwhollyorpartlyfundedobligations (2,309) (2,129) –

Netliabilityrecognisedinthebalancesheet(includedin“Otherliabilities”) (240) (223) –



30 Employee retirement benefits (continued)

(b) Movementsinthepresentvalueofthedefinedbenefitobligations:


2012 2011 2011


Atthebeginningoftheyear 2,129 1,807 56Currentservicecost 106 96 5Interestcost 30 46 2Benefitspaid (135) (110) (2)Actuariallosses 179 222 7Transferin/(out) – 68 (68)

Attheendoftheyear 2,309 2,129 –

(c) Movementsinthefairvalueofplanassets:


2012 2011 2011


Atthebeginningoftheyear 1,906 1,927 75Contributions 61 57 4Expectedreturnonassets 119 120 5Benefitspaid (135) (110) (2)Actuarialgains/(losses)onplanassets 118 (159) (11)Transferin/(out) – 71 (71)

Attheendoftheyear 2,069 1,906 –

(d) Movements inthenet (liabilities)/assetsrecognised intheconsolidatedbalancesheetareasfollows:


2012 2011 2011


Atthebeginningoftheyear (223) 120 19Contributions 61 57 4Expenserecognisedintheincomestatement(note4(g)) (17) (22) (2)Actuariallossestopensionreserve (61) (381) (18)Transferin/(out) – 3 (3)

Attheendoftheyear (240) (223) –

Asat31December2012,theSchemedidnotinvestintheBank’sownfinancialinstrumentsandproperties(2011:HK$Nil).TheBankexpectstocontributeapproximatelyHK$62milliontotheSCBSchemein2013.

Thetotalcumulativeamountofactuarialgainsand lossesrecogniseddirectly inconsolidatedothercomprehensiveincometodateisalossofHK$610million(2011:lossofHK$549million).




(e) Theexpenserecognisedintheconsolidatedincomestatementfortheyearisasfollows:


2012 2011 2011


Currentservicecost 106 96 5Interestcost 30 46 2Actuarialexpectedreturnonplanassets (119) (120) (5)

17 22 2

Theactualreturnonplanassets(takingintoaccountallchangesinthefairvalueofplanassets)wasanetincomeofHK$237million(2011:netlossesofHK$45million(restated)).

(f) Theprincipalactuarialassumptionsusedinthevaluationareasfollows:


2012 2011 2011


Discountrate 0.70% 1.50% 1.50%Expectedrateofreturnonplanassets 6.50% 6.50% 6.50%Futuresalaryincreases 3.50% 3.50% 3.50%

Theexpectedreturnisbasedonmarketexpectationsatthebeginningoftheyear,forthereturnnetofadministrationcosts,overtheentirelifeoftherelatedobligations.

(g) Themajorcategoriesofassetsasapercentageoftotalassetsareasfollows:


2012 2011 2011


Equities 52% 47% –Bonds 45% 46% –Cash 3% 7% –

100% 100% –

(h) Amountsforthecurrentandpreviousyears

SCB Scheme

2012 2011 2010 2009 2008


Fairvalueofplanassets 2,069 1,906 1,927 1,799 1,467Presentvalueofdefinedbenefitobligations (2,309) (2,129) (1,807) (1,712) (1,890)

Net(deficit)/surplus (240) (223) 120 87 (423)

Experiencegains/(losses)onschemeassets 118 (159) 36 261 (623)Experiencegains/(losses)onschemeliabilities (59) (70) (50) (9) (57)




(h) Amountsforthecurrentandpreviousyears(continued)

Cazenove Scheme

2011 2010

30 January to

31 December 2009


Fairvalueofplanassets – 75 70Presentvalueofdefinedbenefitobligations – (56) (54)

Netsurplus/(deficit) – 19 16

Experience(losses)/gainsonschemeassets (11) – 13Experience(losses)/gainsonschemeliabilities (2) 1 7

31 Subordinated liabilities


2012 2011

HK$’M HK$’M

US$300millionFloatingRateStep-UpNotes2017(1) – 2,330US$750million5.875%FixedRateNotes2020(2) 6,565 6,427SGD750million4.15%FixedRateNotes2021(3) 4,702 4,343

11,267 13,100

Allsubordinatedliabilitiesareunsecuredandsubordinatedtotheclaimsofothercreditors.

(1) Interestrateatthree-monthsUSdollarLIBORplus0.25percent,payablequarterly,tothecalloptiondateon13April2012.Thereafter,itwillberesettothree-monthsUSdollarLIBORplus0.75percent,payablequarterly.TheBankexerciseditsoptiontoredeemtheNotesinfullon13April2012.

(2) Interestrateat5.875percentperannum,payablesemi-annually,tothematuritydateon24June2020.

(3) Interestrateat4.15percentperannum,payablesemi-annually,tothematuritydateon27October2021.

32 Share capital

2012 and 2011

No . of shares

in millions HK$’M

Authorised:‘A’ordinarysharesofHK$0.05each 780 39‘B’ordinarysharesofHK$0.05each 1,231 62

2,011 101PreferencesharesofHK$1.00each 3,800 3,800

5,811 3,901



32 Share capital (continued)

2012 and 2011

No . of shares

in millions HK$’M

Issuedandfullypaid:‘A’ordinarysharesofHK$0.05each 706 35‘B’ordinarysharesofHK$0.05each 1,231 62

1,937 97PreferencesharesofHK$1.00each – –

1,937 97

Thepreferencesharesbearanon-cumulativepreferentialdividendatarateof8.25%perannumontheirnominalamountandrankinprioritytothe‘A’ordinarysharesandthe‘B’ordinaryshareswithrespecttothepaymentofdividendsandanyreturnofcapital.The‘B’ordinarysharesrankinprioritytothe‘A’ordinaryshareswithrespecttoanyreturnofcapital.

33 Reserves

Natureandpurposeofreserves

(i) Sharepremium

Theapplicationof thesharepremiumaccount isgovernedbySection48Bof theHongKongCompaniesOrdinance.

(ii) Capitalredemptionreserve

ThecapitalredemptionreserverepresentstherepurchaseoftheBank’sownshares.

(iii) Available-for-saleinvestmentreserve

Theavailable-for-saleinvestmentreservecomprisesthecumulativenetchangeinthefairvalueofavailable-for-salesecuritiesheldatthebalancesheetdateandisdealtwithinaccordancewiththeaccountingpolicyinnote2(i).

(iv) Cashflowhedgereserve

Thecashflowhedgereservecomprisestheeffectiveportionofthecumulativenetchangeinthefairvalueofhedginginstrumentsusedincashflowhedgespendingsubsequentrecognitionofthehedgedcashflowinaccordancewiththeaccountingpolicyadoptedforcashflowhedgesinnote2(j).

(v) Pensionreserve

Thepensionreservecomprisesthecumulativeneteffectoftheactuarialgainsandlossesforthedefinedbenefitplan.



33 Reserves (continued)

Natureandpurposeofreserves(continued)

(vi) Exchangereserve

Theexchangereservecomprisesallforeignexchangedifferencesarisingfromthetranslationofthefinancialstatementsofforeignoperations.Thereserveisdealtwithinaccordancewiththeaccountingpolicysetoutinnote2(s).

(vii) Revaluationreserve

Therevaluationreservecomprisestheshareofthechangeinfairvalueofanassociate’sidentifiablenetassetspriortotheBankanditssubsidiariesobtainingsignificantinfluenceinastep-acquisition.

(viii) Shareoptionequityreserve

TheGroupoperatesequity-settledshare-basedcompensationplansinwhichtheBankanditssubsidiaries’employeesparticipate.Thefairvalueoftheemployeeservicesreceivedinexchangeforthegrantoftheshareawardsisrecognizedasanexpensewiththecorrespondingamountcreditedtotheshareoptionequityreserve.

(ix) PropertyrevaluationreserveThepropertyrevaluationreserverepresentstherevaluationsurplusarisinguponthereclassificationofapropertypreviouslyincludedin“Buildingsandleaseholdlandheldforownuse”to“investmentproperties”.

TheHKMArequirestheBankanditssubsidiariestomaintainaminimumlevelofimpairmentallowanceswhichisinexcessoftheimpairmentallowancesrequiredunderHongKongFinancialReportingStandards.Oftheretainedearningsasat31December2012,anamountofHK$5,561million(2011:HK$5,309million)hasbeenreservedforthispurpose.

34 Cash and cash equivalents

2012 2011

HK$’M HK$’M

(a) Componentsofcashandcashequivalentsinthecashflowstatement

Cashandbalanceswithbanks,centralbanksandotherfinancialinstitutions 20,492 21,777

Tradingassetswithoriginalmaturitywithinthreemonths 2,599 14,856Placementswithbanksandotherfinancialinstitutionswith

originalmaturitywithinthreemonths 60,270 67,301Investmentsecuritieswithoriginalmaturitywithinthreemonths 10,609 –Amountsduefromimmediateholdingcompanyandfellow

subsidiarieswithoriginalmaturitywithinthreemonths 53,067 44,789Less:Overdraftsincludedin“depositsandbalances

ofbanksandotherfinancialinstitutions (153) (77)Less:Overdraftsincludedin“amountsdueto

immediateholdingcompany” (5,736) (121)

141,148 148,525



34 Cash and cash equivalents (continued)

2012 2011

HK$’M HK$’M

(b) ReconciliationwiththeconsolidatedbalancesheetCashandbalanceswithbanks,centralbanks,and

otherfinancialinstitutions 20,492 21,777Tradingassets 28,414 35,377Placementswithbanksandotherfinancialinstitutions 143,581 136,513Investmentsecurities 174,379 135,090Amountsduefromimmediateholdingcompanyand

fellowsubsidiaries 79,322 68,488Overdraftsincludedin“depositsandbalancesof

banksandotherfinancialinstitutions” (153) (77)Overdraftsincludedin“amountsduetoimmediate

holdingcompany” (5,736) (121)

Amountsshowninthebalancesheet 440,299 397,047Less:amountswithanoriginalmaturityofbeyondthreemonths (299,151) (248,522)

Cashandcashequivalentsintheconsolidatedcashflowstatement 141,148 148,525

35 Derivative financial instruments

Theuseofderivativesfortradingandtheirsaletocustomersasriskmanagementproductsisanintegralpartof theBank’sbusinessactivities.These instrumentsarealsoused tomanage theBank’sownexposurestomarketriskaspartofitsassetandliabilitymanagementprocess.TheprincipalderivativeinstrumentsusedbytheBankareforeignexchangerelatedandinterestraterelatedcontracts,whichareprimarilyover-the-counterderivatives.MostoftheBank’sderivativepositionshavebeenenteredintotomeetcustomerdemandandtohedgetheseandothertradingpositions.Foraccountingpurposes,derivativesareclassifiedaseitherheldfortradingorheldforhedging.

(a) Notionalamountsofderivatives

Derivativesarefinancialinstrumentsthatderivetheirvalueinreferencetochangesininterestorexchangerates,creditrisk,financialinstrumentpricesandindices.Thenotionalamountsoftheseinstrumentsindicatethevolumeoftransactionsoutstandinganddonotrepresentamountsatrisk.



35 Derivative financial instruments (continued)

(a) Notionalamountsofderivatives(continued)

ThefollowingisasummaryofthenotionalamountsofeachsignificanttypeofderivativeenteredintobytheBankanditssubsidiaries:

Consolidated

2012

Qualifying

for hedge

accounting

Managed

in conjunction with

financial instruments

designated at

fair value through

profit or loss

Others,

including

held for

trading Total


ExchangeratecontractsForwards – 99 1,192,815 1,192,914Crosscurrencyswaps 36,264 1,214 32,176 69,654Optionspurchased – 69 13,210 13,279Optionswritten – 1,927 13,231 15,158

InterestratecontractsSwaps 103,927 108 28,587 132,622Optionspurchased – – 436 436Optionswritten – 217 43 260

Otherderivatives – – 2,442 2,442

140,191 3,634 1,282,940 1,426,765

2011

ExchangeratecontractsForwards – 795 690,004 690,799Crosscurrencyswaps 12,502 1,372 20,756 34,630Optionspurchased – 382 15,177 15,559Optionswritten – 2,233 15,600 17,833

InterestratecontractsSwaps 105,278 593 11,924 117,795Optionspurchased – 416 350 766Optionswritten – 480 350 830

Otherderivatives – 99 14,035 14,134

117,780 6,370 768,196 892,346




(a) Notionalamountsofderivatives(continued)

Bank

2012

Qualifying

for hedge

accounting

Managed

in conjunction with

financial instruments

designated at

fair value through

profit or loss

Others,

including

held for

trading Total


ExchangeratecontractsForwards – 99 1,192,815 1,192,914Crosscurrencyswaps 36,264 1,214 32,176 69,654Optionspurchased – 69 13,210 13,279Optionswritten – 1,927 13,231 15,158

InterestratecontractsSwaps 103,927 108 27,482 131,517Optionspurchased – – 436 436Optionswritten – 217 43 260

Otherderivatives – – 2,270 2,270

140,191 3,634 1,281,663 1,425,488

2011

ExchangeratecontractsForwards – 795 690,004 690,799Crosscurrencyswaps 12,502 1,372 20,756 34,630Optionspurchased – 382 15,177 15,559Optionswritten – 2,233 15,600 17,833

InterestratecontractsSwaps 105,278 593 11,384 117,255Optionspurchased – 416 350 766Optionswritten – 480 350 830

Otherderivatives – 99 14,035 14,134

117,780 6,370 767,656 891,806




(b) Fairvaluesandcreditriskweightedamountsofderivatives

Consolidated2012 2011 Restated

Fair valueassets

Fair valueliabilities

Credit risk weighted

amount

Fair valueassets



amountHK$’M HK$’M HK$’M HK$’M HK$’M HK$’M

Exchangeratecontracts 6,467 6,653 1,597 2,644 3,088 1,135Interestratecontracts 1,079 1,749 360 872 1,549 295Otherderivatives 120 73 90 903 909 7

7,666 8,475 2,047 4,419 5,546 1,437

Bank2012 2011 Restated

Fair valueassets



amount

Fair valueassets



amountHK$’M HK$’M HK$’M HK$’M HK$’M HK$’M

Exchangeratecontracts 6,467 6,653 1,597 2,644 3,088 1,135Interestratecontracts 1,075 1,749 357 869 1,549 294Otherderivatives 116 70 34 903 909 7

7,658 8,472 1,988 4,416 5,546 1,436

CreditriskweightedamountreferstotheamountascomputedinaccordancewiththeBanking(Capital)RulesoftheHongKongBankingOrdinance.Theamountcalculatedisdependentuponthestatusofthecounterpartyandmaturitycharacteristicsofeachtypeofcontract.

The fair values and credit risk weighted amounts do not take into account any bilateral nettingarrangementsenteredintoduringtheyearandaccordinglytheseamountsareshownonagrossbasis.

(c) Fairvalueofderivativefinancialinstrumentsdesignatedashedginginstruments

ThefollowingisasummaryofthefairvaluesofderivativesheldforhedgingpurposesbyproducttypeenteredintobytheBankanditssubsidiariesasat31December2012:

ConsolidatedandBank2012

Assets

(Included in Amounts

due from immediate holding company

and fellow subsidiaries)

Liabilities

(Included in

Amounts due to immediate holding

company and fellow subsidiaries)

HK$’M HK$’M

Exchangeratecontracts 16 355Interestratecontracts 895 1,563

911 1,918




(c) Fairvalueofderivativefinancialinstrumentsdesignatedashedginginstruments(continued)

ConsolidatedandBank2011

Assets

(Included in Other assets and Amounts

due from immediate holding company

and fellow subsidiaries)

Liabilities

(Included in

Amounts due to immediate holding

company and fellow subsidiaries)

HK$’M HK$’M

Exchangeratecontracts 269 30Interestratecontracts 688 1,344

957 1,374

Fairvaluehedges

Thefairvaluehedgesprincipallyconsistofinterestrateswapsandcrosscurrencyswaps.Theinterestrateswapsareusedtoprotectagainstchangesinthefairvalueofcertainfixedrateassetsandliabilitiesdue tomovements inmarket interest rates.Thecrosscurrencyswapsareused tomanage foreignexchangeexposures.At31December2012,thenetnegativefairvalueofderivativesheldasfairvaluehedgeswasHK$705million(2011:negativeHK$338million)comprisingassetsofHK$827million(2011:HK$917million)andliabilitiesofHK$1,532million(2011:HK$1,255million).ThelossesonthehedginginstrumentsfortheyearwereHK$330million(2011:lossesofHK$501million).ThegainsonthehedgeditemattributabletothehedgedriskwereHK$330million(2011:gainsofHK$501million).

Cashflowhedges

Thecashflowhedgesprincipallyconsistofinterestrateswapsandcrosscurrencyswapsthatareusedtohedgeagainstthevariabilityincashflowsofcertainfloatingrateassetsandliabilities.At31December2012,thenetnegativefairvalueofderivativesheldascashflowhedgeswasHK$302million(2011:negativeHK$79million) comprising assets ofHK$84million (2011:HK$40million) and liabilitiesofHK$386million(2011:HK$119million).Thederivativeswillmaturewithin5years(2011:within5years)fromthebalancesheetdate.Duringtheyear,therewasnoineffectivenessrecognisedintheincomestatementthatarosefromcashflowhedges(2011:HK$Nil).



36 Contingent liabilities and commitments

(a) Thefollowingisasummaryofthecontractualamountsofeachsignificantcontingentliabilityandcommitment:

Consolidated Bank

Restated Restated

2012 2011 2012 2011


Directcreditsubstitutes 7,963 16,520 7,963 16,615Transaction-relatedcontingencies 10,786 13,755 10,790 13,755Trade-relatedcontingencies 23,009 22,054 23,088 22,086Forwardassetpurchases 140 622 140 622Othercommitments:whicharenotunconditionallycancellable:

withoriginalmaturityofnotmorethanoneyear 8,649 11,479 7,741 10,096withoriginalmaturityofmorethanoneyear 18,425 13,436 17,639 13,309

whichareunconditionallycancellable 368,461 303,223 382,477 323,993

437,433 381,089 449,838 400,476

Creditriskweightedamount 34,779 30,891 34,597 31,057

Contingentliabilitiesandcommitmentsarecredit-relatedinstruments,whichincludelettersofcredit,guaranteesandcommitmentstoextendcredit.Theriskinvolvedissimilartothecreditriskinvolvedinextending loan facilities to customers. These transactions are, therefore, subject to thesamecreditapplication,portfoliomaintenanceandcollateralrequirementsasforcustomersapplyingforloans.Thecontractualamountsrepresenttheamountsatriskshouldthecontractbefullydrawnuponandtheclientdefaults.Asthefacilitiesmayexpirewithoutbeingdrawnupon,thecontractedamountsdonotrepresentexpectedfuturecashflows.

(b) Capitalcommitments

Capitalcommitmentsoutstandingat31Decemberinrespectoffixedassetpurchasesnotprovidedforinthefinancialstatementswereasfollows:


2012 2011

HK$’M HK$’M

Contractedfor 63 66Authorisedbutnotcontractedfor 61 76

124 142



36 Contingent liabilities and commitments (continued)

(c) Leasecommitments

TheBankanditssubsidiariesleaseanumberofpropertiesunderoperatingleases.Theleasestypicallyrun for an initial period of two to ten years, with an option to renew the lease when all terms arerenegotiated.At31December,totalfutureminimumleasepaymentsundernon-cancellableoperatingleasesarepayableasfollows:

Consolidated Bank

2012 2011 2012 2011


Within1year 759 710 737 691After1yearbutwithin5years 1,531 1,433 1,519 1,425After5years 1,094 931 1,094 931

3,384 3,074 3,350 3,047

DuringtheyearHK$744million(2011:HK$707million)wasrecognisedasanexpenseintheincomestatement inrespectofoperating leases.TheBankand itssubsidiaries leasevariouspremisesandequipmentundernon-cancellableoperatingleaseagreements.

(d) Contingencies

TheBankanditssubsidiariesarenamedinandaredefendinganumberoflegalactionsarisingfromitsbankingactivities.ManagementoftheBankbelievesthattheresolutionoftheseactionsandproceedingswillnotbematerialtothefinancialpositionoftheBankanditssubsidiaries.

37 Risk management

ThemanagementofriskliesattheheartoftheBank’sbusiness.OneoftheprincipalriskstheBankincursarisesfromextendingcredittocustomersthroughitstradingandlendingoperations.Beyondcreditrisk,theBankisalsoexposedtoarangeofotherrisktypessuchascross-bordercountry,market,liquidity,operational,pensions, reputationalandotherrisksthatare inherent totheBank’sstrategy,productrangeandbusinesscoverage.

Risk management framework

Effective risk management is fundamental to being able to generate profits consistently andsustainably–andisthusacentralpartofthefinancialandoperationalmanagementoftheBank.

ThroughitsriskmanagementframeworktheBankmanagesenterprise-widerisks,withtheobjectiveofmaximisingrisk-adjustedreturnswhileremainingwithinitsriskappetite.

Aspartofthisframework,theBankusesasetofprinciplesthatdescribetheriskmanagementculturetheBankwishestosustain:

• Balancingriskandreturn:riskistakeninsupportoftherequirementsoftheBank’sstakeholders,inlinewiththeBank’sstrategyandwithinitsriskappetite;



37 Risk management (continued)

Risk management framework (continued)

• Responsibility:itistheresponsibilityofallemployeestoensurethatrisk-takingisdisciplinedandfocused.TheBanktakesaccountofitssocialresponsibilities,anditscommitmenttocustomersintakingrisktoproduceareturn;

• Accountability: risk is taken only within agreed authorities and where there is appropriateinfrastructureandresource.Allrisk-takingmustbetransparent,controlledandreported;

• Anticipation:theBankseekstoanticipatefuturerisksandensureawarenessofallknownrisks;and

• Competitiveadvantage:theBankseekscompetitiveadvantagethroughefficientandeffectiveriskmanagementandcontrol.

The Risk function

TheCountryChiefRiskOfficer(“CCRO”)directlymanagesaRiskfunctionthatisseparatefromandindependentoftheorigination,tradingandsalesfunctionsofthebusinesses.TheCCROchairstheRiskCommittee.

TheroleoftheRiskfunctionis:

• To maintain the Risk Management Framework, ensuring it remains appropriate to the Bank’sactivities,iseffectivelycommunicatedandimplementedacrosstheBankandforadministeringrelatedgovernanceandreportingprocesses.

• ToupholdtheoverallintegrityoftheBank’srisk/returndecisions,andinparticularforensuringthatrisksareproperlyassessed,thatrisk/returndecisionsaremadetransparentlyonthebasisofthisproperassessment,andarecontrolledinaccordancewiththeBank’sstandards.

• ToexercisedirectRiskControlOwnershipforCredit,Market,CountryCross-Border,Short-termLiquidityandOperationalrisktypes.

(a) Creditrisk

Creditriskisthepotentialforlossduetothefailureofacounterpartytomeetitsobligationstopayinaccordancewithagreedterms.Creditexposuresmayarisefromboththebankingandtradingbooks.

Credit risk is managed through a framework that sets out policies and procedures covering themeasurementandmanagementofcreditrisk.Thereisaclearsegregationofdutiesbetweentransactionoriginators in the businesses and the approvers in the Risk function. All credit exposure limits areapprovedwithinadefinedcreditapprovalauthorityframework.

Group-widecreditpoliciesandstandardsareconsideredandapprovedbytheGroupRiskCommittee(“GRC”), which also oversees the delegation of credit approval and loan impairment provisioningauthorities.




(a) Creditrisk(continued)

TheBank’sRiskCommitteeisresponsibleforthemanagementofallrisks,exceptthoseforwhichtheAssetandLiabilityCommitteeandthePensionsExecutiveCommitteehavedirectresponsibility.TheRiskCommitteeapprovespoliciesandstandardsbasedonthoseapprovedbyGRC,risklimitsandriskexposuredelegatedapprovalauthorityframeworks.Whenapprovingriskpoliciesandstandards,theRiskCommitteetakesintoaccounttherequirementsoftheHongKongBankingOrdinanceandtheguidelinesissuedbytheHKMAwithrespecttolargeexposuresandprovisioningrequirements.

Credit rating and measurement

Riskmeasurementplaysacentralrole,alongwithjudgementandexperience,ininformingrisk-takingandportfoliomanagementdecisions.Itisaprimaryareaforsustainedinvestmentandseniormanagementattention.

Since1January2008,theBankhasusedtheadvancedInternalRatingsBased(IRB)approachundertheBaselIIregulatoryframeworktocalculatecreditriskcapital.

ForIRBportfolios,astandardalphanumericcreditrisk-gradingsystemisusedinbothWholesaleandConsumerBanking.ThegradingisbasedontheGroup’sinternalestimateofprobabilityofdefaultoveraoneyearhorizon,withcustomersorportfoliosassessedagainstarangeofquantitativeandqualitativefactors.Thenumericgradesrunfrom1to14andsomeofthegradesarefurthersub-classifiedA,BorC.Lowercreditgradesareindicativeofalowerlikelihoodofdefault.Creditgrades1Ato12Careassignedtoperformingcustomersoraccounts,whilecreditgrades13and14areassignedtonon-performingordefaultedcustomers.

TheBank’screditgradesinWholesaleBankingarenotintendedtoreplicateexternalcreditgrades,andratingsassignedbyexternal ratingsagenciesarenotused indeterminingtheBank’s internalcreditgrades.Nonetheless,asthefactorsusedtogradeaborrowermaybesimilar,aborrowerratedpoorlybyanexternalratingagencyistypicallyassignedaworseinternalcreditgrade.

Advanced IRBmodelscoverasubstantialmajorityof theBank’s loansandareusedextensively inassessingrisksatcustomerandportfoliolevel,settingstrategyandoptimisingtheBank’srisk-returndecisions.

IRBriskmeasurementmodelsareapprovedbytheRiskCommittee,ontherecommendationoftheGroupModelAssessmentCommittee(‘MAC’)andtheBank’sMAC.TheBank’sMACsupportstheRiskCommitteeinensuringriskidentificationandmeasurementcapabilitiesareobjectiveandconsistent,sothatriskcontrolandriskoriginationdecisionsareproperlyinformed.PriortoreviewbytheMAC,allIRBmodelsarevalidatedindetailbyamodelvalidationteam,whichisseparatefromtheteamswhichdevelopandmaintainthemodels.Modelsundergoadetailedannualreview.Reviewsarealsotriggeredif the performance of a model deteriorates materially against predetermined thresholds during theongoingmodelperformancemonitoringprocess.





Credit Approval

TheBankhasbeenlocallyincorporatedsince1July2004.Sincethen,theapprovalprocessreflectsthatstrategicdecisionsarebeingmadeinaccordancewithindividualmanagers’delegatedauthoritiesandthetermsofreferenceoftheappropriatecommittees.Itisrecognisedthat,asamajorpartoftheGroup,allsignificantriskdecisionsemanatingfromHongKongwillhaveanimpacttotheGroup,beitregulatory,concentration,strategic,etc.ItisthereforerecognisedthatitisessentialfortheGrouptoconsidersuchtransactionstoensurethattheseGroupissuesareincludedaspartofthedecisionmakingprocess.DelegatedauthoritiesapprovedbytheRiskCommitteeoftheBankaredelegatedtothekeyriskmanagerstoensurethatallriskdecisionsaremadewithintheBank.Whereproposalsfalloutsideoftheindividual’sauthorities,theadviceandguidanceoftheGroupissought.Insuchcases,therelevantGroupentity,whetheranindividualoracommittee(includingbutnotlimitedtotheGRC),willreviewtheproposalfromaGroupperspectiveandgivetheirrecommendation.Onreceiptofsuchrecommendation,theBank’sExcessApprovalCommittee,beingasub-committeeoftheRiskCommittee,willmeettoconsidersuchadviceandreachasuitabledecision.AllthecreditapplicationsapprovedbytheExcessApprovalCommitteewillbereportedateachRiskCommitteemeetingfornoting.

Concentration risk

Credit concentration risk is managed within concentration caps set by counterparty or groups ofconnectedcounterparties,bycountryandindustryinWholesaleBanking;andtrackedbyproductinConsumerBanking(andalsobyindustryforthesmallandmedium-sizedenterprisebusiness(SME)).Additionaltargetsaresetandmonitoredforconcentrationsbycreditrating.

CreditconcentrationsaremonitoredbytheRiskCommitteeandconcentrationlimitsthatarematerialtotheBankarereviewedandapprovedatleastannuallybytheRiskCommittee.

Credit monitoring

TheBankanditssubsidiariesregularlymonitorcreditexposures,portfolioperformance,andexternaltrendsthatmayimpactriskmanagementoutcomes.

Internal risk management reports are presented to risk committees, containing information on keyenvironmental,politicalandeconomictrendsacrossmajorportfoliosandcountries;portfoliodelinquencyandloanimpairmentperformance;aswellasIRBportfoliometricsincludingcreditgrademigration.

TheBank’sWholesaleBankingCreditIssuesForum(whichisasub-committeeoftheRiskCommittee)meetsregularlytoassesstheimpactofexternaleventsandtrendsontheWholesaleBankingcreditriskportfolioandtodefineandimplementtheBank’sresponseintermsofappropriatechangestoportfolioshape,portfolioandunderwritingstandards,riskpolicyandprocedures.

ClientaccountsareplacedonEarlyAlertwhentheydisplaysignsofactualorpotentialweakness.Forexamplewherethereisadeclineintheclients’positionwithintheindustry,afinancialdeterioration,abreachofcovenants,non-performanceofanobligation,orthereareissuesrelatingtoownershipormanagement.





SuchaccountsandportfoliosaresubjectedtoadedicatedprocessoverseenbyanEarlyAlertCommittee.Clientaccountplansandcreditgradesarere-evaluatedandremedialactionsareagreedandmonitored.Remedialactionsinclude,butarenotlimitedto,exposurereduction,securityenhancement,exitingtheaccountorimmediatemovementoftheaccountintothecontrolofGroupSpecialAssetsManagement(GSAM),theBank’sspecialistrecoveryunit.

In Consumer Banking, portfolio delinquency trends are monitored continuously at a detailed level.Individualcustomerbehaviourisalsotrackedandisconsideredforlendingdecisions.Accountsthatarepastduearesubjecttoacollectionsprocess,managedindependentlybytheRiskfunction.Charged-offaccountsaremanagedbyaspecialistrecoveryteam.

TheSMEbusinessismanagedwithinConsumerBankingintwodistinctcustomersub-segments:smallbusinessesandmediumenterprises,differentiatedbytheannualturnoverofthecounterparty.Thecreditprocessesarefurtherrefinedbasedonexposureatrisk.LargerexposuresaremanagedthroughtheDiscretionaryLendingapproach,inlinewithWholesaleBankingprocedures,andsmallerexposuresaremanaged through Programmed Lending, in line with Consumer Banking procedures. DiscretionaryLendingandPrivateBankingpastdueaccountsaremanagedbyGSAM.

Credit mitigation

Potentialcreditlossesfromanygivenaccount,customerorportfolioaremitigatedusingarangeoftoolssuchascollateral,nettingagreements,creditinsurance,creditderivativesandotherguarantees.Thereliancethatcanbeplacedonthesemitigants iscarefullyassessed in lightof issuessuchas legalenforceability,marketvalueandcounterpartyriskoftheguarantor.

Riskmitigationpoliciesdeterminetheeligibilityofcollateraltypes.Collateraltypeswhichareeligibleforriskmitigationinclude:cash;residential,commercialandindustrialproperty;fixedassetssuchasmotorvehicles,aircraft,plantandmachinery;marketablesecurities;commodities;bankguarantees;andlettersofcredit.Riskmitigationpoliciescontroltheapprovalofcollateraltypes.

CollateralisvaluedinaccordancewiththeBank’sriskmitigationpolicy,whichprescribesthefrequencyofvaluationfordifferentcollateraltypes.Thevaluationfrequencyisdrivenbythelevelofpricevolatilityofeachtypeofcollateralandthenatureoftheunderlyingproductorriskexposure.

InWholesaleBankingtheeffectivenessofcreditmitigationisensuredbypolicieswhichgoverneligibilitycriteriasuchasmonitoringofconcentrationofcollateral,correlationofthecollateraltounderlyingassets,adjustmentsforcurrencyfluctuationsforcollateral.Forallcreditriskmitigationthatmeetsthepolicycriteria,aclearsetofproceduresareappliedtoensurethatthevalueoftheunderlyingcollateral isappropriatelyrecordedandupdatedregularly.





InConsumerBankingeffectiveuseofcollateralisakeytoolbywhichcreditriskismitigated.AlleligiblecollateralacceptedbyConsumerBankingiscoveredbyaproductproposalapprovedbyseniorcreditofficersdelegatedwiththerelevantauthority.Newcollateraltypeshavetobevettedthroughastringent‘NewBusinessApproval’processandareapprovedinaccordancewiththedelegatedauthoritieswithinConsumerBankingRiskorbytheExcessApprovalCommitteeunderadviceoftheBank’sConsumerBankingRiskCommitteeasappropriate.Inordertoberecognizedassecurityandfortheloantobeclassifiedassecured,allitemspledgedmustbevaluedandanactivesecondaryresalemarketmustexistforthecollateral.DocumentationmustbeheldtoenableConsumerBankingtorealizetheassetwithout thecooperationof theassetowner in theevent that this isnecessary.RegularvaluationofcollateralisrequiredinaccordancewiththeGroup’sriskmitigationpolicy,whichprescribesboththeprocessofvaluationandthefrequencyofvaluationfordifferentcollateraltypes.Thevaluationfrequencyisdrivenbythelevelofpricevolatilityofeachtypeofcollateralandthenatureoftheunderlyingproductorriskexposure.Stresstestsareperformedonchangesincollateralvaluesforkeyportfoliostoassistseniormanagementinmanagingtherisksinthoseportfolios.Physicalcollateralisrequiredtobeinsuredatalltimesandagainstallrisks,withtheBankasthelosspayeeundertheinsurancepolicy.

Detailedproceduresovercollateralmanagementmustbeinplaceforeachbusiness.

Traded Products

Creditriskfromtradedproductsismanagedwithintheoverallcreditriskappetiteforcorporatesandfinancialinstitutions.

Thecreditriskexposurefromtradedproductsisderivedfromthepositivemark-to-marketvalueoftheunderlyinginstruments,andanadditionalcomponenttocaterforpotentialmarketmovements.

Forderivativecontracts,theBanklimitsitsexposuretocreditlossesintheeventofdefaultbyenteringintomasternettingagreementswithcertaincounterparties.AsrequiredbyHKAS32/IAS32,exposuresarepresentedonagrossbasisinthefinancialstatementsassuchtransactionsarenotintendedtobesettlednetintheordinarycourseofbusiness.

Inaddition,theBankentersintoCreditSupportAnnexes(‘CSA’)withcounterpartieswherecollateralisdeemedanecessaryordesirablemitiganttotheexposure.Underavariationmarginprocess,additionalcollateraliscalledfromthecounterpartyiftotaluncollateralisedmark-to-marketexposureexceedsthethresholdandminimumtransferamountspecifiedintheCSA.Withcertaincounterparties,theCSAisreciprocalandrequirestheBanktopostcollateraliftheoverallmark-to-marketvalueofpositionsisinthecounterparty’sfavourandexceedsanagreedthreshold.

Securities

WithinWholesaleBanking,theExcessApprovalCommitteeunderadviceoftheGroup’sUnderwritingCommittee (asapprovedby theBank’sBoard)approves theportfolio limitsandparameters for theunderwritingandpurchaseofallpre-definedsecuritiesassetstobeheldforsale.TheUnderwritingCommitteeisestablishedundertheauthorityoftheRiskCommitteeunderadviceoftheGroup.WholesaleBankingoperateswithinsetlimits,whichincludecountry,singleissuer,holdingperiodandcreditgradelimits.

DaytodaycreditriskmanagementactivitiesfortradedsecuritiesarecarriedoutbyTradedCreditRiskManagement whose activities include oversight and approval within the levels delegated by theUnderwritingCommittee.Issuercreditrisk,includingsettlementandpre-settlementrisk,iscontrolledbyWholesaleBankingRisk,whilepriceriskiscontrolledbyMarketRisk.





TheUnderwritingCommitteeapprovesindividualproposalstounderwritenewcorporatesecurityissuesforclients.Whereanunderwrittensecurityisheldforaperiodlongerthanthetargetsell-downperiod,thefinaldecisiononwhethertosellthepositionrestswithintheRiskfunction.

Maximumexposuretocreditrisk

Themaximumexposurestocreditriskofon-balancesheetfinancialinstruments,beforetakingaccountofanycollateralorothercreditenhancementsisthecarryingamountreportedonthebalancesheet.Foroff-balancesheetinstruments,themaximumexposuretocreditriskexcludesloancommitmentswhichareunconditionallycancellableisthecontractualnominalamountsassetoutbelow:

Consolidated Bank

2012

Restated

2011 2012

Restated

2011


Financialguaranteesandothercreditrelatedcontingentliabilities 41,758 52,329 41,841 52,456

Loancommitmentsandothercreditrelatedcommitments 27,214 25,537 25,520 24,027

68,972 77,866 67,361 76,483

Collateral

Collateralisheldtomitigatecreditriskexposuresandriskmitigationpoliciesdeterminetheeligibilityofcollateraltypes.

Forcertaintypesoflending–typicallymortgagesandassetfinancing–therighttotakechargeoverphysicalassetsissignificantintermsofdeterminingappropriatepricingandrecoverabilityintheeventofdefault.

Collateral isvalued inaccordancewithourriskmitigationpolicy,whichprescribesthefrequencyofvaluationfordifferentcollateraltypes,basedonthelevelofpricevolatilityofeachtypeofcollateralandthenatureoftheunderlyingproductorriskexposure.Whereappropriate,collateralvaluesareadjustedtoreflectcurrentmarketconditions,probabilityofrecoveryandtheperiodoftimetorealisethecollateralintheeventofpossession.Thecollateralvaluesreportedbelowreflectthisconservativebasisandarealsoadjustedfortheeffectsofover-collateralisation.

(i) Loans and advances

Therequirementforcollateralisnotasubstitutefortheabilitytopay,however,whichistheprimaryconsiderationforanylendingdecisions.Indeterminingthefinancialeffectofcollateralheldagainstloansneitherpastduenorimpaired,wehaveassessedthesignificanceofthecollateralheldinrelationtothetypeoflending.





Loans neither past due nor impaired

At31December2012,theBankanditssubsidiarieshaveHK$173,846million(2011:HK$153,707million)ofmortgageloansinConsumerBankingthatareneitherpastduenorimpaired.Thesearegenerallyfullysecuredexposures(2011:fullysecured).

InWholesaleBanking,theBankanditssubsidiarieshaveHK$159,310million(2011:HK$178,402million)ofcorporateexposuresthatareneitherpastduenorimpaired.Basedonthefairvalueofthecollateralheld(Note),20%(2011:24%)oftheseexposuresaresecuredbytangiblecollaterals.

TheBankanditssubsidiariesalsoundertakecollateralisedlendingandborrowing(reverserepoandrepo)arrangements,andthecollateralheldagainstthesetypesofloansaresetoutinnote39tothefinancialstatements.

Non-tangiblecollateral–suchasguaranteesandlettersofcredit–mayalsobeheldagainstcorporateexposuresalthoughthefinancialeffectofthistypeofcollateralislesssignificantintermsofrecoveries.Itisnotpracticabletoquantifytheeffectofthiscollateralasthevalueofthecollateralisconditionaloncircumstancesatthetimeofdefaultandothercreditrelatedfactors.

Loans past due or impaired

Thefairvalueofcollateralheldagainstpastdueorimpairedloansisdetailedinthetablebelowasat31December:

Consolidated

2012 2011

Advances to

customers

Advances to

banks

Advances to

customers

Advances to

banks


Estimatedfairvalueofcollateral(Note):Heldagainstimpairedadvances 307 – 249 –Heldagainstpastduebutnotimpairedadvances 6,407 – 2,650 –

Bank

2012 2011

Advances to

customers

Advances to

banks

Advances to

customers

Advances to

banks


Estimatedfairvalueofcollateral(Note):Heldagainstimpairedadvances 298 – 249 –Heldagainstpastduebutnotimpairedadvances 6,297 – 2,510 –

(Note)Thefairvalueofthecollateralheldrepresentsfairvalue,aftertakingintoaccounttheeffectsofover-collateralisationwhereitisnotavailableforoffsetagainstotherloans.





Repossessed Collateral

Asat31December,theamountsofassetsobtainedbytakingpossessionofcollateralheldassecuritywereasfollows:

Consolidated Bank

2012 2011 2012 2011


Property,plantandequipment 32 48 26 31

Loancollateralacquiredfromborrowersduetorestructuringortheirinabilitytorepay,continuestoberecordedas“Advancestocustomers”inthebalancesheetattheloweroffairvalue(lesscoststosell)andthecarryingamountoftheloan(netofanyimpairmentallowances),untilthecollateralisrealised.

RepossessedcollateralsobtainedareintendedtoberealisedinanorderlyfashiontorepaytheimpairedloansandarenotheldfortheownuseoftheBankanditssubsidiaries.

(ii) Off-balance sheet exposures

Forcertaintypesofexposuressuchaslettersofcreditandguarantees,theBankanditssubsidiariesobtaincollateralsuchascashdependingoninternalcreditriskassessments.However,fortradefinanceproductssuchaslettersofcredit,theBankanditssubsidiarieswillalsoholdlegaltitletotheunderlyingassetsshouldadefaulttakesplace.





Creditquality

(i) Analysis of the loan portfolio

Consolidated2012 2011

Advances to

customers

Advances to

banks

Advances to

customers

Advances to

banks


Loansandadvances–neitherpastduenorimpaired 398,645 143,525 386,145 135,967–pastduebutnotimpaired 9,082 13 3,781 485–impaired,netofindividuallyassessed

impairmentcharges 858 43 391 61Less:collectivelyassessed

impairmentcharges (567) – (554) –

408,018 143,581 389,763 136,513

Bank2012 2011

Advances to

customers

Advances to

banks

Advances to

customers

Advances to

banks


Loansandadvances–neitherpastduenorimpaired 386,169 143,515 374,011 135,931–pastduebutnotimpaired 8,835 13 3,526 485–impaired,netofindividuallyassessed

impairmentcharges 836 43 384 61Less:collectivelyassessed

impairmentcharges (454) – (444) –

395,386 143,571 377,477 136,477





(i) Analysis of the loan portfolio (continued)

Thefollowingtablessetoutananalysisoftheinternalcreditgradingsforadvanceswhicharenotpastdueandforwhichnoindividualimpairmentprovisionhasbeenraised.Thecreditgradingssetoutinthetablesbelowarebasedonaprobabilityofdefaultmeasureassetoutonpage74.


Advances to

customers

Advances to

banks

Advances to

customers

Advances to

banks


Creditgrades:1to5 238,341 142,449 225,102 134,8286to8 115,727 953 115,332 1,0959to11 43,194 123 44,226 4412 1,383 – 1,485 –

398,645 143,525 386,145 135,967

Bank2012 2011

Advances to

customers

Advances to

banks

Advances to

customers

Advances to

banks


Creditgrades:1to5 233,993 142,439 223,420 134,7926to8 112,022 953 108,114 1,0959to11 38,976 123 41,374 4412 1,178 – 1,103 –

386,169 143,515 374,011 135,931

Thefollowingtablessetouttheageingofadvanceswhicharepastdueandforwhichnoindividualimpairmentprovisionhasbeenraised.Aloanisconsideredtobepastduewhenthecounterpartyhas failedtomakeaprincipalor interestpaymentwhencontractuallydue.Pastduedoesnotnecessarilymeanthatthecounterpartyisimpaired.


Advances to

customers

Advances to

banks

Advances to

customers

Advances to

banks


Pastdue–upto30days 7,903 13 3,474 485–31-60days 200 – 176 ––61-90days 844 – 55 ––91-120days 45 – 13 ––121-150days 90 – 63 –

9,082 13 3,781 485





(i) Analysis of the loan portfolio (continued)

Bank2012 2011

Advances to

customers

Advances to

banks

Advances to

customers

Advances to

banks


Pastdue–upto30days 7,705 13 3,274 485–31-60days 174 – 138 ––61-90days 821 – 38 ––91-120days 45 – 13 ––121-150days 90 – 63 –

8,835 13 3,526 485

(ii) Analysis of debt securities (including certificates of deposit), equity shares and treasury bills

Consolidated2012

Treasury

bills

Debt

securities

Equity

shares Total


Impairedsecurities – 26 6 32Impairmentprovisions – (26) (6) (32)

Netimpairedsecurities – – – –Securitiesneitherpastduenorimpaired 42,209 163,419 1,021 206,649

2011

Treasury

bills

Debt

securities

Equity

shares Total



Netimpairedsecurities – 10 – 10Securitiesneitherpastduenorimpaired 48,254 127,412 427 176,093

Bank2012

Treasury

bills

Debt

securities

Equity

shares Total



Netimpairedsecurities – – – –Securitiesneitherpastduenorimpaired 42,209 163,352 1,021 206,582





(ii) Analysis of debt securities (including certificates of deposit), equity shares and treasury bills(continued)

Bank(continued)2011

Treasury

bills

Debt

securities

Equity

shares Total



Netimpairedsecurities – 6 – 6Securitiesneitherpastduenorimpaired 48,254 125,589 427 174,270

Thefollowingtableanalysesdebtsecurities(includingcertificatesofdeposit)andtreasurybillswhichareneitherpastduenorimpairedbyexternalcreditrating.ThestandardcreditratingsusedbytheBankarethoseusedbyStandard&Poorsortheirequivalent.Debtsecuritiesheldwhichhaveashort-termratingarereportedagainstthelong-termratingoftheissuer.


Treasury

bills

Debt

securities

Treasury

bills

Debt

securities


AAA – 19,122 – 12,704AA-toAA+ 42,209 72,764 48,254 50,658A-toA+ – 65,339 – 58,012LowerthanA- – 1,487 – 890Unrated – 4,707 – 5,148

42,209 163,419 48,254 127,412

Bank2012 2011

Treasury

bills

Debt

securities

Treasury

bills

Debt

securities


AAA – 19,122 – 12,704AA-toAA+ 42,209 72,764 48,254 50,658A-toA+ – 65,339 – 58,012LowerthanA- – 1,487 – 890Unrated – 4,640 – 3,325

42,209 163,352 48,254 125,589




(b) Countrycross-borderrisk

Countrycross-borderriskistheriskthattheBankwillbeunabletoobtainpaymentfromitscustomersorthirdpartiesontheircontractualobligationsasaresultofcertainactionstakenbyforeigngovernments,chieflyrelatingtoconvertibilityandtransferabilityofforeigncurrency.

TheRiskCommitteeisresponsibleforourcountrycross-borderrisklimits.

Cross-borderassetscompriseloansandadvances,interest-bearingdepositswithotherbanks,tradeandotherbills,acceptances,amountsreceivableunderfinanceleases,derivatives,certificatesofdepositandothernegotiablepaper,investmentsecuritiesandformalcommitmentswherethecounterpartyisresident in a country other than where the assets are recorded. Cross-border assets also includeexposuresto local residentsdenominated incurrenciesother thanthe localcurrency.Cross-borderexposurealsoincludesthevalueofcommodity,aircraftandshippingassetsownedbytheBankthatareheldinagivencountry.

(c) Marketriskmanagement

Marketrisk

TheBankrecognisesmarketriskasthepotentiallossofearningsoreconomicvalueduetoadversechangesinfinancialmarketratesorprices.TheBank’sexposuretomarketriskarisesprincipallyfromcustomer-driventransactions.TheobjectiveoftheBank’smarketriskpoliciesandprocessesistoobtainthebestbalanceofriskandreturnwhilstmeetingcustomers’requirements.

TheBanktransactsinthemoneymarket,foreignexchangemarkets,equitymarkets,andcapitalmarketsgivingrisetomarketriskexposures.Financialinstrumentstransactedincludedebtandothersecuritiesand certain off-balance sheet (“derivatives”) financial instruments. Derivatives are contracts withcharacteristicsandvaluederivedfromunderlyingfinancialinstruments,interestandexchangeratesorindices.Theyincludefutures,forwards,swaps,andoptionstransactionsintheforeignexchangeandinterestratemarkets.TheBankentersintoderivativecontractsinthenormalcourseofbusinesstomeetcustomerdemandandforhedgingpurposes.DerivativecontractsenteredintobytheBankareprimarilyover-the-counterderivativeswhichthemark-to-marketvaluesarereadilydeterminablebyreferencetoindependentpricesandvaluationquotes.

TheBankhasestablishedamarketriskmanagementframeworkandpolicies,includinglimitssetting,monitoringandreportingandcontrolprocedures,whicharereviewedregularlybytheRiskCommittee.MarketrisklimitsareproposedbythebusinesswithinthetermsofagreedpolicyandreviewedbytheMarketRiskdepartment.TheRiskCommitteeapproves the limitsand theMarketRiskdepartmentmonitorsexposureagainsttheselimitsandapprovestemporarylimitswithinthedelegatedauthorities.Additional limitsareplacedonspecific instrumentsandpositionconcentrationswhereappropriate.Sensitivitymeasuresareusedinadditiontousingvalue-at-risk(“VaR”)asriskmanagementtools.Forexample,interestratesensitivityismeasuredintermsofexposuretoaonebasispointincreaseinyields.

ValueatRisk

VaR,ingeneral,isaquantitativemeasureofmarketriskthatappliesrecenthistoricalmarketconditionstoestimatethepotentialfuturelossinmarketvaluethatwillnotbeexceededinasettimeperiodatasetstatisticalconfidencelevel.VaRprovidesaconsistentmeasurethatcanbeappliedacrosstradingbusinessesandproductsovertimeandcanbesetagainstactualdailytradingprofitandlossoutcome.




(c) Marketriskmanagement(continued)

ValueatRisk(continued)

VaRiscalculatedforexpectedmovementsoveraminimumofonebusinessdayandtoaconfidencelevelof97.5percent.Thisconfidencelevelsuggeststhatpotentialdailylosses,inexcessoftheVaRmeasure,arelikelytobeexperiencedsixtimesperyear.

TheBankappliestwoVaRmethodologies,historicsimulationandMonteCarlosimulation,withahistoricalobservationperiodofoneyear.Historicsimulationisappliedforgeneralmarketriskfactors.Thisapproachinvolvestherevaluationofallexistingpositionstoreflecttheeffectofhistoricallyobservedchangesinmarketriskfactorsonthevaluationofthecurrentportfolio.MonteCarlosimulationisappliedforcreditspreadVaRofthebankingbook.Thisapproachissimilartohistoricsimulationbutwithconsiderablymoreinputriskfactorobservations.Thesearegeneratedbyrandomsamplingtechniques,buttheresultsretaintheessentialvariabilityandcorrelationsofhistoricallyobservedriskfactorchanges.

StressTesting

LossesbeyondtheconfidenceintervalarenotcapturedbyaVaRcalculation,whichthereforegivesnoindicationofthesizeofunexpectedlossesinthesesituations.

VaRandotherriskmeasuresarecomplementedbyweeklystresstestingofmarketriskexposurestohighlightpotentialriskthatmayarisefromextrememarketeventsthatarerarebutplausible.Stresstestingisanintegralpartofthemarketriskmanagementframeworkandconsidersbothhistoricalmarketeventsandforwardlookingscenarios.Aconsistentstresstestingmethodologyisappliedtotradingandnon-tradingbooks.Thestresstestingmethodologyassumesthatscopeformanagementactionwouldbelimitedduringastressevent,reflectingthedecreaseinliquiditythatoftenoccurs.

Stressscenariosareregularlyupdatedtoreflectchangesinriskprofileandeconomicevents.TheRiskCommitteereviewsstresstestresultsonaregularbasis.Adhocscenariosarealsopreparedreflectingspecificmarketconditionsandforparticularconcentrationsofriskthatarisewithinthebusiness.

2011 Distribution of Market Risk-Related Revenues2012 Distribution of Market Risk-Related Revenues

58

6

16

27

38

43

32 31

18

117

31

3 1 154 3 3

7 6

17 16

2227

46

2925

18

96 4

9

-20

or b

elow

-20

to -1

5

-15

to -1

0

-10

to -5

-5 to

00

to 5

5 to

10

10 to

15

15 to

20

20 to

25

25 to

30

30 to

35

35 to

40

40 to

45

45 to

50

50 to

55

-5 o

r belo

w

-5 to

00

to 5

5 to

10

10 to

15

15 to

20

20 to

25

25 to

30

30 to

35

35 to

40

40 to

45

45 to

50

50 to

55

55 to

60

60 to

65

65 to

70

70 to

75

75 to

80

over

80

over

55

Revenue (HK$’M)Revenue (HK$’M)

Num

ber

of D

ays

Num

ber

of D

ays

0

10

20

30

40

50

60

4

0

10

20

30

40

50





TradingandNon-trading(VaRat97.5%,1day)*

Value at risk: 2012 2011

Average High Low Actual** Average High Low Actual**

HK$’M HK$’M HK$’M HK$’M HK$’M HK$’M HK$’M HK$’M

Interestraterisk^ 75.3 116.9 52.2 52.2 45.2 54.2 35.8 51.7Foreignexchangerisk 4.8 9.2 2.2 3.4 3.5 6.6 0.9 1.8

Total^^ 76.3 117.2 53.5 53.7 45.4 54.3 36.0 51.7

Trading(VaRat97.5%,1day)




Interestraterisk 13.6 26.7 8.5 11.9 12.3 16.6 9.1 9.2Foreignexchangerisk 4.8 9.2 2.2 3.4 3.5 6.6 0.9 1.8

Total^^ 14.9 26.3 8.9 11.7 13.0 18.6 9.3 10.1

Non-trading(VaRat97.5%,1day)




Interestraterisk^ 74.1 109.2 51.2 51.2 43.4 52.8 34.0 50.8

Averagedailyincomeearnedfrommarketriskrelatedactivities***areasfollows:

2012 2011

HK$’M HK$’M

TradingInterestraterisk 5.1 3.8Foreignexchangerisk 10.0 9.8

Total 15.1 13.6

Non-TradingInterestraterisk 6.5 4.0





ThehighestandlowestVaRareindependentandusuallyoccurondifferentdays.* VaRisrepresentativeofSCBHKonshoreportfoliosonly.** ThisrepresentstheactualonedayVaRasat31December.*** P/Lincludesprofitscomingfromoffshoreportfolios.^ InterestrateriskVaRincludescreditspreadriskarisingfromsecuritiesheldbytheFinancialMarkets’

AssetandLiabilityManagementdesk(“ALM”).^^ ThetotalVaRshowninthetableaboveisnotasumofthecomponentrisksduetooffsetsbetween

them.

(d) Foreignexchangerisk

TheforeignexchangepositionsoftheBankanditssubsidiariesarisefromforeignexchangetradingandcommercialbankingoperations.Foreignexchangetradingexposuresareprincipallyderivedfromcustomerdriven transactions.TheMarketRiskdepartmentapproves foreignexchange limitswithindelegatedauthoritiesandmonitorsexposuresagainsttheselimits.Thenetoptionpositioniscalculatedonthebasisofthedelta-weightedpositionsofallforeignexchangeoptioncontracts.

Foreignexchangeriskonthenon-tradingbookportfoliosisminimisedbymatchfundingassetsandliabilitiesinthesamecurrency.

TheBankanditssubsidiarieshadthefollowingnon-structuralforeigncurrencypositionswhichexceeded10%ofthenetnon-structuralpositioninallforeigncurrencies:

Consolidated Bank

2012 2011 2012 2011


US dollars exposure

Spotassets 320,683 311,090 320,680 311,090Spotliabilities (279,069) (262,066) (279,069) (262,066)Forwardpurchases 608,542 328,649 608,542 328,649Forwardsales (644,729) (378,787) (644,729) (378,787)Netoptionposition – – – –

Netlong/(short)non-structuralposition 5,427 (1,114) 5,424 (1,114)




(d) Foreignexchangerisk(continued)


2012 2011

HK$’M HK$’M

Chinese renminbi exposure

Spotassets 98,441 87,053Spotliabilities (86,732) (63,195)Forwardpurchases 382,433 162,096Forwardsales (393,558) (185,047)Netoptionposition – –

Netlongnon-structuralposition 584 907


2012 2011

HK$’M HK$’M

Australian dollars exposure

Spotassets 7,239 6,800Spotliabilities (13,599) (15,005)Forwardpurchases 12,433 10,833Forwardsales (5,980) (2,977)Netoptionposition – –

Netlong/(short)non-structuralposition 93 (349)

TheBankanditssubsidiarieshadthefollowingstructuralforeigncurrencypositionswhichexceeded10%ofthenetstructuralpositioninallforeigncurrencies:

Consolidated Bank

2012 2011 2012

Restated

2011


ChineseRenminbi 5,085 4,163 5,085 4,163UnitedArabEmiratesDirham 503 531 503 531VietnameseDong 764 740 317 307USdollars 318 363 318 363

6,670 5,797 6,223 5,364




(e) Interestraterisk

TheBank’sinterestrateexposurescomprisetradingexposuresandnon-tradingstructuralinterestrateexposures.Structuralinterestrateriskgenerallyarisesfromthedifferingre-pricingcharacteristicsofcommercialbankingassetsandliabilities.

Interest raterisk fromthenon-tradingbookportfolios is transferredtoFinancialMarkets .FinancialMarketsmanagestheseriskswithoversightbytheAssetandLiabilityCommittee(“ALCO”)andwithinlimitsapprovedbytheMarketRiskdepartment.VaRandstresstestsareappliedtonon-tradingbookinterestrateexposuresinthesamewayasforthetradingbook.

TheBankhasestablishedprinciples,policiesandtechniquesformanaginginterestraterisk.InterestrateriskmanagementisgovernedbytheALCO.

(f) Liquidityrisk

TheBankdefines liquidity riskas the risk that it eitherdoesnothavesufficientfinancial resourcesavailable tomeetall itsobligationsandcommitmentsas they falldue,orcanonly secure thematexcessivecost.

TheBankhasestablishedstandards,principles,policiesandtechniquesformanagingliquidityrisk.LiquidityriskmanagementisgovernedbytheALCO.ItisthepolicyoftheBanktomaintainadequateliquidityatalltimesandhencetobeinapositiontomeetallobligationsastheyfalldue.Thetoolsusedfor themanagementof liquidity riskrangefromkeybalancesheet ratiosandmedium-termfundingrequirementsforensuringbalancesheetsarenotdevelopingstructuralimbalances,toshorttermcashflowlimits,controlsonborrowinginthewholesalemarketsandguidelinesoncommitments.Theyaresupplementedbytheestablishmentofregularstresstestingofliquiditypositionsandaliquiditycrisiscontingencyplan.

TheBankhassignificantlevelsofmarketablesecurities,principallygovernmentsecuritiesandbankpaper,whichcanberealisedintheeventthatthereisaneedfor liquidity inacrisis.TheBankalsoprescribesaliquiditystressscenariothatassumesacceleratedwithdrawalofdepositsoveraperiodoftimeandneedstoensurethatcashinflowsexceedoutflowsundersuchascenario.Theliquiditycrisismanagementplanlaysouttriggerpointsandactionsintheeventofaliquiditycrisistoensurethatthereisaneffectiveresponsebyseniormanagementincaseofsuchanevent.

FinancialMarketsisresponsiblefortheday-to-daymanagementofalltheliquidityriskintheBank,executingliquiditydirectivesandoperatingwithintheliquiditypolicyandapprovedlimits.LiquiditylimitsareregularlymonitoredbyaMarketRiskfunctionthatisindependentfromthebusiness.LiquidityprofilesarereviewedbytheALCOonaregularbasis.

CustomerdepositsformasignificantpartoftheBank’soverallfunding.Itscompositionhasremainedrelativelydiversifiedandstable.TheALCOmonitorstrendsinthebalancesheetandensuresthatanyconcernsthatmightimpactthestabilityofthesedepositsareaddressedeffectively.TheALCOalsoreviewsbalancesheetplanstoensurethatassetgrowthplansarematchedbygrowthinthestablefundingbase.Moreover,professionalmarketsareaccessedforthepurposesofprovidingadditionalfunding,maintainingapresenceinlocalmoneymarketsandoptimisingassetandliabilitymaturities.




(f) Liquidityrisk(continued)

(i) Contractualmaturity

Thefollowingmaturityprofileisbasedontheremainingperiodtothecontractualmaturitydateasatthebalancesheetdate,onadiscountedbasis.Thedisclosuredoesnotimplythattheassetswillbeheldtomaturityorthattheliabilitieswillbewithdrawnonmaturity.

Consolidated

2012

Due Due Due

Due between between between Due

Repayable within 1 month to 3 months to 1 year to after

on demand 1 month 3 months 1 year 5 years 5 years Undated Total


AssetsCashandbalanceswithbanks,central

banksandotherfinancialinstitutions 20,492 – – – – – – 20,492Placementswithbanksand

otherfinancialinstitutions 537 46,669 47,572 47,582 1,222 – (1) 143,581HongKongSARGovernment

certificatesofindebtedness – – – – – – 32,481 32,481Tradingassets – 1,513 4,173 9,273 8,851 4,103 501 28,414Financialassetsdesignatedat

fairvalue – – – – 110 3,106 – 3,216Advancestocustomers 16,228 62,269 30,857 56,102 113,699 129,924 (1,061) 408,018Investmentsecurities 67 18,306 32,919 56,861 59,158 6,548 520 174,379Amountsduefromgroupcompanies 14,986 35,131 10,090 12,635 5,602 2,463 (1,585) 79,322Others 350 4,515 10,796 733 554 86 32,737 49,771

Total Assets 52,660 168,403 136,407 183,186 189,196 146,230 63,592 939,674

LiabilitiesHongKongSARcurrency

notesincirculation – – – – – – 32,481 32,481Depositsandbalancesofbanks

andotherfinancialinstitutions 10,798 494 217 772 – – – 12,281Depositsfromcustomers 487,710 97,913 87,138 81,955 1,831 42 – 756,589Tradingliabilities – 21,601 110 447 50 86 774 23,068Financialliabilitiesdesignatedat

fairvalue – 818 924 1,372 468 30 – 3,612Debtsecuritiesinissue – 320 3,586 6,100 – – – 10,006Amountsduetogroupcompanies 10,031 3,253 4,825 3,325 1,247 2,042 – 24,723Subordinatedliabilities – – – – – 11,267 – 11,267Others 6,395 5,025 5,528 1,309 48 244 327 18,876

Total Liabilities 514,934 129,424 102,328 95,280 3,644 13,711 33,582 892,903





(i) Contractualmaturity(continued)


2012

Due Due Due




Of which:

Certificates of deposit held– includedinTradingassets – 4 452 590 33 – – 1,079– includedinInvestmentsecurities

asavailable-for-salesecurities – 6,603 11,663 10,634 2,856 – – 31,756

– 6,607 12,115 11,224 2,889 – – 32,835

Treasury bills (including Exchange Fund Bills)

– includedinTradingassets – 1,341 3,348 3,988 25 – – 8,702– includedinInvestmentsecurities

asavailable-for-salesecurities – 4,994 15,007 13,506 – – – 33,507

– 6,335 18,355 17,494 25 – – 42,209

Debt securities– includedinTradingassets – – 291 4,278 8,725 4,075 – 17,369– includedinFinancialassets

designatedatfairvalue – – – – 110 3,106 – 3,216– includedinInvestmentsecurities

classifiedas:– available-for-salesecurities – 6,116 6,249 28,611 52,182 6,548 – 99,706– loansandreceivables 67 593 – 4,110 4,120 – – 8,890

– includedinAmountsduefromfellowsubsidiariesclassifiedas:– available-for-salesecurities – – – – – 1,305 – 1,305– financialassetsdesignatedat

fairvalue – – – – – 98 – 98

67 6,709 6,540 36,999 65,137 15,132 – 130,584







2011

Due Due Due






banksandotherfinancialinstitutions 21,777 – – – – – – 21,777Placementswithbanksand

otherfinancialinstitutions 510 53,304 36,128 45,070 1,504 – (3) 136,513HongKongSARGovernment


fairvalue – – – 38 344 3,893 – 4,275Advancestocustomers 9,476 57,041 42,141 57,247 109,954 115,038 (1,134) 389,763Investmentsecurities 1,827 12,021 25,611 45,430 48,144 1,640 417 135,090Amountsduefromgroupcompanies 6,519 33,642 12,287 4,984 8,051 3,005 – 68,488Others 322 3,789 6,739 510 326 56 19,428 31,170

Total Assets 40,431 166,203 127,437 163,573 178,432 127,659 50,119 853,854

LiabilitiesHongKongSARcurrency

notesincirculation – – – – – – 31,401 31,401Depositsandbalancesofbanks

andotherfinancialinstitutions 11,156 3,584 256 13 720 – – 15,729Depositsfromcustomers 415,667 130,939 85,872 39,022 1,422 18 – 672,940Tradingliabilities – 23,972 109 543 13 1 – 24,638Financialliabilitiesdesignatedat

fairvalue – 194 1,329 1,353 611 – – 3,487Debtsecuritiesinissue – 8,634 2,930 1,701 – – – 13,265Amountsduetogroupcompanies 2,882 2,738 5,166 3,248 2,366 1,696 – 18,096Subordinatedliabilities – – – – – 13,100 – 13,100Others 5,521 3,618 8,820 2,358 27 130 223 20,697








2011

Due Due Due




Of which:

Certificates of deposit held– includedinTradingassets – 52 54 1,502 412 100 – 2,120– includedinInvestmentsecurities

asavailable-for-salesecurities – 4,532 6,861 7,979 4,415 – – 23,787

– 4,584 6,915 9,481 4,827 100 – 25,907


– includedinTradingassets – 5,828 3,183 4,727 – – – 13,738– includedinInvestmentsecurities

asavailable-for-salesecurities – 1,418 15,833 17,265 – – – 34,516

– 7,246 19,016 21,992 – – – 48,254

Debt securities– includedinTradingassets – 280 979 3,706 9,640 3,908 – 18,513– includedinFinancialassets

designatedatfairvalue – – – 38 344 3,893 – 4,275– includedinInvestmentsecurities

classifiedas:– available-for-salesecurities – 5,801 2,567 19,546 38,406 – – 66,320– loansandreceivables 1,827 270 350 640 5,323 1,640 – 10,050

– includedinAmountsduefromimmediateholdingcompanyastradingsecurities – – – – 2 15 – 17

– includedinAmountsduefromfellowsubsidiariesclassifiedas:– available-for-salesecurities – – – – – 2,119 – 2,119– financialassetsdesignatedat

fairvalue – – – – – 221 – 221

1,827 6,351 3,896 23,930 53,715 11,796 – 101,515






Bank

2012

Due Due Due






banksandotherfinancialinstitutions 20,331 – – – – – – 20,331Placementswithbanksandother

financialinstitutions 537 46,660 47,572 47,581 1,222 – (1) 143,571HongKongSARGovernment


fairvalue – – – – 110 3,106 – 3,216Advancestocustomers 16,148 61,801 29,937 52,964 109,656 125,823 (943) 395,386Investmentsecurities – 18,306 32,919 56,861 59,158 6,548 520 174,312Amountsduefromgroupcompanies 14,388 36,383 12,929 16,978 18,500 14,306 (1,585) 111,899Others 337 4,096 9,364 540 38 – 9,069 23,444

Total Assets 51,741 168,756 136,893 184,197 197,535 153,886 40,042 933,050

LiabilitiesHongKongSARcurrencynotesin

circulation – – – – – – 32,481 32,481Depositsandbalancesofbanksand

otherfinancialinstitutions 10,798 444 62 52 – – – 11,356Depositsfromcustomers 487,709 97,610 86,704 81,596 1,826 42 – 755,487Tradingliabilities – 21,599 109 447 50 86 774 23,065Financialliabilitiesdesignatedat

fairvalue – 818 924 1,372 468 30 – 3,612Debtsecuritiesinissue – 320 3,586 6,100 – – – 10,006Amountsduetogroupcompanies 10,754 3,414 5,715 3,081 1,143 2,042 – 26,149Subordinatedliabilities – – – – – 11,267 – 11,267Others 6,395 4,939 5,222 1,010 – – 235 17,801







Bank(continued)

2012

Due Due Due




Of which:

Certificates of deposit held– includedinTradingassets – 4 452 590 33 – – 1,079– includedinInvestmentsecuritiesas

available-for-salesecurities – 6,603 11,663 10,634 2,856 – – 31,756

– 6,607 12,115 11,224 2,889 – – 32,835


– includedinTradingassets – 1,341 3,348 3,988 25 – – 8,702– includedinInvestmentsecuritiesas

available-for-salesecurities – 4,994 15,007 13,506 – – – 33,507

– 6,335 18,355 17,494 25 – – 42,209

Debt securities– includedinTradingassets – – 291 4,278 8,725 4,075 – 17,369– includedinFinancialassets

designatedatfairvalue – – – – 110 3,106 – 3,216– includedinInvestmentsecurities

classifiedas:– available-for-salesecurities – 6,116 6,249 28,611 52,182 6,548 – 99,706– loansandreceivables – 593 – 4,110 4,120 – – 8,823

– includedinAmountsduefromfellowsubsidiariesclassifiedas:

– available-for-salesecurities – – – – – 1,305 – 1,305– financialassetsdesignatedat

fairvalue – – – – – 98 – 98

– 6,709 6,540 36,999 65,137 15,132 – 130,517






Bank(continued)

2011

Due Due Due






banksandotherfinancialinstitutions 21,676 – – – – – – 21,676Placementswithbanksandother

financialinstitutions 474 53,304 36,128 45,070 1,504 – (3) 136,477HongKongSARGovernment


fairvalue – – – 38 344 3,893 – 4,275Advancestocustomers 9,384 56,002 40,464 54,663 106,539 111,447 (1,022) 377,477Investmentsecurities – 12,021 25,611 45,430 48,144 1,640 417 133,263Amountsduefromgroupcompanies 6,335 43,052 16,279 6,213 11,512 3,439 – 86,830Others 322 3,789 6,349 404 275 56 9,808 21,003

Total Assets 38,191 174,574 129,362 162,112 178,427 124,502 40,611 847,779

LiabilitiesHongKongSARcurrencynotesin

circulation – – – – – – 31,401 31,401Depositsandbalancesofbanksand

otherfinancialinstitutions 11,156 3,484 81 13 – – – 14,734Depositsfromcustomers 415,659 130,851 85,580 38,898 1,419 18 – 672,425Tradingliabilities – 23,972 109 543 13 1 – 24,638Financialliabilitiesdesignatedat

fairvalue – 194 1,329 1,353 611 – – 3,487Debtsecuritiesinissue – 8,634 2,930 1,701 – – – 13,265Amountsduetogroupcompanies 3,333 3,028 6,104 1,782 1,916 1,696 – 17,859Subordinatedliabilities – – – – – 13,100 – 13,100Others 5,510 3,515 8,535 1,922 – 44 223 19,749







Bank(continued)

2011

Due Due Due




Of which:

Certificates of deposit held– includedinTradingassets – 52 54 1,502 412 100 – 2,120– includedinInvestmentsecuritiesas

available-for-salesecurities – 4,532 6,861 7,979 4,415 – – 23,787

– 4,584 6,915 9,481 4,827 100 – 25,907


– includedinTradingassets – 5,828 3,183 4,727 – – – 13,738– includedinInvestmentsecuritiesas

available-for-salesecurities – 1,418 15,833 17,265 – – – 34,516

– 7,246 19,016 21,992 – – – 48,254

Debt securities– includedinTradingassets – 280 979 3,706 9,640 3,908 – 18,513– includedinFinancialassets

designatedatfairvalue – – – 38 344 3,893 – 4,275– includedinInvestmentsecurities

classifiedas:– available-for-salesecurities – 5,801 2,567 19,546 38,406 – – 66,320– loansandreceivables – 270 350 640 5,323 1,640 – 8,223

– includedinAmountsduefromimmediateholdingcompanyastradingsecurities – – – – 2 15 – 17

– includedinAmountsduefromfellowsubsidiariesclassifiedas:

– available-for-salesecurities – – – – – 2,119 – 2,119– financialassetsdesignatedat

fairvalue – – – – – 221 – 221

– 6,351 3,896 23,930 53,715 11,796 – 99,688





(ii) Behaviouralmaturityoffinancialliabilitiesonadiscountedbasis

Thecashflowspresentedinnote37(f)(i)reflectthecashflowswhichwillbecontractuallypayableovertheresidualmaturityofthe instruments. Inpractice,however, liability instrumentsbehavedifferentlyfromtheircontractualtermsandtypically,shorttermcustomeraccountsextendtoalongerperiodthantheircontractualmaturity.TheBankanditssubsidiaries’expectationofwhensuchliabilitiesarelikelytobecomepayableisprovidedinthetablebelow.Noinformationhasbeenpresentedforfinancialliabilitieswhichwillbecomepayableontheircontractualduedates.

Consolidated

2012

Within 3 months

Between 3 months

and 1 year

Between 1 year

and 5 years After 5 years Total


Depositsandbalancesofbanksandotherfinancialinstitutions 11,509 772 – – 12,281

Depositsfromcustomers 135,216 112,815 508,558 – 756,589

Total 146,725 113,587 508,558 – 768,870

2011

Within 3 months

Between 3 months

and 1 year

Between 1 year



Depositsandbalancesofbanksandotherfinancialinstitutions 14,996 13 720 – 15,729


Total 147,247 118,888 422,534 – 688,669





(ii) Behaviouralmaturityoffinancialliabilitiesonadiscountedbasis(continued)

Bank

2012

Within 3 months

Between 3 months

and 1 year

Between 1 year





Total 145,783 112,508 508,552 – 766,843

2011

Within 3 months

Between 3 months

and 1 year

Between 1 year





Total 146,585 118,763 421,811 – 687,159





(iii) Financialliabilitiesexcludingderivativefinancialinstrumentsonanundiscountedbasis

ThefollowingtablesshowthecashflowsbyremainingcontractualmaturityonanundiscountedbasisfortheBank’sfinancialliabilities.Thefinancialliabilitybalancesinthetableswillnotagreetothebalancesreportedinthebalancesheetsasthetablesincorporateallcontractualcashflows,onanundiscountedbasis,relatingtobothprincipalandinterestpayments.Thecashflowspresentedinthetablesreflectthecashflowswhichwillbecontractuallypayableovertheresidualmaturityof the instruments. In practice, however, the liability instruments behave differently from theircontractualtermsandtypically,forshorttermcustomeraccounts,extendtoalongerperiodthantheircontractualmaturity.

Consolidated

2012

Due Due

between between Due

Repayable Due within 3 months to 1 year to after

on demand 3 months 1 year 5 years 5 years Undated Total

HK$’M HK$’M HK$’M HK$’M HK$’M HK$’M HK$’M

Depositsandbalancesofbanksandotherfinancialinstitutions 10,798 715 772 – – – 12,285

Depositsfromcustomers 487,710 185,600 83,138 2,005 84 – 758,537Tradingliabilities – 20,818 – – – 774 21,592Financialliabilitiesdesignatedat

fairvalue – 1,777 1,390 497 28 – 3,692Debtsecuritiesinissue – 3,918 6,161 – – – 10,079Amountsduetogroupcompanies 10,031 8,078 3,326 1,267 2,042 – 24,744Subordinatedliabilities – – 536 2,153 12,217 – 14,906Others 5,744 9,750 1,114 11 244 33,095 49,958

514,283 230,656 96,437 5,933 14,615 33,869 895,793

2011

Due Due

between between Due




Depositsandbalancesofbanksandotherfinancialinstitutions 11,156 3,845 13 720 – – 15,734

Depositsfromcustomers 415,667 217,161 39,481 1,451 18 – 673,778Tradingliabilities – 23,137 – – – – 23,137Financialliabilitiesdesignatedat

fairvalue – 1,593 1,336 618 – – 3,547Debtsecuritiesinissue – 11,570 1,712 – – – 13,282Amountsduetogroupcompanies 2,882 7,913 3,297 2,449 1,696 – 18,237Subordinatedliabilities – 2 528 2,187 14,943 – 17,660Others 5,521 11,589 2,358 27 130 31,624 51,249

435,226 276,810 48,725 7,452 16,787 31,624 816,624





(iii) Financialliabilitiesexcludingderivativefinancialinstrumentsonanundiscountedbasis(continued)

Bank

2012

Due Due

between between Due




Depositsandbalancesofbanksandotherfinancialinstitutions 10,798 509 52 – – – 11,359

Depositsfromcustomers 487,709 184,861 82,777 2,000 84 – 757,431Tradingliabilities – 20,818 – – – 774 21,592Financialliabilitiesdesignatedat

fairvalue – 1,777 1,390 497 28 – 3,692Debtsecuritiesinissue – 3,918 6,161 – – – 10,079Amountsduetogroupcompanies 10,754 9,132 3,081 1,165 2,042 – 26,174Subordinatedliabilities – – 536 2,153 12,217 – 14,906Others 5,735 9,636 968 – – 32,716 49,055

514,996 230,651 94,965 5,815 14,371 33,490 894,288

2011

Due Due

between between Due




Depositsandbalancesofbanksandotherfinancialinstitutions 11,156 3,569 13 – – – 14,738

Depositsfromcustomers 415,659 216,780 39,356 1,448 18 – 673,261Tradingliabilities – 23,137 – – – – 23,137Financialliabilitiesdesignatedat

fairvalue – 1,593 1,336 618 – – 3,547Debtsecuritiesinissue – 11,570 1,712 – – – 13,282Amountsduetogroupcompanies 3,333 9,136 1,785 1,916 1,696 – 17,866Subordinatedliabilities – 2 528 2,187 14,943 – 17,660Others 5,510 11,204 1,922 – 44 31,624 50,304

435,658 276,991 46,652 6,169 16,701 31,624 813,795





(iv) Derivativefinancialinstrumentsonanundiscountedbasis

Thefollowingtablesshowthematurityofderivativefinancialinstrumentsincludingthosenetsettledderivativecontractsinanetliabilityposition,togetherwiththepaylegofgrosssettledcontractsregardlessofwhethertheoverallcontractisinanassetorliabilityposition.Thereceivinglegisnotshowninthistableandasaresultthederivativeamountsinthistableareinflatedbytheirexclusion.

Consolidated

Due Due

between between Due

Due within 3 months to 1 year to after

3 months 1 year 5 years 5 years Total


2012

Derivativefinancialinstruments 731,255 532,200 26,824 6,061 1,296,340

2011

Derivativefinancialinstruments 341,680 341,484 11,107 2,398 696,669

Bank

Due Due

between between Due

Due within 3 months to 1 year to after

3 months 1 year 5 years 5 years Total


2012

Derivativefinancialinstruments 731,170 532,200 26,824 6,061 1,296,255

2011

Derivativefinancialinstruments 341,680 341,484 11,107 2,398 696,669




(g) Operationalrisk

Operationalriskisthepotentialforlossarisingfromthefailureofpeople,processortechnologyortheimpactofexternalevents.Weseektominimizeourexposuretooperationalrisk,subjecttocosttrade-offs.Operationalriskexposuresaremanagedthroughaconsistentsetofmanagementprocessesthatdriveriskidentification,assessment,controlandmonitoring.

TheRiskCommittee(asdelegatedbytheBoard)overseesthemanagementofoperationalrisksacrosstheBank,supportedbybusinessandfunctionallevelcommittees.ThisformalstructureofgovernanceprovidestheBoardwithconfidencethatoperationalrisksarebeingproactivelyidentifiedandeffectivelymanaged.

TheRiskCommitteeisresponsibleforsettingandmaintainingstandardsforoperationalriskmanagementandmeasurement. Inaddition, specialistoperational riskcontrolownershave responsibility for themanagementofoperationalriskarisingfromthefollowingBank-wideactivities:legalprocesses,peoplemanagement, technology management, vendor management, property management, securitymanagement,accountingandfinancialcontrol,taxmanagement,corporateauthoritiesandstructureandregulatorycompliance.EachriskcontrolownerisresponsibleforidentifyingrisksthatarematerialtotheBankandformaintaininganeffectivecontrolenvironment,whichincludesdefiningappropriatepoliciesandproceduresforapprovalbyauthorizedriskcommittees.

TheCountryOperationalRiskCommittee(“CORC”)isasub-committeeoftheRiskCommitteeandisresponsibleforthesupervisionandmanagementofoperationalrisksacrosstheBank.CORCisalsoresponsibleforensuringadequateandappropriatepoliciesandprocedures,andresourcesareinplaceforidentification,assessment,monitoring,controlandreportingofoperationalrisks.

CompliancewithoperationriskpoliciesandproceduresistheresponsibilityofallmanagerswithintheBank.WholesaleBankandConsumerBankhaveindependentOperationalRiskteamsreportingtotheRiskFunctiontoensureoperationalriskiseffectivelymanaged.Theseunitsareresponsibleforapprovingoperationalcontrols,ensuringcompliancewithpoliciesandprocedures in thebusiness,monitoringmaterial operational risk exposures, and providing guidance to the respective business areas onoperationalriskmanagement.

(h) Reputationalrisk

ReputationalriskisthepotentialfordamagetotheBank’sfranchise,resultinginlossofearningsoradverseimpactonmarketcapitalisationasaresultofstakeholderstakinganegativeviewoftheBankoritsactions.

ReputationalriskcouldarisefromthefailurebytheBanktoeffectivelymitigatetherisksinitsbusinessesincludingoneormoreofcountry,credit,liquidity,market,regulatory,legalorotheroperationalrisk.Itmayalsoarisefromafailuretocomplywithenvironmentalandsocialstandards.DamagetotheBank’sreputationcouldcauseexistingclientstoreduceorceasetodobusinesswiththeBankandprospectiveclientstobereluctanttodobusinesswiththeBank.Afailuretomanagereputationalriskeffectivelycouldmateriallyaffect theBank’sbusiness, resultsofoperationsandprospects.Allemployeesareresponsiblefordaytodayidentificationandmanagementofreputationalrisk.




(h) Reputationalrisk(continued)

The Risk Committee and its sub-committee, the Responsibility and Reputational Risk Committee,providesBank-wideoversightonreputationalrisk,setspolicyandmonitorsmaterialrisks.TheHeadofCorporateAffairsistheoverallriskcontrolownerforreputationalrisk.TheExecutiveCommittee(“EXCO”)provideadditionaloversightofreputationalriskonbehalfoftheBoard.

TheHeadofCorporateAffairsas riskcontrolowner is responsible for theprotectionof theBank’sreputationwiththesupportofthecountrymanagementteam.TheHeadofCorporateAffairsandChiefExecutiveOfficermustactively:

• PromoteawarenessandapplicationoftheBank’spoliciesandproceduresregardingreputationalrisk.

• EncouragebusinessandfunctionstotakeaccountoftheBank’sreputationinalldecision-making,includingdealingswithcustomersandsuppliers.

• Implementeffectivein-countryreportingsystemstoensuretheyareawareofallpotentialissuesintandemwithrespectivebusinesscommittees.

• Promoteeffective,proactivestakeholdermanagementthroughongoingengagement.

(i) Pensionrisk

PensionriskisthepotentialforlossduetohavingtomeetanactuariallyassessedshortfallintheBank’spensionscheme.PensionriskexposureisnotconcernedwiththefinancialperformanceoftheBank’spensionschemebutisfocusedupontherisktotheBank’sfinancialpositionarisingfromtheneedtomeetpensionschemefundingobligations.TheriskassessmentisfocusedonourobligationstowardstheBank’spensionscheme,ensuring thatour fundingobligation iscomfortablywithinourfinancialcapacity.Pensionriskismonitoredonaquarterlybasistakingaccountoftheactualvariationsinassetvaluesandupdatedexpectationsregardingtheprogressionofthepensionfundassetsandliabilities.

ThePensionRiskCommitteeisthebodyresponsibleforgovernanceofpensionriskanditreceivesitsauthorityfromEXCO.

(j) Capitalmanagement

TheHKMAsetsandmonitorscapitalrequirementsfortheBankandcertainofitssubsidiariesspecifiedbytheHKMA.Inimplementingcurrentcapitalrequirements,theHKMArequirestheBanktomaintainaprescribedratiooftotalcapitaltototalrisk-weightedassets.TheBankcalculatesitscapitaladequacyratiosinaccordancewiththeBanking(Capital)RulesoftheHongKongBankingOrdinance.

Inadditiontomeetingtheregulatoryrequirements,theBank’sprimaryobjectiveswhenmanagingcapitalaretosafeguardtheBankanditssubsidiaries’abilitytocontinueasagoingconcern,sothatitcancontinuetoprovidereturnsforshareholdersandbenefitsforotherstakeholders,bypricingproductsandservicescommensuratelywiththelevelofriskandbysecuringaccesstofinanceatareasonablecost.TheBankactivelyandregularlyreviewsandmanagesitscapitalstructuretomaintainabalancebetweenthehighershareholderreturnsthatmightotherwisebepossiblewithgreatergearingandtheadvantagesandsecurityaffordedbyasoundcapitalposition,andmakesadjustmentstothecapitalstructureinlightofchangesineconomicconditions.




(j) Capitalmanagement(continued)

TheprocessofallocatingcapitaltospecificoperationsandactivitiesisundertakenbytheAssetandLiabilityCommitteeandisreviewedregularlybytheBoardofDirectors.

Consistentwith industrypractice,theBankmonitors itscapitalstructureonthebasisofthecapitaladequacyratioandtherehavebeennomaterialchangesintheBank’spolicyonthemanagementofcapitalduringtheyear.

TheBankanditssubsidiarieshavecompliedwithallexternallyimposedcapitalrequirementsthroughouttheyearsended31December2012and2011.

Forthecapitalratiosasat31December2012and2011,theBankusesboththeadvancedinternalratings-basedapproachandstandardizedapproachtocalculateitscreditriskfornon-securitizationexposures.TheBankadoptstheinternalratings-based(securitization)approachtocalculateitscreditriskforsecuritizationexposures.

Forthecalculationofitscapitalchargeformarketrisk,theBankusesaninternalmodelsapproachfortwoguaranteedfundsandthestandardized(marketrisk)approachforotherexposures.Inaddition,theBankadoptsthestandardized(operationalrisk)approachforoperationalrisk.

The Bank’s consolidated capital as at 31 December 2012 and 2011 consists of core capital afterdeductionsofHK$34,061million(2011:HK$28,612million)andsupplementarycapitalafterdeductionsofHK$10,441million(2011:HK$11,708million).Supplementarycapitalincludessubordinateddebt,andcollectiveimpairmentallowancesforimpairedassets.

38 Financial instruments

(a) Valuationoffinancialinstrumentscarriedatfairvalue

ValuationoffinancialassetsandliabilitiesheldatfairvaluearesubjecttoareviewindependentofthebusinessbyValuationControl.Forthosefinancialassetsandliabilitieswhosefairvalueisdeterminedbyreferencetoexternallyquotedpricesormarketobservablepricinginputstovaluationmodels,anassessmentismadeagainstexternalmarketdataandconsensusservices.Financialinstrumentsheldat fair value in the balance sheet have been classified into a valuation hierarchy that reflects thesignificanceoftheinputsusedinthefairvaluemeasurements.

Valuation methodologies

Thevaluationhierarchy,andthetypesofinstrumentsclassifiedintoeachlevelwithinthathierarchy,issetoutbelow:

Level1 Level2 Level3

Fairvaluedeterminedusing: Unadjustedquotedpriceinanactivemarketforidenticalassetsandliabilities

Valuationmodelswithdirectlyorindirectlymarketobservableinputs

Valuationmodelsusingsignificantnon-marketobservableinputs

Typesoffinancialassets ActivelytradedgovernmentandagencysecuritiesListedequitiesQuotedderivativeinstruments

CorporateandothergovernmentbondsandloansOver-the-counterderivativesAssetbackedsecurities

AssetbackedsecuritiesCorporatebondsandloansinilliquidmarketsUnlistedequities

Typesoffinancialliabilities ShortpositionsinactivelytradedgovernmentandagencysecuritiesShortpositionsinlistedequitiesQuotedderivativeinstruments

StructuredcustomerdepositsOver-the-counterderivatives

Over-the-counterderivativeswithunobservableparameters



38 Financial instruments (continued)

(a) Valuationoffinancialinstrumentscarriedatfairvalue(continued)

Thetablesbelowshowtheclassificationoffinancialinstrumentsheldatfairvalueintothevaluationhierarchysetoutaboveasat31December:

Consolidated

2012

Level 1 Level 2 Level 3 Total


Tradingassets– Tradingsecurities 24,871 2,780 – 27,651– Advancestocustomers – 186 – 186– Positivefairvaluesoftradingderivatives 2 567 8 577

Amountsduefromimmediateholdingcompany– Positivefairvaluesoftradingderivatives 3 6,093 1 6,097– Positivefairvaluesofhedgingderivatives – 911 – 911

Amountsduefromfellowsubsidiaries– Available-for-saledebtsecurities – – 1,305 1,305– Debtsecuritiesdesignatedatfairvalue – – 98 98– Positivefairvaluesoftradingderivatives – 81 – 81

Financialassetsdesignatedatfairvalue– Debtsecurities – 2,668 548 3,216

Available-for-salesecurities– Treasurybills(includingExchangeFund

Bills) 33,507 – – 33,507– Certificatesofdepositheld – 31,756 – 31,756– Debtsecurities 28,692 71,014 – 99,706– Equityshares,netofimpairment 90 – 430 520

Total assets measured at fair value 87,165 116,056 2,390 205,611

Tradingliabilities– Shortpositionsinsecurities 22,229 – – 22,229– Negativefairvaluesoftradingderivatives – 838 1 839

Financialliabilitiesdesignatedatfairvalue– Structuredcustomerdeposits – 3,574 – 3,574– Debtsecuritiesissued – 38 – 38

Amountsduetoimmediateholdingcompany– Structureddepositsdesignatedatfairvalue – 186 – 186– Negativefairvaluesoftradingderivatives 2 5,632 8 5,642– Negativefairvaluesofhedgingderivatives – 1,654 – 1,654

Amountsduetofellowsubsidiaries– Negativefairvaluesoftradingderivatives – 76 – 76– Negativefairvaluesofhedgingderivatives – 264 – 264

Total liabilities measured at fair value 22,231 12,262 9 34,502

Therewerenosignificanttransfersbetweenlevel1andlevel2instrumentsin2012.






2011 Restated



Tradingassets– Tradingsecurities 30,410 3,971 – 34,381– Placementwithbanksandotherfinancial

institutions – 21 – 21– Advancestocustomers – 185 – 185– Positivefairvaluesoftradingderivatives 45 745 – 790

Amountsduefromimmediateholdingcompany– Tradingdebtsecurities – 17 – 17– Positivefairvaluesoftradingderivatives 6 2,563 – 2,569– Positivefairvaluesofhedgingderivatives – 802 – 802

Amountsduefromfellowsubsidiaries– Available-for-saledebtsecurities – – 2,119 2,119– Debtsecuritiesdesignatedatfairvalue – – 221 221– Positivefairvaluesoftradingderivatives – 103 – 103– Positivefairvaluesofhedgingderivatives – 99 – 99

Financialassetsdesignatedatfairvalue– Debtsecurities – 2,659 1,616 4,275



Otherassets– Positivefairvaluesofhedgingderivatives – 56 – 56


Tradingliabilities– Shortpositionsinsecurities 23,855 – – 23,855– Negativefairvaluesoftradingderivatives 6 777 – 783


Amountsduetoimmediateholdingcompany– Negativefairvaluesoftradingderivatives 2 3,375 – 3,377– Negativefairvaluesofhedgingderivatives – 1,358 – 1,358


Total liabilities measured at fair value 23,863 9,025 – 32,888






Bank

2012



Tradingassets– Tradingsecurities 24,871 2,780 – 27,651– Advancestocustomers – 186 – 186– Positivefairvaluesoftradingderivatives 2 563 8 573

Amountsduefromimmediateholdingcompany– Positivefairvaluesoftradingderivatives 3 6,089 1 6,093– Positivefairvaluesofhedgingderivatives – 911 – 911

Amountsduefromfellowsubsidiaries– Available-for-saledebtsecurities – – 1,305 1,305– Debtsecuritiesdesignatedatfairvalue – – 98 98– Positivefairvaluesoftradingderivatives – 81 – 81

Financialassetsdesignatedatfairvalue– Debtsecurities – 2,668 548 3,216




Tradingliabilities– Shortpositionsinsecurities 22,229 – – 22,229– Negativefairvaluesoftradingderivatives – 835 1 836


Amountsduetoimmediateholdingcompany– Structureddepositsdesignatedatfairvalue – 186 – 186– Negativefairvaluesoftradingderivatives 2 5,632 8 5,642– Negativefairvaluesofhedgingderivatives – 1,654 – 1,654


Total liabilities measured at fair value 22,231 12,259 9 34,499






Bank(continued)

2011 Restated



Tradingassets– Tradingsecurities 30,410 3,971 – 34,381– Placementwithbanksandotherfinancial

institutions – 21 – 21– Advancestocustomers – 185 – 185– Positivefairvaluesoftradingderivatives 45 745 – 790

Amountsduefromimmediateholdingcompany– Tradingdebtsecurities – 17 – 17– Positivefairvaluesoftradingderivatives 6 2,560 – 2,566– Positivefairvaluesofhedgingderivatives – 802 – 802

Amountsduefromfellowsubsidiaries– Available-for-saledebtsecurities – – 2,119 2,119– Debtsecuritiesdesignatedatfairvalue – – 221 221– Positivefairvaluesoftradingderivatives – 103 – 103– Positivefairvaluesofhedgingderivatives – 99 – 99Financialassetsdesignatedatfairvalue– Debtsecurities – 2,659 1,616 4,275



Otherassets– Positivefairvaluesofhedgingderivatives – 56 – 56


Tradingliabilities– Shortpositionsinsecurities 23,855 – – 23,855– Negativefairvaluesoftradingderivatives 6 777 – 783


Amountsduetoimmediateholdingcompany– Negativefairvaluesoftradingderivatives 2 3,375 – 3,377– Negativefairvaluesofhedgingderivatives – 1,358 – 1,358


Total liabilities measured at fair value 23,863 9,025 – 32,888






Themovementsduringtheyearforlevel3financialassetsandliabilitiesareasfollows:

ConsolidatedandBank

2012

Financial

assets

designated at

fair value

Amounts due

from immediate

holding

company

Amounts due

from fellow

subsidiaries

(Note)

Available-

for-sale

securities

Derivatives

financial

instruments

Total level

3 assets


FinancialassetsAt1January2012 1,616 – 2,340 318 – 4,274Totalgainsrecognisedinthe

incomestatement 76 1 35 – 8 120Totalgainsrecognisedinthe

available-for-saleinvestmentreserve – – 8 30 – 38Purchases – – – 217 – 217Sales – – – (31) – (31)Settlements (700) – (980) (104) – (1,784)Transferredintolevel3 113 – – – – 113Transferredoutoflevel3 (557) – – – – (557)

At31December2012 548 1 1,403 430 8 2,390

Totalgains/(losses)recognisedintheincomestatementrelatingtoassetsheldat31December2012 5 1 (1) – 8 13

Amounts due

to immediate

holding

company

Derivatives

financial

instruments

Total level

3 liabilities


FinancialliabilitiesAt1January2012 – – –Totallossesrecognisedintheincomestatement 8 1 9

At31December2012 8 1 9

Totallossesrecognisedintheincomestatementrelatingtoliabilitiesheldat31December2012 8 1 9





2011

Financial

assets

designated at

fair value

Amounts due

from fellow

subsidiaries

(Note)

Available-

for-sale

securities

Total level

3 assets


FinancialassetsAt1January2011 2,385 3,309 277 5,971Totalgainsrecognisedinthe

incomestatement 31 10 240 281Totalgains/(losses)recognisedinthe

available-for-saleinvestmentreserve – 13 (38) (25)Purchases – – 526 526Sales – – (491) (491)Settlements (1,133) (992) (196) (2,321)Transferredintolevel3 824 – – 824Transferredoutoflevel3 (491) – – (491)

At31December2011 1,616 2,340 318 4,274

Totalgainsrecognisedintheincomestatementrelatingtoassetsheldat31December2011 6 18 – 24

Note: Amountsduefromfellowsubsidiariesincludeddebtsecuritieswhichareavailableforsaleanddesignatedatfairvalue.

Sensitivitiesinrespectofthefairvaluesoflevel3assetsandliabilitiesareasfollows:

ConsolidatedandBank

2012

Held at fair value through profit or loss Available-for-sale securities

Net

exposure

Favourable

changes

Unfavourable

changes

Net

exposure

Favourable

changes

Unfavourable

changes


Amountsduefromimmediateholdingcompany 1 1 1 – – –

Amountsduefromfellowsubsidiaries 98 98 98 1,305 1,310 1,300

Debtsecurities 548 554 542 – – –Equitysecurities – – – 430 473 387Derivativefinancial

instruments 7 7 7 – – –Amountsduetoimmediate

holdingcompany (8) (8) (8) – – –

646 652 640 1,735 1,783 1,687





2011

Held at fair value through profit or loss Available-for-sale securities

Net

exposure

Favourable

changes

Unfavourable

changes

Net

exposure

Favourable

changes

Unfavourable

changes


Amountsduefromfellowsubsidiaries 221 222 220 2,119 2,126 2,112

Debtsecurities 1,616 1,631 1,601 – – –Equityshares – – – 318 350 286

1,837 1,853 1,821 2,437 2,476 2,398

Wherethefairvalueoffinancialinstrumentsaremeasuredusingvaluationtechniquesthatincorporateoneormoresignificantinputwhicharebasedonunobservablemarketdata,weapplystressesontheseunobservableparameterinputs.A10percentincreaseordecreaseincorrelationandcreditsensitivitieshasbeenusedtogeneratearangeofreasonablypossiblealternativevaluations.Asof31December2012,thesestressescouldhaveincreasedordecreasedthefairvaluesoffinancialinstrumentsheldatfairvaluebyHK$6million(2011:HK$16million)andavailable-for-salesecuritiesbyHK$48million(2011:HK$39million).

(b) Valuationoffinancialinstrumentscarriedatamortizedcost

Allfinancialinstrumentsarestatedatfairvalueoramountsnotmateriallydifferentfromtheirfairvalueasat31December2012and2011.

ThefollowingsetsouttheBank’sbasisofestablishingthefairvalueofitsfinancialassetsandliabilitieswhicharenotcarriedatfairvalue.Thebasisforestablishingthefairvalueoffinancialassetsandliabilitiesheldatfairvalueandofderivativesissetoutinnote2(i)andnote2(j),respectively.

Cash and balances with banks, central banks and other financial institutions

Thefairvalueofcashandbalanceswithbanks,centralbanksandotherfinancialinstitutionsistheircarryingamounts.




(b) Valuationoffinancialinstrumentscarriedatamortizedcost(continued)

Placements with banks and other financial institutions

Thefairvalueoffloatingrateplacementsandovernightdepositsistheircarryingamounts.Theestimatedfairvalueoffixedinterestbearingdepositsisbasedondiscountedcashflowsusingtheprevailingmoneymarketratesfordebtswithasimilarcreditriskandremainingmaturity.

Advances to customers

Advancesarenetofprovisionsfor impairment.Theestimatedfairvalueofadvancesrepresentsthediscountedamountof futurecashflowsexpectedtobereceived, includingassumptionsrelatingtoprepaymentratesand,whereappropriate,creditspreads.Expectedcashflowsarediscountedatcurrentmarketratestodeterminefairvalue.

Deposits and balances of banks, other financial institutions and customers

Theestimatedfairvalueofdepositswithnostatedmaturityistheamountrepayableondemand.Theestimatedfairvalueoffixedinterestbearingdepositsandotherborrowingswithoutquotedmarketpricesisbasedondiscountingcashflowsusingtheprevailingmarketratesfordebtswithasimilarcreditriskandremainingmaturity.

Debt securities in issue and subordinated liabilities

Theaggregatefairvaluesarecalculatedbasedonquotedmarketprices.Forthosesecuritieswherequotedmarketpricesarenotavailable,adiscountedcashflowmodelisusedbasedonacurrentmarketrelatedyieldcurveappropriatefortheremainingtermtomaturity.

(c) Transfersoffinancialassets

TheBankentersintocollateralisedrepurchaseagreements(repos).ThesetransactionstypicallyentitletheBankanditscounterpartiestohaverecoursetoassetssimilartothoseprovidedascollateralintheeventofadefault.SecuritiessoldsubjecttoreposamountingtoHK$847millioncontinuetoberecognisedonthebalancesheetastheBankretainssubstantiallytheassociatedriskandrewardsofthesesecurities.ThecounterpartyliabilityamountingtoHK$813millionisincludedin“Amountsduetoimmediateholdingcompany”.

39 Assets pledged as security for liabilities

LiabilitiesoftheBankamountingtoHK$23,043million(2011:HK$24,245million)aresecuredbythedepositofassets, includingassetspledgedinrespectofsaleandrepurchaseagreements,tocovershortpositionsandtofacilitatesettlementprocesseswithclearinghouses.TheamountofassetspledgedbytheBanktosecuretheseliabilitiesisHK$23,076million(2011:HK$24,247million).Theseassetsmainlycompriseofdebtsecuritiesandtreasurybills.



39 Assets pledged as security for liabilities (continued)

Inrespectofreverserepurchaseagreementsandsecuritiesborrowingtransactions,thefairvalueofcollateralheldbytheBankwhichwaspermittedtobesoldorrepledgedamountedtoHK$3,333million(2011:HK$11,397million). The fair valueof suchcollateral actually soldor repledgedby theBankamountedtoHK$Nilmillion(2011:HK$2,396million).

Thesetransactionsareconductedundertermsthatareusualandcustomarytostandardlendingandstockborrowingactivities.

40 Material related party transactions

Inadditiontothetransactionsandbalancesdisclosedelsewhereinthesefinancialstatements,theBankanditssubsidiariesenteredintothefollowingmaterialrelatedpartytransactions.ThetransactionsoftheBankaremateriallythesameasthoseappearingintheconsolidatedfinancialstatementsin2012and2011.

(a) Keymanagementpersonnelremuneration

RemunerationforkeymanagementpersonneloftheBank,includingamountspaidtothedirectorsasdisclosedinnote8isasfollows:

Restated

2012 2011

HK$’M HK$’M

Short-termemployeebenefits 129 110Post-employmentbenefits 12 11Equitycompensationbenefits 48 33

189 154

Totalremunerationisincludedinstaffcosts(seenote4(g)).

(b) Creditfacilitiesandloanstokeymanagementpersonnel

Duringtheyear,theBankprovidedcreditfacilitiestokeymanagementpersonneloftheBankandtheirclosefamilymembersandcompaniescontrolledorsignificantlyinfluencedbythem.Thecreditfacilitieswereprovidedintheordinarycourseofbusinessandonsubstantiallythesametermsasforcomparabletransactionswithpersonsofasimilarstandingor,whereapplicable,withotheremployees.

Restated

2012 2011

HK$’M HK$’M

Loanbalances:At1January 441 1,240

At31December 124 441

Averagebalanceduringtheyear 454 909

Incomeearned 4 8



40 Material related party transactions (continued)

(c) Sharebasedpayments

TheGroupoperatesanumberofsharebasedpaymentschemesforitsdirectorsandemployees.TheschemelivesreferredtobelowrelatetotheremainingperiodinwhichoptionsmaybegrantedundertheschemebytheBankanditssubsidiaries’ultimateholdingcompanyStandardCharteredPLC(SCPLC).

2011 Standard Chartered Share Plan (the 2011 Plan)

ApprovedbyshareholdersinMay2011,itistheGroup’smainshareplan.The2011Planisdesignedtodeliverperformanceshares,deferredawards(shareorcash)andrestrictedshares,givingtheGroupsufficientflexibility tomeet thechallengesof thechangingregulatoryandcompetitiveenvironment.Discretionaryshareawardsareakeypartofbothexecutivedirectors’andseniormanagement’svariablecompensationandtheirsignificanceasaproportionofpotentialtotalremunerationisoneofthestrongestindicatorsoftheGroup’scommitmenttopayforsustainableperformanceandaligningrewardwiththeriskhorizon.PerformanceandrestrictedshareawardswillgenerallybeintheformofnilpriceoptionstoacquiresharesinSCPLC.

Performance shares

Awardsofperformancesharesvestafterathree-yearperiodandaresubjecttoacombinationofthreeperformancemeasures,TotalShareholderReturn(TSR),Earningspershare(EPS)andReturnonRiskWeightedAssets(RoRWA).Thethreeperformancemeasuresareequallyweightedwithonethirdoftheawarddependingoneachmeasure,assessedindependently.PerformanceshareawardsaresubjecttotheGroup’sclaw-backpolicy.

Restricted shares

Restrictedshareawardswhicharemadeoutsideoftheannualperformanceprocess,asbuy-outorretentionmechanisms,areprovidedasrestrictedsharesunderthe2011Plan.Theseawardsvestinequalinstalmentsonthesecondandthethirdanniversariesoftheawarddate.Inafewcircumstances,someawardsvestoverafour-yearperiodinequaltranches.ThisisinlinewithsimilarplansoperatedbytheGroup’scompetitors.Restrictedshareawardsarenotsubjecttoanannuallimitanddonothaveanyperformanceconditions,althoughtheGroup’sclaw-backpolicywillapply.

1997/2006 Restricted Share Scheme (2006 RSS)/ 2007 Supplementary Restricted Share Scheme (2007 SRSS)

TheGroup’spreviousplansfordeliveringrestrictedshareswerethe2006RSSand2007SRSS,bothofwhicharenowreplacedbythe2011Plan.Therearestillunvestedandvestedawardsoutstandingundertheseplanswhichwerepreviouslyusedtodeliverthedeferredportionofannualperformanceawardsandasanincentivetomotivateandretainhighperformingemployees.Awardswillgenerallybeintheformofnilcostoptionsanddonothaveanyperformanceconditions.Generallydeferredrestrictedshareawardsvestequallyoverthreeyearsandfornon-deferredawardshalfveststwoyearsafterthedateofgrantandthebalanceafterthreeyears.Nofurtherawardswillbegrantedunderthe2006RSSand2007SRSS.




(c) Sharebasedpayments(continued)

2000 Executive Share Option Scheme (2000 ESOS)

The2000ESOSisdesignedtobeinternationallycompetitiveandfocusexecutivedirectorsandtheirseniormanagementteamsondeliveringlong-termperformance.AnEPSperformancecriterionmustbemetbeforeoptionscanbeexercised.

Executiveshareoptionstopurchaseordinarysharesintheultimateholdingcompanyareexercisableafterthethird,butbeforethetenthanniversaryofthedateofgrant.Theexercisepricepershareisthesharepriceatthedateofgrantandoptionscanonlybeexercisedifaperformanceconditionissatisfied.NofurtherawardsmaybegrantedtotheemployeesoftheBankanditssubsidiariesunderthe2000ESOS.

2001 Performance Share Plan (PSP)

The Group’s previous plan for delivering performance shares was the PSP. Although the PSP wasreplacedin2011,therearestilloutstandingvestedandunvestedawardsundertheplan.

UnderthePSP,halftheawardisdependentuponTSRperformanceandthebalanceissubjecttoatarget of defined EPS growth. Both measures use the same three-year period and are assessedindependently.Nofurtherawardscanbegrantedundertheplan.

2004 Deferred Bonus Plan

Underthe2004DeferredBonusPlan,sharesareconditionallyawardedaspartoftheexecutivedirectors’annualperformanceaward.

All Employee Sharesave Schemes (Sharesave)

UndertheSharesaveschemes,employeeshavethechoiceofopeningathree-yearorfive-yearsavingscontract.Withinaperiodofsixmonthsafterthethirdorfifthanniversary,asappropriate,employeesmaypurchaseordinarysharesintheultimateholdingcompany.Thepriceatwhichtheymaypurchasesharesisatadiscountofupto20percentonthesharepriceatthedateofinvitation.TherearenoperformanceconditionsattachedtooptionsgrantedundertheSharesaveschemes.

2011 Standard Chartered Share Plan (the 2011 plan)

Performance Shares

Valuation

The fair value isbasedon themarket value lessanadjustment to take intoaccount theexpecteddividendsoverthevestingperiodandtherelevantperformanceconditionapplyingtothatportionoftheaward.ThefairvalueoftheTSRcomponentisderivedbydiscountingathirdoftheawardthatissubjecttotheTSRconditionbythelossofexpecteddividendsovertheperformanceperiodtogetherwiththeprobabilityofmeetingtheTSRcondition.TheEPSfairvalueisderivedbydiscountingonethirdoftheawardrespectivelybythelossofexpecteddividendsovertheperformanceperiod.ThesameapproachisappliedtocalculatetheRoRWAfairvalueforonethirdoftheaward.InrespectoftheEPSandRoRWAcomponentsonly, thenumberofsharesexpected tovest isadjusted foractualperformancewhencalculatingthechargefortheyear.ThesamefairvalueisappliedtoawardsmadetobothdirectorsandemployeesoftheGroup.





2012 2011

Grant Date 21 December 13 March 20 September 6 May

Sharepriceatgrantdate(£) 15.84 15.65 13.52 16.31Sharesgranted 4,142 624,382 32,915 487,341Vestingperiod(years) 3 3 3 3Expecteddividends(yield)(%) 3.7 3.5 4.0 3.7Fairvalue(EPS)(£) 4.73 4.71 4.01 4.87Fairvalue(RoRWA)(£) 4.73 4.71 4.01 4.87Fairvalue(TSR)(£) 1.86 1.85 1.58 1.91

Theexpecteddividendyieldisbasedonthehistoricaldividendyieldoverthethreeyearspriortogrant.

Areconciliationofmovementsfortheyearto31December2012and2011isshownbelow:

2012 2011

No . of shares No . of shares

Outstandingat1January 503,484 –Granted 628,524 520,256Lapsed (50,452) (16,772)

Outstandingat31December 1,081,556 503,484Weightedaverageremainingcontractuallife 8.83years 9.45yearsExercisableat31December – –

Restricted Share Awards

Valuation

The fair value isbasedon themarket value lessanadjustment to take intoaccount theexpecteddividendsoverthevestingperiod.ThesamefairvalueisappliedforawardsmadetoboththedirectorsandemployeesoftheGroup.

2012

Grant Date 21 December 19 September 20 June 13 March

Sharepriceatgrantdate(£) 15.84 14.82 14.17 15.65Sharesgranted 37,872 63,876 111,978 1,330,714Vestingperiod(years) 2/3,1/2/3/4 2/3 2/3 2/3Expecteddividends(yield)(%) 3.7 3.0 3.8 3.8Fairvalue(£) 14.46 13.76 12.91 14.26





2011

Grant Date 14 December 20 September 22 June

Sharepriceatgrantdate(£) 14.35 13.52 15.75Sharesgranted 19,642 65,422 51,941Vestingperiod(years) 2/3 2/3 2/3Expecteddividends(yield)(%) 2.9 2.9 4.1Fairvalue(£) 13.36 12.59 14.25

Theexpecteddividendyieldisbasedonthehistoricaldividendyieldforthreeyearspriortogrant.


2012 2011


Outstandingat1January 137,005 –Granted 1,544,440 137,005Lapsed (86,596) –

Outstandingat31December 1,594,849 137,005Weightedaverageremainingcontractuallife 6.21years 6.67yearsExercisableat31December – –

1997/2006 Restricted Share Scheme (2006 RSS)

Noshareawardsweregrantedin2012.

Valuation

The fair value isbasedon themarket value lessanadjustment to take intoaccount theexpecteddividendsoverthevestingperiod.

2011

Grant Date 10 March

Sharepriceatgrantdate(£) 16.82Sharesgranted 1,811,942Vestingperiod(years) 1/2/3Expecteddividends(yield)(%) 4.1Fairvalue(£) 16.82/15.22






Areconciliationofmovementsfortheyearended31December2012and2011isshownbelow:

2012 2011


Outstandingat1January 4,393,297 3,479,217Granted – 1,811,942AdditionalsharesforSCPLCrightsissue 53,801 –Lapsed (219,520) (202,127)Exercised (1,851,537) (695,735)

Outstandingat31December 2,376,041 4,393,297Weightedaverageremainingcontractuallife 4.53years 5.28yearsExercisableat31December 1,120,469 665,964

2007 Supplementary Restricted Share Scheme (2007 SRSS)

Noshareawardsweregrantedin2012.

Valuation

The fair value isbasedon themarket value lessanadjustment to take intoaccount theexpecteddividendsoverthevestingperiod.

2011

Grant Date 10 March

Sharepriceatgrantdate(£) 16.82Sharesgranted 10,713Vestingperiod(years) 2/3Expecteddividends(yield)(%) 4.1Fairvalue(£) 15.22



2012 2011


Outstandingat1January 1,525,196 2,516,214Granted – 10,713Lapsed (245,516) (20,827)Exercised (832,977) (980,904)

Outstandingat31December 446,703 1,525,196Weightedaverageremainingcontractuallife 4.18years 4.76yearsExercisableat31December 292,095 602,907





2000 Executive Share Option Scheme (2000 ESOS)

Noshareawardsweregrantedin2012and2011.

Areconciliationofoptionmovementsfortheyearended31December2012and2011isshownbelow:

2012 2011

No . of shares

Weighted

average

exercise price No . of shares

Weighted

average

exercise price

Outstandingat1January 541,426 £6.74 728,821 £6.59Lapsed (225,621) £6.58 – –Exercised (243,071) £6.62 (187,395) £6.16

Outstandingat31December 72,734 £7.67 541,426 £6.74Exercisableat31December 72,734 £7.67 541,426 £6.74

2012 2011

Range of exercise price

Weighted

average

exercise

price

No . of

shares

Weighted

average

remaining

contractual

life

Weighted

average

exercise

price

No . of

shares

Weighted

average

remaining

contractual

life

£5.82/£8.76(2011:£5.82/£7.89) £7.67 72,734 1.07years £6.74 541,426 1.07years

2001 Performance Share Plan (PSP)


Areconciliationofmovementsfortheyearended31December2012and2011isshownbelow:

2012 2011


Outstandingat1January 648,053 889,647Lapsed (180,974) (87,807)Exercised (258,389) (153,787)

Outstandingat31December 208,690 648,053Weightedaverageremainingcontractuallife 6.44years 7.05yearsExercisableat31December 88,364 113,877





2004 Deferred Bonus Plan


Underthisplan,sharesareissueddirectlytoparticipantsuponvesting.

Areconciliationofsharemovementsfortheyearended31December2012and2011isshownbelow:

2012 2011


Outstandingat1January – 12,649Sharesexercised – (12,649)

Outstandingat31December – –

Notes:a) Thesharesvestoneyearafterthedateofaward.b)AnotionalscripdividendaccruesonthesharesheldintheTrust.Thedividendisnormallydeliveredintheformofshares

andisreleasedonvesting.

Sharesave

Valuation

Optionsarevaluedusingabinomialoption-pricingmodel.Thefairvalueperoptiongrantedandtheassumptionsusedinthecalculationareasfollows:

2012 2011

Grant Date 11 October 11 October

Sharepriceatgrantdate(£) 13.95 14.11Exerciseprice(£) 11.40 10.65Sharesgranted 820,453 493,772Vestingperiod(years) 3 3/5Expectedvolatility(%) 29.8 45.8-53.8Expectedoptionlife(years) 3.33 3.33-5.33Riskfreerate(%) 0.4 0.9-1.4Expecteddividends(yield)(%) 3.1 3.5-3.9Fairvalue(£) 3.28 5.39-5.46

Theexpectedvolatilityisbasedonhistoricalvolatilityoverthelastthreetofiveyearsorthreetofiveyearspriortogrant.Theexpectedlifeistheaverageexpectedperiodtoexercise.Theriskfreerateofreturnistheyieldonzero-couponUKGovernmentbondsofatermconsistentwiththeassumedoptionlife.Theexpecteddividendyieldisbasedonhistoricaldividendyieldforthreeyearspriortogrant.Wheretwoamountsareshownforvolatility,riskfreerates,expecteddividendyieldandfairvalues,thefirstrelatestoathreeyearsvestingperiodandthesecondtoafiveyearsvestingperiod.





Areconciliationofoptionmovementsfortheyearended31December2012and2011isshownbelow:

2012 2011

No . of shares

Weighted

average

exercise price No . of shares

Weighted

average

exercise price

Outstandingat1January 1,703,989 £11.48 1,626,299 £11.50Granted 820,453 £11.40 493,772 £10.65Lapsed (179,473) £12.42 (199,673) £11.29Exercised (595,149) £10.80 (216,409) £9.92

Outstandingat31December 1,749,820 £11.57 1,703,989 £11.48Exercisableat31December 174,964 £10.96 114,945 £9.65

2012 2011

Range of exercise price

Weighted

average

exercise

price

No . of

shares

Weighted

average

remaining

contractual

life

Weighted

average

exercise

price

No . of

shares

Weighted

average

remaining

contractual

life

£9.79/£14.63(2011:£8.32/£14.63) £11.57 1,749,820 2.57years £11.48 1,703,989 2.30years

(d) Loanstoofficers

LoanstoofficersoftheBankdisclosedpursuanttosection161BoftheHongKongCompaniesOrdinanceareasfollows:

2012

Restated

2011

HK$’M HK$’M

AggregateamountofrelevantloansbytheBankoutstandingat31December 117 109

MaximumaggregateamountofrelevantloansbytheBankoutstandingduringtheyear 131 121




(e) RelatedpartytransactionswithassociatesandjointventuresoftheGroup

Duringtheyear,theBankanditssubsidiariesenteredintotransactionswithassociatesandjointventuresoftheGroupintheordinarycourseofitsbankingbusiness.Theamountsofmaterialtransactionsduringtheyeararesetoutbelow:

2012

Restated

2011

HK$’M HK$’M

Amountsduefromassociatesandjointventures 474 1,632

Depositsfromassociatesandjointventures 287 312

Operatingincome 42 19

41 Ultimate holding company

TheBank’sultimateholdingcompanyisStandardCharteredPLC,acompanyregisteredinEnglandandWales.StandardCharteredPLChaslistingsontheLondonStockExchangeandtheStockExchangeofHongKong.Inaddition,StandardCharteredPLCisalsolistedontheBombayandNationalStockExchangesofIndiainaformofIndianDepositoryReceipts.

42 Significant accounting estimates and judgements

Indeterminingthecarryingamountsofcertainassetsandliabilities,theBankanditssubsidiariesmakeassumptionsabouttheeffectsofuncertainfutureeventsonthoseassetsandliabilitiesatthebalancesheetdate.Theseestimationsandassumptionsarebasedonhistoricalexperienceandexpectationoffutureeventsandarereviewedperiodicallyasactualresultsmaydifferfromtheseestimates.

Pensions

Actuarialassumptionsaremadeinvaluingfuturedefinedpensionobligationsassetoutinnote30andareupdatedperiodically.

Taxes

Determiningincometaxprovisionsinvolvesjudgementonthefuturetaxtreatmentofcertaintransactions.Deferredtaxliabilitiesarerecognisedonalltemporarydifferencesanddeferredtaxassetsarerecognisedontemporarydifferenceswhereitisprobablethattherewillbetaxablerevenueagainstwhichthesecanbeoffset.Managementhasmadejudgementsastotheprobabilityoffuturetaxablerevenuesbeinggeneratedagainstwhichtaxlosseswillbeavailableforoffset.

Fair value of financial instruments

Fair value is the amount for which an asset could be exchanged or a liability settled, betweenknowledgeablewillingpartiesinanarm’slengthtransaction.Notes2(i)and38providefurtherinformationontheBank’sfairvalueaccountingpolicyandprocess.

Impairment of financial assets

Policiesonimpairmentoffinancialassetsaresetoutinnote2(k).



42 Significant accounting estimates and judgements (continued)

Goodwill impairment

Anannualassessmentismade,assetoutinnote22,astowhetherthecurrentcarryingvalueofgoodwillisimpaired.

43 Possible impact of amendments, new standards and interpretations issued but not yet effective for the annual accounting period ended 31 December 2012

Uptothedateofissueofthefinancialstatements,theHKICPA/IASBhasissuedanumberofamendments,newstandardsandinterpretationswhicharenotyeteffectivefortheaccountingyearended31December2012andwhichhavenotbeenadoptedinthesefinancialstatements.

Theseinclude:

– AmendmentstoHKFRS7/IFRS7,Financial instruments: Disclosures – Offsetting financial assets and financial liabilities

– AmendmentstoHKAS1/IAS1,Presentation of financial statements – Presentation of items of other comprehensive income

– HKFRS9/IFRS9,Financial instruments

– HKFRS10/IFRS10,Consolidated financial statements

– HKFRS11/IFRS11,Joint arrangements

– HKFRS12/IFRS12,Disclosure of interests in other entities

– HKFRS13/IFRS13,Fair value measurement

– RevisedHKAS19/IAS19,Employee benefits

– HKAS27/IAS27,Separate financial statements (2011)

– HKAS28/IAS28,Investments in associates and joint ventures

– HKAS32/IAS32, Financial Instruments: Presentation – Offsetting financial assets and financial liabilities

– AnnualImprovementstoHKFRS2009-2011

TheBankanditssubsidiariesareintheprocessofmakinganassessmentofwhattheimpactoftheseamendmentsisexpectedtobeintheperiodofinitialapplication.SofarithasconcludedthattheadoptionofthesestandardsisunlikelytohaveasignificantimpactontheBankanditssubsidiaries’resultsofoperationsandfinancialpositionexceptforHKFRS9/IFRS9andHKFRS13/IFRS13whichmayhaveanimpactontheBankanditssubsidiaries’resultsandfinancialpositionarisingfromchangesintheBankanditssubsidiaries’classificationandmeasurementoffinancialinstruments.

44 Comparative figures

Certaincomparativefigureshavebeenrestatedtoconformwiththecurrentyear’spresentation.


Unaudited supplementary financial information

Disclosure on Remuneration for CG-5 Guideline on a Sound Remuneration System issued by the HKMAPursuanttosection3ofCG-5onGuidelineonaSoundRemunerationSystemoftheSupervisoryPolicymanualissuedbytheHongKongMonetaryAuthorityandthePillar3disclosurerequirementsforremunerationbytheBaselCommitteeonBankingSupervision,thefollowingdisclosuresaremade:

a) Informationrelatingtothegovernancestructureoftheremunerationsystem

b) Informationrelatingtothedesignandstructureoftheremunerationprocesses

c) Descriptionofthewaysinwhichcurrentandfuturerisksaretakenintoaccountintheremunerationprocesses

d) DescriptionofthewaysinwhichtheBankseekstolinkperformanceduringaperformancemeasurementperiodwithlevelsofremuneration

e) DescriptionofthewaysinwhichtheBankseekstoadjustremunerationtotakeaccountoflonger-termperformance

f) DescriptionofthedifferentformsofvariableremunerationthattheBankutilizesandtherationaleforusingthesedifferentforms

g) Number of meetings held by the Board Remuneration Committee during the financial year andremunerationpaidtothestaff

The Bank adopts the remuneration policy and systems of Standard Chartered PLC. Please refer to theDirectors’RemunerationReportintheAnnualReportofStandardCharteredPLCfordetailsoftheBoardRemunerationCommittee,themajorcharacteristicsoftheremunerationsystem,andhowrisksaretakenintoaccountintheremunerationprocesses.

h) AggregatequantitativeinformationonremunerationforSeniorManagementandKeyPersonnel(note1)fortheyearended31December2012and31December2011areasfollows:

Analysis of remuneration spilt between fixed and variable compensation

2012 2011

SeniorManagement KeyPersonnel SeniorManagement KeyPersonnel

HK$’000 HK$’000 HK$’000 HK$’000

Fixedcompensation 18,699 9,911 17,761 8,782Variablecompensation–Upfrontcash 15,779 12,072 13,508 4,150–Upfrontshares 1,314 – – ––Deferredcash 3,467 568 – ––Deferredshares: –Restrictedshares 4,391 6,405 9,430 10,074 –Performanceshares 9,278 951 10,484 884

Total 52,928 29,907 51,183 23,890

Numberofstaffat31December 7 4 7 4


Unaudited supplementary financial information (continued)

Disclosure on Remuneration for CG-5 Guideline on a Sound Remuneration System issued by the HKMA (continued)

Analysis of deferred remuneration (note 2)

2012 2011


HK$’000 HK$’000 HK$’000 HK$’000

At1January 35,525 14,443 38,074 5,126Awardedduringtheyear 17,136 7,924 19,914 10,958Paidoutduringtheyear (13,794) (2,300) (12,257) (1,651)Notvestedduetoperformance

adjustment (2,007) (233) (2,268) –

At31December 36,860 19,834 43,463 14,433

Vestedduringtheyear 14,686 2,797 12,584 1,375

Analysis of total amount of outstanding deferred remuneration

2012 2011


HK$’000 HK$’000 HK$’000 HK$’000

At31December–Vested 1,003 497 678 ––Not-vested 35,857 19,337 42,785 14,433

36,860 19,834 43,463 14,433

At31December–Cash 3,467 568 – ––Shares 33,393 19,266 43,463 14,433

36,860 19,834 43,463 14,433

Totalamountofoutstandingdeferredremunerationexposedtoexpostexplicitand/orimplicitadjustments(note3) 36,860 19,834 43,463 14,433


Unaudited supplementary financial information (continued)

Disclosure on Remuneration for CG-5 Guideline on a Sound Remuneration System issued by the HKMA (continued)

Analysis of adjustments of deferred remuneration

2012 2011


HK$’000 HK$’000 HK$’000 HK$’000

Totalamountofadjustmentsduringthefinancialyeardueto

–expostexplicitadjustments (2,007) (233) (2,268) – –expostimplicitadjustments 3,463 1,996 (10,062) (3,132)

Analysis of sign-on payments and severance payments awarded during the year

2012 2011


HK$’000 HK$’000 HK$’000 HK$’000

Sign-onpayments(includingguaranteedperformanceawards) – – – 11,673

Severancepayments – – – –

Note 1: As defined in the CG5 on Guideline on a Sound Remuneration System issued by the HKMA, senior management are those who are responsible for oversight of either the Bank’s company-wide strategy or activities or those of the Bank’s material business lines . Key Personnel are individual employees whose duties or activities in the course of their employment involve the assumption of material risk or the taking on of material exposures on behalf of the Bank .

Note 2: The population of Senior Management and Key Personnel in 2012 differs from that of 2011 .

Note 3: Ex post adjustments are adjustments made after the awards are granted .

董事會報告書及 directors’ report and 綜合財務報表 ......2013/04/16 · 2012 2011...

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