董事會報告書及 directors’ report and 綜合財務報表 … · kong and has its registered...

Standard Chartered Bank (Hong Kong) Limited

For the year ended 31 December 2016

Directors’ Report andConsolidated FinancialStatements

渣打銀行（香港）有限公司

截至二零一六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

Pantone 368C

Pantone 362C

Pantone 7469C

Process Cyan C

Pantone 307C

Standard C

hartered Bank (H

ong Kong) Lim

ited D

irectors’ Report and C

onsolidated F

inancial Sta

tements 2016

渣打銀行(香港)有限公司

二零一六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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Consolidated statement of comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Consolidated statement of financial position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Consolidated statement of changes in equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Consolidated cash flow statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Notes to the consolidated financial statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Appendix I: unaudited supplementary financial information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133

Appendix II: directors of the Bank’s subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136

Standard Chartered Bank (Hong Kong) Limited 1

Report of the directors

Thedirectorshavepleasureinsubmittingtheirannualreporttogetherwiththeauditedfinancialstatementsfortheyearended31December2016.

Principal place of business

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

Principal activities

TheBankisalicensedbankregisteredundertheHongKongBankingOrdinance.TheBank’sprincipalactivitiesaretheprovisionofbankingandrelatedfinancialservices.TheprincipalactivitiesandotherparticularsoftheBank’sprincipalsubsidiariesaresetoutinnote19totheconsolidatedfinancialstatements.

Financial statements

TheprofitoftheBankanditssubsidiariesfortheyearended31December2016andthestateoftheBank’sanditssubsidiaries’affairsasatthatdatearesetoutintheconsolidatedfinancialstatementsonpages10to132.

During theyearended31December2016, thedirectorshaddeclaredandpaidanordinarydividendofHK$3.17479(2015:HK$4.0214)pereach“A”and“B”ordinarysharetotallingHK$6,150million(2015:HK$7,790million.AtotaldividendofHK$242million(2015:HK$242million)waspaidinrespectoftheUS$500million6.25%perpetualnon-cumulativeconvertiblepreferencesharesclassifiedasequity.

Detailsofthemovementsinreservesaresetoutintheconsolidatedstatementofchangesinequity.

Charitable donations

Charitable donations made by the Bank and its subsidiaries during the year amounted to HK$8 million(2015:HK$8million).

Share capital

Detailsof themovements in thesharecapitalof theBankduring theyeararesetout innote32 to theconsolidatedfinancialstatements.

Directors

Thedirectorsduringtheyearanduptothedateofthisreportare:

Executive directorsTanSiewBoiLingFouTsong


Report of the directors (continued)

Non-executive directorsHungPiChengBenjamin,ChairpersonSunilKaushal(resignedon27May2016)EdwardMartinWilliamsAnnaElizabethMarrsHuenWaiYiMary(appointedon21September2016)FongChing*StephenRobertEno*ChengEdwardWaiSun*TungLiehCheungAndrew*

* Independent non-executive directors

HuenWaiYiMarywillbesubjecttore-electionatthe2017annualgeneralmeetinginaccordancewithArticle110oftheBank’sArticleofAssociation.

AfulllistofthenamesofthedirectorsoftheBank’ssubsidiariesissetoutinAppendixII.

Directors’ service contracts

Themaximumtermofappointmentofindependentnon-executivedirectorsis2years.Theirremunerationisdeterminedbytheshareholdersattheannualgeneralmeeting.

Directors’ interests in Share Option Schemes

CertaindirectorsoftheBankhavebeengrantedoptionsundervariousshareoptionschemesofStandardCharteredPLC,theultimateholdingcompanyoftheBank.Duringtheyear,AnnaElizabethMarrs,HungPiChengBenjamin,EdwardMartinWilliams,LingFouTsong,HuenWaiYiMary,TanSiewBoiandSunilKaushalweregrantedoptionsundertheseschemes.

Directors’ rights to acquire shares

AtnotimeduringtheyearwastheBank,anyofitsholdingcompanies,subsidiaries,orfellowsubsidiaries,apartytoanyotherarrangementtoenablethedirectorsoftheBanktoacquirebenefitsbymeansoftheacquisitionofsharesinordebenturesoftheBankoranyotherbodycorporate.

Directors’ interests in transactions, arrangements or contracts

No transactions, arrangements or contract of significance to which the Bank, its holding companies,subsidiariesorfellowsubsidiarieswasapartyandinwhichadirectoroftheBankhadamaterialinterest,subsistedattheendoftheyearoratanytimeduringtheyear.

Management contracts

Nocontractsconcerningthemanagementandadministrationofthewholeoranysubstantialpartof thebusinessoftheBankwereenteredintoorexistedduringtheyear.


Report of the directors (continued)

Indemnity of directors

Apermittedindemnityprovision(asdefinedinsection469oftheHongKongCompaniesOrdinance)forthebenefitofthedirectorsoftheBankiscurrentlyinforceandwasinforcethroughouttheyear.

Auditor

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

OnbehalfoftheBoard

HungPiChengBenjaminChairman

HongKong,24February2017


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

Opinion

WehaveauditedtheconsolidatedfinancialstatementsofStandardCharteredBank(HongKong)Limited(the“Bank”)anditssubsidiaries(together“theGroup”)setoutonpages10to132,whichcomprisetheconsolidatedstatementoffinancialpositionasat31December2016,theconsolidatedincomestatement,theconsolidatedstatementofcomprehensiveincome,theconsolidatedstatementofchangesinequityandtheconsolidatedcashflowstatementfortheyearthenendedandnotestotheconsolidatedfinancialstatements,includingasummaryofsignificantaccountingpoliciesandotherexplanatoryinformation.

Inouropinion,theconsolidatedfinancialstatementsgiveatrueandfairviewoftheconsolidatedfinancialpositionoftheGroupasat31December2016andofitsfinancialperformanceanditscashflowsfortheyearthenendedinaccordancewithInternationalFinancialReportingStandards(“IFRSs”)issuedbytheInternationalAccountingStandardsBoard(“IASB”)andwithHongKongFinancialReportingStandards(“HKFRSs”)issuedbytheHongKongInstituteofCertifiedPublicAccountants(“HKICPA”)andhavebeenproperlypreparedincompliancewiththeHongKongCompaniesOrdinance.

Basis of opinion

Weconductedouraudit inaccordancewithHongKongStandardsonAuditing (“HKSAs”) issuedby theHKICPA.OurresponsibilitiesunderthosestandardsarefurtherdescribedintheAuditor’s responsibilities for the audit of the consolidated financial statementssectionofourreport.WeareindependentoftheGroupinaccordancewiththeHKICPA’sCode of Ethics for Professional Accountants(“theCode”)andwehavefulfilledourotherethicalresponsibilitiesinaccordancewiththeCode.Webelievethattheauditevidencewehaveobtainedissufficientandappropriatetoprovideabasisforouropinion.

Key audit matters

Keyauditmattersarethosemattersthat,inourprofessionaljudgement,wereofmostsignificanceinourauditoftheconsolidatedfinancialstatementsofthecurrentperiod.Thesematterswereaddressedinthecontextofourauditoftheconsolidatedfinancialstatementsasawhole,andinformingouropinionthereon,andwedonotprovideaseparateopiniononthesematters.

Impairment of loans and advances

Refertonote15totheconsolidatedfinancialstatementsandtheaccountingpoliciesonpages24to26

The Key Audit Matter How the matter was addressed in our audit

ThecurrenteconomicenvironmentinHongKongandMainlandChinahascontributedtoanoverallincreaseintheimpairmentofloansandadvancesacrossthebanking industry, as counterparties have struggledwithdownwardpressureonthepricesofcommoditiesandoilandover-capacity.

Ourauditprocedurestoassessimpairmentofloansandadvancesincludedthefollowing:

• assessing the design, implementation andoperatingeffectivenessofkeyinternalcontrolsover the approval, recording, monitoring andrestructuringofloansandadvances,thecreditgrading process and the measurement ofimpairmentprovisionsforindividuallyassessedloansandadvances;


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

Key audit matters (continued)

Corporate&InstitutionalBankingclients,CommercialBanking clients and loans and advances to banks(collectively ‘Larger Clients’) represent 53 per cent(HK$315,809million)oftheGroup’snetloanexposure,while Retail Banking clients represent 47 per cent(HK$280,963million). TheLargerClients’ exposurecompriseslargerloansthataremonitoredindividually,basedontheknowledgeofeachindividualborrower.However, the Retail Banking clients’ exposurecomprisesmuchsmallervalueloanstoamuchgreaternumberofcustomers.Accordingly,theseloansarenotmonitoredonanindividualbasis,butaregroupedbyproductintohomogeneousexposures.Exposuresarethenmonitoredthroughdelinquencystatistics,whichalsodrivetheassessmentofloanlossprovisions.

Thegrossamountofimpairedloansandadvancesofthe Group decreased from HK$3,807 million as at31 December 2015 to HK$3,693 million as at31 December 2016 and the total portfolio andindividual impairment provisions amounted toHK$2,000millionasat31December2016.

Theimpairmentofloansandadvancesisasubjectivearea due to the level of judgement applied bymanagementindeterminingprovisions.

From the Bank’s perspective, the impairmentallowances of certain portfolios are relatively moresensitive tomanagement judgement,namely thoseto clients that operate in stressed industries, forexamplecommoditiesandrelatedexposures,wheretheloansandadvancesareunsecuredorwheretheloansandadvancesaresubjecttopotentialcollateralshortfalls.

The determination of the portfolio impairmentprovision(“PIP”)isheavilydependentontheexternalmacroenvironmentandtheBank’sinternalcreditriskmanagement. The Bank’s PIP is derived fromestimates including theBank’shistorical losses forloansandadvances,thehistoricalemergenceperiod(i.e. the time lapse between the occurrence of theeventcausingeventualdefaulttotheactualrecordingof a loss) and other adjustment factors such asbusiness cycle adjustments and country specificadjustments.

• evaluatingthevalidityofthemodelsusedandassumptionsadoptedbytheBankbyassessingtheinputsintothemodels,makingcomparisonswithdatafromexternalsourcesandcomparingthehistorical lossesagainst theBank’sotherinternalrecordsandourprioryearrecords;

• comparing the economic factors used in themodels with market information to assesswhether they were aligned with market andeconomicdevelopment.Wealsoassessedtheemergence period by tracing the lifecycle ofoverdueaccountsfromthespecificcrediteventtodowngradingtheaccounttoeitherearlyalertorGroupSpecialAssetsManagement(“GSAM”);

• assessing the emergence period, businesscycle adjustments and country specificadjustments to the models, through thebenchmarking of PIP coverage against otherlarge banks, comparing the PIP with actualimpairmentinprioryearsanddiscussingwithseniormanagementanymanagementoverlays;

• assessingtheIIPbalancebyselectingasample,based on specific risk criteria, of individuallyimpaired loans and advances, non-impairedloansandadvancesfromtheBank’sEarlyAlertReport(“EAR”)andloansinindustriesvulnerableto the current economic slowdown inCommercialBanking(“CB”)andCorporateandInstitutional Banking (“CIB”) for creditassessment.Forthesesamples,weassessedtheforecastofrecoverablecashflowsthroughinquiry, applying judgement and our ownresearch.Wealsoevaluatedtheconsistencyofmanagement’sapplicationofkeyassumptionsandcomparedthemwithourowndatasources;

• evaluating the experience, independence,competenceandintegrityoftheexternalvaluersengagedbytheBanktovaluecertainpropertyand illiquid collateral. Where possible, wecomparedthevaluationswithexternallyderiveddatasuchascommoditypricesandrealestatevaluations;




Anindividualimpairmentprovision(“IIP”)isestimatedbymanagementonceobjectiveevidenceofimpairmentbecomesapparent.

Managementexercisesjudgementindeterminingthequantumoflossbasedonarangeoffactors.Theseincludeavailableremediesforrecovery,thefinancialsituation of the borrower, collateral valuation, theseniority of the claim and the existence andcooperativenessofothercreditors.

Whilst the Bank appoints external valuers for thevaluation of certain property and other illiquidcollateral, enforceability, timing and means ofrealisationalsoaffecttheultimatecollectabilityand,thereby,theamountofIIPasatthereportingdate.

WeidentifiedimpairmentofloansandadvancesasakeyauditmatterbecauseoftheinherentuncertaintyandmanagementjudgementinvolvedincalculatingimpairmentprovisionsandbecauseofitssignificancetothefinancialresultsandcapitaloftheGroup.

• recalculatingtheIIPtoevaluatetheapplicationoftheBank’smethodology;and

• for the key underlying systems used for theprocessing of transactions we involved ourinformation technology specialists to test aselection of automated controls within thesesystems. We also assessed the design,implementationandoperatingeffectivenessofthekeyinternalcontrolsovertheseunderlyingsystems,forexample,controlsoveraccesstosystems and controls over data and changemanagement.

Assessing the fair value of financial instruments

Refertonote38totheconsolidatedfinancialstatementsandtheaccountingpoliciesonpages20to24

The Key Audit Matter How the matter was addressed in our audit

At31December2016thefairvalueof theGroup’sfinancialinstrumentstotalledHK$280,727millionofwhichHK$124,198million,HK$154,332millionandHK$2,197millionwereclassifiedunderthefairvaluehierarchy as level 1, 2 and 3 financial instrumentsrespectively.

ThevaluationoftheGroup’sfinancialinstrumentsisbasedonacombinationofmarketdataandvaluationmodelswhichoftenrequireaconsiderablenumberofinputs.Manyoftheseinputsareobtainedfromreadilyavailabledataforliquidmarkets.

Wheresuchobservabledataisnotreadilyavailable,as inthecaseof level3financial instruments,thenestimatesneedtobedevelopedwhichcan involvesignificantmanagementjudgement.

Ourauditprocedures toassess the fairvalueoffinancialinstrumentsincludedthefollowing:

• assessing the design, implementation andoperatingeffectivenessofkeyinternalcontrolsovervaluation,independentpriceverification,front office/back office reconciliations andmodelapproval;

• comparingthefairvaluesappliedbytheGroupwithpubliclyavailablemarketdataforalllevel1securitiesandonasamplebasisforlevel1derivativepositions;




Inaddition,theGrouphasdevelopeditsownmodelstovaluecertainlevel2andlevel3financialinstruments,which also involves significant managementjudgement.

We identified assessing the fair value of financialinstruments as a key audit matter because of thedegree of complexity involved in valuing certainfinancial instrumentsandbecauseofthedegreeofjudgementexercisedbymanagementindeterminingtheinputsusedinthevaluationmodels.

• engaging our internal valuation specialists toperform, on a sample basis, independentvaluations of level 2 and level 3 financialinstruments and comparing these valuationswiththeGroup’svaluations.Ourindependentvaluations included developing models,obtaining inputs independently and verifyingtheinputs;

• engaging our internal valuation specialists toevaluate a sample of models key to theindependent price verification process ofcomplexfinancialinstruments;

• inquiringofmanagementaboutchangesinthecreditandfundingadjustmentmethodologiesandassessing the inputs into themodelandre-performingthenettinglogicappliedbythesystem;

• assessing whether the financial statementdisclosures, including fair value hierarchyinformation and sensitivity to key inputs,appropriatelyreflectedtheGroup’sexposuretofinancialinstrumentvaluationriskinaccordancewith the requirements of the prevailingaccountingstandards,and

• for the key underlying systems used for theprocessing of transactions we involved ourinformation technology specialists to test aselection of automated controls within thesesystems. We also assessed the design,implementationandoperatingeffectivenessofthekeyinternalcontrolsovertheseunderlyingsystems,forexample,controlsoveraccesstosystems and controls over data and changemanagement.

Information other than the consolidated financial statements and our auditor’s report thereon

TheDirectorsareresponsiblefortheotherinformation.TheotherinformationcomprisesalltheinformationincludedintheDirectors’ReportandConsolidatedFinancialStatements,otherthantheconsolidatedfinancialstatementsandourauditor’sreportthereon.

Ouropinionontheconsolidatedfinancialstatementsdoesnotcovertheotherinformationandwedonotexpressanyformofassuranceconclusionthereon.



Information other than the consolidated financial statements and our auditor’s report thereon (continued)

Inconnectionwithourauditoftheconsolidatedfinancialstatements,ourresponsibilityistoreadtheotherinformation and, in doing so, consider whether the other information is materially inconsistent with theconsolidatedfinancialstatementsorourknowledgeobtainedintheauditorotherwiseappearstobemateriallymisstated.If,basedontheworkwehaveperformed,weconcludethatthereisamaterialmisstatementofthisotherinformation,wearerequiredtoreportthatfact.Wehavenothingtoreportinthisregard.

Responsibilities of the directors for the consolidated financial statements

TheDirectorsareresponsibleforthepreparationoftheconsolidatedfinancialstatementsthatgiveatrueandfairviewinaccordancewithIFRSsissuedbytheIASBandwithHKFRSsissuedbytheHKICPAandtheHongKongCompaniesOrdinance,andforsuchinternalcontrolastheDirectorsdetermineisnecessarytoenablethepreparationofconsolidatedfinancialstatementsthatarefreefrommaterialmisstatement,whetherduetofraudorerror.

Inpreparingtheconsolidatedfinancialstatements,theDirectorsareresponsibleforassessingtheGroup’sabilitytocontinueasagoingconcern,disclosing,asapplicable,mattersrelatedtogoingconcernandusingthegoingconcernbasisofaccountingunlesstheDirectorseitherintendtoliquidatetheGrouportoceaseoperations,orhavenorealisticalternativebuttodoso.

TheDirectorsareassistedbytheAuditandRiskCommitteeindischargingtheirresponsibilitiesforoverseeingtheGroup’sfinancialreportingprocess.

Auditor’s responsibilities for the audit of the consolidated financial statements

Ourobjectivesaretoobtainreasonableassuranceaboutwhethertheconsolidatedfinancialstatementsasawholearefreefrommaterialmisstatement,whetherduetofraudorerror,andtoissueanauditor’sreportthatincludesouropinion.Thisreportismadesolelytoyou,asabody,inaccordancewithsection405oftheHongKongCompaniesOrdinance,andfornootherpurpose.Wedonotassumeresponsibilitytowardsoracceptliabilitytoanyotherpersonforthecontentsofthisreport.

Reasonableassuranceisahighlevelofassurance,butisnotaguaranteethatanauditconductedinaccordancewithHKSAswillalwaysdetectamaterialmisstatementwhenitexists.Misstatementscanarisefromfraudorerrorandareconsideredmaterialif,individuallyorintheaggregate,theycouldreasonablybeexpectedtoinfluencetheeconomicdecisionsofuserstakenonthebasisoftheseconsolidatedfinancialstatements.

AspartofanauditinaccordancewithHKSAs,weexerciseprofessionaljudgementandmaintainprofessionalscepticismthroughouttheaudit.Wealso:

• Identifyandassesstherisksofmaterialmisstatementoftheconsolidatedfinancialstatements,whetherduetofraudorerror,designandperformauditproceduresresponsivetothoserisksandobtainauditevidencethatissufficientandappropriatetoprovideabasisforouropinion.Theriskofnotdetectingamaterialmisstatementresultingfromfraudishigherthanforoneresultingfromerror,asfraudmayinvolvecollusion,forgery,intentionalomissions,misrepresentationsortheoverrideofinternalcontrol.

• Obtainanunderstandingofinternalcontrolrelevanttotheauditinordertodesignauditproceduresthatareappropriateinthecircumstances,butnotforthepurposeofexpressinganopinionontheeffectivenessoftheGroup’sinternalcontrol.



Auditor’s responsibilities for the audit of the consolidated financial statements (continued)

• Evaluate the appropriateness of accounting policies used and the reasonableness of accountingestimatesandrelateddisclosuresmadebytheDirectors.

• ConcludeontheappropriatenessoftheDirectors’useofthegoingconcernbasisofaccountingand,based on the audit evidence obtained, whether a material uncertainty exists related to events orconditionsthatmaycastsignificantdoubtontheGroup’sabilitytocontinueasagoingconcern.Ifweconcludethatamaterialuncertaintyexists,wearerequiredtodrawattentioninourauditor’sreporttotherelateddisclosuresintheconsolidatedfinancialstatementsor,ifsuchdisclosuresareinadequate,tomodifyouropinion.Ourconclusionsarebasedontheauditevidenceobtaineduptothedateofourauditor’sreport.However,futureeventsorconditionsmaycausetheGrouptoceasetocontinueasagoingconcern.

• Evaluate the overall presentation, structure and content of the consolidated financial statements,includingthedisclosures,andwhethertheconsolidatedfinancialstatementsrepresenttheunderlyingtransactionsandeventsinamannerthatachievesfairpresentation.

• ObtainsufficientappropriateauditevidenceregardingthefinancialinformationoftheentitiesorbusinessactivitieswithintheGrouptoexpressanopinionontheconsolidatedfinancialstatements.Weareresponsibleforthedirection,supervisionandperformanceoftheaudit.Weremainsolelyresponsibleforourauditopinion.

WecommunicatewiththeAuditandRiskCommitteeregarding,amongothermatters,theplannedscopeandtimingoftheauditandsignificantauditfindings,includinganysignificantdeficienciesininternalcontrolthatweidentifyduringouraudit.

WealsoprovidetheAuditandRiskCommitteewithastatementthatwehavecompliedwithrelevantethicalrequirementsregardingindependenceandcommunicatewiththemallrelationshipsandothermattersthatmayreasonablybethoughttobearonourindependenceand,whereapplicable,relatedsafeguards.

FromthematterscommunicatedwiththeAuditandRiskCommittee,wedeterminethosemattersthatwereofmostsignificanceintheauditoftheconsolidatedfinancialstatementsofthecurrentperiodandarethereforethekeyauditmatters.Wedescribethesemattersinourauditor’sreportunlesslaworregulationprecludespublicdisclosureaboutthematterorwhen, inextremelyrarecircumstances,wedeterminethatamattershouldnotbecommunicatedinourreportbecausetheadverseconsequencesofdoingsowouldreasonablybeexpectedtooutweighthepublicinterestbenefitsofsuchcommunication.

The engagement partner on the audit resulting in this independent auditor’s report is Donowho, SimonChristopher.

KPMG

CertifiedPublicAccountants8thFloor,Prince’sBuilding10ChaterRoadCentral,HongKong

24February2017


Consolidated income statementFor the year ended 31 December 2016(Expressed in millions of Hong Kong dollars)

Note 2016 2015

HK$’M HK$’M

Interestincome 4(a) 13,672 16,103Interestexpense 4(b) (3,547) (4,724)

Net interest income 10,125 11,379

Feeandcommissionincome 7,434 9,759Feeandcommissionexpense (440) (382)

Netfeeandcommissionincome 4(c) 6,994 9,377Nettradingincome 4(d) 1,576 1,143Net(losses)/gainsfromfinancialinstrumentsdesignated

atfairvaluethroughprofitorloss 4(e) (751) 13Netgainsfromdisposalofavailable-for-salesecurities 5 164 85Otheroperatingincome 4(f) 5,651 4,845

13,634 15,463

Total operating income 23,759 26,842

Staffcosts (6,126) (6,762)Premisesandequipment (3,196) (3,104)Others (5,131) (5,069)

Operatingexpenses 4(g) (14,453) (14,935)

Operating profit before impairment 9,306 11,907

Impairmentchargesonadvancestobanksandcustomers 6(a) (1,310) (3,067)Otherimpairmentcharges 6(b) (412) (763)

Operating profit after impairment 7,584 8,077Shareofprofitofassociates 1,360 1,388

Profit before taxation 8,944 9,465Taxation 7(a) (1,015) (975)

Profit after taxation 7,929 8,490

Thenotesonpages16to132formpartoftheseconsolidatedfinancialstatements.


Consolidated statement of comprehensive incomeFor the year ended 31 December 2016(Expressed in millions of Hong Kong dollars)

2016 2015

HK$’M HK$’M

Profit after taxation 7,929 8,490

Other comprehensive income:Itemsthatwillnotbereclassifiedtotheincomestatement:Definedbenefitplans:

–Remeasurementofnetdefinedbenefitliability 92 (143)–Relatedtaxeffect (15) 23

Itemsthatmaybereclassifiedsubsequentlytotheincomestatement:Available-for-salesecurities:

–Changesinfairvaluerecognisedduringtheyear (249) (298)–Changesinfairvaluetransferredtotheincomestatementondisposal (164) (85)–Transfertotheincomestatementonfairvaluehedgeditems

attributabletohedgedrisk 128 (7)–Relatedtaxeffect 18 72

Cashflowhedges:–Changesinfairvaluerecognisedduringtheyear (215) (6)–Transfertotheincomestatementonterminationofhedgingderivatives (36) (34)–Relatedtaxeffect 41 7

Exchangedifference (652) (572)

Othercomprehensiveincomefortheyear,netoftax (1,052) (1,043)

Total comprehensive income for the year 6,877 7,447



Consolidated statement of financial position as at 31 December 2016(Expressed in millions of Hong Kong dollars)

Note 2016 2015HK$’M HK$’M

Assets

Cashandbalanceswithbanks,centralbanksandotherfinancialinstitutions 10 15,332 48,769Placementswithbanksandotherfinancialinstitutions 11 156,750 119,658HongKongSARGovernmentcertificatesofindebtedness 12 42,211 38,031Tradingassets 13 15,634 18,597Financialassetsdesignatedatfairvalue 14 370 666Investmentsecurities 17 207,471 210,572Advancestocustomers 15(a) 440,022 414,955Amountsduefromimmediateholdingcompany 18 46,521 30,357Amountsduefromfellowsubsidiaries 18 16,328 16,105Interestinassociates 20 9,166 9,481Property,plantandequipment 21 39,471 37,480Goodwillandintangibleassets 22 1,302 1,075Currenttaxassets 112 556Deferredtaxassets 27 349 314Otherassets 23 14,983 12,349

1,006,022 958,965

Liabilities

HongKongSARcurrencynotesincirculation 12 42,211 38,031Depositsandbalancesofbanksandotherfinancialinstitutions 19,674 24,655Depositsfromcustomers 24 778,242 745,701Tradingliabilities 28 8,289 8,847Financialliabilitiesdesignatedatfairvalue 26 9,568 13,724Debtsecuritiesinissue 25 2,173 1,209Amountsduetoimmediateholdingcompany 18 42,282 27,519Amountsduetofellowsubsidiaries 18 11,932 8,314Currenttaxliabilities 3 4Deferredtaxliabilities 27 404 274Otherliabilities 29 19,444 15,245Subordinatedliabilities 31 6,088 10,093

940,310 893,616

Equity

Sharecapital 32 20,256 20,256Reserves 33 45,456 45,093

Shareholders’equity 65,712 65,349

1,006,022 958,965

ApprovedandauthorisedforissuebytheBoardofDirectorson24February2017.

Tan Siew Boi Ling Fou TsongDirector Director



Consolidated statement of changes in equityFor the year ended 31 December 2016(Expressed in millions of Hong Kong dollars)

Attributable to equity shareholders of the Bank

Sharecapital

Cash flowhedge

reserve

Available-for-sale

investmentreserve

Revaluationreserve

Exchangereserve

Propertyrevaluation

reserveRetained

profits

Shareoptionequity

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

At1January2015 20,256 51 311 146 369 2 44,494 414 66,043Totalcomprehensiveincome – (33) (318) – (572) – 8,370 – 7,447Dividendpaid – – – – – – (8,032) – (8,032)Movementinrespectofshare-

basedcompensationplans – – – – – – – (108) (108)Disposalofinterestinasubsidiary

andanassociate – – – – (1) (2) 2 – (1)

At31December2015 20,256 18 (7) 146 (204) – 44,834 306 65,349

Totalcomprehensiveincome – (210) (267) – (652) – 8,006 – 6,877Dividendpaid – – – – – – (6,392) – (6,392)Movementinrespectofshare-

basedcompensationplans – – – – – – – (122) (122)Disposalofinterestinasubsidiary – – – – – – – – –

At31December2016 20,256 (192) (274) 146 (856) – 46,448 184 65,712



Consolidated cash flow statementFor the year ended 31 December 2016(Expressed in millions of Hong Kong dollars)

Note 2016 2015

HK$’M HK$’M

Operating activities

Profitbeforetaxation 8,944 9,465

Adjustmentsfor:Impairmentchargesonadvancestobanksandcustomers 1,310 3,067Advanceswrittenoffnetofrecoveries (1,359) (2,708)Unwindingofdiscountonloanimpairmentprovision (59) (44)Otherimpairmentcharges 412 763Depreciationonproperty,plantandequipment 1,870 1,717Amortisationofintangibleassets 146 121(Gains)/lossesondisposalofproperty,plantandequipment (51) 61Gainsondisposalofasubsidiaryandanassociate – (1,758)GainsondisposalofMandatoryProvidentFundandOccupational RetirementSchemesOrdinancebusinesses (1,964) –Netgainsonrevaluationofinvestmentproperties (21) (3)Shareofprofitofassociates (1,360) (1,388)Interestexpenseonsubordinatedliabilitiesandotherborrowings 675 364Expenseinrespectofthedefinedbenefitplan 98 99Fairvaluegainstransferredfromreserveson cashflowhedges (36) (34)Stockdividendfromassociates (4) –Exchangetranslationonsubordinatedliabilities 65 (272)

8,666 9,450(Increase)/decreaseinoperatingassets:

Placementswithbanksandotherfinancialinstitutionswithoriginalmaturitybeyondthreemonths (27,753) (12,112)

Tradingassets 1,893 3,410Financialassetsdesignatedatfairvalue 296 909Investmentsecurities (10,994) (13,636)Grossadvancestocustomers (24,889) 39,740Amountsduefromimmediateholdingcompanyandfellowsubsidiaries (449) 16,931Otherassets 5,651 13,921

Increase/(decrease)inoperatingliabilities:Depositsandbalancesofbanksandotherfinancialinstitutions (5,345) (7,953)Depositsfromcustomers 32,532 (105,330)Debtsecuritiesinissue 964 (12,629)Financialliabilitiesdesignatedatfairvalue (4,156) (1,191)Amountsduetoimmediateholdingcompanyandfellowsubsidiaries 19,414 16,562Tradingliabilities (558) (3,953)Otherliabilities 4,198 (4,707)

Cash used in operations (530) (60,588)

Incometaxpaid (434) (1,248)

Net cash used in operating activities (964) (61,836)


Consolidated cash flow statement (continued)For the year ended 31 December 2016(Expressed in millions of Hong Kong dollars)

Note 2016 2015

HK$’M HK$’M

Investing activities

Dividendreceivedfromassociates – 35Paymentforpurchaseofproperty,plantandequipment (8,121) (6,897)Paymentforpurchaseofintangibleassets (373) (80)Proceedsfromdisposalofproperty,plantandequipment 4,003 5,539Proceedsfromdisposalofasubsidiaryandanassociate 2,271 4,437

Net cash (used in)/generated from investing activities (2,220) 3,034

Financing activities

Paymentforredemptionofsubordinatedliabilities (4,178) –Interestpaidonsubordinatedliabilities (637) (348)DividendpaidtoshareholdersoftheBank (6,392) (8,032)

Net cash used in financing activities (11,207) (8,380)

Net decrease in cash and cash equivalents (14,391) (67,182)

Cash and cash equivalents at 1 January 162,860 232,850Effectofforeignexchange (7,576) (2,808)

Cash and cash equivalents at 31 December 34 140,893 162,860

Cashflowsfromoperatingactivitiesinclude:Interestreceived 13,030 16,079Interestpaid 2,920 4,660Dividendsreceived 27 25



Notes to the consolidated 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”),whichcollectivetermincludesallapplicableindividualInternationalFinancialReportingStandards,InternationalAccountingStandards(“IAS”)andInterpretations issued by the International Accounting Standards Board (“IASB”), these financialstatementsalsocomplywithIFRSs.AsummaryofthesignificantaccountingpoliciesadoptedbytheBankissetoutbelow.

TheHKICPAhasissuedcertainnewandrevisedHKFRSsthatarefirsteffectiveoravailableforearlyadoptionforthecurrentaccountingperiodoftheBankanditssubsidiaries.Note3providesinformationonanychangesinaccountingpoliciesresultingfrominitialapplicationofthesedevelopmentstotheextentthattheyarerelevanttotheBankanditssubsidiariesforthecurrentandprioraccountingperiodsreflectedinthesefinancialstatements.

(b) Basisofpreparationofthefinancialstatements

(i) BasisofPreparation

Theconsolidatedfinancialstatementsfortheyearended31December2016comprisetheBankanditssubsidiariesanditsinterestinassociates.

Themeasurementbasisusedinthepreparationoftheconsolidatedfinancialstatementsisthehistoricalcostconvention,asmodifiedbytherevaluationofavailable-for-saleassets,financialassets and liabilities (including derivatives) at fair value through profit or loss and investmentproperties,whicharecarriedatfairvalue.

Assetsanddisposalgroupsheldforsalearestatedatthelowerofcarryingamountandfairvaluelesscosttosell.

Thepreparationofconsolidatedfinancialstatements inconformitywithadoptedHKFRS/IFRSrequirestheuseofcertaincriticalaccountingestimates.ItalsorequiresmanagementtoexerciseitsjudgementintheprocessofapplyingtheBankanditssubsidiaries’accountingpolicies.Actualresults may differ from these estimates. The significant judgements made by management inapplyingtheaccountingpoliciesandkeysourcesofuncertaintywerethesameasthoseappliedtotheconsolidatedfinancialstatementsasatandfortheyearended31December2015.

TheaccountingpoliciessetoutbelowhavebeenappliedconsistentlyacrosstheBankanditssubsidiariesandtoallperiodspresentedinthesefinancialstatements.


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

2 Significant accounting policies (continued)

(b) Basisofpreparationofthefinancialstatements(continued)

(ii) ConsolidatedFinancialStatements

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

(c) Subsidiariesandnon-controllinginterests

SubsidiariesareallentitieswhichtheBankanditssubsidiariescontrol.TheBankanditssubsidiariescontrolanentitywhentheyareexposedto,orhaverightsto,variablereturnsfromtheirinvolvementwith the entity and have the ability to affect those returns through their power over the investee.SubsidiariesarefullyconsolidatedfromthedateonwhichtheBankanditssubsidiarieseffectivelyobtaincontrol.Theyarede-consolidated from thedate thatcontrolceases,andwhereany interest in thesubsidiaryremains,thisisremeasuredtoitsfairvalueandthechangeincarryingamountisrecognisedintheincomestatement.DetailsoftheBank’sprincipalsubsidiariesaregiveninnote19.

Intra-groupbalancesandtransactionsandanyunrealisedprofitsarisingfromintra-grouptransactionsareeliminatedinfullinpreparingtheconsolidatedfinancialstatements.Unrealisedlossesresultingfromintra-grouptransactionsareeliminatedinthesamewayasunrealisedgainsbutonlytotheextentthatthereisnoevidenceofimpairment.

Non-controllinginterestsrepresenttheportionofthenetassetsofsubsidiariesattributabletointereststhatarenotownedbytheBank,whetherdirectlyorindirectlythroughsubsidiaries,andinrespectofwhichtheBankanditssubsidiarieshavenotagreedanyadditionaltermswiththeholdersofthoseinterestswhichwouldresultintheBankanditssubsidiariesasawholehavingacontractualobligationinrespectofthoseintereststhatmeetthedefinitionofafinancialliability.Non-controllinginterestsarepresented in the consolidated statement of financial position within equity, separately from equityattributabletotheequityshareholdersoftheBank.Non-controllinginterestsarepresentedonthefaceoftheconsolidatedincomestatementandtheconsolidatedstatementofcomprehensiveincomeasanallocationofthetotalprofitorlossandtotalcomprehensiveincomefortheyearbetweennon-controllinginterestsandtheequityshareholdersoftheBank.

IntheBank’sstatementoffinancialposition,investmentsinsubsidiariesarestatedatcostlessimpairmentlosses,ifany.

(d) Associates

AssociatesareentitiesinrespectofwhichtheBankhassignificantinfluence,butnotcontrol,overthefinancialandoperatingpoliciesandprocedures,generallyaccompanyingashareholdingofbetween20percentand50percentofthevotingrights.

DetailsoftheBankanditssubsidiaries’interestinassociatesareprovidedinnote20.

Investmentsinassociatesareaccountedforusingtheequitymethodofaccountingintheconsolidatedfinancialstatementsandareinitiallyrecognisedatcost.TheBankanditssubsidiaries’investmentinassociatesincludesgoodwillidentifiedonacquisitionandaccumulatedimpairmentloss.




(d) Associates(continued)

TheBankanditssubsidiaries’shareofitsassociates’post-acquisitionprofitsorlossesarerecognisedin the consolidated income statement, and the share of post-acquisition movements in othercomprehensive incomearerecognised inreserves.Thecumulativepost-acquisitionmovementsareadjustedagainstthecarryingamountoftheinvestmentintheconsolidatedstatementoffinancialposition.WhentheBankanditssubsidiaries’shareoflossesinanassociateisequaltoorexceedsitsinterestintheassociate,includinganyotherunsecuredreceivables,theBankanditssubsidiariesdonotrecognisefurtherlosses,unlesstheyhaveincurredobligationsormadepaymentsonbehalfoftheassociate.

UnrealisedgainsandlossesontransactionsbetweentheBankanditsassociatesandjointventuresareeliminatedtotheextentoftheBankanditssubsidiaries’interestintheassociates.

IntheBank’sstatementoffinancialposition,investmentsinassociatesarestatedatcostlessimpairmentlossesanddividendsfrompre-acquisitionprofitsreceivedpriorto1January2009,ifany.

(e) Intangibleassets

(i) Goodwill

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

Goodwillincludedin“Goodwillandintangibleassets”istestedannuallyforimpairmentandcarriedatcostlessanyaccumulatedimpairmentlosses.Detailedcalculationsareperformedbasedondiscountingexpectedpre-taxcashflowsoftherelevantcashgeneratingunitsanddiscountingtheseatanappropriatediscountrate,thedeterminationofwhichrequirestheexerciseofjudgement.Goodwillisallocatedtocashgeneratingunitsforthepurposeofimpairmenttesting.Cashgeneratingunits represent the lowest level within the Bank and its subsidiaries at which the goodwill ismonitoredforinternalmanagementpurposes.Note22setsoutthemajorcash-generatingunitstowhichgoodwillhasbeenallocated.

(ii) Acquiredintangibles

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




(e) Intangibleassets(continued)

(iii) Computersoftware

Acquiredcomputersoftwarelicensesarecapitalisedonthebasisofthecostsincurredtoacquireandbringtousethespecificsoftware.Costsassociatedwiththedevelopmentofsoftwarearecapitalisedwhereitisprobablethatitwillgeneratefutureeconomicbenefitsinexcessofitscost.Computer software costs are amortised on the basis of expected useful life (5 years). Costsassociatedwithmaintainingsoftwarearerecognisedasanexpenseasincurred.Ateachreportingdate,theseassetsareassessedforindicatorsofimpairment.Intheeventthatanasset’scarryingamount is determined to be greater than its recoverable amount, the asset is written downimmediately.

(f) Investmentproperties

Investmentpropertiesarelandandbuildingswhichareownedeithertoearnrentalincomeorforlongterminvestmentsorforboth.Investmentpropertiesarestatedintheconsolidatedstatementoffinancialpositionatfairvalue.Anygainsorlossesarisingfromachangeinfairvalueorfromthedisposalofaninvestmentpropertyisrecognisedintheconsolidatedincomestatement.

(g) Otherproperty,plantandequipment

Property,plantandequipmentisstatedatcostlessaccumulateddepreciationandimpairment,ifany.Costincludesexpenditurethatisdirectlyattributabletotheacquisitionoftheitems.Subsequentcostsareincludedintheasset’scarryingamountorarerecognisedasaseparateasset,asappropriate,onlywhenitisprobablethatfutureeconomicbenefitsassociatedwiththeitemwillflowtotheBankandthecost of the item can be measured reliably. All other repairs and maintenance are charged to theconsolidatedincomestatementduringthefinancialperiodinwhichtheyareincurred.

Depreciationonproperty,plantandequipmentiscalculatedusingthestraight-linemethodtoallocatetheircosttotheirresidualvaluesovertheirestimatedusefullives,asfollows:

– Buildings,leaseholdlandandleaseholdimprovements,aredepreciatedovertheshorteroftheirestimatedusefullives,being50yearsfromthedateofcompletion,andtheunexpiredtermsofthelease.

– Equipmentandmotorvehicles,aredepreciatedover3to15years.

– Aircraftandvessels,aredepreciatedover18and25yearsrespectively.

Theassets’residualvaluesandusefullivesarereviewed,andadjustedifappropriate,ateachreportingdate.

Duringtheyear,theBankanditssubsidiariesrevisedtheusefullivesandresidualvalueestimateforaircraftleasedtothirdpartiesunderoperatingleases.Basedonthelatestindustryparticipantinformation,theBankanditssubsidiariesreducedtheusefullivesofaircraftfrom25yearstoamaximumof18years,increasingthedepreciationexpensefortheyearended31December2016byHK$87million.

Ateachreportingdate,theseassetsareassessedforindicatorsof impairment.Intheeventthatanasset’scarryingamountisdeterminedtobegreaterthanitsrecoverableamount,theassetiswrittendownimmediately.

Gainsandlossesondisposalsareincludedintheconsolidatedincomestatement.




(h) Leases

Where the Bank and its subsidiaries are the lessees

TheleasesenteredintobytheBankanditssubsidiariesareprimarilyoperatingleases.Thetotalpaymentsmadeunderoperatingleasesarechargedtotheconsolidatedincomestatementonastraight-linebasisovertheperiodoftheleases.

Where the Bank and its subsidiaries are the lessors

Assetsleasedtocustomersunderoperatingleasesareincludedwithinproperty,plantandequipmentanddepreciatedovertheirestimatedusefullives.Rentalincomeontheseleasedassetsisrecognisedintheconsolidatedincomestatementonastraight-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.




(i) Financialassetsandliabilities(excludingderivatives)(continued)

(iii) Available-for-sale assets

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

(iv) Financial liabilities held at amortised cost

Financialliabilities,whichincludeborrowings,notclassifiedasheldatfairvaluethroughprofitorlossareclassifiedasamortisedcostinstruments.

Initial recognition

Purchasesandsalesoffinancialassetsandliabilitiesheldatfairvaluethroughprofitorlossandfinancialassetsclassifiedasavailable-for-saleareinitiallyrecognisedusingtradedateaccounting(thedateonwhichtheBankanditssubsidiariescommittopurchaseorselltheasset).Loansandreceivablesarerecognisedwhencashisadvancedtotheborrowers.Allfinancialinstrumentsareinitiallyrecognisedatfairvalue,whichisnormallythetransactionpriceplus,forthosefinancialassetsandliabilitiesnotcarriedatfairvaluethroughprofitandloss,directlyattributabletransactioncosts.

Subsequent measurement

Financialassetsandliabilitiesheldatfairvaluethroughprofitorlossaresubsequentlycarriedatfairvalue,withgainsandlossesarisingfromchangesinfairvaluetakendirectlytotheconsolidatedincomestatement.

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

Loansandreceivablesaresubsequentlycarriedatamortisedcostusingtheeffectiveinterestmethod.

Financialliabilitiesotherthanthoseheldatfairvaluethroughprofitorlossaresubsequentlystatedatamortisedcost,withanydifferencebetweenproceedsnetofdirectlyattributabletransactioncostsandtheredemptionvaluerecognisedintheconsolidatedincomestatementovertheperiodoftheborrowingsusingtheeffectiveinterestmethod.

Inadditiontotheseinstruments,thecarryingvalueofafinancialinstrumentcarriedatamortisedcostthatisthehedgediteminaqualifyingfairvaluehedgerelationshipisadjustedbythefairvaluegainorlossattributabletothehedgedrisk.

Fair value of financial assets and liabilities

Fairvalueisthepricethatwouldbereceivedtosellanassetorpaidtotransferaliabilityinanorderlytransactionbetweenmarketparticipantsat themeasurementdate in theprincipalmarketor in theabsenceofaprincipalmarketthemostadvantageousmarkettowhichtheBankanditssubsidiarieshaveaccessatthatdate.Thefairvalueofaliabilityreflectsitsnon-performancerisk.





Fair value of financial assets and liabilities (continued)

Thefairvaluesofquotedfinancialassetsorfinancialliabilitiesinactivemarketsarebasedoncurrentprices.Amarketisregardedasactiveiftransactionsfortheassetorliabilitytakeplacewithsufficientfrequencyandvolumetoprovidepricinginformationonanongoingbasis.Ifthemarketforafinancialassetorfinancialliabilityandforunlistedsecurities,isnotactive,theBankanditssubsidiariesestablishfairvaluebyusingvaluationtechniques.These includetheuseof recentarm’s length transactions,discountedcashflowanalysis,optionpricingmodelsandothervaluationtechniquescommonlyusedbymarketparticipants.

Reclassifications

Reclassificationsoffinancialassets,otherthanasdisclosedbelow,oroffinancialliabilitiesbetweenmeasurementcategoriesarenotpermittedfollowingtheirinitialrecognition.

Heldfortradingnon-derivativefinancialassetscanonlybetransferredoutoftheheldatfairvaluethroughprofitorlosscategoryinthefollowingcircumstances:(i)totheavailable-for-salecategory,where,inrarecircumstances,theyarenolongerheldforthepurposeofsellingorrepurchasinginthenearterm;or(ii)to the loansand receivables category, where they areno longer held for thepurposeof sellingorrepurchasingintheneartermandtheywouldhavemetthedefinitionofaloanandreceivableoninitialrecognitionand theBankand itssubsidiarieshave the intentandability tohold theassets for theforeseeablefutureoruntilmaturity.

Financialassetscanonlybetransferredoutoftheavailable-for-salecategorytotheloansandreceivablescategory,wheretheywouldhavemetthedefinitionofaloanandreceivableoninitialrecognitionandtheBankanditssubsidiarieshavetheintentandabilitytoholdtheassetsfortheforeseeablefutureoruntilmaturity.

Financialassetsarereclassifiedattheirfairvalueonthedateofreclassification.Forfinancialassetsreclassifiedoutoftheavailable-for-salecategoryintoloansandreceivables,anygainorlossonthoseassets recognised in shareholders’ equity prior to the date of reclassification is amortised to theconsolidatedincomestatementovertheremaininglifeofthefinancialasset,usingtheeffectiveinterestmethod.

Renegotiated loans

Loansandreceivableswithrenegotiatedtermsareloansthathavebeenrestructuredduetodeteriorationintheborrower’sfinancialpositionandwheretheBankanditssubsidiarieshavemadeconcessionsthat theywouldnototherwiseconsider.Renegotiated loansandreceivablesaresubject toongoingmonitoringtodeterminewhethertheyremainimpairedorpastdue.

Derecognition

FinancialassetsarederecognisedwhentherightstoreceivecashflowsfromthefinancialassetshaveexpiredorwheretheBankanditssubsidiarieshavetransferredsubstantiallyallrisksandrewardsofownership.





Financialliabilitiesarederecognisedwhentheyareextinguished,i.e.whentheobligationisdischarged,cancelledorexpires.IftheBankanditssubsidiariespurchasetheirowndebt,itisremovedfromtheconsolidatedstatementoffinancialposition,andthedifferencebetweenthecarryingamountoftheliabilityandtheconsiderationpaidisincludedin‘Otheroperatingincome’.

(j) Derivativefinancialinstrumentsandhedgeaccounting

Derivativesarefinancial instrumentsthatderivetheirvalue inresponsetochanges in interestrates,financialinstrumentprices,commodityprices,foreignexchangerates,creditriskandindices.Derivativesarecategorisedastradingunlesstheyaredesignatedashedginginstruments.

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

Certainderivativesembeddedinotherfinancialinstrumentsaretreatedasseparatederivativeswhentheireconomiccharacteristicsandrisksarenotcloselyrelatedtothoseofthehostcontractandthehostcontractisnotcarriedatfairvaluethroughprofitorloss.Theseembeddedderivativesaremeasuredatfairvaluewithchangesinfairvaluerecognisedintheconsolidatedincomestatement.

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

Changesinthefairvalueofderivativesthataredesignatedandqualifiedasfairvaluehedginginstrumentsarerecordedintheconsolidatedincomestatement,togetherwithanychangesinthefairvalueofthehedgedassetorliabilitythatareattributabletothehedgedrisk.Ifthehedgenolongermeetsthecriteriaforhedgeaccounting,theadjustmenttothecarryingamountofahedgeditem for which the effective interest method is used is amortised to the consolidated incomestatementovertheperiodtomaturityorderecognition.




(j) Derivativefinancialinstrumentsandhedgeaccounting(continued)

(ii) Cash flow hedge

Theeffectiveportionofchangesinthefairvalueofderivativesthataredesignatedandqualifiedascashflowhedginginstrumentsarerecognisedinothercomprehensiveincome.Thegainorlossrelatingtotheineffectiveportionisrecognisedimmediatelyintheconsolidatedincomestatement.

Amountsaccumulatedinequityarerecycledtotheconsolidatedincomestatementintheperiodsinwhichthehedgeditemaffectsprofitorloss.

Whenahedginginstrumentexpiresorissold,orwhenahedgenolongermeetsthecriteriaforhedgeaccounting,anycumulativegainorlossexistinginequityatthattimeremainsinequityandisrecognisedwhentheforecasttransactionisultimatelyrecognisedintheconsolidatedincomestatement.Whenaforecasttransactionisnolongerexpectedtooccur,thecumulativegainorlossthatwasreportedinequityisimmediatelytransferredtotheconsolidatedincomestatement.

Derivatives that do not qualify for hedge accounting

Certainderivativetransactionsdonotqualifyforhedgeaccounting.Changesinthefairvalueofanyderivative instruments that do not qualify for hedge accounting are recognised immediately in theconsolidatedincomestatement.

(k) Impairmentoffinancialassets

TheBankanditssubsidiariesassessateachreportingdatewhetherthereisobjectiveevidencethatafinancialassetorgroupoffinancialassetsisimpaired.Afinancialassetoragroupoffinancialassetsisimpairedandimpairmentlossesareincurredif,andonlyif,thereisobjectiveevidenceofimpairmentasaresultofoneormoreeventsthatoccurredaftertheinitialrecognitionoftheasset(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.Thecarryingamountoftheassetisreducedthroughtheuseofanallowanceaccountandtheamountofthelossisrecognisedintheconsolidatedincomestatement.Ifaloanhasavariableinterestrate,thediscountrateformeasuringanyimpairmentlossisthecurrenteffectiveinterestratedeterminedunderthecontract.Asapracticalexpedient,theBankanditssubsidiariesmaymeasureimpairmentonthebasisofaninstrument’sfairvalueusingobservablemarketprice.

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

Futurecashflowsinagroupoffinancialassetsthatarecollectivelyevaluatedforimpairmentarebasedontheprobabilityofdefaultinherentwithintheportfolioofimpairedloansorreceivablesandthehistoricallossexperienceforassetswithcreditriskcharacteristicssimilartothoseinthegroup.Historicallossexperienceisadjustedonthebasisofcurrentobservabledatatoreflecttheeffectsofcurrentconditionsthatdidnotaffecttheperiodonwhichthehistoricallossexperienceisbasedandtoremovetheeffectsofconditionsinthehistoricalperiodthatdonotcurrentlyexist.

Totheextentaloanisirrecoverable,itiswrittenoffagainsttherelatedprovisionforloanimpairment.Suchloansarewrittenoffafterallthenecessaryprocedureshavebeencompletedandtheamountofthelosshasbeendetermined.Subsequentrecoveriesofamountspreviouslywrittenoffarecreditedtotheconsolidatedincomestatement.

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




(k) Impairmentoffinancialassets(continued)

Available-for-sale assets

Asignificantorprolongeddeclineinthefairvalueofanequitysecuritybelowitscostisconsidered,amongstotherfactorsindeterminingwhethertheequitysecurityisimpaired.Whereobjectiveevidenceofimpairmentexistsforavailable-for-salefinancialassets,thecumulativeloss(measuredasthedifferencebetweentheacquisitioncostandthecurrentfairvalue,lessanyimpairmentlossonthatfinancialassetpreviouslyrecognisedintheconsolidatedincomestatement)isremovedfromequityandrecognisedinthe consolidated income statement. If, in a subsequent period, the fair value of a debt instrumentclassifiedasavailable-for-saleincreasesandtheincreasecanbeobjectivelyrelatedtoaneventoccurringaftertheimpairmentlosswasrecognisedintheconsolidatedincomestatement,theimpairmentlossisreversedthroughtheconsolidatedincomestatement.Impairmentlossesrecognisedintheconsolidatedincomestatementonequityinstrumentsarenotreversedthroughtheconsolidatedincomestatement.

(l) Offsettingfinancialtransactions

Financialassetsandliabilitiesareoffsetandthenetamountreportedintheconsolidatedstatementoffinancialpositionwhenthereisalegallyenforceablerighttooffsettherecognisedamountsandthereisanintentiontosettleonanetbasis,ortorealisetheassetandsettletheliabilitysimultaneously.

(m) Fiduciaryactivities

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

(n) Cashandcashequivalents

Forthepurposesoftheconsolidatedcashflowstatement,cashandcashequivalentscomprisebalanceswithlessthanthreemonthsmaturityfromthedateofacquisition,including:cashandbalanceswithbanks,centralbanksandotherfinancialinstitutions,tradingassets,placementswithbanksandotherfinancialinstitutions,andamountsduefromimmediateholdingcompanyandfellowsubsidiaries.

(o) Revenuerecognition

(i) Interest income and expense

Interest incomeandexpenseonavailable-for-saleassets, financial assetsor liabilitiesheldatamortisedcostandfinancialassetsandliabilitiesheldatfairvaluethroughprofitorlossexcludingderivativesisrecognisedintheconsolidatedincomestatementusingtheeffectiveinterestratemethod.

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




(o) Revenuerecognition(continued)

(i) Interest income and expense (continued)

Wheretheestimatesofcashflowshavebeenrevised,thecarryingamountofthefinancialassetorliabilityisadjustedtoreflecttheactualandrevisedcashflows,discountedattheinstrument’soriginaleffectiveinterestrate.Theadjustmentisrecognisedasinterestincomeorexpenseintheperiodinwhichtherevisionismade.

Onceafinancialassetoragroupofsimilarfinancialassetshasbeenwrittendownasaresultofanimpairmentloss,interestincomeisrecognisedattheoriginaleffectiveinterestrateofthefinancialassetappliedtotheimpairedcarryingamount.

(ii) Fees and commissions

Feesandcommissionsaregenerallyrecognisedonanaccrualbasiswhentheservicehasbeenprovidedorsignificantactperformed.LoansyndicationfeesarerecognisedasrevenuewhenthesyndicationhasbeencompletedandtheBankanditssubsidiarieshaveretainednopartoftheloanpackageforitselforhaveretainedapartatthesameeffectiveinterestrateasfortheotherparticipants.Portfolioandothermanagementadvisoryandservicefeesarerecognisedbasedontheapplicableservicecontracts,usuallyonatime-apportionedbasis.

(iii) Other income from financial assets and liabilities

Gainsandlossesarisingfromchangesinthefairvalueoffinancialassetsandliabilitiesheldatfairvalue throughprofitor loss, aswell asany interest receivableorpayable, are included in theconsolidatedincomestatementintheperiodinwhichtheyarise.

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

DividendsonequityinstrumentsarerecognisedintheconsolidatedincomestatementwhentheBankanditssubsidiaries’righttoreceivepaymentisestablished.

(p) Incometax

Incometaxpayableonprofits,basedontheapplicabletaxlawineachjurisdiction,isrecognisedasanexpenseintheperiodinwhichprofitsarise.Thetaxeffectsof incometaxlossesavailableforcarryforwardarerecognisedasanassetwhenitisprobablethatfuturetaxableprofitswillbeavailableagainstwhichtheselossescanbeutilised.

Deferredtaxisprovidedinfull,usingtheliabilitymethod,ontemporarydifferencesarisingbetweenthetaxbasesofassetsandliabilitiesandtheircarryingamountsintheconsolidatedfinancialstatements.Deferredincometaxisdeterminedusingtaxratesandlawsthathavebeenenactedorsubstantiallyenactedbythereportingdateandthatareexpectedtoapplywhentherelateddeferredincometaxassetisrealisedorthedeferredincometaxliabilityissettled.

Deferredtaxassetsarerecognisedwhereitisprobablethatfuturetaxableprofitswillbeavailableagainstwhichthetemporarydifferencescanbeutilised.




(p) Incometax(continued)

Currentanddeferredtaxrelatingtoitemswhicharechargedorcrediteddirectlytoequity,arecreditedorchargeddirectlytoequityandaresubsequentlyrecognisedintheconsolidatedincomestatementtogetherwiththecurrentordeferredgainorloss.

Currenttaxbalancesanddeferredtaxbalances,andmovementstherein,arepresentedseparatelyfromeachotherandarenotoffset.Currenttaxassetsareoffsetagainstcurrenttaxliabilities,anddeferredtaxassetsagainstdeferredtaxliabilitiesiftheBankanditssubsidiarieshavealegallyenforceablerighttosetoffcurrenttaxassetsagainstcurrenttaxliabilitiesandthefollowingadditionalconditionsaremet:

– inthecaseofcurrenttaxassetsandliabilities,theBankoritssubsidiariesintendeithertosettleonanetbasis,ortorealisetheassetandsettletheliabilitysimultaneously;or

– inthecaseofdeferredtaxassetsandliabilities,iftheyrelatetoincometaxesleviedbythesametaxationauthorityoneitherthesametaxableentityordifferenttaxableentitiesforwhichalegalrightofsetoffexists.

(q) Provisions

TheBankrecognisesaprovisionforapresentlegalorconstructiveobligationresultingfromapasteventwhenitismorelikelythannotthatitwillberequiredtotransfereconomicbenefitstosettletheobligationandtheamountoftheobligationcanbeestimatedreliably.

Contingentliabilitiesarepossibleobligationsarisingfrompastevents,whoseexistencewillbeconfirmedonlybyuncertainfutureevents,orpresentobligationsarisingfrompasteventsthatarenotrecognisedbecauseeitheranoutflowofeconomicbenefitsisnotprobableortheamountoftheobligationcannotbereliablymeasured.Contingentliabilitiesarenotrecognisedbutinformationaboutthemisdisclosedunlessthepossibilityofanyoutflowofeconomicbenefitsinsettlementisremote.

(r) Employeebenefits

(i) Short term employee benefits

Salaries,annualbonuses,andthecostofnon-monetarybenefitsareaccruedintheyearinwhichtheassociatedservicesarerenderedbyemployees.

(ii) Retirement benefit obligations

TheBankanditssubsidiariesoperateanumberofdefinedcontributionanddefinedbenefitplans.

Fordefinedcontributionplans,theBankanditssubsidiariespaycontributionstopubliclyorprivatelyadministeredpensioninsuranceplansonamandatory,contractualorvoluntarybasis,andsuchamountsarechargedtooperatingexpenses.TheBankanditssubsidiarieshavenofurtherpaymentobligationsoncethecontributionshavebeenpaid.

For fundeddefinedbenefitplans, thenet liability recognised in the consolidated statement offinancialpositionrepresentsthepresentvalueofthedefinedbenefitobligationsatthereportingdatelessthefairvalueofplanassets.Thedefinedbenefitobligationsarecalculatedannuallybyindependentactuariesusingtheprojectedunitcreditmethod.Thepresentvalueofthedefinedbenefit obligations is determined by discounting the estimated future cash outflows using aninterestrateequaltotheyieldongovernmentbondsthataredenominatedinthecurrencyinwhichthebenefitswillbepaid,andthathaveatermtomaturityapproximatingtothetermoftherelatedpensionliability.




(r) Employeebenefits(continued)

(ii) Retirement benefit obligations (continued)

Actuarialgainsandlossesthatarisearerecognisedinshareholders’equityandpresentedintheconsolidatedstatementofothercomprehensiveincomeintheperiodtheyarise.Pastservicecostsarerecognisedimmediatelytotheextentthatbenefitsarevestedandareotherwiserecognisedovertheaverageperioduntilbenefitsarevestedonastraight-linebasis.Currentservicecostsandanypastservicecosts,togetherwiththenetinterestexpenseonthenetdefinedbenefitliability,arechargedtooperatingexpenses.

TheBankdeterminesthenetinterestexpenseonthenetdefinedbenefitliabilityfortheyearbyapplyingthediscountrateusedtomeasurethedefinedbenefitobligationatthebeginningoftheannualperiodtothethennetdefinedbenefitliability,takingintoaccountanychangesinthenetdefinedbenefitliabilityduringtheyearasaresultofcontributionsandbenefitpayment.

(iii) Share-based compensation

TheStandardCharteredPLCGroup(“Group”)operatesequity-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.Ateachreportingdate,theBankanditssubsidiariesreviseitsestimatesofthenumberofoptionsthatareexpectedtovest.Itrecognisestheimpactoftherevisionoforiginalestimates,ifany,intheconsolidatedincomestatement,andacorrespondingadjustmenttoequityovertheremainingvestingperiod.Forfeiturespriortovestingattributabletofactorsotherthanthefailuretosatisfyanon-marketvestingconditionaretreatedasacancellationandtheremainingunamortisedchargeisdebitedtotheconsolidatedincomestatementatthetimeofcancellation.

(s) Translationofforeigncurrencies

ForeigncurrencytransactionsaretranslatedintoHongKongdollarsusingtheexchangeratesprevailingatthedatesofthetransactions.Foreignexchangegainsandlossesresultingfromthesettlementofsuchtransactions,andfromthetranslationatyear-endexchangeratesofmonetaryassetsandliabilitiesdenominatedinforeigncurrencies,arerecognisedintheconsolidatedincomestatement.

Non-monetaryassetsandliabilitiesaretranslatedathistoricalexchangeratesifheldathistoricalcostoryear-endexchangeratesifheldatfairvalue,andtheresultingforeignexchangegainsandlossesarerecognised in either the consolidated income statement or shareholders’ equity depending on thetreatmentofthegainorlossontheassetorliability.




(s) Translationofforeigncurrencies(continued)

TheresultsandfinancialpositionofallforeignoperationsthathaveafunctionalcurrencydifferentfromtheBank’spresentationcurrencyareaccountedforasfollows:

– assetsandliabilitiesforeachconsolidatedstatementoffinancialpositionpresentedaretranslatedattheclosingrateatthereportingdate.

– incomeandexpensesforeachconsolidatedincomestatementaretranslatedataverageexchangeratesoratratesonthedateofthetransactionwhereexchangeratesfluctuatesignificantly;and

– allresultingexchangedifferencesarerecognisedasaseparatecomponentofequity.

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

(t) Relatedparties

Forthepurposesofthesefinancialstatements,partiesareconsideredtoberelatedtotheBankanditssubsidiariesiftheBankanditssubsidiarieshavetheability,directlyorindirectly,tocontrolthepartyorexercisesignificantinfluenceoverthepartyinmakingfinancialandoperatingdecisions,orviceversa,orwheretheBankanditssubsidiariesandthepartyaresubjecttocommoncontrolorcommonsignificantinfluence.Relatedpartiesmaybeindividuals(beingmembersofkeymanagementpersonnel,significantshareholdersand/ortheirclosefamilymembers)orotherentitiesandinclude(i)associatesandjointventuresoftheGroup,(ii)entitieswhichareunderthesignificantinfluenceofrelatedpartiesoftheBankwhere thosepartiesare individuals, (iii)post-employmentbenefitplanswhichare for thebenefitofemployeesoftheBankorofanyentitythatisarelatedpartyoftheBank,and(iv)entitiesoranymemberoftheBankanditssubsidiariesofwhichitisapart,provideskeymanagementpersonnelservicestotheBankanditssubsidiariesortotheBankanditssubsidiaries’parent.

(u) Segmentreporting

Operatingsegments,and theamountsofeachsegment itemreported in theconsolidatedfinancialstatements,areidentifiedfromthefinancialinformationprovidedregularlytotheBankanditssubsidiaries’mostseniorexecutivemanagement for thepurposesofallocating resources to,andassessing theperformanceof,theBankanditssubsidiaries’variouslinesofbusinessandgeographicallocations.

(v) Saleandrepurchaseagreements

Securitiessoldsubjecttorepurchaseagreements(“repos”)remainontheconsolidatedstatementoffinancialposition;thecounterpartyliabilityisincludedin“Depositsandbalancesofbanksandotherfinancialinstitutions”,“Depositsfromcustomers”or“AmountsduetoGroupcompanies”,asappropriate.Securitiespurchasedunderagreementstore-sell(“reverserepos”)arenotrecognisedontheconsolidatedstatementoffinancialpositionand theconsiderationpaid is recorded in“Advances tocustomers”,“Placementswithbanksandotherfinancialinstitutions”or“AmountsduefromGroupCompanies”asappropriate.Thedifferencebetweenthesaleandrepurchasepriceistreatedasinterestandrecognisedoverthelifeoftheagreement.

Securitiesborrowedarenotrecognisedintheconsolidatedfinancialstatements,unlessthesearesoldtothirdparties,inwhichcasethepurchaseandsalearerecordedwiththegainorlossincludedintradingincome.




(w) Assetsheldforsale

Non-currentassets(suchasproperty)anddisposalgroups(includingboththeassetsandliabilitiesofthedisposalgroups)areclassifiedasheldforsaleandmeasuredattheloweroftheircarryingamountandfairvaluelesscosttosellwhen:(i)theircarryingamountswillberecoveredprincipallythroughsale;(ii)theyareavailableforsaleintheirpresentcondition;and(iii)theirsaleishighlyprobable.

Immediatelybeforetheinitialclassificationasheldforsale,thecarryingamountsoftheassets(orassetsandliabilitiesinthedisposalgroups)aremeasuredinaccordancewiththeapplicableaccountingpoliciesdescribedabove.

(x) Preferencesharecapital

Preferencesharecapitalisclassifiedasequityifitisnon-redeemable,orredeemableonlyatthecompany’soption,andanydividendsarediscretionary.Dividendsonpreferencesharecapitalclassifiedasequityarerecognisedasdistributionswithinequity.

3 Changes in accounting policies

Amendments to HKFRSs/IFRSs and new interpretation

TheHKICPA/IASBhasissuedthefollowingamendmentstoHKFRSs/IFRSsthatarefirsteffectiveforthecurrentaccountingperiodcommencing1January2016.

– HKFRS14/IFRS14RegulatoryDeferralAccounts– AccountingforAcquisitionsofinterestsinJointOperations(AmendmentstoHKFRS11/IFRS11)– ClarificationofAcceptableMethodsofDepreciationandAmortisation(AmendmentstoHKAS16/

IAS16andHKAS38/IAS38)– Agriculture:BearerPlants(AmendmentstoHKAS16/IAS16andHKAS41/IAS41)– EquityMethodinSeparateFinancialStatements(AmendmentstoHKAS27/IAS27)– AnnualImprovementstoHKFRSs/IFRSs2012-2014Cycle–variousstandards– InvestmentEntities:ApplyingtheConsolidationException(AmendmentstoHKFRS10/IFRS10,

HKFRS12/IFRS12andHKAS28/IAS28)– DisclosureInitiative(AmendmentstoHKAS1/IAS1)

TheBankanditssubsidiariesadoptedtheaboveamendmentstoexistingaccountingstandardsfrom1 January 2016. The application of these amendments did not have a material impact on theseconsolidatedfinancialstatements.



4 Operating profit

Theoperatingprofitfortheyearisstatedaftertakingintoaccountthefollowing:

2016 2015

HK$’M HK$’M

(a) InterestincomeInterestincomeonlistedsecurities 789 1,112Interestincomeonunlistedsecurities 1,409 1,424Otherinterestincome(note) 11,474 13,567

Amountshownintheconsolidatedincomestatement 13,672 16,103

Less:interestincomearisingfromtradingassets (293) (359)Less:interestincomeonfinancialassetsdesignatedatfairvalue (26) (49)

Totalinterestincomeonfinancialassetsthatarenotmeasuredatfairvaluethroughprofitorloss 13,353 15,695

(note)TheamountincludesinterestincomeonunwindingofdiscountsonloanimpairmentprovisionsofHK$59million(note16)(2015:HK$44million),andfairvaluegainsofHK$33milliontransferredfromreservesoncashflowhedges(2015:HK$31million).

2016 2015

HK$’M HK$’M

(b) InterestexpenseInterestexpenseoncustomerdeposits,depositsofbanks,

certificatesofdepositissued,debtsecuritiesissued,tradingliabilitiesandfinancialliabilitiesdesignatedatfairvalue(note) 2,872 4,360

Interestexpenseonsubordinatedliabilities 624 364Interestexpenseonotherborrowings 51 –


Less:interestexpensearisingfromtradingliabilities (68) (66)Less:interestexpensearisingfromfinancialliabilitiesdesignated

atfairvalue (23) (119)

Totalinterestexpenseonfinancialliabilitiesthatarenotmeasuredatfairvaluethroughprofitorloss 3,456 4,539

(note)TheamountincludesfairvaluegainsofHK$3milliontransferredfromreserveoncashflowhedges(2015:HK$3million).



4 Operating profit (continued)

2016 2015

HK$’M HK$’M

(c) NetfeeandcommissionincomeNetfeeandcommissionincome(otherthanamounts

includedindeterminingtheeffectiveinterestrate)arisingfromfinancialassetsorfinancialliabilitiesthatarenotheldfortradingordesignatedatfairvalue–feeandcommissionincome 1,961 2,880–feeandcommissionexpense 144 112

NetfeeandcommissionincomefromtrustandotherfiduciaryactivitieswheretheBankanditssubsidiariesholdorinvestassetsonbehalfofitscustomers–feeandcommissionincome 396 605–feeandcommissionexpense 99 159

2016 2015

HK$’M HK$’M

(d) NettradingincomeGainslesslossesfromdealinginforeigncurrencies 1,765 1,008Gainslesslossesfromtradingsecurities 15 168Gainslesslossesfromotherdealingactivities (204) (33)


Add:interestincomearisingfromtradingassets 293 359Less:interestexpensearisingfromtradingliabilities (68) (66)

Netincomefromtradinginstruments 1,801 1,436

2016 2015

HK$’M HK$’M

(e) NetgainsfromfinancialinstrumentsdesignatedatfairvalueNet(losses)/gainsasshownintheconsolidatedincomestatement (751) 13Add:interestincomearisingfromfinancialassetsdesignatedatfairvalue 26 49Less:interestexpensearisingfromfinancialliabilitiesdesignated

atfairvalue (23) (119)

(748) (57)



4 Operating profit (continued)

2016 2015

HK$’M HK$’M

(f) OtheroperatingincomeRentalincomefromoperatingleaseassets 3,513 3,120Dividendincomefromlistedavailable-for-salesecurities 3 –Dividendincomefromunlistedavailable-for-salesecurities 24 25Netgains/(losses)ondisposaloffixedassets 51 (61)Netlossesondisposaloffinancialinstruments

measuredatamortisedcost (51) (76)Netgainsonrevaluationofinvestmentproperties(note21) 21 3Netgainsondisposalofasubsidiaryandanassociate – 1,758NetgainsondisposalofMandatoryProvidentFundandOccupational

RetirementSchemesOrdinancebusinesses 1,964 –Others 126 76

5,651 4,845

2016 2015

HK$’M HK$’M

(g) OperatingexpensesStaffcosts–contributionstodefinedcontributionplans 197 39–expenseinrespectofthedefinedbenefitsplan(note30(c)) 98 99–equity-settledshare-basedpaymentexpenses 100 226–salariesandotherstaffcosts 5,731 6,398Depreciation(note21) 1,870 1,717Premisesandequipmentexpense,excludingdepreciation–rentalofpremises 948 998–others 378 389Amortisation–otherintangibleassets(note22) 146 121Auditor’sremuneration 18 19Others 4,967 4,929

14,453 14,935

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

2016 2015

HK$’M HK$’M

Netgainstransferredfromreserves 164 85



6 Impairment charges

2016 2015

HK$’M HK$’M

(a) ImpairmentchargesonadvancestobanksandcustomersIndividualimpairmentprovisions(note16)–additions 1,916 2,804–releases (155) (19)–recoveries (206) (173)

1,555 2,612

Portfolioimpairment(releases)/charges(note16) (245) 455

1,310 3,067

(b) OtherimpairmentchargesChargesforaninterestinanassociate – 357Chargesforriskparticipationtransactions 83 270Chargesforproperty,plantandequipment(note21) 329 133Others – 3

412 763

7 Taxation in the consolidated income statement

(a) Taxationintheconsolidatedincomestatementrepresents:

2016 2015

HK$’M HK$’M

Current taxHongKongprofitstax 849 1,008Overseastaxation 15 20Under/(over)-provisioninrespectofprioryears 13 (44)

877 984

Deferred tax (note 27)Origination/reversaloftemporarydifferences 45 4Under/(over)-provisioninrespectofprioryears 93 (13)

138 (9)

1,015 975

TheprovisionforHongKongprofitstaxfor2016iscalculatedat16.5%(2015:16.5%)oftheestimatedassessableprofitsfortheyear.Taxationforoverseassubsidiariesischargedattheappropriatecurrentratesoftaxationrulingintherelevantcountries.



7 Taxation in the consolidated income statement (continued)

(b) Reconciliationbetweentaxexpensesandaccountingprofitatapplicabletaxrates:

2016 2015

HK$’M HK$’M


Notionaltaxonprofitbeforetaxation,calculatedatHongKongprofitstaxrateof16.5% 1,476 1,562

Taxeffectofnon-deductibleexpenses 252 253Taxeffectofnon-taxablerevenue (802) (762)Under/(over)-provisioninprioryears 106 (57)Taxeffectofdifferenttaxratesofsubsidiariesoperating

inotherjurisdictions (24) (26)Others 7 5

Actualtaxexpense 1,015 975

8 Directors’ remuneration

Directors’remunerationdisclosedpursuanttosection383(1)oftheHongKongCompaniesOrdinanceandPart2oftheCompanies(DisclosureofinformationaboutBenefitsofDirectors)Regulationareasfollows:

Bank

2016 2015

HK$’M HK$’M

Fees 2 1Short-termemploymentbenefits 35 45Post-employmentbenefits 1 1Equitycompensationbenefits 4 4

42 51

9 Segmental reporting

TheBankanditssubsidiariesmanageitsbusinessesbyfourclientsegments:CorporateandInstitutional,Commercial,PrivateBankingandRetail:

• Corporate & Institutional Banking (CIB)comprisesInternationalCorporates(majormultinationalcorporationsandlargebusinessgroupswhichhavesophisticated,cross-borderneedsrequiringhighlevelsofinternationalservice);andFinancialInstitutions(Banks,Investorclients,Insurancecompanies,BrokerDealers,PublicSectornames(includingCentralBanks,SovereignWealthFundsandDevelopmentOrganisations)andothertypesoffinancialinstitutions).ThemajorityofCIBclientincomeisgeneratedbyTransactionBanking,FinancialMarketsandCorporateFinanceproducts.

• Commercial BankingsegmentservesLocalCorporates(typicallyclientswithoperationsinthreegeographiesorless);medium-sizedbusinessclients,MidMarketsclientsandHighValueSegmentclientsprovidingproductsacrossTransactionBanking,FinancialMarketsandLending.

• Private Banking segmentisdedicatedtogivinghighnetworthclientshighlypersonalisedserviceandacomprehensivesuiteofproductsandservicestailoredtomeettheirfinancialneeds.IncomefromPrivateBankingclientsprimarilyrelatestoWealthManagementandRetailproducts.



9 Segmental reporting (continued)

• Retail Bankingcomprises:• Personal&Priorityclients,providingbankingproductsandservicestoabroaderconsumer

market;and• Businessclients, servingsmallbusinessclients, soleproprietorsandprivatecompanies,

offeringsolutionssuchasworkingcapital,businessexpansion,businessesprotectionandyieldenhancement.

Besides the fourclientsegments,AssetandLiabilityManagementandcertain itemswhicharenotmanageddirectlybyaclientsegment,includingunallocatedcentralcostsarereportedin“Central&OtherItems”.FinancialinformationispresentedinternallytotheBank’sseniormanagementusingthesesegments.

TheBankanditssubsidiariescompriseonlyonegeographicalsegmentasover90%ofthebusinessisbasedinHongKong.Geographicalsegmentisclassifiedbythelocationoftheprincipaloperationsofthesubsidiaryor,inthecaseoftheBank,thelocationofthebranchresponsibleforreportingtheresultsoradvancingthefunds.

InNovember2015,StandardCharteredPLC (the“Group”or theBank’sultimateholdingcompany)announcedareorganisationofitsbusinesstobetteraligntheGroup’sstructuretoclientsegmentswithclearlocalorglobalneedsandtostreamlinethegeographicregions.Thisapproachalignswithhowtheclientsegmentsandgeographiesaremanagedinternally.Thesechangesbecameeffectiveon1January2016. The comparative figures have been restated to reflect these changes for the year ended 31December2015.

(a) Segmentresults,assetsandliabilities

Revenueandexpensesareallocatedtothereportablesegmentswithreferencetoincomegeneratedbythosesegmentsandtheexpensesincurredbythosesegmentsorwhichotherwisearisefromthedepreciationoramortisationofassetsattributabletothosesegments.

2016

Corporate &

Institutional

Banking

Commercial

Banking

Private

Banking Retail Banking

Central &

Other Items

Consolidated

Total

HK$’M HK$’M HK$’M HK$’M HK$’M HK$’M

Operating income–Netinterestincome 1,838 1,482 590 5,802 960 10,672–Otheroperatingincome 6,786 1,037 545 4,742 2,100 15,210

8,624 2,519 1,135 10,544 3,060 25,882

Operatingexpenses(note) (5,485) (1,681) (1,349) (5,433) (102) (14,050)

Operatingprofitbeforeimpairment 3,139 838 (214) 5,111 2,958 11,832

Impairment(charges)/releases (1,057) (434) 1 (487) 1 (1,976)

Profit/(loss)beforetaxation 2,082 404 (213) 4,624 2,959 9,856

Segmentassets 367,669 56,308 27,698 258,183 354,364 1,064,222

Segmentliabilities 361,012 108,680 54,344 379,011 71,648 974,695




(a) Segmentresults,assetsandliabilities(continued)

2015 (Restated)

Corporate &

Institutional

Banking

Commercial

Banking

Private

Banking Retail Banking

Central &

Other Items

Consolidated

Total


Operating income–Netinterestincome 3,047 1,695 444 5,488 1,264 11,938–Otheroperatingincome 7,538 1,834 617 5,169 1,296 16,454

10,585 3,529 1,061 10,657 2,560 28,392

Operatingexpenses(note) (5,398) (2,065) (926) (5,250) (102) (13,741)

Operatingprofitbeforeimpairment 5,187 1,464 135 5,407 2,458 14,651

Impairmentcharges (150) (1,623) (725) (765) (2) (3,265)

Profit/(loss)beforetaxation 5,037 (159) (590) 4,642 2,456 11,386

Segmentassets 323,578 52,374 27,956 247,319 368,080 1,019,307

Segmentliabilities 385,357 84,837 49,836 355,870 65,302 941,202

(note)OperatingexpensesinCorporate&InstitutionalBankingsegmentincludeddepreciationchargesofHK$1,662million(2015:HK$1,538million)forcommercialaircraftandvesselsleasedtocustomersunderoperatingleases.

(b) Reconciliationofreportablesegmentoperatingincome,profitbeforetaxation,assetsandliabilities

2016 2015

HK$’M HK$’M

Operating income Reportablesegmentrevenue 25,882 28,392IncomerelatingtoFinancialMarketproducts (225) (1,134)Costoffreefunds 84 78Others (1,982) (494)

Totaloperatingincome 23,759 26,842




(b) Reconciliationofreportablesegmentoperatingincome,profitbeforetaxation,assetsandliabilities(continued)

2016 2015

HK$’M HK$’M

Restated

Profit before taxationReportablesegmentprofitbeforetaxation 9,856 11,386IncomerelatingtoFinancialMarketproducts (225) (1,134)Costoffreefunds 84 78Reallocationsofimpairmentcharges 253 (452)Others (1,024) (413)


2016 2015

HK$’M HK$’M

AssetsReportablesegmentassets 1,064,222 1,019,307Assetsofgroupcompaniesnotincludedinconsolidatedtotalassets (2,066) (1,804)Amountsduefromimmediateholdingcompanyandfellowsubsidiaries 62,849 46,462Others (118,983) (105,000)

Totalassets 1,006,022 958,965

2016 2015

HK$’M HK$’M

LiabilitiesReportablesegmentliabilities 974,695 941,202Liabilitiesofgroupcompaniesnotincludedinconsolidatedtotalliabilities (1,437) (1,386)Amountsduetoimmediateholdingcompanyandfellowsubsidiaries 54,214 35,833Others (87,162) (82,033)

Totalliabilities 940,310 893,616

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

Reportablesegmentassetsandliabilities includeassetsandliabilitieswhicharenotbookedontheBankanditssubsidiaries’statementoffinancialpositionbutwhichcontributetothereportablesegment’sincomeandprofitbeforetaxation.



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

2016 2015

HK$’M HK$’M

Cashinhand 2,095 1,572Balanceswithcentralbanks 8,352 38,290Balanceswithbanksandother

financialinstitutions 4,885 8,907

15,332 48,769

11 Placements with banks and other financial institutions

2016 2015

HK$’M HK$’M

Grossplacementswithbanksandotherfinancialinstitutions–maturingwithinonemonth 64,658 64,774–maturingbetweenonemonthtooneyear 87,100 53,090–maturingbetweenoneyeartofiveyears 4,992 1,794

156,750 119,658Less:impairmentprovision–individuallyassessed – –

156,750 119,658

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

TheHongKongSpecialAdministrativeRegioncurrencynotesincirculationaresecuredbythedepositoffundsinrespectofwhichtheGovernmentofHongKongSpecialAdministrativeRegioncertificatesofindebtednessareheld.



13 Trading assets

2016 2015

HK$’M HK$’M

Tradingsecurities 14,484 16,721Advancestocustomers 116 163Positivefairvaluesoftradingderivatives 1,034 1,713

15,634 18,597

Tradingsecurities:Treasurybills 4,345 3,127Certificatesofdepositheld 2,127 388Debtsecurities 8,008 12,897Equitysecurities 4 309

14,484 16,721

Issuedby:Centralgovernmentsandcentralbanks 8,619 13,808Publicsectorentities 61 –Banksandotherfinancialinstitutions 4,286 1,490Corporateentities 1,518 1,423

14,484 16,721

Byplaceoflisting:ListedinHongKong 6,160 7,191ListedoutsideHongKong 1,426 7,036

7,586 14,227Unlisted 6,898 2,494

14,484 16,721



14 Financial assets designated at fair value

2016 2015

HK$’M HK$’M

Debtsecurities 370 666

Issuedby:Corporateentities 370 666

Byplaceoflisting:ListedoutsideHongKong 228 453Unlisted 142 213

370 666

Theabovefinancialassetsdesignatedatfairvaluerepresentcertaindebtsecuritieswithembeddedderivativesthatarenotseparatelyrecognised.

15 Advances to customers

(a) Advancestocustomers

2016 2015

HK$’M HK$’M

Grossadvancestocustomers 440,347 415,278Tradebills 1,675 1,785

442,022 417,063Less:Impairmentprovision

–individuallyassessed(note16) (1,437) (1,300)–collectivelyassessed(note16) (563) (808)

440,022 414,955



15 Advances to customers (continued)

(b) Impairedadvancestocustomers

2016 2015HK$’M HK$’M

Grossimpairedadvancestocustomers 3,693 3,807Impairmentprovision–individuallyassessed (1,437) (1,300)

2,256 2,507

Grossimpairedadvancestocustomersasa%ofgrossadvancestocustomers 0.84% 0.91%

Fairvalueofcollateralheldagainstthecoveredportionofimpairedadvancestocustomers 1,340 1,967

Coveredportionofimpairedadvancestocustomers 934 1,452Uncoveredportionofimpairedadvancestocustomers 2,759 2,355

Thecoveredportionofimpairedadvancestocustomersrepresentstheamountofcollateralheldagainstoutstandingbalances.Itdoesnotincludeanycollateralheldoverandaboveoutstandingexposures.



16 Movement in impairment provision on advances to banks and customers

Advancestocustomers

2016Individually

assessedCollectively

assessed TotalHK$’M HK$’M HK$’M

At1January2016 1,300 808 2,108Amountswrittenoff (1,565) – (1,565)Recoveriesofadvanceswrittenoffinpreviousyears 206 – 206Netcharge/(release)totheconsolidated

incomestatement(note6(a)) 1,555 (245) 1,310Unwindofdiscountonloanimpairmentprovision(note4(a)) (59) – (59)

At31December2016(note15(a)) 1,437 563 2,000

2015Individually

assessedCollectively

assessed TotalHK$’M HK$’M HK$’M

At1January2015 1,440 353 1,793Amountswrittenoff (2,881) – (2,881)Recoveriesofadvanceswrittenoffinpreviousyears 173 – 173Netchargetotheconsolidatedincomestatement(note6(a)) 2,612 455 3,067Unwindofdiscountonloanimpairmentprovision(note4(a)) (44) – (44)

At31December2015(note15(a)) 1,300 808 2,108

Asat31December2016and31December2015,therewerenoindividuallyassessedprovisiontobanksandotherfinancialinstitutions.



17 Investment securities

2016 2015

HK$’M HK$’M

Available-for-salesecuritiesTreasurybills 60,393 60,737Certificatesofdepositheld 25,291 14,952Debtsecurities 113,236 126,441Equityshares 480 632Less:impairmentprovision (6) (11)

199,394 202,751

Loansandreceivables–Debtsecurities 8,077 7,821

207,471 210,572

Issuedby:Available-for-salesecurities

Centralgovernmentsandcentralbanks 115,808 121,623Publicsectorentities 5,094 4,686Banksandotherfinancialinstitutions 61,387 49,286Corporateentities 17,105 27,156

199,394 202,751

Loansandreceivables–DebtsecuritiesCorporateentities 8,077 7,821

207,471 210,572

Byplaceoflisting:Available-for-salesecurities

ListedinHongKong 7,895 8,095ListedoutsideHongKong 87,043 105,257

94,938 113,352Unlisted 104,456 89,399

199,394 202,751

Loansandreceivables–DebtsecuritiesListedoutsideHongKong 4,329 3,278Unlisted 3,748 4,543

8,077 7,821

207,471 210,572



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,theBankundertakestodepositanamountequaltotheparticipatingbalanceswith the relatedcompanies.When there isadefault,under theundertakingclauseof theagreement,theBankisobligatedtohonortheriskparticipationbytransferringsuchdepositstotherelatedcompanies.

Duringtheyear,HK$269millionoftheabovedepositsweretransferredfromarelatedcompany(2015:HK$270milliontransferredto).Asat31December2016,theamountduefromgroupcompanyshownontheconsolidatedstatementoffinancialpositionisstatednetofHK$912million(2015:HK$1,819million)inrespectofsuchobligations.

Theamountsofmaterialtransactionsduringtheyeararesetoutbelow:

Immediate holding

company Fellow subsidiaries

2016 2015 2016 2015

HK$’M HK$’M HK$’M HK$’M

Operatingincome 1,767 2,280 (111) 130

Operatingexpenses 1,726 2,042 584 578

MaterialtransactionsenteredduringtheyearbetweentheBankanditssubsidiariesincludedoperatingincomeofHK$1,816million(2015:HK$1,660million)andoperatingexpenseofHK$85million(2015:HK$97million).Intra-grouptransactionsareeliminatedinfullintheconsolidatedincomestatement.



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

Theamountsduefrom/toimmediateholdingcompanyandfellowsubsidiariesstatedontheconsolidatedstatementoffinancialpositionincludedthefollowing:

2016 2015

Immediate

holding

company

Fellow

subsidiaries

Immediate

holding

company

Fellow

subsidiaries


Amounts due from:Cashandbalanceswithbanksandother

financialinstitutions 3,626 1,962 1,733 628Placementswithbanksandotherfinancial

institutions 17,202 14,240 12,024 13,687Tradingassets

–Positivefairvaluesoftradingderivatives 22,083 54 14,390 –Investmentsecurities

–Listedavailable-for-saledebtsecurities – – – 1,395Otherassets

–Positivefairvaluesofhedgingderivatives 1,567 7 1,214 92–Others 2,043 65 996 303

46,521 16,328 30,357 16,105

2016 2015

Immediate

holding

company

Fellow

subsidiaries

Immediate

holding

company

Fellow

subsidiaries


Amounts due to:Depositsandbalancesofbanksandother

financialinstitutions 2,500 10,070 4,991 6,630Tradingliabilities:

–Negativefairvaluesoftradingderivatives 22,643 10 15,405 –Debtsecuritiesinissue – 1,494 – 1,387Subordinatedliabilities(note) 6,204 – – –Otherliabilities

–Negativefairvaluesofhedgingderivatives 1,108 – 1,755 27–Others 9,827 358 5,368 270

42,282 11,932 27,519 8,314

(note)Interestrateat3monthUSDLiborplus250bps,payablequarterlyinarrear,tothematuritydateon19December2026.



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

Thecontractualamountsofcontingentliabilitiesandcommitmentstotheimmediateholdingcompanyandfellowsubsidiariesaresetoutbelow:

2016 2015Immediate

holdingcompany

Fellowsubsidiaries

Immediateholding

companyFellow

subsidiariesHK$’M HK$’M HK$’M HK$’M

Financialguaranteesandothercreditrelatedcontingentliabilities 3,728 27 4,615 89

Loancommitmentsandothercreditrelatedcommitments – 27,520 – 29,866

19 Investments in subsidiaries of the Bank

Bank

2016 2015

HK$’M HK$’M

Unlistedshares,atcostlessimpairmentprovision,ifany 886 853

The following listcontainsonly theparticularsofsubsidiarieswhichprincipallyaffected the results,assetsorliabilitiesoftheBankanditssubsidiaries.

Name of companyPlace of

incorporationParticulars of issued and paid up capital

Proportion ofownership

interest held by the Bank

Principalactivity

StandardCharteredAPRLimited

UnitedKingdom 21,971,715ordinarysharesofUS$1each

100% Investmentholdings

StandardCharteredSecurities(HongKong)Limited

HongKong 1,000,000ordinaryshares

100% Institutionalbrokerage

StandardCharteredLeasingGroupLimited

HongKong 30,000ordinaryshares

100% Provisionofleasingservices

StandardCharteredTradeSupport(HK)Limited

HongKong 53,431ordinaryshares

100% Provisionoffinancingand

otherservicesandactivitiesclosely

relatedtobankingtoclientsforinventory

andextendedpayment



20 Interest in associates

2016 2015

HK$’M HK$’M

Shareofnetassets 9,907 9,206Goodwill 1,717 1,717Less:Impairmentprovision (1,442) (1,442)

10,182 9,481Less:Transferredtoassetsheldforsale(Note46) Shareofnetassets 741 – Goodwill 1,717 – Less:Impairmentprovision (1,442) –

1,016 –

9,166 9,481

Thefollowingcontainsonlytheparticularsofthematerialassociate:

Name of associate

Place of establishment and operation

Particulars of issued and

paid up capital

Proportion of ownership

interestPrincipal

activity

ChinaBohaiBankCompanyLimited(“Bohai”)

ThePeople’sRepublicofChina

13,855,000,000ordinarysharesofRMB1each

19.99% Provisionofbankingand

relatedfinancialservices(Note1)

Note1: BohaiisastrategicpartnerfortheGrouptodevelopitsChinabusiness.

TheBank’sinvestmentinBohaiislessthan20%butthecompanyisconsideredtobeanassociatebecauseofthesignificantinfluencetheBankisabletoexerciseoverthemanagementofthecompanyanditsfinancialandoperatingpolicies.Significantinfluenceisevidencedlargelythroughthepresenceofmanagementpersonnelandtheprovisionofexpertise.

Inrespectoftheyearended31December2016,Bohai’sresultwasincludedintheconsolidatedfinancialstatementsbasedonaccountsdrawnupto30November2016.TheBankhastakenadvantageoftheprovisioncontainedinHKAS28/IAS28“InvestmentsinAssociates”wherebyitispermittedtoincludetheattributableshareofassociates’resultsbasedonaccountsdrawnuptoanon-coterminousperiodandwherethedifferenceisnotgreaterthanthreemonths.

Theassociateisaccountedforusingtheequitymethodintheconsolidatedfinancialstatements.

In2016,theBankreclassifieditsinterestinAsiaCommercialJointStockBank(“ACB”)as“Assetsheldforsale”.Theanalysisoftheresultsoftheassetsheldforsaleissummarisedinnote46.



20 Interest in associates (continued)

Summary of financial information of the material associates and reconciliation to the carrying amounts in the consolidated financial statements

2016 2015

Bohai ACB Bohai

HK$'M HK$'M HK$'M

Gross amounts of the associates

Assets 979,959 66,572 959,690Liabilities (934,105) (62,220) (917,098)

Netassets 45,854 4,352 42,592

Operatingincome 25,006 2,353 23,012

Profitaftertaxation 6,495 341 6,677Othercomprehensiveincome (67) – 67

Totalcomprehensiveincome 6,428 341 6,744

Dividendsreceivedfromtheassociate – 35 –

Grossamountofnetassetsoftheassociate 45,854 4,352 42,592EffectiveinterestoftheBankanditssubsidiaries 19.99% 15% 19.99%

ShareofnetassetsoftheassociateattributabletotheBankanditssubsidiaries 9,166 653 8,514

Fairvalueadjustmentonacquisition – 39 –Goodwill – 1,717 –Less:Impairmentprovision – (1,442) –

Carryingamountintheconsolidatedfinancialstatements 9,166 967 8,514

Reconciliation to the Bank and its subsidiaries’ total interest in associates:

2016 2015

HK$’M HK$’M

Carryingamountofmaterialassociates -ACB – 967 -Bohai 9,166 8,514

Interestinassociatesintheconsolidatedfinancialstatements 9,166 9,481



21 Property, plant and equipment

2016

Buildings and

leasehold

land held for

own use

Equipment,

furniture

& fixtures

Operating

lease

assets Sub-total

Investment

properties

Total

property,

plant and

equipment


Costorvaluation:At1January2016 2,878 483 38,108 41,469 937 42,406Additions 112 77 7,932 8,121 – 8,121Disposalsandwrite-offs (29) (104) (4,351) (4,484) – (4,484)Reclassifications (2) 2 – – – –Fairvalueadjustments(note4(f)) – – – – 21 21

At31December2016 2,959 458 41,689 45,106 958 46,064

Representing:Cost 2,959 458 41,689 45,106 – 45,106Valuation – – – – 958 958

2,959 458 41,689 45,106 958 46,064

Accumulateddepreciation:At1January2016 837 263 3,826 4,926 – 4,926Chargefortheperiod(note4(g)) 130 78 1,662 1,870 – 1,870Impairments(note6(b)) – – 329 329 – 329Attributabletoassetssoldor

writtenoff (25) (104) (403) (532) – (532)

At31December2016 942 237 5,414 6,593 – 6,593

Netbookvalue:At31December2016 2,017 221 36,275 38,513 958 39,471



21 Property, plant and equipment (continued)

2015

Buildings and

leasehold

land held for

own use

Equipment,

furniture

& fixtures

Operating

lease

assets Sub-total

Investment

properties

Total

property,

plant and

equipment


Costorvaluation:At1January2015 2,921 518 39,116 42,555 934 43,489Additions 23 37 6,837 6,897 – 6,897Transferredtoassetclassifiedas

assetheldforsale – – (2,049) (2,049) – (2,049)Disposalsandwrite-offs (41) (97) (5,796) (5,934) – (5,934)Reclassifications (25) 25 – – – –Fairvalueadjustments(note4(f)) – – – – 3 3

At31December2015 2,878 483 38,108 41,469 937 42,406

Representing:Cost 2,878 483 38,108 41,469 – 41,469Valuation – – – – 937 937

2,878 483 38,108 41,469 937 42,406

Accumulateddepreciation:At1January2015 721 255 2,563 3,539 – 3,539Chargefortheperiod(note4(g)) 91 88 1,538 1,717 – 1,717Impairments(note6(b)) 64 17 52 133 – 133Transferredtoassetclassifiedas

assetheldforsale – – (129) (129) – (129)Attributabletoassetssoldor

writtenoff (39) (97) (198) (334) – (334)

At31December2015 837 263 3,826 4,926 – 4,926

Netbookvalue:At31December2015 2,041 220 34,282 36,543 937 37,480



21 Property, plant and equipment (continued)

(a) Buildingsandleaseholdlandheldforownuse

2016 2015

HK$’M HK$’M

LeaseholdinHongKong,atcost–medium-termleases 1,771 1,847–short-termleases 131 83

1,902 1,930

FreeholdoutsideHongKong,atcost 115 111

2,017 2,041

(b) Investmentproperties

2016 2015HK$’M HK$’M

FreeholdoutsideHongKong,atfairvalue 958 937

TheinvestmentpropertyoutsideHongKongwasrevaluedasat31December2016onanopenmarketvaluebasis.Thevaluationwascarriedoutbyanindependentfirm,CBRELimited,whichhasamongitsstaffmembersoftheRoyalInstituteofCharteredSurveyorswithrecentexperienceinthelocationandcategoryofthepropertybeingvalued.

The fair value of the investment property is primarily determined using comparable recent markettransactionsonarm’slengthterms.

Thesefairvaluesarecategorisedaslevel2valuationsusingobservableinputs.

(c) Operatingleaseassets:

Assetsleasedtocustomersunderoperatingleasesconsistofcommercialaircraftandvessels.At31December,thetotalfutureminimumleasereceivablesunderoperatingleasesareasfollows:

2016 2015

HK$’M HK$’M

Within1year 3,836 3,730After1yearbutwithin5years 14,461 13,779After5years 8,474 10,814

26,771 28,323



22 Goodwill and intangible assets

2016

Capitalised

software

and other

intangible assets Goodwill Total

HK$’M HK$’M HK$’M

Cost:At1January2016 685 729 1,414Additions 373 – 373Disposalsandwrite-offs (81) – (81)

At31December2016 977 729 1,706

Accumulatedamortisation:At1January2016 339 – 339Chargefortheyear(note4(g)) 146 – 146Attributabletointangibleassetssoldorwrittenoff (81) – (81)

At31December2016 404 – 404

Carryingamount:At31December2016 573 729 1,302

2015

Capitalised

software

and other

intangible assets Goodwill Total


Cost:At1January2015 668 729 1,397Additions 80 – 80Disposalsandwrite-offs (63) – (63)

At31December2015 685 729 1,414

Accumulatedamortisation:At1January2015 281 – 281Chargefortheyear(note4(g)) 121 – 121Attributabletointangibleassetssoldorwrittenoff (63) – (63)

At31December2015 339 – 339

Carryingamount:At31December2015 346 729 1,075



22 Goodwill and intangible assets (continued)

Impairmenttestsforcash-generatingunitscontaininggoodwill

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

2016 2015

HK$’M HK$’M

Lending 611 611PrivateBanking 118 118

729 729

Therecoverableamountsof theCGUsaredeterminedbasedonvalue inusecalculations.Thekeyassumptionsandapproachtodeterminingvalueinusecalculations,assetoutbelow,aresolelyusedfor the purpose of assessing impairment on acquired goodwill. These calculations use cash flowprojectionsovera20-yearperiodbasedonbudgetsandforecastsapprovedbymanagement.Thesebudgetsandforecastscoverperiodsoffiveyearandareextrapolatedforwardusingsteadygrowthratesof2.8percent(2015:3.0percent).

Inassessingimpairmentofgoodwill,theBankanditssubsidiariesassumedgrowthatasteadyrateinlinewithlong-termforecastGDPgrowth.Adiscountrateof12.1percent(2015:14.1percent)wasused.

23 Other assets

2016 2015

HK$’M HK$’M

Prepaymentsandaccruedincome 4,754 2,631Sundrydebtors 3,414 2,642Acceptancesandendorsements 3,745 2,588Unsettledtradesandothers 2,050 2,568Assetsheldforsale(note) 1,020 1,920

14,983 12,349

(note)Assetsheldforsaleasof31December2016includedinterestinanassociateheldforsale.Theanalysisoftheresultsoftheassetsheldforsaleissummarisedinnote46.

Assetsheldforsaleasof31December2015includedcommercialaircraftandvesselsheldforsale.



24 Deposits from customers

2016 2015

HK$’M HK$’M

Currentaccounts 164,374 158,967Savingsaccounts 437,750 432,975Time,callandnoticedeposits 164,354 144,672Depositsandbalancesofcentralbanks 11,764 9,087

778,242 745,701

25 Debt securities in issue

2016 2015

HK$’M HK$’M

Otherdebtsecurities 2,173 1,209

26 Financial liabilities designated at fair value

2016 2015

HK$’M HK$’M

Structureddepositsfrombanksandcustomers 3,420 6,542Debtsecuritiesissued 6,148 7,182

9,568 13,724

TheBankdesignatescertainfinancialliabilitiesatfairvaluewhereeithertheliabilities:

– havefixedratesofinterestandinterestrateswapsorotherinterestrelatedderivativeshavebeentransactedwiththeintentionofsignificantlyreducinginterestraterisk;or

– areexposedtoequitypricerisk, foreigncurrencyriskorcredit riskandderivativeshavebeentransactedwiththeintentionofsignificantlyreducingexposuretomarketchanges;

At31December2016,thecontractualamountpayableatmaturityofthesefinancialliabilitiesexceededthe carrying amount by HK$718 million (2015: HK$1,328 million). Of this, the cumulative fair valuemovementrelatingtochangesincreditriskwasagainofHK$433million(2015:againofHK$1,112million). The amount of fair value movement relating to changes in credit risk recognised in theconsolidatedincomestatementduringtheyearwasalossofHK$679million(2015:againofHK$387million).



27 Taxation in the consolidated statement of financial position

Deferredtaxassetsandliabilities:

The components of gross deferred tax (assets)/liabilities recognised in the consolidated statement of financial position and the movements during the year are as follows:

Depreciation

allowances

in excess

of related

depreciation

Impairment

losses on

financial

assets

Available-

for-sale

securities Others Total

HK$’M HK$’M HK$’M HK$’M HK$’M

2016

Deferredtaxarisingfrom:At1January2016 888 (134) (35) (759) (40)Charge/(release)toconsolidatedincome

statement(note7(a)) 327 40 – (229) 138Releasetoreserves – – (18) (26) (44)Others – 1 (2) 2 1

At31December2016 1,215 (93) (55) (1,012) 55

2015

At1January2015 688 (59) 37 (595) 71Charge/(release)toconsolidatedincome

statement(note7(a)) 200 (75) – (134) (9)Releasetoreserves – – (72) (30) (102)

At31December2015 888 (134) (35) (759) (40)

2016 2015

HK$’M HK$’M

Analysedby:Netdeferredtaxassetrecognisedontheconsolidatedstatementof

financialposition (349) (314)Netdeferredtaxliabilityrecognisedontheconsolidatedstatementof

financialposition 404 274

55 (40)



28 Trading liabilities

2016 2015

HK$’M HK$’M

Shortpositionsinsecurities 7,710 8,476Negativefairvaluesoftradingderivatives 579 371

8,289 8,847

29 Other liabilities

2016 2015

HK$’M HK$’M

Accrualsanddeferredincome 4,078 3,340Provisionforliabilitiesandcharges 397 314Acceptancesandendorsements 3,745 2,588Unsettledtradesandothers 11,224 9,003

19,444 15,245

30 Employee retirement benefits

TheBankmakescontributionstoadefinedbenefitretirementscheme,namelyStandardCharteredBankHongKongRetirementScheme(“theScheme”),whichprovideslumpsumbenefitsbasedonamultipleofamember’sfinalsalaryandyearsofserviceuponthemember’sretirement,death,disabilityorleavingservice.TheSchemeisclosedtonewemployees.

The Scheme was established under a trust arrangement. It is registered under the OccupationalRetirementSchemesOrdinance(“ORSO”).TheBankisthesoleemployerparticipatingintheScheme.

TheBankhasanunconditionalrighttotheScheme’ssurplusandtheSchemehasnominimumfundingrequirements.

Thekey responsibilitiesof theScheme’s trusteesare toensure that theScheme isadministered inaccordancewiththetrustdeedandtoactonbehalfofallmembersimpartially,prudentlyandingoodfaith.

TheSchemeexposestheBanktointerestraterisk,investmentriskandsalaryrisk.

TheBank’scontributionsaredeterminedwith reference to the fundingvaluationcarriedoutby theScheme’sactuaryinaccordancewiththeORSOrequirements.ThelastfundingvaluationoftheSchemewascarriedoutasat31December2014.



30 Employee retirement benefits (continued)

(a) Amountsrecognisedintheconsolidatedstatementoffinancialposition

2016 2015

HK$’M HK$’M

Fairvalueofplanassets 1,813 1,970Presentvalueofwhollyorpartlyfundedobligations (2,045) (2,226)

Netliabilityrecognisedintheconsolidatedstatementoffinancialposition(includedin“Otherliabilities”) (232) (256)

(b) Movementsinthefairvalueofplanassetsandthepresentvalueofthedefinedbenefitobligations

2016

Assets Obligations Total


At1January2016 1,970 (2,226) (256)Contributions 30 – 30Benefitspaid (229) 229 –Currentservicecost – (94) (94)Netinterestincome/(cost) 23 (26) (3)Administrativeexpenses (1) – (1)Returnonplanassets,excludingamountsincludedin interestincome 20 – 20Actuarialgain–fromexperience – 24 24Actuarialgain–fromfinancialassumptions – 48 48

At31December2016 1,813 (2,045) (232)

2015

Assets Obligations Total


At1January2015 2,173 (2,229) (56)Contributions 40 – 40Benefitspaid (244) 244 –Currentservicecost – (98) (98)Netinterestincome/(cost) 36 (36) –Administrativeexpenses (1) – (1)Returnonplanassets,excludingamountsincludedin interestincome (34) – (34)Actuarialloss–fromexperience – (58) (58)Actuarialloss–fromfinancialassumptions – (49) (49)

At31December2015 1,970 (2,226) (256)

Theweightedaveragedurationofthedefinedbenefitobligationasat31December2016is5years(2015:5years).

TheBankexpectstocontributeapproximatelyHK$28milliontotheSchemein2017.



30 Employee retirement benefits (continued)

(c) Amountsrecognisedintheconsolidatedincomestatementfortheyear

2016 2015

HK$’M HK$’M

Currentservicecost 94 98Netinterestcost 3 –Administrativeexpenses 1 1

98 99

(d) Principalactuarialassumptionsusedinthevaluationandsensitivityanalysis

2016 2015

HK$’M HK$’M

Discountrate 1.70% 1.30%Futuresalaryincreases 4.00% 4.00%

Theseassumptionsarelikelytochangeinthefutureandthuswillaffectthevalueplacedonthedefinedbenefitobligations.Changesatthereportingdatetooneoftherelevantactuarialassumptions,holdingotherassumptionsconstant,wouldhaveaffectedthedefinedbenefitobligationbytheamountsshownbelow:

• ifthediscountrateincreasedby25basispointstheobligationwouldreducebyapproximatelyHK$27million(2015:HK$31million).

• iftherateofgrowthofsalarieswashigherby25basispointstheobligationwouldincreasebyapproximatelyHK$26million(2015:HK$29million).

Theabovesensitivityanalysisisbasedontheassumptionthatchangesinactuarialassumptionsarenot correlated and therefore it does not take into account the correlations between the actuarialassumptions.

(e) Majorcategoriesofassets

2016 2015

HK$’M HK$’M

Equities 61% 59%Bonds 37% 37%Cash 2% 4%

100% 100%

Asat31December2016,theSchemedidnotinvestintheBank’sownfinancialinstrumentsandproperties(2015:Nil).TheSchemehasabenchmarkassetallocationof60%inequitiesand40%inbondsandcash(2015:60%inequitiesand40%inbondsandcash).ThelongtermstrategicassetallocationsoftheSchemearesetandreviewedfromtimetotimebythetrusteestakingintoaccounttheScheme’smembership,liabilityprofile,liquidityrequirements,andtheriskappetiteoftheBank.



31 Subordinated liabilities

2016 2015

HK$’M HK$’M

US$750million5.875%FixedRateNotes2020(note1) 6,088 6,191SGD750million4.15%FixedRateNotes2021(note2) – 3,902

6,088 10,093

Allsubordinatedliabilitiesareunsecuredandsubordinatedtotheclaimsofothercreditors.

(note1)Interestrateat5.875percentperannum,payablesemi-annually,tothematuritydateon24June2020.

(note2)Interestrateat4.15percentperannum,payablesemi-annually,tothematuritydateon27October2021.Thenoteswereredeemedinfullin2016.

32 Share capital

2016 2015

No . of share HK$’M No . of share HK$’M

Issued and fully paidA’ordinaryshares 706million 12,500 706million 12,500B’ordinaryshares 1,231million 78 1,231million 78US$500million6.25%perpetual

non-cumulativeconvertiblepreferenceshares 10 3,878 10 3,878

Fully repurchased in prior yearsHK$3,800million8.25%non-cumulative

preferenceshares – 3,800 – 3,800

20,256 20,256

Inaccordancewithsection135oftheHongKongCompaniesOrdinance,theordinarysharesoftheBankdonothaveaparvalue.

On30December2014, 10perpetual non-cumulativeconvertiblepreference shareswere issued toStandardCharteredBankatanaggregateissuepriceofUS$500millionwithaliquidationpreferenceofUS$500million.Eachpreferencesharewillbeconvertedto12,500,000‘A’SharesofUS$4.00eachuponanon-viabilityeventassetoutinthesubscriptionagreement.ThepreferencesharesqualifyasAdditionalTier1capitalundertheBanking(Capital)Rules.

Theconvertiblepreferencesharesrankinprioritytothe‘A’ordinarysharesand‘B’ordinaryshareswithrespecttothepaymentofdividendsandanyreturnofcapital.The‘B’ordinarysharesrankinprioritytothe‘A’ordinaryshareswithrespecttoanyreturnofcapital.



33 Reserves

Natureandpurposeofreserves

(i) Cashflowhedgereserve

Thecashflowhedgereservecomprisestheeffectiveportionofthecumulativenetchangeinthefairvalueofhedginginstrumentsusedincashflowhedgespendingsubsequentrecognitionofthehedgedcashflowinaccordancewiththeaccountingpolicyadoptedforcashflowhedgesinnote2(j).

(ii) Available-for-saleinvestmentreserve

Theavailable-for-saleinvestmentreservecomprisesthecumulativenetchangeinthefairvalueofavailable-for-salesecuritiesheldatthereportingdateandisdealtwith inaccordancewiththeaccountingpolicyinnote2(i).

(iii) Revaluationreserve

Therevaluationreservecomprisestheshareofthechangeinfairvalueofanassociate’sidentifiablenetassetspriortotheBankanditssubsidiariesobtainingsignificantinfluenceinastep-acquisition.

(iv) Exchangereserve

Theexchangereservecomprisesallforeignexchangedifferencesarisingfromthetranslationoftheconsolidatedfinancialstatementsofforeignoperations.Thereserveisdealtwithinaccordancewiththeaccountingpolicysetoutinnote2(s).

(v) Propertyrevaluationreserve

Thepropertyrevaluationreserverepresentstherevaluationsurplusarisinguponthereclassificationofapropertypreviouslyincludedin“Buildingsandleaseholdlandheldforownuse”to“Investmentproperties”.

(vi) Shareoptionequityreserve

TheGroupoperatesequity-settledshare-basedcompensationplansinwhichtheBankanditssubsidiaries’employeesparticipate.Thefairvalueoftheemployeeservicesreceivedinexchangeforthegrantoftheshareawardsisrecognisedasanexpensewiththecorrespondingamountcreditedtotheshareoptionequityreserve.

TheHKMArequirestheBankanditssubsidiariestomaintainaminimumlevelofimpairmentallowanceswhichisinexcessoftheimpairmentallowancesrequiredunderHongKongFinancialReportingStandards.Oftheretainedprofitsasat31December2016,anamountofHK$5,208million(2015:HK$5,428million)hasbeenreservedforthispurpose.



34 Cash and cash equivalents

2016 2015

HK$’M HK$’M

(a) Componentsofcashandcashequivalentsintheconsolidatedcashflowstatement

Cashandbalanceswithbanks,centralbanksandotherfinancialinstitutions 15,332 48,769

Tradingassetswithoriginalmaturitywithinthreemonths 50 1,120Placementswithbanksandotherfinancialinstitutionswith

originalmaturitywithinthreemonths 52,263 42,925Investmentsecuritieswithoriginalmaturitywithinthreemonths 47,468 60,346Amountsduefromimmediateholdingcompanyandfellow

subsidiarieswithoriginalmaturitywithinthreemonths 26,787 10,824Less:Overdraftsincludedin“depositsandbalances

ofbanksandotherfinancialinstitutions (367) (3)Less:Overdraftsincludedin“amountsdueto

immediateholdingcompany” (640) (1,121)

140,893 162,860

2016 2015

HK$’M HK$’M

(b) ReconciliationwiththeconsolidatedstatementoffinancialpositionCashandbalanceswithbanks,centralbanks,and

otherfinancialinstitutions 15,332 48,769Tradingassets 15,634 18,597Placementswithbanksandotherfinancialinstitutions 156,750 119,658Investmentsecurities 207,471 210,572Amountsduefromimmediateholdingcompanyandfellowsubsidiaries 62,849 46,462Overdraftsincludedin“depositsandbalancesof

banksandotherfinancialinstitutions” (367) (3)Overdraftsincludedin“amountsduetoimmediateholdingcompany” (640) (1,121)

Amountsshownintheconsolidatedstatementoffinancialposition 457,029 442,934Less:amountswithanoriginalmaturityofbeyondthreemonths (316,136) (280,074)

Cashandcashequivalentsintheconsolidatedcashflowstatement 140,893 162,860

35 Derivative financial instruments

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



35 Derivative financial instruments (continued)

(a) Notionalamountsofderivatives

Thenotionalamountsoftheseinstrumentsindicatethevolumeoftransactionsoutstandinganddonotrepresentamountsatrisk.

ThefollowingisasummaryofthenotionalamountsofeachsignificanttypeofderivativeenteredintobytheBankanditssubsidiaries:

2016

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 – – 1,012,402 1,012,402Crosscurrencyswaps 32,607 2,491 1,001,251 1,036,349Optionspurchased – 1,986 874 2,860Optionswritten – 631 5,285 5,916

InterestratecontractsSwaps 75,072 – 98,458 173,530Optionspurchased – 31 – 31Optionswritten – 4,929 128 5,057

Otherderivatives – 4,355 3,254 7,609

107,679 14,423 2,121,652 2,243,754

2015

ExchangeratecontractsForwards 630 – 1,646,789 1,647,419Crosscurrencyswaps 39,252 2,224 12,944 54,420Optionspurchased – 2,661 – 2,661Optionswritten – 4 4,317 4,321

InterestratecontractsSwaps 97,206 1,744 38,706 137,656Optionspurchased – 143 276 419Optionswritten – 4,983 – 4,983

Otherderivatives – 6,710 6,074 12,784

137,088 18,469 1,709,106 1,864,663




(b) Fairvaluesandcreditriskweightedamountsofderivatives

2016 2015

Fair value

assets

Fair value

liabilities

Credit risk

weighted

amount

Fair value

assets

Fair value

liabilities

Credit risk

weighted

amount


Exchangeratecontracts 21,941 21,867 2,691 14,931 14,749 3,801Interestratecontracts 2,653 2,372 818 2,170 2,600 701Otherderivatives 151 101 305 308 209 463

24,745 24,340 3,814 17,409 17,558 4,965

CreditriskweightedamountreferstotheamountascomputedinaccordancewiththeBanking(Capital)RulesoftheHongKongBankingOrdinance.Theamountcalculatedisdependentuponthestatusofthecounterpartyandmaturitycharacteristicsofeachtypeofcontract.

(c) Fairvalueofderivativefinancialinstrumentsdesignatedashedginginstruments

ThefollowingisasummaryofthefairvaluesofderivativesheldforhedgingpurposesbyproducttypeenteredintobytheBankanditssubsidiaries:

2016

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 1,225 824Interestratecontracts 349 284

1,574 1,108

2015

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 826 944Interestratecontracts 480 838

1,306 1,782




(c) Fairvalueofderivativefinancialinstrumentsdesignatedashedginginstruments(continued)

Fairvaluehedges

Thefairvaluehedgesprincipallyconsistofinterestrateswapsandcrosscurrencyswaps.Theinterestrateswapsareusedtoprotectagainstchangesinthefairvalueofcertainfixedrateassetsandliabilitiesdue tomovements inmarket interest rates.Thecrosscurrencyswapsareused tomanage foreignexchangeexposures.At31December2016,thenetpositivefairvalueofderivativesheldasfairvaluehedgeswasHK$543million(2015:negativeHK$495million)comprisingassetsofHK$1,402million(2015:HK$1,261million)andliabilitiesofHK$859million(2015:HK$1,756million).ThelossesonthehedginginstrumentsfortheyearwereHK$606million(2015:lossesofHK$272million).ThegainsonthehedgeditemattributabletothehedgedriskwereHK$611million(2015:gainsofHK$233million).

Cashflowhedges

Thecashflowhedgesprincipallyconsistofinterestrateswapsandcrosscurrencyswapsthatareusedtohedgeagainstthevariabilityincashflowsofcertainfloatingrateassetsandliabilities.At31December2016, thenetnegative fairvalueofderivativesheldascashflowhedgeswasHK$77million (2015:positiveHK$19million)comprisingassetsofHK$172million (2015:HK$45million)and liabilitiesofHK$249million(2015:HK$26million).Duringtheyear,therewasnoineffectivenessrecognisedintheconsolidatedincomestatementthatarosefromcashflowhedges(2015:Nil).

Thetimeperiodsinwhichthehedgedcashflowsareexpectedtooccurandaffecttheconsolidatedstatementofcomprehensiveincomeareasfollows:

Less than

1 year

1 to 2

years

2 to 3

years

3 to 4

years

4 to 5

years Total


2016

Forecastreceivablecashflows 276 147 109 40 31 603Forecastpayablecashflows (35) (45) (19) (5) (1) (105)

241 102 90 35 30 498

2015

Forecastreceivablecashflows 129 72 6 – 68 275Forecastpayablecashflows (14) (26) (24) (6) – (70)

115 46 (18) (6) 68 205



36 Contingent liabilities and commitments

(a) Thefollowingisasummaryofthecontractualamountsofeachsignificantcontingentliabilityandcommitment:

2016 2015

HK$’M HK$’M

Directcreditsubstitutes 8,079 7,288Transaction-relatedcontingencies 7,312 6,259Trade-relatedcontingencies 13,522 13,124Forwardassetpurchases 196 105Forwardforwarddepositsplaced – 358Othercommitments:whicharenotunconditionallycancellable:

withoriginalmaturityofnotmorethanoneyear 4,898 1,761withoriginalmaturityofmorethanoneyear 19,259 15,726

whichareunconditionallycancellable 332,358 339,269

385,624 383,890

Creditriskweightedamount 35,726 38,333

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

(b) Capitalcommitments

Capitalcommitmentsoutstandingat31Decemberinrespectofproperty,plantandequipmentpurchases(otherthanoperatingleaseassets)notprovidedforintheconsolidatedfinancialstatementswereasfollows:

2016 2015

HK$’M HK$’M

Contractedfor 12 5Authorisedbutnotcontractedfor 14 4

26 9

StandardCharteredLeasingGroupLimited,asubsidiaryoftheBank,hascommittedtopurchase16aircraftsfordeliveryin2017and2018.ThecombinedpurchasecommitmentfortheseorderstotalsamaximumofHK$13,446million.Pre-deliverypaymentsofHK$2,923millionhavebeenmadetodatewithrespectoftheseaircraft.



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:

2016 2015

HK$’M HK$’M

Within1year 787 845After1yearbutwithin5years 1,839 1,882After5years 319 643

2,945 3,370

During the year, HK$1,005 million (2015: HK$1,031 million) was recognised as an expense in theconsolidated incomestatement in respectofoperating leases.TheBankand itssubsidiaries leasevariouspremisesandequipmentundernon-cancellableoperatingleaseagreements.

(d) Contingencies

TheBankanditssubsidiariesreceivelegalclaimsagainstitarisinginthenormalcourseofbusiness.TheBankanditssubsidiariesconsidernoneofthesemattersasmaterial.WhereappropriatetheBankanditssubsidiariesrecogniseaprovisionforliabilitieswhenitisprobablethatanoutflowofeconomicresourcesembodyingeconomicbenefitswillberequiredandforwhichareliableestimatecanbemadeoftheobligation.

TheSecuritiesandFuturesCommission(“SFC”)inHongKonghasbeeninvestigatingStandardCharteredSecurities (HongKong)Limited’s (“SCSHK”) roleasa jointsponsorofan initialpublicofferingofacompanylistedonTheStockExchangeofHongKongin2009.InOctober2016SFCinformedtheBankthatitintendstocommenceactionagainstSCSHKandotherparties.On16January2017awritwasfiledbytheSFCwithHongKong’sHighCourt.ThewritnamesSCSHKasoneofsixdefendantsfromwhom the SFC is seeking compensation for an unspecified amount of losses incurred by certainshareholdersinrelationtotheinitialpublicoffering.TheremaybefinancialconsequencesforSCSHKinconnectionwiththismatter.

37 Risk management

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

Riskmanagementframework

EffectiveriskmanagementisessentialconsistentandsustainableperformanceforallofourstakeholdersandisthereforeacentralpartofthefinancialandoperationalmanagementoftheBank.TheBankaddsvaluetoclientsandthereforethecommunitiesinwhichtheyoperate,generatingreturnsforshareholdersbytakingandmanagingrisk.



37 Risk management (continued)

Riskmanagementframework(continued)

ThroughitsRiskManagementFramework(“RMF”)theBankmanagesenterprise-widerisks,withtheobjectiveofmaximisingrisk-adjustedreturnswhileremainingwithinitsriskappetite.

Aspartofthisframework,theBoardhasapprovedasetofprinciplesthatdescribetheriskmanagementculturetheBankwishestosustain:

Balancingriskandreturn

• Wemanageourriskstobuildasustainablefranchise,intheinterestsofallourstakeholders

• Weonlytakeriskwithinourriskappetiteandrisktolerance,andwhereconsistentwithourapprovedstrategy

• Wemanageourriskprofilesoastomaintainalowprobabilityofanunexpectedlosseventthatwouldmateriallyunderminetheconfidenceofourinvestors

Conductofbusiness

• Wedemonstrateweare“HereforGood”throughourconduct,andaremindfulofthereputationalconsequencesofinappropriateconduct

• Weseektoachievegoodoutcomesforclients,investors,andthemarketsinwhichweoperate,whileabidingbythespiritandletteroflawsandregulations

• Wetreatourcolleaguesfairlyandwithrespect

ResponsibilityandAccountability

• Wetakeindividualresponsibilitytoensurerisk-takingisdisciplinedandfocused,particularlywithinourareaofauthority

• Wemakesurerisktakingistransparent,controlledandreportedinlinewiththeRiskManagementFramework,withinriskappetiteandrisktoleranceboundaries,andonlywherethereisappropriateinfrastructureandresource

Anticipation

• Weseektoanticipatematerialfuturerisks,learnlessonsfromeventsthathaveproducedadverseoutcomesandensureawarenessofknownrisks

Competitiveadvantage

• Weseektoachievecompetitiveadvantagethroughefficientandeffectiveriskmanagementandcontrol




Riskgovernance

UltimateresponsibilityforsettingtheBank’sriskappetitestatementandfortheeffectivemanagementofriskrestswiththeBoard.

ActingwithinanauthoritydelegatedbytheBoard,theBoard’sAuditandRiskCommittee(“BARC”),whosemembershipiscomprisedexclusivelyofnon-executivedirectors,hasresponsibilityforoversightandreviewofprudentialrisks,includingbutnotlimitedtocredit,countrycross-border,market,pension,capital,liquidityandfundingandoperationalrisks.ItreviewstheBank’soverallriskappetitestatementandmakesrecommendationsthereontotheBoard.

ActingwithinanauthoritydelegatedbytheBoardviatheExecutiveCommittee(“ExCo”),theBank’sExecutiveRiskCommittee (“ERC”) is responsible for themanagementof all risksother than thosedelegatedtotheAssetandLiabilityCommittee(“ALCO”)andtheCountryPensionsCommittee(“CPC”).

TheERCisresponsibleforthemanagementofallrisksotherthanthosedelegatedtoALCOandCPC.TheERCisresponsiblefortheestablishmentof,andcompliancewithpoliciesrelatingtocreditrisk,countrycross-borderrisk,marketrisk,operationalriskandreputationalrisk.TheERCalsodefinestheoverallRiskManagementFramework.

The ALCO is responsible for determining the Bank’s approach to balance sheet management andensuringthat,inexecutingtheBank’sstrategy,theBankoperateswithintheinternallyapprovedandexternally requiredcapital, liquidityand leverage riskappetite. It isalso the responsible forpoliciesrelatingtobalancesheetmanagement,includingmanagementofourliquidity,capitaladequacyandstructural foreignexchangeand interest rateriskandtaxexposure.TheCPC is responsible for themanagementofPensionsRisk.

Thecommitteegovernancestructureensuresthatrisk-takingauthorityandriskmanagementpoliciesarecascadeddownfromtheBoardthroughtotheappropriatefunctional,clientsegmentandcountry-levelseniormanagementandcommittees.Informationregardingmaterialriskissuesandcompliancewithpoliciesandstandardsiscommunicatedtotheappropriateclientsegment,functionalandseniormanagementandcommittees.

RolesandresponsibilitiesforriskmanagementaredefinedunderaThreeLinesofDefencemodel.Eachlineofdefencedescribesaspecificsetofresponsibilitiesforriskmanagementandcontrol.

• Firstlineofdefence:allemployeesarerequiredtoensuretheeffectivemanagementofriskswithinthescopeoftheirdirectorganisationalresponsibilities.Businessunit,functionandgeographicheadsareaccountableforriskmanagementintheirrespectivebusinessesandfunctions,andforcountrieswheretheyhavegovernanceresponsibilities.

• Second lineofdefence: thiscomprises the riskcontrolowners,supportedby their respectivecontrolfunctions.Riskcontrolownersareresponsibleforensuringthattheresidualriskswithinthescopeoftheirresponsibilitiesremainwithinriskappetiteandrisktoleranceboundaries.Thescope of a risk control owner’s responsibilities is defined by a given risk type and the riskmanagementprocessesthatrelatetothatrisktype.TheseresponsibilitiescutacrosstheBankandarenotconstrainedbyfunctionalandbusinessboundaries.Themajorrisktypesaredescribedindividuallyinthefollowingsections.




Riskgovernance(continued)

• Thirdlineofdefence:theindependentassuranceprovidedbytheInternalAudit(“IA”)function.ItsroleisdefinedandoverseenbytheBARC.

IAprovidesindependentassuranceoftheeffectivenessofmanagement’scontrolofitsownbusinessactivities(thefirstline)andoftheprocessesmaintainedbytheriskcontrolfunctions(thesecondline).Asaresult,IAprovidesassurancethattheoverallsystemofcontroleffectivenessisworkingasrequiredwithintheRiskManagementFramework.

TheRiskfunction

TheCountryChiefRiskOfficer(“CCRO”)directlymanagesaRiskfunctionthatisseparatefromandindependentfromtheorigination,tradingandsalesfunctionsofthebusinesses.TheCCROchairstheERCandisamemberofExCo.

TheroleoftheRiskfunctionis:

• To maintain the RMF, ensuring it remains appropriate to the Bank’s activities, is effectivelycommunicated and implemented across the Bank and to administer related governance andreportingprocesses.

• ToupholdtheoverallintegrityoftheBank’srisk/returndecisions,andinparticularensurethatrisksareproperlyassessed,thatrisk/returndecisionsaremadetransparentlyonthebasisofthisproperassessment,andarecontrolledinaccordancewiththeBank’sstandardsandriskappetite.

• Toexercisedirectriskcontrolownershipforcredit,market,countrycross-borderandoperationalrisktypes.

TheindependenceoftheRiskfunctionistoensurethatthenecessarybalanceinrisk/returndecisionsisnotcompromisedbyshort-termpressurestogeneraterevenues.Thisisparticularlyimportantgiventhatrevenuesarerecognisedfromthepointofsale,whilelossesarisingfromriskpositionstypicallymanifestthemselvesovertime.

Inaddition,theRiskfunctionisacentreofexcellencethatprovidesspecialistcapabilitiesofrelevancetoriskmanagementprocessesinthewiderorganisation.

Credit,countrycross-border,market,liquidityandfunding,operational,reputational,pensionandstrategicriskarecoveredinpages73to101andtheapproachtocapitalriskonpages101to102.

Riskappetiteandtolerance

In 2016 our risk appetite and risk tolerance definitions were updated. We recognise three sets ofconstraintswhichdetermine the risks thatwearewilling to take inpursuitofour strategyand thedevelopmentofasustainablebusiness:

• RiskcapacitydefinesexternallyimposedconstraintswithinwhichtheBankmustoperate.ItisthemaximumlevelofrisktheBankcanassume,givenitscurrentcapabilitiesandresources,beforebreachingconstraintsdeterminedbyregulatorycapitalandliquidityrequirements,orotherwisefailingtomeettheexpectationsofregulatorsandlawenforcementagencies.




Riskappetiteandtolerance(continued)

• RiskappetiteisdefinedbytheBoardthatdeterminesthemaximumamountandtypeofriskthattheBankiswillingtoassumeinpursuitofitsstrategy.Riskappetitecannotexceedriskcapacity.

• Risk tolerances are outer constraints defined by the Bank for each risk type via metrics andthresholds.TheRiskToleranceareareflectionoftheBank’sRiskAppetite.

TheBank’sriskprofileistheBank’soverallexposuretorisk,atagivenpointintime,coveringallapplicablerisktypes.Riskcontroltoolssuchasexposurelimits,underwritingstandards,scorecardcut-offsandpoliciesandotheroperationalcontrolparametersareusedtokeeptheBank’sriskprofilewithinriskappetite(andthereforealsoriskcapacity).StatusagainstriskappetiteisreportedtotheBARC.Thisincludesthereportingofbreaches.

TheBoardhasapprovedaRiskAppetiteStatement,whichisunderpinnedbyasetoffinancialandoperationalcontrolparameters,knownasrisktolerances.TheserisktolerancesdirectlyconstraintheaggregateriskexposuresthatcanbetakenacrosstheBank.Thenumberofrisktoleranceshasbeenincreased in 2016 to include greater breath and greater granularity for credit, capital, market andoperationalrisks.Astrategicriskstatementhasbeenintroducedforthefirsttime.

TheBank’sRiskAppetiteStatement,andtherelatedrisktolerancecategoriesapprovedbytheBoard,areasfollows:

• General:theBankwillnotcompromiseadherencetoitsrisktolerancesinordertopursuerevenuegrowthorhigherreturns.

• Creditandcountrycross-border:theBankmanagesitscreditandcountrycross-borderexposures,followingtheprinciplesofdiversificationacrossproducts,clientsegmentsandindustrysectors.

• Capitalandearningsvolatility:theBankshouldmaintainastrongcapitalpositionincludingthemaintenanceofmanagementbufferssufficienttosupportitsstrategicaims.

• Marketrisk:theBankshouldcontrolitstradingportfolioandactivitiestoensurethatmarketrisklosses(financialorreputational)donotcausematerialdamagetotheBank’sfranchiseortheGroupfranchise.

• Liquidityrisk:theBankshouldbeabletomeetitspaymentandcollateralobligationsunderextremebutplausibleliquiditystressscenarioswithoutrecoursetoextraordinarycentralbanksupport(orsupportfromtheGroup).

• Operational risk: the Bank aims to control operational risks to ensure that operational losses(financialor reputational), includingany related toconductofbusinessmatters,donotcausematerialdamagetotheBank’sfranchiseortheGroup’sfranchise.




Riskappetiteandtolerance(continued)

• Reputationalrisk:theBankwillprotectitsreputationtoensurethatthereisnomaterialdamagetotheBank’sfranchiseortheGroupfranchise.

• PensionRisk:theBankwillmanageitspensionplanssuchthat:

Thereisnomaterialunexpecteddeteriorationinthefundingrequirementsorotherfinancialmetrics.

Members’benefitswillcontinueintheircurrentformalthoughmanagementactionssuchasaremovalofdiscretionarybenefitsareallowableinthecaseofamarketstressevent.

TheERCandALCOareresponsibleforensuringthattheBank’sriskprofileismanagedincompliancewiththerisktolerancessetbytheBoard.

Stresstesting

StresstestingandscenarioanalysisareusedtoassesstheabilityoftheBanktocontinueoperatingeffectivelyunderextremebutplausiblemacro-financialconditions.

TheBank’sapproachtostresstestingisdesignedto:

• Contributetothesettingandmonitoringofexecutivelevelriskappetiteandriskmanagementmoregenerally.

• Identifykeyriskstocapitalandliquidityposition,strategy,franchise,andreputation.

• Support the development of management actions and contingency plans, including businesscontinuity,toensuretheBankcanrecoverfromextremebutplausibleconditions.

• Meetregulatoryrequirements.

TheBank’sstresstestingfocusesonthepotentialimpactofmacro-financial,geo-politicalandphysicaleventsonrelevantgeographies,clientsegmentsandrisktypesincludingamongstotherscreditriskwhichisdiscussedinmoredetailbelow.

(a) Creditrisk

CreditriskisthepotentialforlossduetothefailureofacounterpartytomeetitsobligationstopaytheBankinaccordancewithagreedterms.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.TheBankmanagesitscreditexposuresfollowingtheprincipleofdiversificationacrossproducts,geographies,industries,collateraltypesandclientsegments.




(a) Creditrisk(continued)

Group-widecreditpoliciesandstandardsareconsideredandapprovedbyrecognizedsecondlineriskcommitteesor individualwith appropriatedelegatedauthority. TheGroupRiskCommittee (“GRC”)overseesthedelegationofcreditapprovalandloanimpairmentprovisioningauthorities.Theprinciplesforthedelegation,reviewandmaintenanceofcreditapprovalauthoritiesaredefinedintheRiskAuthoritiespolicy.Inaddition,thereareotherGroup-widepoliciesintegraltocreditriskmanagementsuchasthoserelatingtostresstesting,riskmeasurementandimpairmentprovisioning.

TheERCapprovespoliciesandstandardsbasedonthoseapprovedbyGRC,risklimitsandriskexposuredelegatedapprovalauthorityframeworks.Whenapprovingriskpoliciesandstandards,theERCtakesintoaccounttherequirementsoftheHongKongBankingOrdinanceandtheguidelinesissuedbytheHKMAwithrespecttolargeexposures,connectedlendingandprovisioningrequirements.

Creditratingandmeasurement

Riskmeasurementplaysacentralrole,alongwithjudgementandexperience,ininformingrisk-takingandportfoliomanagementdecisions.

Since1January2008,theBankhasusedtheAdvancedInternalRatings-Based(IRB)approachundertheBaselIIregulatoryframeworktocalculatecreditriskcapitalrequirements.

Astandardalphanumericcredit risk-grade (“CG”)system forCorporate& InstitutionalBankingandCommercialBankingisused.Thenumericgradesrunfrom1to14andsomeofthegradesarefurthersub-classified.Lowercreditgradesareindicativeofalowerlikelihoodofdefault.Creditgrades1to12areassignedtoperformingcustomersoraccounts,whilecreditgrades13and14areassignedtonon-performingordefaultedcustomers.

RetailBankingIRBportfoliosuseapplicationandbehaviourcreditscoresthatarecalibratedtogenerateaprobabilityofdefaultandthenmappedtothestandardalphanumericcreditriskgradesystem.Werefertoexternalratingsfromcreditbureau,however,wedonotrelysolelyonthesetodetermineRetailBankingCGs.

AdvancedIRBmodelscoverasubstantialmajorityoftheBank’sexposureandareusedinassessingrisksatcustomerandportfoliolevel,settingstrategyandoptimisingtheBank’srisk-returndecisions.

IRBriskmeasurementmodelsareapprovedbytheERC,ontherecommendationoftheGroupModelAssessmentCommittee(“MAC”)andtheBank’sModelAssessmentForum(“MAF”).TheBank’sMAFsupports the ERC in ensuring risk identification and measurement capabilities are objective andconsistent,sothatriskcontrolandriskoriginationdecisionsareproperlyinformed.PriortoreviewbytheMAF,allIRBmodelsarevalidatedindetailbyamodelvalidationteam,whichisseparatefromtheteamswhichdevelopandmaintainthemodels.Modelsundergoannualperiodicreview.Reviewsarealsotriggerediftheperformanceofamodeldeterioratesmateriallyagainstpredeterminedthresholdsduringtheongoingmodelperformancemonitoringprocess.





CreditApproval

TheBankhasbeenlocallyincorporatedsince1July2004.Sincethen,theapprovalprocessreflectsthatstrategicdecisionsarebeingmadeinaccordancewithindividualmanagers’delegatedauthoritiesandthetermsofreferenceoftheappropriatecommittees.Itisrecognisedthat,asamajorpartoftheGroup,allsignificantriskdecisionsemanatingfromHongKongwillhaveanimpacttotheGroup,beitregulatory,concentration,strategic,etc.ItisthereforerecognisedthatitisessentialfortheGrouptoconsidersuchtransactionstoensurethattheseGroupissuesareincludedaspartofthedecisionmakingprocess.DelegatedauthoritiesapprovedbytheERCaredelegatedtothekeyriskmanagerstoensurethatallriskdecisionsaremadewithintheBank.Whereproposalsfalloutsideoftheindividual’sauthorities,theadviceandguidanceoftheGroupissought.Insuchcases,therelevantGroupauthority,whetheran individual or a committee, will review the proposal from a Group perspective and give theirrecommendation.Onreceiptofsuchrecommendation,theBank’sExcessApprovalCommittee(“EAC”),beingasub-committeeoftheERC,willmeettoconsidersuchadviceandreachasuitabledecision.AllthecreditapplicationsapprovedbytheEACwillbereportedateachERCmeetingfornoting.

Allcreditproposalsaresubjecttoarobustcreditriskassessment.Itincludesacomprehensiveevaluationoftheclient’screditquality, includingwillingness,abilityandcapacitytorepay.Theprimary lendingconsiderationisusuallybasedontheclient’screditqualityandtherepaymentcapacityfromoperatingcashflowsforcounterparties;andleverageposition.Whereapplicable,theassessmentincludesadetailanalysisofthecreditriskmitigationarrangementstodeterminethelevelofrelianceonsucharrangementsasthesecondarysourceofrepaymentintheeventofasignificantdeteriorationinaclient’screditqualityleadingtodefault.Lendingactivitiesthatareconsideredashighriskornon-standardaresubjectedtostricterminimumrequirementsandrequireescalationtoaseniorcreditofficerorauthorizedbody.

Creditconcentrationrisk

Creditconcentrationriskmayarisefromasinglelargeexposuretoacounterpartyoragroupofconnectedcounterparties,orfrommultipleexposuresacrosstheportfoliothatarecloselycorrelated.

Largeexposureconcentrationriskismanagedthroughconcentrationlimitssetbycounterpartyorgroupsofconnectedcounterparties.

Attheportfoliolevel,creditconcentrationthresholdsaresetandmonitoredtocontrolconcentration,whereappropriate,bycountry,industry,product,tenor,collateraltype,collateralizationlevelandcreditriskprofile.

CreditconcentrationsaremonitoredbytheERCandconcentrationlimitsthatarematerialtotheBankarereviewedandapprovedatleastannuallybytheERC.

Creditmonitoring

TheBankanditssubsidiariesregularlymonitorcreditexposures,portfolioperformance,andexternaltrendsthatmayimpactriskmanagementoutcomes.

Internal riskmanagement reports thatarepresented to riskcommitteescontain informationonkeyenvironmental,politicalandeconomictrendsacrossmajorportfoliosandcountries;portfoliodelinquencyandloanimpairmentperformance.





Creditmonitoring(continued)

TheBank’sCreditIssuesCommittee(“CIC”)meetsregularlytoassesstheimpactofexternaleventsandtrendsontheCorporate&InstitutionalBankingandCommercialBankingcreditriskportfolioandtodefineandimplementtheBank’sresponseintermsofappropriatechangestoportfolioshape,portfolioandunderwritingstandards,riskpolicyandprocedures.

ClientaccountsareplacedonEarlyAlertwhentheydisplaysignsofactualorpotentialweakness.Forexamplewherethereisadeclineintheclient’spositionwithintheindustry,afinancialdeterioration,abreachofcovenants,non-performanceofanobligationwithinthestipulatedperiod,orthereareconcernsrelatingtoownershipormanagement.

SuchaccountsandportfoliosaresubjectedtoadedicatedprocessoverseenbytheCIC.ThisistomaintainaneffectiveoversightovertheexistingEarlyAlertportfolio.Clientaccountplansandcreditgradesare re-evaluated. Inaddition, remedialactionsareagreedandmonitored.Remedialactionsinclude, but are not limited to, exposure reduction, security enhancement, exiting the account orimmediatemovementoftheaccountintothecontrolofGroupSpecialAssetsManagement(“GSAM”),theBank’sspecialistrecoveryunit.

TheRetailBankingCreditIssuesForum(“CIF”)isasub-forumoftheERC.TheCIFmeetsregularlytoassessrelevantcreditmatters,whichincludemarketdevelopmentswithdirectcreditimplications,creditpolicychanges,prominentoremergingcreditconcerns,portfolioperformancemonitoring,andmitigatingactions.

ForRetailBankingexposures,portfoliodelinquencytrendsaremonitoredcontinuouslyatadetailedlevel.Individualcustomerbehaviourisalsotrackedandconsideredforlendingdecisions.Accountsthatarepastdueorcharge-offaresubjecttoacollectionsorrecoveryprocessrespectively,andmanagedindependentlybytheRiskfunction.

Creditmitigation

Potentialcreditlossesfromanygivenaccount,clientorportfolioaremitigatedusingarangeoftoolssuchascollateral,nettingagreements,creditinsurance,creditderivativesandguarantees.Thereliancethatcanbeplacedonriskmitigantsiscarefullyassessedinlightofissuessuchaslegalcertaintyandenforceability, market valuation correlation and counterparty risk of the protection provider. Therequirementforriskmitigationis,however,notasubstitutefortheabilitytopay,whichistheprimaryconsiderationforanylendingdecisions.

Creditpoliciessetoutthekeyconsiderationforeligibility,enforceabilityandeffectivenessofcreditriskmitigationarrangements.

Collateraltypeswhichareeligibleforriskmitigationinclude:cash;residential,commercialandindustrialproperty;fixedassetssuchasmotorvehicles,aircraft,plantandmachinery;marketablesecurities;commodities;bankguarantees;andstandbylettersofcredit.

Thebankhascreditpoliciesandproceduresinplacesettingoutthecriteriaforcollateraltoberecognisedas a credit risk mitigant, including requirements concerning legal certainty, priority, concentration,correlation,liquidityandvaluationparameterssuchasfrequencyofreviewandindependence.





Creditmitigation(continued)

Allitemspledgedascollateralmustbevaluedindependentlyandanactivesecondaryresalemarketforthecollateralmustexist.Thecollateralmustbeindependentlyvaluedpriortodrawdownandregularlythereafter.Thevaluationfrequencyisatminimumannualandmorefrequentvaluationsaredrivenbythelevelofpricevolatilityofeachtypeofcollateralandthenatureoftheunderlyingproductorriskexposure.Riskmitigationbenefitsmaybereducedorremovedwherethecollateralvalueisnotsupportedbyarecentindependentvaluation.

Forfinancialcollateraltobeeligibleforrecognition,thecollateralmustbesufficientlyliquidanditsvalueovertimesufficientlystabletoprovideappropriatecertaintyastothecreditprotectionachieved.

DocumentationmustbeheldtoenabletheBanktorealisethecollateralwithoutthecooperationoftheobligorintheeventthatthisisnecessary.

Forcertaintypesoflending,typicallymortgagesorassetfinancingwhereafirstchargeovertheriskmitigant must be attained, the right to take charge over physical assets is significant in terms ofdeterminingappropriatepricingandrecoverabilityintheeventofdefault.Therequirementforcollateralis,however,notasubstitutefortheabilitytopay,whichistheprimaryconsiderationforanylendingdecisions(exceptinPrivateBankingandWealthManagementLending).

Collateralvaluesare,whereappropriate,adjustedtoreflectcurrentmarketconditions,theprobabilityofrecoveryandtheperiodoftimetorealisethecollateralintheeventofliquidation.Stresstestsareperformedonchangesincollateralvaluesforkeyportfoliostoassistseniormanagementinmanagingtherisksinthoseportfolios.TheGroupalsoseekstodiversifyitscollateralholdingsacrossassetclassesandmarkets.

Where guarantees, credit insurance or credit derivatives are used as credit risk mitigation, thecreditworthinessoftheprotectionproviderisassessedandmonitoredusingthesamecreditapprovalprocessappliedtotheobligor.Themaintypesofguarantorsincludebanks,insurancecompanies,parentcompanies,governmentsandexportcreditagencies.

Traded Products

Credit risk from traded products derives from the positive mark-to-market value of the underlyinginstruments,andanadditionalcomponenttocaterforpotentialmarketmovements.ThiscounterpartycreditriskismanagedwithintheBank’soverallcreditriskappetiteforcorporateandfinancialinstitutionsandreliesonvarioussingleandmulti-risk factorstress testscenarios tomeasure, identifyandriskmanagecounterpartycreditriskacrossderivativesandsecuritiesfinancingtransactions.

TheBankusesbilateralandmultilateralnettingtoreducepresettlementandsettlementcounterpartycreditrisk.Pre-settlementriskexposuresarenormallynettedusingbilateralnettingdocumentationinlegallyapprovedjurisdictions.SettlementexposuresaregenerallynettedusingDeliveryversusPaymentsorPaymentversusPaymentssystems.Masternettingagreementsaregenerallyenforcedonlyintheeventofdefault.InlinewithHKAS32/IAS32,derivativeexposuresarepresentedonagrossbasisinthefinancialstatementsassuchtransactionsarenotintendedtobesettlednetintheordinarycourseofbusiness.





Creditmitigation(continued)

Traded Products (continued)

Inaddition,theBankentersintoCreditSupportAnnexes(“CSA”)withcounterpartieswherecollateralisdeemedanecessaryordesirablemitiganttotheexposure.

Wrongwayriskoccurswhenanexposureincreaseiscoupledwithadecreaseinthecreditqualityoftheobligor.Specifically,asthemark-to-marketonaderivativecontractincreasesinfavouroftheBank,thedriverofthismark-to-marketchangealsoreducestheabilityofthecounterpartytomeetitspayment,margincallorcollateralpostingrequirements.TheBankemploysvariouspoliciesandprocedurestoensurethatwrongwayriskexposuresarerecognisedupfrontandmonitored.

Securities

WithinCorporate&InstitutionalBankingandCommercialBanking,theportfoliolimitsandparametersfortheunderwritingandpurchaseofallpre-definedsecuritiesassetstobeheldforsaleareapprovedbytheBank’sExcessApprovalCommitteewithsupportbytheGroup’sUnderwritingCommittee(“UC”).TheExcessApprovalCommitteeisestablishedundertheauthorityofERC.Corporate&InstitutionalBankingandCommercialBankingbusinessoperateswithinset limits,which includecountry,singleissuer,holdingperiodandcreditgradelimits.

DaytodaycreditriskmanagementactivitiesfortradedsecuritiesarecarriedoutbyaspecialistteamwithintheRiskfunctionwhoseactivitiesincludeoversightandapprovalwithinthelevelsdelegatedbytheUC.Issuercreditrisk,includingsettlementandpre-settlementrisk,andpriceriskarecontrolledbytheRiskfunction.

TheUCapprovesindividualproposalstounderwritenewcorporatesecurityissuesforclients.Whereanunderwrittensecurityisheldforaperiodlongerthanthetargetsell-downperiod,thefinaldecisiononwhethertosellthepositionrestswithintheRiskfunction.

Maximum exposure to credit risk

Themaximumexposurestocreditriskofon-balancesheetfinancialinstruments,beforetakingaccountofanycollateralorothercreditenhancements is thecarryingamountreportedontheconsolidatedstatementoffinancialposition.Foroff-balancesheetinstruments,themaximumexposuretocreditrisk,whichexcludesloancommitmentswhichareunconditionallycancellable, isthecontractualnominalamountsassetoutbelow:

2016 2015

HK$’M HK$’M

Financialguaranteesandothercreditrelatedcontingentliabilities 28,913 26,671

Loancommitmentsandothercreditrelatedcommitments 24,353 17,950

53,266 44,621





(i) Loans and advances

Therequirementforcollateralisnotasubstitutefortheabilitytopay,however,whichistheprimaryconsiderationforanylendingdecisions.Indeterminingthefinancialeffectofcollateralheldagainstloansneitherpastduenorimpaired,theBankhaveassessedthesignificanceofthecollateralheldinrelationtothetypeoflending.

Loans neither past due nor impaired

At31December2016,theBankanditssubsidiarieshaveHK$221,870million(2015:HK$214,572million)ofmortgageloansinRetailBankingthatareneitherpastduenorimpaired.Thesearegenerallyfullysecuredexposures(2015:fullysecured).

In Corporate & Institutional Banking and Commercial Banking, the Bank and its subsidiaries haveHK$156,713million(2015:HK$141,857million)ofcorporateexposuresthatareneitherpastduenorimpaired.Basedonthefairvalueofthecollateralheld,23%(2015:28%)oftheseexposuresaresecuredbytangiblecollateral.

TheBankanditssubsidiariesalsoundertakecollateralisedlendingandborrowing(reversereposandrepos)arrangements,andthecollateralheldagainstthesetypesofloansaresetoutinnote39totheconsolidatedfinancialstatements.

Non-tangiblecollateral–suchasguaranteesandlettersofcredit–mayalsobeheldagainstcorporateexposuresalthoughthefinancialeffectofthistypeofcollateralislesssignificantintermsofrecoveries.Itisnotpracticabletoquantifytheeffectofthiscollateralasthevalueofthecollateralisconditionaloncircumstancesatthetimeofdefaultandothercreditrelatedfactors.

Loans past due or impaired

Thefairvalueofcollateralheldagainstpastdueorimpairedloansisdetailedinthetablebelowasat31December:

2016 2015

Advances to

customers

Advances to

banks

Advances to

customers

Advances to

banks


Estimatedfairvalueofcollateral(Note):Heldagainstimpairedadvances 934 – 1,452 –Heldagainstpastduebutnotimpairedadvances 2,101 – 1,399 –

(Note)Thefairvalueofthecollateralheldrepresentsfairvalue,aftertakingintoaccounttheeffectsofover-collateralisationwhereitisnotavailableforoffsetagainstotherloans.





(i) Loans and advances (continued)

Repossessed Collateral

Asat31December,theamountofassetsobtainedbytakingpossessionofcollateralheldassecuritywereasfollows:

2016 2015

HK$’M HK$’M

Property,plantandequipment 298 185

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

RepossessedcollateralobtainedareintendedtoberealisedinanorderlyfashiontorepaytheimpairedloansandarenotheldfortheownuseoftheBankanditssubsidiaries.

(ii) Off-balance sheet exposures

Forcertaintypesofexposuressuchaslettersofcreditandguarantees,theBankanditssubsidiariesobtaincollateralsuchascashdependingoninternalcreditriskassessments.However,fortradefinanceproductssuchas lettersofcredit, theBankand itssubsidiarieswill normallyhold legal title to theunderlyingassetsshouldadefaulttakeplace.

Creditquality

(i) Analysis of the loan portfolio

2016 2015

Advances to

customers

Advances to

banks

Advances to

customers

Advances to

banks


Loansandadvances–neitherpastduenorimpaired 435,229 154,359 411,174 119,653–pastduebutnotimpaired 3,100 2,391 2,082 5–impaired,netofindividuallyassessed

impairmentprovision 2,256 – 2,507 –Less:collectivelyassessed

impairmentprovision (563) – (808) –

440,022 156,750 414,955 119,658





(i) Analysis of the loan portfolio (continued)

Thefollowingtablessetoutananalysisoftheinternalcreditgradingsforadvanceswhicharenotpastdueandforwhichnoindividualimpairmentprovisionhasbeenraised.Thecreditgradingssetoutinthetablesbelowarebasedonaprobabilityofdefaultmeasureassetoutonpage74.

2016 2015

Advances to

customers

Advances to

banks

Advances to

customers

Advances to

banks


Creditgrades:1to5 323,671 149,015 294,070 118,9206to8 85,214 5,287 88,339 6769to11 25,449 57 27,891 5712 895 – 874 –

435,229 154,359 411,174 119,653

Thefollowingtablessetouttheageingofadvanceswhicharepastdueandforwhichnoindividualimpairmentprovisionhasbeenraised.Aloanisconsideredtobepastduewhenthecounterpartyhas failedtomakeaprincipalor interestpaymentwhencontractuallydue.Pastduedoesnotnecessarilymeanthatthecounterpartyisimpaired.

2016 2015

Advances to

customers

Advances to

banks

Advances to

customers

Advances to

banks


Pastdue–upto30days 2,695 2,391 1,775 5–31-60days 280 – 165 ––61-90days 54 – 58 ––91-120days 35 – 48 ––121-150days 36 – 36 –

3,100 2,391 2,082 5





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

2016

Treasury

bills

Debt

securities

Equity

shares Total


Impairedsecurities – – 12 12Impairmentprovisions – – (6) (6)

Netimpairedsecurities – – 6 6Securitiesneitherpastduenorimpaired 64,738 157,109 472 222,319

2015

Treasury

bills

Debt

securities

Equity

shares Total


Impairedsecurities – – 19 19Impairmentprovisions – – (11) (11)

Netimpairedsecurities – – 8 8Securitiesneitherpastduenorimpaired 63,864 164,560 922 229,346

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

2016 2015

Treasury

bills

Debt

securities

Treasury

bills

Debt

securities


AAA – 60,818 – 48,203AA-toAA+ 56,958 27,813 62,618 58,082A-toA+ 7,780 64,374 1,246 53,863LowerthanA- – 2,651 – 2,595Unrated – 1,453 – 1,817

64,738 157,109 63,864 164,560




(b) Countrycross-borderrisk

Countrycross-borderriskistheriskthattheBankwillbeunabletoobtainpaymentfromourcustomersorthirdpartiesontheircontractualobligationsasaresultofcertainactionstakenbyforeigngovernments,chieflyrelatingtoconvertibilityandtransferabilityofforeigncurrency.

TheERCisresponsibleforcountrycross-borderrisklimitsanddelegatesthesettingandmanagementofthoselimitstothecountry’sRiskfunction.Thebusinessheadsandchiefexecutiveofficermanageexposureswithintheselimitsandpolicies.Countriesdesignatedashigherriskaresubjecttoincreasedmonitoring.

Assetsthatgeneratecountrycross-borderexposurearethosewherethemainsourceofrepaymentorsecurityisderivedfromacountryotherthanthecountryinwhichtheassetisbooked.Thesecoverawiderangeofproductsincludingloansandadvances,interest-bearingdepositswithotherbanks,tradeandotherbills,acceptances,amountsreceivableunderfinanceleases,derivatives,certificatesofdepositandothernegotiablepaper,investmentsecuritiesandformalcommitments.Cross-borderassetsalsoincludeexposurestolocalresidentsdenominatedincurrenciesotherthanthelocalcurrencyandlocalcurrency assets funded by intra-group funding. Cross-border exposure also includes the value ofcommodity,aircraftandshippingassetsownedbytheBankthatareheldinagivencountry.

(c) Marketriskmanagement

Marketriskisthepotentialforlossofeconomicvalueduetoadversechangesinfinancialmarketratesorprices.TheBank’sexposuretomarketriskarisespredominantlyfromprovidingclientsaccesstofinancialmarkets,facilitationofwhichentailstheBanktakingmoderatemarketriskpositions.Alltradingteamssupportclientactivity;therearenoproprietarytradingteams.Hence,incomeearnedfrommarketriskrelatedactivitiesisprimarilydrivenbythevolumeofclientactivityratherthanrisk-taking.Marketriskalsoarisesinthenon-tradingbookfromtherequirementtoholdalargeliquidassetsbufferofhigh-qualityliquiddebtsecuritiesandfromthetranslationofforeigncurrencydenominatedassets,liabilitiesandearnings.

TheprimarycategoriesofmarketriskfortheBankare:

• interestraterisk:arisingfromchangesinyieldcurves,creditspreadsandimpliedvolatilitiesoninterestrateoptions;

• currencyexchangeraterisk:arisingfromchangesinexchangeratesandimpliedvolatilitiesonforeignexchangeoptions.

Marketriskgovernance

TheBanksetstheBank’sriskappetiteformarketrisk.Subjecttotheriskappetitesetformarketrisk,theERCapprovestheBank’soverallmarketriskVaRandstresslosstriggerstakingaccountofmarketvolatility,therangeofproductsandassetclasses,businessvolumesandtransactionsizes.TheERCisresponsibleforsettingbusinessanddesklevelVaR,andstresslosstriggersformarketrisk.TheERCisalsoresponsibleforpoliciesandotherstandardsforthecontrolofmarketriskandoverseeingtheireffectiveimplementation.Thesepoliciescoverbothtradingandnon-tradingbooksoftheBank.




Marketriskgovernance(continued)

TheMarketandTradedCreditRiskfunction(“MTCR”)approvesthelimitswithindelegatedauthoritiesandmonitorsexposuresagainsttheselimits.Additionallimitsareplacedonspecificinstrumentsandpositionconcentrationswhereappropriate.Sensitivitymeasuresareused inadditiontoVaRasriskmanagementtools.Forexample,interestratesensitivityismeasuredintermsofexposuretoaonebasispointincreaseinyields.

ValueatRisk

TheBankmeasurestheriskoflossesarisingfromfuturepotentialadversemovementsinmarketrates,pricesandvolatilitiesusingaVaRmethodology.VaR,ingeneral,isaquantitativemeasureofmarketriskthatappliesrecenthistoricalmarketconditionstoestimatethepotentialfuturelossinmarketvaluethatwill notbeexceeded in a set timeperiodat a set statistical confidence level.VaRprovidesaconsistentmeasurethatcanbeappliedacrosstradingbusinessesandproductsovertimeandcanbesetagainstactualdailytradingprofitandlossoutcome.

VaRiscalculatedforexpectedmovementsoveraminimumofonebusinessdayandtoaconfidencelevelof97.5percent.ThisconfidencelevelsuggeststhatpotentialdailylossesinexcessoftheVaRmeasurearelikelytobeexperiencedsixtimesperyear.

TheBankappliestwoVaRmethodologies:

• Historicalsimulation:involvestherevaluationofallexistingpositionstoreflecttheeffectofhistoricallyobservedchangesinmarketriskfactorsonthevaluationofthecurrentportfolio.Thisapproachisappliedforgeneralmarketriskfactorsandthemajorityofspecific(creditspread)riskVaR.

• MonteCarlosimulation:thismethodologyissimilartohistoricalsimulationbutwithconsiderablymoreinputriskfactorobservations.Thesearegeneratedbyrandomsamplingtechniques,buttheresultsretaintheessentialvariabilityandcorrelationsofhistoricallyobservedriskfactorchanges.Thisapproachisappliedforsomeofthespecific(creditspread)riskVaRinrelationtoidiosyncraticexposuresincreditmarkets.

Inbothmethods,anhistoricalobservationperiodofoneyearischosenandapplied.

StressTesting

Lossesbeyondthe97.5percentconfidenceintervalarenotcapturedbyaVaRcalculation,thereforeVaRcalculationgivesnoindicationofthesizeofunexpectedlossesinthesesituations.

MTCRcomplementstheVaRmeasurementbyweeklystresstestingofmarketriskexposurestohighlightthepotentialriskthatmayarisefromextrememarketeventsthatarerarebutplausible.

Stresstestingisanintegralpartofthemarketriskmanagementframeworkandconsidersbothhistoricalmarketeventsandforward-lookingscenarios.Aconsistentstresstestingmethodologyisappliedtotradingandnon-tradingbooks.Thestresstestingmethodologyassumesthatscopeformanagementactionwouldbelimitedduringastressevent,reflectingthedecreaseinmarketliquiditythatoftenoccurs.

Stressscenariosareregularlyupdatedtoreflectchangesinriskprofileandeconomicevents.MTCRreviewsstressexposuresand,wherenecessary,enforcesreductionsinoverallmarketriskexposure.TheERCconsiderstheresultsofstresstestsaspartofitssupervisionofriskappetite.




(c) Marketriskmanagement(continued)

StressTesting(continued)

Regularstresstestscenariosareappliedto interestrates,creditspreads,andexchangerates.ThiscoversallassetclassesintheFinancialMarketsbankingandtradingbooks.

Adhocscenariosarealsopreparedreflectingspecificmarketconditionsandforparticularconcentrationsofriskthatarisewithinthebusiness.

MarketriskVaRcoverage

Interestrateriskfromnon-tradingbookportfoliosistransferredtoFinancialMarketswhereitismanagedbytheAssetandLiabilityManagement(ALM)deskunderthesupervisionofALCO.ALMdealsinthemarketinapprovedfinancialinstrumentsinordertomanagethenetinterestraterisk,subjecttoapprovedVaRandrisklimits.

VaRandstresstestsarethereforeappliedtothesenon-tradingbookexposures(exceptGroupTreasury,seebelow)inthesamewayasforthetradingbook,includingavailable-for-salesecurities.SecuritiesclassedasLoansandReceivablesorHeldtoMaturityarenotreflectedinVaRorstresstestssincetheyareaccountedonanamortisedcostbasis,somarketpricemovementshavelimitedeffectoneitherprofitandlossorreserves.

StructuralforeignexchangecurrencyrisksaremanagedbyGroupTreasury,andarenotincludedwithinVaR.Otherwise,thenon-tradingbookdoesnotrunopenforeignexchangepositions.




(c) Marketriskmanagement(continued)

MarketriskVaRcoverage(continued)

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

Value at risk: 2016 2015

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^ 57.5 74.4 42.9 56.1 51.3 67.9 35.1 54.9Foreignexchangerisk 5.5 17.7 1.9 7.7 3.8 10.6 0.9 7.7

Total^^ 56.3 73.6 41.6 55.9 51.9 67.9 35.2 57.1 7 7

Trading(VaRat97.5%,1day)




Interestraterisk 11.8 24.7 5.3 11.0 9.6 12.9 6.0 11.0Foreignexchangerisk 5.5 17.7 1.9 7.7 3.8 10.6 0.9 7.7

Total^^ 13.4 25.6 6.6 16.8 11.1 20.0 7.0 15.9

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




Interestraterisk^ 54.2 72.6 37.8 57.2 47.2 63.9 30.9 47.1

* ActualonedayVaRatperiodenddate.** HighestandlowestVaRforeachriskfactorareindependentandusuallyoccurondifferentdays.^ InterestrateriskVaRincludescreditspreadriskarisingfromsecuritiesheldfortradingoravailable-

for-sale.^^ ThetotalVaRshowninthetablesaboveisnotasumofthecomponentrisksduetooffsetsbetween

them.Totalincludedtradingbookequityriskisinsignificant.




(d) Foreignexchangerisk

TheforeignexchangepositionsoftheBankanditssubsidiariesarisefromforeignexchangetradingandcommercialbankingoperations.Foreignexchangetradingexposuresareprincipallyderivedfromcustomerdriventransactions.

Foreignexchangeriskinthenon-tradingbookportfoliosisminimisedbymatchingfundingassetsandliabilitiesinthesamecurrency.

TheBankanditssubsidiarieshadthefollowingnon-structuralforeigncurrencypositionswhichexceeded10%ofthenetnon-structuralpositioninallforeigncurrencies:

2016 2015

HK$’M HK$’M

US dollars exposure

Spotassets 364,096 278,272Spotliabilities (324,498) (293,469)Forwardpurchases 995,460 838,812Forwardsales (1,031,735) (819,270)Netoptionposition – –

Netlongnon-structuralposition 3,323 4,345

2016 2015

HK$’M HK$’M

Chinese renminbi exposure

Spotassets 57,399 83,495Spotliabilities (61,396) (55,165)Forwardpurchases 605,830 564,160Forwardsales (602,494) (590,802)Netoptionposition – –

Net(short)/longnon-structuralposition (661) 1,688

TheBankanditssubsidiarieshadthefollowingstructuralforeigncurrencypositionswhichexceeded10%ofthenetstructuralpositioninallforeigncurrencies:

2016 2015HK$’M HK$’M

ChineseRenminbi 9,167 8,515USdollars 2,283 2,147

11,450 10,662




(e) Interestrateriskinthebankingbook

InterestrateriskinthebankingbookismanagedchieflybytheAssetandLiabilityManagement(“ALM”)functionwithinFinancialMarkets.Theseinterestrateriskpositionsaremeasured,reportedandmonitoredindependentlyagainstlimitsonadailybasis.

Assumptionsonloanprepaymentandbehaviourofdepositsarecountryandproductspecific.TransferpricingofinterestrateriskisoverseenbylocalALCOsinaccordancewiththeBank’sFundTransferPricingPolicy.

(f) Liquidityandfundingrisk

LiquidityandFundingRiskisthepotentialthattheBankdoesnothavesufficientfinancialresourcesorstablesourcesoffundinginthemediumorlongterm,tomeetitsobligationsastheyfalldue,orcanaccessthesefinancialresourcesonlyatexcessivecost.

• LiquidityRiskis“PotentialforlossbecausetheBank,althoughsolvent,doesnothaveavailablesufficientfinancialresourcestoenableittomeetitsobligationsastheyfalldue,orcanaccessthesefinancialresourcesonlyatexcessivecost”.

• Fundingrisk“PotentialforactualoropportunitylossbecausetheBankdoesnothavestableordiversified sources of funding in the medium and long term to enable it to meet its financialobligations,inpursuitofitsdesiredbusinessstrategyorgrowthobjectives”.

Liquidity and funding risk management

TheBankseekstomanageliquidityandfundingprudently.ExceptionalmarketeventscouldimpacttheBankadversely,therebypotentiallyaffectingtheBank’sabilitytofulfillobligationsastheyfalldue.

TheBankhasarobustrisktypeframeworkformanagingtheliquidityandfundingrisk.ThroughthisframeworktheBankcontrolsandoptimisestherisk-returnprofile.Thisisprincipallyachievedby:

• SettingBoardRiskAppetitealignedwithstrategicobjectives

• Identifying,measuringandmonitoringliquidityrisks:

– Assessmentof regulatory requirementsand internalbalancesheetcharacteristicsdrivingliquidityrisk

– TheBank’sliquiditystresstestingframeworkcoveringbothinternalandregulatoryscenarios

• ConstrainingriskprofilewithinBoardriskappetite:

– Developmentofpoliciestoaddresstheliquidityandfundingrisksidentified

– Implementationofassociatedriskmeasuresthatactasmitigantsoftheserisks

– Ongoingmonitoringofriskmeasuresagainstlimits




(f) Liquidityandfundingrisk(continued)

Theprincipaluncertaintiesforliquidityandfundingriskarethatcustomerswithdrawtheirdepositsatasubstantially faster rate thanexpected,or thatasset repaymentsarenot receivedon theexpectedmaturitydate.Tomitigatetheseuncertainties,theBankseekstomaintainawelldiversified,customer-drivenfundingbaseand,accesstowholesalefundsundernormalmarketconditions.

Inaddition,theBankmaintainsadiversifiedportfolioofmarketablesecuritiesthatcanbemonetisedorpledgedascollateralintheeventofaliquiditystress.TheBank’sRecoveryPlan,reviewedandapprovedannually,includesabroadsetofRecoveryIndicators,anescalationframeworkandasetofmanagementactionsthatcouldbeeffectivelyimplementedbyseniormanagementintheeventofaliquiditystress.

Liquidity and funding risk governance

TheBoardapprovestheBank’sRiskAppetiteforliquidityandfundingriskalongwithsupportingmetrics.TheoversightundertheliquidityandfundingframeworkresideswiththeAssetandLiabilityCommittee(“ALCO”),supportedbytheAssetandLiabilityManagement(“ALM”)desksotoensuretheyoperatewithinpredefinedliquiditylimitsandremainincompliancewithGroupliquiditypoliciesandpractices,aswellaslocalregulatoryrequirements.

Liquidity management – stress scenarios

TheBankintendstomaintainaprudentandsustainablefundingandliquiditypositionsuchthatitcanwithstandasevereyetplausibleliquiditystress.

RegularstresstestingisconductedtodemonstratethattheBank’sliquidityexposureremainswithintheapprovedBoardriskappetite.

Theinternal liquiditystresstestingframeworkincludesmultiplestressscenarioswithvariedsurvivalperiodsandstressedconditions,toappropriatelyreflecttheliquidityrisksundertakenbytheBank.Theframeworkincludesanidiosyncraticstress,amarket-widestressandacombinedstress.Thecombinedstressassumesbothidiosyncraticandmarket-wideeventsaffecttheBanksimultaneouslyandhenceistypicallythemostseverescenario.

TheBank’sliquiditystresstestingalsoconsiderspotentialcurrencymismatchesbetweenoutflowsandinflows.Particularfocusispaidtomismatchesinlessliquidcurrenciesandthosethatarenotfreelyconvertible.MismatchesarecontrolledbymanagementactiontriggerssetbyGroupTreasury.

ALCOistheprimaryforumwherestresstestingresultsarereviewedandconsideredforrelevantdecisionmakingsuchasdeterminingfundingrequirements/mix,businessstrategy,balancesheetgrowthetc.





Liquidity and funding risk framework

TheliquidityandfundingriskframeworkrequirestheBanktooperateonastandalonebasiswithoutimplicitrelianceonGroupsupportorrecoursetoextraordinarycentralbanksupport.

TheBankachievesthisthroughacombinationofsettingBoardRiskAppetiteandassociatedlimits,policyformation,riskmeasuringandmonitoring,prudentialandinternalstresstesting,governanceandreview.

TheliquiditypositionoftheBankremainedstrongin2016andtheBankcontinuedtomaintaingoodaccesstowholesalemarket.

Liquidity metrics

TheBankmonitorskeyliquiditymetricsonaregularbasis.

Stress Coverage

TheBankintendstomaintainaprudentandsustainablefundingandliquiditypositionsuchthatitcanwithstandaseverebutplausibleliquiditystress.

TheBank’sinternalliquiditystresstestingframeworkcoversthefollowingscenarios:

Name-specific–ThisscenariocapturestheliquidityimpactfromanidiosyncraticeventaffectingtheBankonlyi.e.restofthemarketisassumedtooperatenormally.

Market-wide – This scenario captures the liquidity impact from a market wide crisis affecting allparticipantsinacountry,regionorglobally.

Combined–ThisscenarioisaBoardrisktolerancemetric.Thisscenarioassumesbothaname-specificandamarket-widecrisisaffectingtheBanksimultaneouslyandhencethemostseverescenario.

Allscenarios include,butarenot limited to,modelledoutflows for retailandwholesale funding,offbalancesheetfundingrisk,crosscurrencyfundingrisk,intradayrisk,franchiseriskandrisksassociatedwithadeteriorationofafirm’screditrating.

Stresstestingresultsshowsthatapositivesurpluswasmaintainedunderallscenariosat31December2016.Thecombinedscenarioat31December2016showedtheBankmaintainedliquidityresourcestosurvivegreaterthan60days,aspertheBank’sBoardRiskAppetite.

TheBank’screditratingsasattheendofDecember2016wereA+withstableoutlook(S&P)andAa3with negative outlook (Moody’s). A downgrade in credit rating would increase derivative collateralrequirementsandoutflowsduetorating-linkedliabilities.Theimpactofatwo-notchdowngradehasaminimalimpactontheBank’sderivativecollateralrequirements.





Liquidity Coverage Ratio (“LCR”)

TheBankmonitorstheLCRinlinewiththeBankofInternationalSettlementsandHongKongMonetaryAuthority’sguidelines.TheBankreportstheLCRonamonthlybasistotheHongKongMonetaryAuthority(“HKMA”).

Advances-to-deposits ratio

Thisisdefinedastheratiooftotalloansandadvancestocustomersrelativetototalcustomerdeposits.An advances-to-deposit ratio of below 100 per cent demonstrates that customer deposits exceedcustomerloansasaresultoftheemphasisplacedongeneratingahighlevelofstablefundingfromcustomers.CustomerdepositstendtobemorestablethanwholesalefundingandacoreportionofthesedepositsislikelytoremainwithintheBankforthemediumterm.

2016 2015

HK$’M HK$’M

Advancestocustomers 440,022 414,955Depositsfromcustomers 778,242 745,701Advancestodepositsratio 57% 56%

Liquidity Pool

Liquidityassetsarethetotalcash(lessrestrictedbalances),treasurybills,loansandadvancestobanks(lessdepositsbybanks)anddebtsecurities(lessilliquidsecurities).Illiquidsecuritiesaredebtsecuritiesthatcannotbesoldorexchangeeasily forcashwithoutsubstantial loss invalue.TheBankkeepssufficientliquidassetstosurviveanumberofstressscenarios.





(i) Contractualmaturityofassetsandliabilities

Thetableanalysesassetsandliabilities inrelevantmaturitygroupingsbasedontheremainingperiodtothecontractualmaturitydateasatthereportingdateonadiscountedbasis.Contractualmaturitiesdonotnecessarilyreflectactualrepaymentsorcashflow.Withinthetablesbelowcashandbalanceswithbanks,centralbanks,interbankplacements,andinvestmentsecuritiesthatareavailable-for-saleareusedbytheBankprincipallyforliquiditymanagementpurposes.

2016

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 15,332 – – – – – – 15,332Placementswithbanksand

otherfinancialinstitutions 863 63,795 54,503 32,597 4,078 914 – 156,750HongKongSARGovernment

certificatesofindebtedness – – – – – – 42,211 42,211Tradingassets 116 795 1,533 6,157 3,787 3,242 4 15,634Financialassetsdesignatedat

fairvalue – – – – – 370 – 370Advancestocustomers 16,238 75,695 32,585 38,453 102,136 176,915 (2,000) 440,022Investmentsecurities 234 24,702 55,787 64,802 51,685 9,787 474 207,471Amountsduefromgroupcompanies 5,313 17,829 17,122 15,853 6,013 1,540 (821) 62,849Others 1,192 1,401 5,773 6,054 752 10 50,201 65,383

Total Assets 39,288 184,217 167,303 163,916 168,451 192,778 90,069 1,006,022

LiabilitiesHongKongSARcurrency

notesincirculation – – – – – – 42,211 42,211Depositsandbalancesofbanks

andotherfinancialinstitutions 18,760 2 1 – 911 – – 19,674Depositsfromcustomers 613,902 47,772 63,511 50,413 2,429 215 – 778,242Tradingliabilities – 7,900 300 57 29 3 – 8,289Financialliabilitiesdesignatedat

fairvalue – 156 247 4,011 1,444 3,710 – 9,568Debtsecuritiesinissue – 7 14 1,041 1,111 – – 2,173Amountsduetogroupcompanies 11,320 4,456 16,525 12,888 883 8,142 – 54,214Subordinatedliabilities – – – – 6,088 – – 6,088Others 6,540 2,625 5,781 3,993 550 130 232 19,851

Total Liabilities 650,522 62,918 86,379 72,403 13,445 12,200 42,443 940,310





(i) Contractualmaturity(continued)

2015

Due Due Due





AssetsCashandbalanceswithbanks,central

banksandotherfinancialinstitutions 48,769 – – – – – – 48,769Placementswithbanksand

otherfinancialinstitutions 12 64,762 39,993 13,097 1,794 – – 119,658HongKongSARGovernment

certificatesofindebtedness – – – – – – 38,031 38,031Tradingassets – 259 1,506 6,094 6,783 3,646 309 18,597Financialassetsdesignatedat

fairvalue – – – – – 666 – 666Advancestocustomers 11,337 70,496 27,664 53,656 91,205 162,705 (2,108) 414,955Investmentsecurities 234 20,866 49,071 41,139 83,570 15,071 621 210,572Amountsduefromgroupcompanies 2,384 9,235 15,494 13,116 6,877 1,175 (1,819) 46,462Others 532 1,242 7,440 990 321 679 50,051 61,255

Total Assets 63,268 166,860 141,168 128,092 190,550 183,942 85,085 958,965

LiabilitiesHongKongSARcurrency

notesincirculation – – – – – – 38,031 38,031Depositsandbalancesofbanks

andotherfinancialinstitutions 22,637 1,107 – – 911 – – 24,655Depositsfromcustomers 595,324 62,853 51,438 35,237 849 – – 745,701Tradingliabilities – 8,537 73 139 87 11 – 8,847Financialliabilitiesdesignatedat

fairvalue – 68 2,051 3,356 2,978 5,271 – 13,724Debtsecuritiesinissue – – – – 1,209 – – 1,209Amountsduetogroupcompanies 7,778 5,750 8,411 8,796 2,637 2,461 – 35,833Subordinatedliabilities – – – – 6,191 3,902 – 10,093Others 5,985 1,459 5,178 2,107 256 282 256 15,523

Total Liabilities 631,724 79,774 67,151 49,635 15,118 11,927 38,287 893,616






2016

Due Due Due





Of which:

Certificates of deposit held– includedinTradingassets – 646 844 431 206 – – 2,127– includedinInvestmentsecuritiesas

available-for-salesecurities – 1,318 2,592 21,221 160 – – 25,291

– 1,964 3,436 21,652 366 – – 27,418

Treasury bills– includedinTradingassets – – 71 4,274 – – – 4,345– includedinInvestmentsecuritiesas

available-for-salesecurities – 12,583 40,104 7,706 – – – 60,393

– 12,583 40,175 11,980 – – – 64,738

Debt securities– includedinTradingassets – 77 85 1,252 3,361 3,233 – 8,008– includedinFinancialassets

designatedatfairvalue – – – – – 370 – 370– includedinInvestmentsecurities

classifiedas:– available-for-salesecurities – 10,801 12,703 34,681 47,073 7,978 – 113,236– loansandreceivables 234 – 388 1,195 4,451 1,809 – 8,077

234 10,878 13,176 37,128 54,885 13,390 – 129,691






2015

Due Due Due





Of which:

Certificates of deposit held– includedinTradingassets – 1 6 301 80 – – 388– includedinInvestmentsecuritiesas

available-for-salesecurities – – 2,089 12,863 – – – 14,952

– 1 2,095 13,164 80 – – 15,340

Treasury bills– includedinTradingassets – 40 1,225 1,862 – – – 3,127– includedinInvestmentsecuritiesas

available-for-salesecurities – 19,017 41,720 – – – – 60,737

– 19,057 42,945 1,862 – – – 63,864

Debt securities– includedinTradingassets – 94 160 3,100 6,149 3,394 – 12,897– includedinFinancialassets

designatedatfairvalue – – – – – 666 – 666– includedinInvestmentsecurities

classifiedas:– available-for-salesecurities – 1,849 5,262 26,339 77,920 15,071 – 126,441– loansandreceivables 234 – – 1,937 5,650 – – 7,821

– includedinAmountsduefromfellowsubsidiariesclassifiedas:

– available-for-salesecurities – 1,395 – – – – – 1,395

234 3,338 5,422 31,376 89,719 19,131 – 149,220





(ii) Behaviouralmaturityoffinancialliabilitiesonadiscountedbasis

Thecashflowspresentedinnote37(f)(i)reflectthecashflowswhichwillbecontractuallypayableovertheresidualmaturityoftheinstruments.However,contractualmaturitiesdonotnecessarilyreflectthetimingofactualrepaymentsorcashflow.Inpractice,certainliabilityinstrumentsbehavedifferentlyfromtheircontractualtermsand,especiallyforshort-termcustomeraccounts,whichextendtoalongerperiodthantheircontractualmaturity.Suchbehaviouraladjustmentsareidentifiedandmanagedthroughanalysisofthehistoricbehaviourofbalances.TheBank’sexpectationofwhenliabilitiesarelikelytobecomedueisprovidedbelow.Noinformationhasbeenpresentedforfinancialliabilitieswhichwillbecomepayableontheircontractualduedates.

2016

Within 3 months

Between 3 months

and 1 year

Between 1 year

and 5 years After 5 years Total


Depositsandbalancesofbanksandotherfinancialinstitutions 18,763 – 911 – 19,674

Depositsfromcustomers 110,288 73,204 594,750 – 778,242

Total 129,051 73,204 595,661 – 797,916

2015

Within 3 months

Between 3 months

and 1 year

Between 1 year

and 5 years After 5 years Total


Depositsandbalancesofbanksandotherfinancialinstitutions 23,745 – 910 – 24,655

Depositsfromcustomers 104,097 71,801 569,803 – 745,701

Total 127,842 71,801 570,713 – 770,356

(iii) Financialliabilities(excludingderivativefinancialinstrumentsonanundiscountedbasis)

ThefollowingtablesanalysethecontractualcashflowspayablefortheBank’sfinancialliabilitiesbyremainingcontractualmaturityonanundiscountedbasis.Thefinancialliabilitybalancesinthetablesbelowwillnotagreetothebalancesreportedintheconsolidatedstatementoffinancialpositionasthetablesincorporateallcontractualcashflows,onanundiscountedbasis,relatingtobothprincipalandinterestpayments.Thecashflowspresentedinthetablesreflectthecashflowswhichwillbecontractuallypayableovertheresidualmaturityoftheinstruments.Inpractice,however,theliabilityinstrumentsbehavedifferentlyfromtheircontractualtermsandtypically,forshorttermcustomeraccounts,extendtoalongerperiodthantheircontractualmaturity.





(iii) Financialliabilitiesexcludingderivativefinancialinstrumentsonanundiscountedbasis(continued)

2016

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 18,760 3 – 968 – – 19,731

Depositsfromcustomers 613,902 111,694 50,836 2,468 215 – 779,115Tradingliabilities – 7,728 – – – – 7,728Financialliabilitiesdesignatedat

fairvalue – 406 4,068 1,465 3,710 – 9,649Debtsecuritiesinissue – 22 1,093 1,154 – – 2,269Amountsduetogroupcompanies 11,320 21,042 13,050 1,750 9,226 – 56,388Subordinatedliabilities – – 374 6,982 – – 7,356Others 6,282 8,141 3,982 551 128 42,443 61,527

650,264 149,036 73,403 15,338 13,279 42,443 943,763

2015

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 22,638 1,107 – 949 – – 24,694

Depositsfromcustomers 595,325 114,630 35,556 871 – – 746,382Tradingliabilities – 8,494 – – – – 8,494Financialliabilitiesdesignatedat

fairvalue – 2,163 3,370 3,589 5,761 – 14,883Debtsecuritiesinissue – – 41 1,298 – – 1,339Amountsduetogroupcompanies 7,778 14,162 8,796 2,643 2,461 – 35,840Subordinatedliabilities – – 510 8,068 4,064 – 12,642Others 5,824 6,336 2,067 254 282 38,287 53,050

631,565 146,892 50,340 17,672 12,568 38,287 897,324





(iv) Derivativefinancialinstrumentsonanundiscountedbasis

Thefollowingtablesshowthematurityofderivativefinancialinstrumentsincludingthosenet-settledderivativecontractsinanetliabilityposition,togetherwiththepaylegofgrosssettledcontractsregardlessofwhethertheoverallcontractisinanassetorliabilityposition.Thereceivinglegisnotshowninthistableandasaresultthederivativeamountsinthistableareinflatedbytheirexclusion.

Due Due

between between Due

Due within 3 months to 1 year to after

3 months 1 year 5 years 5 years Total


2016

Derivativefinancialinstruments 1,295,346 743,224 11,163 3,667 2,053,400

2015

Derivativefinancialinstruments 946,903 718,835 37,099 6,606 1,709,443

(g) Operationalrisk

WedefineOperationalriskasthepotentialforlossresultingfrominadequateorfailedinternalprocesses,people, and systems or from the impact of external events, including legal risks. The potential foroperational riskevents tooccur isaconstantchallengeasoperational riskarises fromallactivitiescarriedoutwithintheBank.ToaddressthiswemaprisksacrosstheBankataprocesseslevelwithcontrol installed to mitigate these risks. We benchmark practices against peers, and regulatoryrequirements.

Operational Risk Governance

TheERCprovidesoversightofoperationalriskmanagementacrosstheBank.ItissupportedbytheCountryOperationalRiskCommittee(“CORC”)andtheFinancialCrimeRiskCommittee(“FCRC”),whichoversee operational risks arising from businesses and functions, and financial crime compliancerespectively.

Risk Tolerance approach

OperationalriskismanagedtoachievetheRiskAppetiteStatementapprovedbytheBoard.TheBankaimstocontroloperationalriskstoensurethatoperationallosses(financialorreputational),includinganyrelatedtoconductofbusinessmatters,donotcausematerialdamagetotheBank.




(g) Operationalrisk(continued)

Risk classification

OperationalRisksub-typesarethedifferentwaysthattheBankmaybeoperationallyexposedtoloss.TheBankusesoperationalrisksub-typesprincipallyasanaidtoensurecomprehensiveandconsistentidentificationofoperationalrisks,wherevertheymayarise.Operationalrisksub-typesarelistedinthetable:

OPERATIONALRISKSUB-TYPES

ExternalRules&Regulations Potentialforactualoropportunitylossduetofailuretocomplywithlawsorregulations,orasaresultofchangesinlawsorregulationsorintheirinterpretationorapplication

Liability PotentialforlossorsanctionduetoalegalclaimagainstanypartoftheGrouporindividualswithintheGroup

Legalenforceability PotentialforlossduetofailuretoprotectlegallytheGroup’sinterestsorfromdifficultyinenforcingtheGroup’srights

Damageorlossofphysicalassets

Potentialforlossordamageordenialofuseofpropertyorotherphysicalassets

Safety&security Potentialforlossordamagerelatingtohealthandsafetyorphysicalsecurity

Internalfraudordishonesty Potentialforlossduetoactionbystaffthatisintendedtodefraud,ortocircumventthelaworcompanypolicy

Externalfraud Potentialforlossduetocriminalactsbyexternalpartiessuchasfraudortheftoffinancialassets

Informationsecurity Potentialforlossduetounauthorizedaccess,use,disclosure,disruption,modificationordestructionofinformation

Processingfailure Potentialforlossduetofailureofanestablishedprocessoraprocessdesignweakness

Model Potentialforlossduetoasignificantdiscrepancybetweentheoutputofcreditandmarketriskmeasurementmodelsandactualexperience

Potentialforregulatorybreachduetoasignificantdiscrepancybetweentheoutputoffinancialcrimeclientriskscoringandfinancialcrimetransactionmonitoringmodelsandactualexperience




(g) Operationalrisk(continued)

Conduct

Conductofbusiness,orconduct,isatermthatisusedinabroadnumberofwaysacrossthefinancialservicesindustry.Atitsbroadest,goodconductistheappropriateexecutionofbusiness,bytheBankoranyindividualactingonitsbehalf,inaccordancewithourstrategicintent,riskmanagementprinciplesandriskappetite.Morenarrowly,itreferstospecificregulationsdesignedtoachievefairoutcomesforcustomersandtheeffectiveoperationofmarkets.

GoodconductisevidencedthroughdisciplinedadherencetoouroverallsystemsandcontrolsoutlinedintheRiskManagementFrameworkandthestandardsofindividualbehavioursetoutintheCodeofConduct(the‘Code’).

Specificallyforoperationalrisk:

• ExternalrulesandregulationsclassificationsdefinedintheOperationalRiskFrameworkincludespecificcategoriesofregulationdesignedtoachievefairoutcomesforclients(clientconduct)andtheeffectiveoperationofmarkets(marketconduct).ThisensuresthateachcategoryofregulationisproperlyclassifiedandalignedtotheBank’ssystemsandcontrolstructures.Riskcontrolownersandpolicyownersare responsible fordefining theBank’sminimumstandardsandcontrols inrespectofeachcategory.

• ConductisconsideredintheBank’stoprisks.TheBankaimstopreventtherisksoffailuretodelivertheconductofbusinessstandardsexpectedbytheBank’sclients,investorsandmarketsinwhichweoperate.ManyofthetopriskscanbedrivenbypoorconductsotheBankisfocusedonitscontrolstandardsaroundtheserisks.

(h) Reputationalrisk

ReputationalriskcouldarisefromthefailurebytheBanktoeffectivelymitigatetherisksinitsbusinessesincludingoneormoreofcountry,credit,liquidity,market,regulatory,legal,strategicorotheroperationalrisk.DamagetotheBank’sreputationcouldcauseexistingclientstoreduceorceasetodobusinesswiththeBankandprospectiveclientstobereluctanttodobusinesswiththeBank.Allemployeesareresponsiblefordaytodayidentificationandmanagementofreputationalrisk.Theseresponsibilitiesform part of the Code of Conduct and are further embedded through values-based performanceassessments.RiskControlOwnersmustidentifymaterialreputationalrisksarisingfromanybusinessactivityortransactionthattheycontrolandensurethattheseareescalatedandcontrolledinaccordancewiththeReputationalRiskPolicyandapplicableprocedures.

Reputationalriskmayalsoarisefromafailuretocomplywithenvironmentalandsocialstandards.TheBank’sprimaryenvironmentalandsocialimpactsarisethroughrelationshipwithclientsandcustomersandthefinancingdecisionstheBanktakes.TheGrouphaspublishedaseriesofPositionstatementsthatweapplyintheprovisionoffinancialservicestoclientswhooperateinsectorswithspecificrisks,andforkeyissues.TheBankhavemechanismsintheoriginationandcreditprocessestoidentifyandassessenvironmentalandsocialrisks,andadedicatedEnvironmentalandSocialRiskManagementteamthatreviewsproposedtransactionswithidentifiedrisks.




(h) Reputationalrisk(continued)

TheERCanditssub-committee,theSCBHKReputationalRiskSub-committee,providesBank-wideoversightonreputationalrisk,setspolicyandmonitorsmaterialrisks.TheHeadofCorporateAffairsistheoverallriskcontrolownerforreputationalrisk.TheExCoprovidesadditionaloversightofreputationalriskonbehalfoftheBoard.

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

• PromoteawarenessandapplicationoftheBank’spoliciesandproceduresregardingreputationalrisk.

• EncouragebusinessesandfunctionstotakeaccountoftheBank’sreputationinalldecision-making,includingdealingswithcustomersandsuppliers.

• Implementeffectivein-countryreportingsystemstoensuretheyareawareofallpotentialissuesintandemwithrespectivebusinesscommittees.

• Promoteeffective,proactivestakeholdermanagementthroughongoingengagement.

(i) Pensionrisk

PensionriskisthepotentialforlossduetohavingtomeetanactuariallyassessedshortfallintheBank’spensionscheme.PensionriskexposureisnotconcernedwiththefinancialperformanceoftheBank’spensionschemebutisfocusedupontherisktotheBank’sfinancialpositionarisingfromtheneedtomeetpensionschemefundingobligations.TheriskassessmentisfocusedontheobligationstowardstheBank’spensionscheme,ensuringthattheBank’sfundingobligationiscomfortablywithintheBank’sfinancialcapacity.Pensionriskismonitoredonasemi-annualbasistakingaccountoftheactualvariationsinassetvaluesandupdatedexpectationsregardingtheprogressionofthepensionfundassetsandliabilities.

TheCPCisthebodyresponsibleforgovernanceofpensionriskanditreceivesitsauthorityfromExCo.

(j) Capitalmanagement

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

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




(j) Capitalmanagement(continued)

TheprocessofallocatingcapitaltospecificoperationsandactivitiesisundertakenbyALCOandisreviewedregularlybytheBoard.

Consistentwith industrypractice,theBankmonitors itscapitalstructureonthebasisofthecapitaladequacyratioandtherehavebeennomaterialchangesintheBank’spolicyonthemanagementofcapitalduringtheyear.

TheBankanditssubsidiarieshavecompliedwithallexternallyimposedcapitalrequirementsthroughouttheyearsended31December2016and2015.

TheBankusestheIRBapproachforboththemeasurementofcreditriskcapitalandthemanagementofcreditriskforthemajorityofitsportfolios.TheBankalsousesthestandardised(creditrisk)approachfor certain insignificant portfolios exempted from IRB. The Bank adopts the internal ratings-based(securitization)approachtocalculateitscreditriskforsecuritizationexposures.

For market risk, the Bank uses an internal models approach for two guaranteed funds and thestandardized(marketrisk)approachforotherexposures.Inaddition,theBankadoptsthestandardized(operationalrisk)approachforoperationalrisk.

TheBanking(Capital)RulesissuedbytheHKMArequireallauthorizedinstitutionsinHongKongtomeetthreelevelsofminimumcapitalratios,namelycommonequitytier1,tier1andtotalcapitalratios.

TheBank’sconsolidatedcapitalasat31December2016consistsoftier1capitalafterdeductionofHK$51,890million(2015:HK$51,412million)andtier2capitalafterdeductionsofHK$13,654million(2015:HK$9,618million).Tier2capitalincludessubordinateddebtandcollectiveimpairmentallowancesforimpairedassets.

38 Financial instruments

(a) Valuationoffinancialinstrumentscarriedatfairvalue

ValuationoffinancialassetsandliabilitiesheldatfairvaluearesubjecttoareviewindependentofthebusinessbyValuationControl.Forthosefinancialassetsandliabilitieswhosefairvalueisdeterminedbyreferencetoexternallyquotedpricesormarketobservablepricinginputstovaluationmodels,anassessmentismadeagainstexternalmarketdataandconsensusservices.Financialinstrumentsheldatfairvalueintheconsolidatedstatementoffinancialpositionhavebeenclassifiedintoavaluationhierarchythatreflectsthesignificanceoftheinputsusedinthefairvaluemeasurements.



38 Financial instruments (continued)

(a) Valuationoffinancialinstrumentscarriedatfairvalue(continued)

Valuation methodologies

Thevaluationhierarchy,andthetypesofinstrumentsclassifiedintoeachlevelwithinthathierarchy,issetoutbelow:

Level1 Level2 Level3

Fairvaluedeterminedusing:

Unadjustedquotedpriceinanactivemarketforidenticalassetsandliabilities

DirectlyorindirectlyobservableinputsotherthanunadjustedquotedpricesincludedwithinLevel1thatareobservable(note1)

Significantinputsfortheassetorliabilitythatarenotbasedonobservablemarketdata(unobservableinputs)(seenote38(a)(i))

Typesoffinancialassets Activelytradedgovernment,agencyandothersecuritiesListedequitiesQuotedderivativeinstruments

AssetbackedsecuritiesCorporateandothergovernmentbondsandloansOver-the-counterderivatives

AssetbackedsecuritiesinilliquidmarketsCorporatebondsandloansinilliquidmarketsUnlistedequitiesOver-the-counterderivativeswithunobservableinputs

Typesoffinancialliabilities ShortpositionsinactivelytradedgovernmentandagencysecuritiesShortpositionsinlistedequitiesQuotedderivativeinstruments

StructuredbankandcustomerdepositsDebtsecuritiesinissueOver-the-counterderivatives

StructuredbankandcustomerdepositsDebtsecuritiesissuedOver-the-counterderivativeswithunobservableinputs

(Note1) Theseincludedvaluationmodelssuchasdiscountedcashflowanalysis,optionpricingmodelsand other valuation techniques commonly used by market participants. These modelsincorporateassumptionsandinputsthatothermarketparticipantswoulduseintheirvaluations,suchasdiscountrates,defaultrates,creditspreadsandoptionvolatilities.TheseinputsneedtobedirectlyorindirectlyobservableinordertobeclassifiedasLevel2.





Thetablesbelowshowtheclassificationoffinancialinstrumentsheldatfairvalueintothevaluationhierarchysetoutaboveasat31December:

2016

Level 1 Level 2 Level 3 Total


Tradingassets– Tradingsecurities 6,023 8,461 – 14,484– Advancestocustomers – 116 – 116– Positivefairvaluesoftradingderivatives – 1,034 – 1,034

Amountsduefromimmediateholdingcompany– Positivefairvaluesoftradingderivatives 61 21,998 24 22,083– Positivefairvaluesofhedgingderivatives – 1,567 – 1,567

Amountsduefromfellowsubsidiaries– Positivefairvaluesoftradingactivities – 54 – 54– Positivefairvaluesofhedgingderivatives – 7 – 7

Financialassetsdesignatedatfairvalue– Debtsecurities – 370 – 370

Available-for-salesecurities– Treasurybills 60,393 – – 60,393– Certificatesofdepositheld 449 24,842 – 25,291– Debtsecurities 55,277 57,939 20 113,236– Equityshares,netofimpairment 7 – 467 474

Total assets measured at fair value 122,210 116,388 511 239,109

Tradingliabilities– Shortpositionsinsecurities 1,954 5,756 – 7,710– Negativefairvaluesoftradingderivatives – 579 – 579

Financialliabilitiesdesignatedatfairvalue– Structuredbankandcustomerdeposits – 3,420 – 3,420– Debtsecuritiesissued – 4,462 1,686 6,148

Amountsduetoimmediateholdingcompany– Negativefairvaluesoftradingderivatives 34 22,609 – 22,643– Negativefairvaluesofhedgingderivatives – 1,108 – 1,108

Amountsduetofellowsubsidiaries– Negativefairvaluesoftradingactivities – 10 – 10

Total liabilities measured at fair value 1,988 37,944 1,686 41,618





2015

Level 1 Level 2 Level 3 Total


Tradingassets– Tradingsecurities 9,010 7,711 – 16,721– Advancestocustomers – 163 – 163– Positivefairvaluesoftradingderivatives – 1,713 – 1,713

Amountsduefromimmediateholdingcompany– Positivefairvaluesoftradingderivatives – 13,919 471 14,390– Positivefairvaluesofhedgingderivatives – 1,214 – 1,214

Amountsduefromfellowsubsidiaries– Listedavailable-for-saledebtsecurities – 1,395 – 1,395– Positivefairvaluesofhedgingderivatives – 92 – 92

Financialassetsdesignatedatfairvalue– Debtsecurities – 666 – 666

Available-for-salesecurities– Treasurybills 60,737 – – 60,737– Certificatesofdepositheld – 14,952 – 14,952– Debtsecurities 60,921 65,380 140 126,441– Equityshares,netofimpairment 8 1 612 621

Total assets measured at fair value 130,676 107,206 1,223 239,105

Tradingliabilities– Shortpositionsinsecurities 3,198 5,278 – 8,476– Negativefairvaluesoftradingderivatives – 371 – 371

Financialliabilitiesdesignatedatfairvalue– Structuredbankandcustomerdeposits – 6,533 9 6,542– Debtsecuritiesissued – 5,367 1,815 7,182

Amountsduetoimmediateholdingcompany– Negativefairvaluesoftradingderivatives – 15,393 12 15,405– Negativefairvaluesofhedgingderivatives – 1,755 – 1,755

Amountsduetofellowsubsidiaries– Negativefairvaluesofhedgingderivatives – 27 – 27

Total liabilities measured at fair value 3,198 34,724 1,836 39,758

TheBanktransferredgovernmentbondswithacarryingvalueofHK$9,348millionduring2015fromLevel1intoLevel2wherethemarketforsuchbondsbecameinactive.





(i) Valuationoffinancialinstrumentswithsignificantunobservableinputs

Themovementsduringtheyearforlevel3financialassetsandliabilitiesareasfollows:

2016

Amounts due

from immediate

holding

company

Available-

for-sale

securities

Total level

3 assets


FinancialassetsAt1January2016 471 752 1,223Totalgainsrecognisedintheconsolidatedincomestatement

–Nettradingincome 4 – 4–Netgainsfromdisposalofavailable-for-salesecurities – 54 54

Sales – (237) (237)Total(losses)/gainsrecognisedinthe

available-for-saleinvestmentreserve – (53) (53)Purchases – 91 91Settlements – (120) (120)Transferredoutoflevel3(note) (451) – (451)

At31December2016 24 487 511

Totalgainsrecognisedintheconsolidatedincomestatementrelatingtoassetsheldat31December2016–Nettradingincome 4 – 4





(i) Valuationoffinancialinstrumentswithsignificantunobservableinputs(continued)

Financial

liabilities

designated at

fair value

Amounts due

to immediate

holding

company

Total level

3 liabilities


FinancialliabilitiesAt1January2016 1,824 12 1,836Totalgainsrecognisedintheconsolidatedincomestatement

–Netgainsfromfinancialinstrumentsdesignatedatfairvaluethroughprofitorloss (129) – (129)

Issuances 404 – 404Settlements (404) (1) (405)TransferredoutofLevel3 (9) (11) (20)

At31December2016 1,686 – 1,686

Totalgainsrecognisedintheconsolidatedincomestatementrelatingtoliabilitiesheldat31December2016–Netgainsfromfinancialinstrumentsdesignatedatfair

valuethroughprofitorloss (129) – (129)

(note)Transfersinto/(outof)level3duringtheyearrelatetofinancialinstrumentswherethevaluationparametersbecameunobservable/(observable)duringtheyear.






2015

Financial

assets

designated at

fair value

Amounts due

from immediate

holding

company

Available-

for-sale

securities

Total level

3 assets


FinancialassetsAt1January2015 62 33 381 476Totalgainsrecognisedintheconsolidated

incomestatement–Nettradingincome – 80 – 80–Netgainsfromfinancial

instrumentsdesignatedatfairvaluethroughprofitorloss 1 – – 1

Total(losses)/gainsrecognisedintheavailable-for-saleinvestmentreserve – – 38 38

Purchases – 358 190 548Settlements (63) – (295) (358)Transferredintolevel3(note) – – 438 438

At31December2015 – 471 752 1,223

Totalgainsrecognisedintheconsolidatedincomestatementrelatingtoassetsheldat31December2015–Nettradingincome – 438 – 438–Netgainsfromfinancial

instrumentsdesignatedatfairvaluethroughprofitorloss – – – –






Financial

liabilities

designated at

fair value

Amounts due

to immediate

holding

company

Total level

3 liabilities


FinancialliabilitiesAt1January2015 661 10 671Totallossesrecognisedintheconsolidatedincomestatement

–Netlossesfromfinancialinstrumentsdesignatedatfairvaluethroughprofitorloss 65 – 65

Issuances 1,098 2 1,100

At31December2015 1,824 12 1,836

Totallossesrecognisedintheconsolidatedincomestatementrelatingtoliabilitiesheldat31December2015–Netlossesfromfinancialinstrumentsdesignatedatfair

valuethroughprofitorloss 65 – 65

(note)Transfersinto/(outof)level3duringtheyearrelatetofinancialinstrumentswherethevaluationparametersbecameunobservable/(observable)duringtheyear.






The following tablepresents thekeyvaluation techniquesused tomeasure the fairvalueof level3financialinstrumentswhichareheldatfairvalue,thesignificantunobservableinputsandtherangeofvaluesforthoseinputsandtheweightedaverageofthoseinputs.

Typeofinstruments Principalvaluationtechnique

Significantunobservableinputs

Range(Note1) Weightedaverage(Note2)

Debtsecurities Discountedcashflows Price/Yield 0.4%(2015:2.1%)

0.4%(2015:2.1%)

Structuredbankandcustomerdeposits

Internalpricingmodel Equity-equitycorrelation

Equity-foreignexchangecorrelation

Nil(2015:Nil)

40%to63%(2015:40%to75%)

Nil(2015:Nil)

Nil(2015:58%)

Debtsecuritiesinissue

Discountedcashflows Creditspreads 2.0%to4.0%(2015:1.9%to4.0%)

2.4%(2015:2.1%)

DerivativefinancialInstruments

Internalpricingmodel Equity-equitycorrelation

Equity-foreignexchangecorrelation

Nil(2015:Nil)

40.0%to63.0%(2015:40%to75%)

Nil(2015:Nil)

Nil(2015:58%)

Discountedcashflows Creditspreads 4.0%(2015:1.9%to4.0%)

4.0%(2015:2.4%)

(Note1)Therangesofvaluesshownrepresentthehighestandlowestlevelsusedinthevaluationofthe level3financial instrumentsasat31December2016and2015.Therangesofvaluesusedarereflectiveoftheunderlyingcharacteristicsoftheselevel3financialinstrumentsbasedonthemarketconditionsatthereportingdate.However,theserangesofvaluesmaynotrepresenttheuncertaintyinfairvaluemeasurementsoftheselevel3financialinstruments.

(Note2)Weightedaveragefornon-derivativefinancialinstrumentshavebeencalculatedbyweightinginputsbytherelativefairvalue.Weightedaverageforderivativeshasbeenprovidedbyweightinginputsbytheriskrelevanttothatvariable.

(Note3)Level3equityshares,whicharemainlymeasuredusingunadjustednetassetvalue,areexcluded.

Thefollowingsectiondescribesthesignificantunobservableinputsidentifiedintheabovevaluationtechniquetable.

Yield

Yieldistheinterestratethatisusedtodiscountthefuturecashflowsinadiscountedcashflowmodel.Anincreaseintheyield,inisolation,wouldresultinadecreaseinafairvaluemeasurement.

Correlation

Correlationisthemeasureofhowmovementinonevariableinfluencesthemovementinanothervariable.Inderivativeproducts,wherethepayoffissubjecttothevalueofmorethanoneunderlying,thecorrelationbetweentwovariablesisusedasaninputindeterminingthevalueoftheproduct.Examplesincludecorrelationbetweentwostocks,astockandanindex,anindexandanotherindexetc.Correlationcanbehighorlowaswellaspositiveornegative.Positivehighcorrelationbetweentwovariablesmeansthatanincreaseinonevariableisexpectedtocauseasimilarincreaseinothervariable.






Credit spreads

Creditspreadsrepresenttheadditionalyieldthatamarketparticipantwoulddemandfortakingexposurestothecreditriskofaninstrument.

(ii) Sensitivitiesinrespectofthefairvaluesoflevel3assetsandliabilities

2016

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 24 32 11 – – –

Debtsecurities – – – 20 20 20Equitysecurities – – – 467 514 421Amountsduetoimmediate

holdingcompany – – – – – –Structuredbankand

customerdeposits – – – – – –Debtsecuritiesissued (1,685) (1,623) (1,710) – – –

(1,661) (1,591) (1,699) 487 534 441

2015

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 471 533 401 – – –

Debtsecurities – – – 140 141 140Equitysecurities – – – 612 673 551Amountsduetoimmediate

holdingcompany (12) (12) (12) – – –Structuredbankand

customerdeposits (9) (8) (9) – – –Debtsecuritiesissued (1,815) (1,746) (1,885) – – –

(1,365) (1,233) (1,505) 752 814 691





Wherethefairvalueoffinancialinstrumentsaremeasuredusingvaluationtechniquesthatincorporateoneormoresignificantinputswhicharebasedonunobservablemarketdata,weapplya10percentincreaseordecreaseonthevaluesoftheseunobservableparameter inputs,togeneratearangeofreasonablypossiblealternativevaluationsinaccordancewiththerequirementsofHKFRS7/IFRS7.Thepercentageshift isdeterminedbystatisticalanalysesperformedonasetofreferenceprices,whichincludedcertainequityindices,creditindicesandvolatilityindices,basedonthecompositionofourlevel3financial instruments.Favourableandunfavourablechangesaredeterminedon thebasisofchangesinthevalueoftheinstrumentasaresultofvaryingthelevelsoftheunobservableparameters.This level3sensitivityanalysisassumesaonewaymarketmoveanddoesnotconsideroffsets forhedges.

Asof31December2016,thesereasonablypossiblealternativescouldhaveincreasedthenetfairvaluesoffinancialinstrumentsheldatfairvaluethroughprofitorlossbyHK$70million(2015:HK$132million)ordecreasedthembyHK$38million(2015:HK$140million);andincreasedthefairvaluesofavailable-for-salesecuritiesbyHK$47million(2015:HK$62million)ordecreasedthembyHK$46million(2015:HK$61million).

(b) Valuationoffinancialinstrumentscarriedatamortisedcost

Allfinancialinstrumentsarestatedatfairvalueoramountsnotmateriallydifferentfromtheirfairvalueasat31December2016and2015,exceptforsubordinatedliabilities.

Thefollowingtablesummarisesthecarryingamountsandfairvalues(includingthevaluationhierarchy)ofsubordinated liabilities.Thevalues inthetablebelowarestatedasat31Decemberandmaybedifferentfromtheactualamountsthatwillbereceivedonthesettlementormaturityofthesubordinatedliabilities.

2016 2015

Carrying amount

Fair value

Level 1 Carrying amount

Fair value

Level 1


Subordinatedliabilities 6,088 6,298 10,093 10,579

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

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

Thefairvalueofcashandbalanceswithbanks,centralbanksandotherfinancialinstitutionsistheircarryingamounts.

Placements with banks and other financial institutions

Thefairvalueoffloatingrateplacementsandovernightdepositsistheircarryingamounts.Theestimatedfairvalueoffixedinterestbearingdepositsisbasedondiscountedcashflowsusingtheprevailingmoneymarketratesfordebtswithasimilarcreditriskandremainingmaturity.




(b) Valuationoffinancialinstrumentscarriedatamortisedcost(continued)

Advances to customers

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

Deposits and balances of banks, other financial institutions and customers

Theestimatedfairvalueofdepositswithnostatedmaturityistheamountrepayableondemand.Theestimatedfairvalueoffixedinterestbearingdepositsandotherborrowingswithoutquotedmarketpricesisbasedondiscountedcashflowsusingtheprevailingmarketratesfordebtswithasimilarcreditriskandremainingmaturity.

Debt securities in issue and subordinated liabilities

Theaggregatefairvaluesarecalculatedbasedonquotedmarketprices.Forthosesecuritieswherequotedmarketpricesarenotavailable,adiscountedcashflowmodelisusedbasedonacurrentmarketyieldcurveappropriatefortheremainingtermtomaturity.

(c) Transfersoffinancialassets

TheBankentersintocollateralisedrepurchaseagreements(repos).ThesetransactionstypicallyentitletheBankanditscounterpartiestohaverecoursetoassetssimilartothoseprovidedascollateralintheeventofadefault.AssetspledgedinrespectofreposcontinuetoberecognisedontheconsolidatedstatementoffinancialpositionastheBankretainssubstantiallytheassociatedriskandrewardsoftheseassets.Theassociatedliabilityisincludedin“Amountsduetoimmediateholdingcompany”.

The table below sets out the financial assets provided by the bank as collateral for repurchasetransactions:

2016 2015

HK$’M HK$’M

Collateral pledged against repurchase agreementsOnbalancesheet

Cash – –Investmentsecurities 2,051 –

OffbalancesheetRepledgedcollateralreceived – –

2,051 –

Balancesheetliabilities–repurchaseagreementsAmountduetocentralbanks 2,006 –

2,006 –




(d) Offsettingfinancialassetsandfinancialliabilities

Thefollowingtablespresentdetailsoffinancialinstrumentssubjecttooffsetting,enforceablemasternettingarrangementsandsimilaragreements.

2016

Assets

Gross

amounts of

recognised

financial

assets

Gross amounts

of recognised

financial

liabilities offset

in the

consolidated

statement of

financial

position

Net amounts of

financial assets

presented

in the

consolidated

statement of

financial

position

Related

amounts not

offset in the

consolidated

statement of

financial

position Net amount


Positivefairvaluesofderivativefinancialinstruments 24,745 – 24,745 (23,927) 818

Reverserepos,securitiesborrowingandsimilaragreements 22,689 – 22,689 (22,504) 185

47,434 – 47,434 (46,431) 1,003

Liabilities

Gross

amounts of

recognised

financial

liabilities

Gross amounts

of recognised

financial assets

offset in the

consolidated

statement of

financial

position

Net amounts of

financial

liabilities

presented

in the

consolidated

statement of

financial

position

Related

amounts not

offset in the

consolidated

statement of

financial

position Net amount


Negativefairvaluesofderivativefinancialinstruments 24,340 – 24,340 (23,916) 424

Reposandsimilaragreements 2,006 – 2,006 (2,006) –

26,346 – 26,346 (25,922) 424




(d) Offsettingfinancialassetsandfinancialliabilities(continued)

2015

Assets

Gross

amounts of

recognised

financial

assets

Gross amounts

of recognised

financial

liabilities offset

in the

consolidated

statement of

financial

position

Net amounts of

financial assets

presented

in the

consolidated

statement of

financial

position

Related

amounts not

offset in the

consolidated

statement of

financial

position Net amount


Positivefairvaluesofderivativefinancialinstruments 17,409 – 17,409 (15,900) 1,509

Reverserepos,securitiesborrowingandsimilaragreements 34,924 – 34,924 (34,722) 202

52,333 – 52,333 (50,622) 1,711

Liabilities

Gross

amounts of

recognised

financial

liabilities

Gross amounts

of recognised

financial assets

offset in the

consolidated

statement of

financial

position

Net amounts of

financial

liabilities

presented

in the

consolidated

statement of

financial

position

Related

amounts not

offset in the

consolidated

statement of

financial

position Net amount


Negativefairvaluesofderivativefinancialinstruments 17,558 – 17,558 (17,343) 215

Reposandsimilaragreements – – – – –

17,558 – 17,558 (17,343) 215




(d) Offsettingfinancialassetsandfinancialliabilities(continued)

TheBankanditssubsidiariesareabletooffsetassetsandliabilitieswhichdonotmeettheHKAS32/IAS 32 netting criteria (see note 2(l)). Such arrangements include master netting arrangements forderivativesandglobalmasterrepurchaseagreementsforreposandreverserepos.Theseagreementsgenerallyallowthatalloutstandingtransactionswithaparticularcounterpartycanbeoffsetbutonlyintheeventofdefaultorotherpre-determinedevents,thereforetherelatedfinancialassetsandfinancialliabilitiesarenotoffsetintheconsolidatedstatementoffinancialposition.

Underreposandreverserepos,theBankanditssubsidiarieswouldpledge(legallysell)andobtain(legallypurchase)financialcollateralwhicharemainlyhighlyliquidassetswhichcanbesoldintheeventofadefault.

Therelatedamountsnotoffsetintheconsolidatedstatementoffinancialpositionwhicharedisclosedinthetableaboveincludefinancialinstrumentscoveredbymasternettingarrangementsandfinancialcollateralpledgedandobtained,butexcludetheeffectofovercollateralisation.

39 Assets pledged as security for liabilities

TheBankmaintainspledgedcashandsecuritiesaccountstosecureanyborrowingsorotherobligationsresultingfromtheBank’suseofclearingsystemsandtocovershortpositions.Asat31December2016,theBankhadsecuritiesamountingtoHK$7,710million (2015:HK$8,476million) tocover theshortpositions.

Reversereposandsecuritiesborrowingtransactions

TheBankalsoundertakesreversereposandsecuritiesborrowingtransactionsassetoutinthetablebelow:

2016 2015

HK$’M HK$’M

Consolidatedstatementoffinancialpositionassets-reversereposandsecuritiesborrowingPlacementswithbanksandotherfinancialinstitutions 14,295 29,499Advancestocustomers 3,741 5,425AmountsduefromGroupCompanies 4,653 –

22,689 34,924

Underreversereposandsecuritiesborrowingarrangements,theBankobtainssecuritiesontermsthatpermitittorepledgeorresellthesecuritiestoothers.TheamountofsecuritieswhichtheBankisabletorepledgeorresellareasfollows:

2016 2015

HK$’M HK$’M

Securitiesandcollateralthatcanberepledgedorsold(atfairvalue) 22,925 34,802Thereofrepledged/transferredtoothersunderrepos(atfairvalue) – –

Thesetransactionsareconductedundertermsthatareusualandcustomarytostandardlendingandstockborrowingactivities.



40 Material related party transactions

Inadditiontothetransactionsandbalancesdisclosedelsewhereinthesefinancialstatements,theBankanditssubsidiariesenteredintothefollowingmaterialrelatedpartytransactions.ThetransactionsoftheBankaremateriallythesameasthoseappearingintheconsolidatedfinancialstatementsin2016and2015.

(a) Keymanagementpersonnelremuneration

RemunerationforkeymanagementpersonneloftheBank,includingamountspaidtothedirectorsasdisclosedinnote8isasfollows:

2016 2015

HK$’M HK$’M

Short-termemployeebenefits 69 94Post-employmentbenefits 2 3Equitycompensationbenefits 5 8Terminationbenefits 1 3

77 108

Totalremunerationisincludedinstaffcosts(seenote4(g)).

(b) Creditfacilitiesandloanstokeymanagementpersonnel

Duringtheyear,theBankprovidedcreditfacilitiestokeymanagementpersonneloftheBankandtheirclosefamilymembersandcompaniescontrolledorsignificantlyinfluencedbythem.Thecreditfacilitieswereprovidedintheordinarycourseofbusinessandonsubstantiallythesametermsasforcomparabletransactionswithpersonsofasimilarstandingor,whereapplicable,withotheremployees.

2016 2015

HK$’M HK$’M

Loanbalances:At1January 1,468 203

At31December 65 1,468

Averagebalanceduringtheyear 1,184 1,627

Incomeearned 24 15



40 Material related party transactions (continued)

(c) Sharebasedpayments

TheGroupoperatesanumberofshare-basedarrangementsforitsdirectorsandemployees.

2011 Standard Chartered Share Plan (the ‘2011 Plan’)

The2011PlanwasapprovedbyshareholdersinMay2011andistheGroup’smainshareplan.Sinceapproval,ithasbeenusedtodelivervarioustypesofshareawards:

Long Term Incentive Plan (‘LTIP’)

Awardsgrantedwithvestingsubject toperformancemeasures.Performancemeasuresattachedtoawards granted previously include: total shareholder return (‘TSR’); return on equity (‘RoE’) with acommonequitytier1(‘CET1’)underpin;strategicmeasures;earningspershare(‘EPS’)growth;andreturnonrisk-weightedassets(‘RoRWA’).Eachmeasureisassessedindependentlyoverathreeyearperiod.Awardsgrantedfrom2016haveanindividualconductgatewaythatresultsintheawardlapsingifnotmet.

Performance shares

Awardsofperformancesharesvestafterathree-yearperiodandaresubjecttoacombinationofthreeperformancemeasures,TotalShareholderReturn(TSR),Earningspershare(EPS)andReturnonRiskWeightedAssets(RoRWA).Thethreeperformancemeasuresareequallyweightedwithonethirdoftheawarddependingoneachmeasure,assessedindependently.Performanceshareawardsformpartofthe variable compensation awarded to executive directors. In line with regulatory requirements,discretionaryvariablecompensationforexecutivedirectorswillnotexceed200percentoffixedpay.

Deferred share awards/Restricted shares

Deferredawardsareused todeliver thedeferredportionofvariable remuneration, in linewithbothmarketpracticeandregulatoryrequirements.Theseawardsvestininstalmentsonanniversariesoftheawarddatespecifiedatthetimeofgrant.Deferredawardsarenotsubjecttoanyplanlimit.ThisenablestheGrouptomeetregulatoryrequirementsrelatingtodeferrallevels,andisinlinewithmarketpractice.

Restrictedshareawards,madeoutsideoftheannualperformanceprocessasreplacementbuy-outawardstonewjoinerswhoforfeitawardsonleavingtheirpreviousemployers,vestininstalmentsontheanniversariesof theawarddatespecifiedat the timeofgrant.Thisenables theGroup tomeetregulatoryrequirementsrelatingtobuy-outs,andisinlinewithmarketpractice.Inlinewithsimilarplansoperatedbyourcompetitors,restrictedshareawardsarenotsubjecttoanannuallimitanddonothaveanyperformancemeasures.




(c) Sharebasedpayments(continued)

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

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

2000 Executive Share Option Scheme (2000 ESOS)

The2000ESOSisdesignedtobeinternationallycompetitiveandfocusexecutivedirectorsandtheirseniormanagementteamsondeliveringlong-termperformance.AnEPSperformancecriterionmustbemetbeforeoptionscanbeexercised.

Executiveshareoptionstopurchaseordinarysharesintheultimateholdingcompanyareexercisableafterthethird,butbeforethetenthanniversaryofthedateofgrant.Theexercisepricepershareisthesharepriceatthedateofgrantandoptionscanonlybeexercisedifaperformanceconditionissatisfied.NofurtherawardsmaybegrantedtotheemployeesoftheBankanditssubsidiariesunderthe2000ESOS.Therearenooutstandingawardsunderthisplan.

2001 Performance Share Plan (2001 PSP)

TheGroup’spreviousplanfordeliveringperformanceshareswasthe2001PSP.Althoughthe2001PSPwasreplacedin2011,therearestilloutstandingvestedawardsundertheplan.

Underthe2001PSP,halftheawardisdependentuponTSRperformanceandthebalanceissubjecttoa targetofdefinedEPSgrowth.Bothmeasuresuse the same three-yearperiodandareassessedindependently.Nofurtherawardscanbegrantedundertheplan.

All Employee Sharesave Plan (2004 International Sharesave, 2004 UK Sharesave and 2013 Sharesave)

UndertheSharesaveschemes,employeeshavethechoiceofopeningasavingscontract.Withinaperiodofsixmonthsafterthethirdorfifthanniversary,asappropriate,employeesmaypurchaseordinarysharesintheultimateholdingcompany.Thepriceatwhichtheymaypurchasesharesisatadiscountofupto20percentonthesharepriceatthedateofinvitation.TherearenoperformanceconditionsattachedtooptionsgrantedundertheSharesaveschemes.Nofurtherawardcanbegrantedunder2004Sharesaveplans.

The2013SharesavePlanwasapprovedbyShareholdersinMay2013andsincethenallSharesaveinvitationshavebeenmadeunderthisplan.





2011 Standard Chartered Share Plan (the 2011 plan)

Management Long Term Incentive Plan “MLTIP”

Valuation

Thevestingofawardsgrantedin2016issubjecttothesatisfactionofRoE(subjecttoacapitalunderpin)andrelativeTSRperformancemeasuresandachievementofastrategicscorecard.ThefairvalueoftheTSRcomponentiscalculatedusingtheprobabilityofmeetingthemeasuresoverathreeyearperformanceperiod,usingaMonteCarlosimulationmodel.Thenumberofsharesexpectedtovestisevaluatedateachreportingdate,basedontheexpectedperformanceagainsttheRoEandstrategicmeasuresinthescorecard,todeterminetheaccountingcharge.

2016

Grant Date 11 March

Sharepriceatgrantdate(£) 4.68Sharesgranted 2,822,977Vestingperiod(years) 3Expecteddividends(yield)(%) N/AFairvalue(RoE)(£) 1.56Fairvalue(TSR)(£) 1.15Fairvalue(Strategic)(£) 1.56

Dividendequivalentsaccrueontheseawardsduringthevestingperiod,sonodiscountisapplied.

Areconciliationofmovementsfortheyearto31December2016and2015isshownbelow:

2016 2015

No . of shares No . of shares

Outstandingat1January – –Granted 2,822,977 –Lapsed (211,570) –Exercised – –

Outstandingat31December 2,611,407 –Weightedaveragecontractualremaininglife 9.20years –Exercisableat31December – –





Performance Shares

Noshareawardsweregrantedin2016and2015.


2016 2015


Outstandingat1January 1,186,275 1,721,430Adjustmentforrightsissue – 57,236Granted – –Lapsed (701,503) (539,920)Exercised (16,383) (52,471)

Outstandingat31December 468,389 1,186,275Weightedaverageremainingcontractuallife 7.10years 7.66yearsExercisableat31December 20,932 45,068

Deferred Share Awards

Valuation

Thefairvalueforallemployeesisbasedon100%ofthefacevalueofthesharesatthedateofgrantasthesharepricewillreflectexpectationsofallfuturedividends.

2016 2015

Grant Date 11 March 17 June 19 March

Sharepriceatgrantdate(£) 4.68 10.28 10.51Sharesgranted 1,180,580 3,723 1,564,894Vestingperiod(years) 1-3 1-3,1-5 1-3,3,1-5,5Expecteddividendsyield(%) n/a n/a n/aFairvalue(£) 4.68 10.28 10.51

Deferredawardsaccruedividendequivalentpaymentsduringthevestingperiod.





Restricted Share Awards

Valuation

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

2016

Grant Date 4 October 11 March

Sharepriceatgrantdate(£) 6.50 4.68Sharesgranted 72,597 22,958Vestingperiod(years) 2-3,1,2,3,4 2-3,1-4Expecteddividends(yield)(%) 2.5,0,2.4,

3.0,3.13.5

Fairvalue(£) 6.11,6.50,6.20,5.95,

5.76

4.30

2015

Grant Date 1 December 22 September 17 June 19 March

Sharepriceatgrantdate(£) 5.57 6.73 10.28 10.50Sharesgranted 8,496 20,585 4,379 19,527Vestingperiod(years) 2-3 2-3,2-4,1-4 2-3 2-3Expecteddividends(yield)(%) 6.4 6.4 7.0 7.0Fairvalue(£) 4.77 5.77 8.68 8.88

Theexpecteddividendyieldisbasedonthehistoricaldividendyieldforthreeyearspriortogrant.

Deferred Share Awards/ Restricted Shares


2016 2015


Outstandingat1January 3,529,703 2,910,711Adjustmentforrightsissue – 171,608Granted 1,276,135 1,621,604AdditionalsharesforNotionalDividend 26,181 118,179Lapsed (472,656) (196,422)Exercised (883,023) (1,095,977)

Outstandingat31December 3,476,340 3,529,703Weightedaverageremainingcontractuallife 8.18years 5.42yearsExercisableat31December 780,398 489,970





1997/2006 Restricted Share Scheme (2006 RSS)


Areconciliationofmovementsfortheyearended31December2016and2015isshownbelow:

2016 2015


Outstandingat1January 125,526 327,711Adjustmentforrightsissue – 6,067AdditionalsharesforNotionalDividend – –Lapsed (12,645) (103,612)Exercised (45,614) (104,640)

Outstandingat31December 67,267 125,526Weightedaverageremainingcontractuallife 0.79years 1.65yearsExercisableat31December 67,267 125,526

2007 Supplementary Restricted Share Scheme (2007 SRSS)



2016 2015


Outstandingat1January 32,494 119,766Adjustmentforrightsissue – 1,565Lapsed (3) (54,546)Exercised (28,673) (34,291)

Outstandingat31December 3,818 32,494Weightedaverageremainingcontractuallife 0.19years 1.19yearsExercisableat31December 3,818 32,494





2000 Executive Share Option Scheme (2000 ESOS)

Nooutstandingsharesandshareawardsweregrantedin2016and2015.

2001 Performance Share Plan (PSP)


Areconciliationofmovementsfortheyearended31December2016and2015isshownbelow:

2016 2015


Outstandingat1January 3,318 17,720Adjustmentforrightsissue – 159Lapsed (3,318) (10,900)Exercised – (3,661)

Outstandingat31December – 3,318Weightedaverageremainingcontractuallife – 0.2yearsExercisableat31December – 3,318

Sharesave (2004 International Sharesave, 2004 UK Sharesave and 2013 Sharesave)

Valuation

Optionsarevaluedusingabinomialoption-pricingmodel.Thefairvalueperoptiongrantedandtheassumptionsusedinthecalculationareasfollows:

2016 2015

Grant Date 4 October 7 October

Sharepriceatgrantdate(£) 6.50 7.41Exerciseprice(£) 5.30 5.57Sharesgranted 187,414 1,034,721Vestingperiod(years) 3 3Expectedvolatility(%) 34.2 28.0Expectedoptionlife(years) 3.33 3.33Riskfreerate(%) 0.13 0.9Expecteddividends(yield)(%) 3.04 6.3Fairvalue(£) 1.71 1.4

Theexpectedvolatilityisbasedonhistoricalvolatilityoverthelastthreeyears,orthreeyearspriortogrant.Theexpectedlifeistheaverageexpectedperiodtoexercise.Theriskfree-rateofreturnistheyieldonzero-couponUKGovernmentbondsofatermconsistentwiththeassumedoptionlife.Theexpecteddividendyieldisbasedonhistoricaldividendyieldforthreeyearspriortogrant.





Sharesave (2004 International Sharesave and 2004 UK Sharesave)


Areconciliationofoptionmovementsfortheyearended31December2016and2015isshownbelow:

2016 2015

No . of shares

Weighted

average

exercise price No . of shares

Weighted

average

exercise price

Outstandingat1January 119,828 £10.76 687,108 £11.26Adjustmentforrightsissue – – 15,812 N/ALapsed (111,420) £10.81 (556,014) £10.89Exercised – – (27,078) £10.66

Outstandingat31December 8,408 £10.14 119,828 £10.76Exercisableat31December 8,408 £10.14 102,923 £10.86

2016 2015

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

£10.1367(2015:£10.14/£13.93) £10.14 8,408 0.41years £10.76 119,828 0.56years





2013 Sharesave

2016 2015

No . of shares

Weighted

average

exercise price No . of shares

Weighted

average

exercise price

Outstandingat1January 1,414,173 £6.73 679,102 £10.66Adjustmentforrightsissue – – 71,357 N/AGranted 187,414 £5.30 1,034,721 £5.86Lapsed (556,114) £7.01 (371,007) £9.78Exercised (158) £5.58 – –

Outstandingat31December 1,045,315 £6.33 1,414,173 £6.73Exercisableat31December 55,773 £11.21 – –

2016 2015

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

£5.30/£11.2122(2015:£5.58/£11.21) £6.33 1,045,315 2.35years £6.73 1,414,173 3.06years

(d) Loanstodirectors

LoanstodirectorsoftheBankdisclosedpursuanttosection383(1)(d)oftheHongKongCompaniesOrdinanceandPart3oftheCompanies(DisclosureofInformationaboutBenefitsofDirectors)Regulationareasfollows:

2016 2015

HK$’M HK$’M

AggregateamountofrelevantloansbytheBankoutstandingat31December 26 28

MaximumaggregateamountofrelevantloansbytheBankoutstandingduringtheyear 31 37




(e) RelatedpartytransactionswithassociatesandjointventuresoftheGroup

Duringtheyear,theBankanditssubsidiariesenteredintotransactionswithassociatesandjointventuresoftheGroupintheordinarycourseofitsbankingbusinessandonsubstantiallythesametermsasforcomparabletransactionswiththird-partycounterparties.Theamountsofmaterialtransactionsduringtheyeararesetoutbelow:

2016 2015

HK$’M HK$’M

Amountsduefromassociatesandjointventures 3 3

Depositsfromassociatesandjointventures 58 540

Debtsecuritiesissuedtoassociatesandjointventures 111 –

Operatingincome 17 26

41 Ultimate and immediate holding company

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

TheBank’simmediateholdingcompanyisStandardCharteredBank,acompanyregisteredinEnglandandWales.

42 Significant accounting estimates and judgements

Indeterminingthecarryingamountsofcertainassetsandliabilities,theBankanditssubsidiariesmakeassumptionsabouttheeffectsofuncertainfutureeventsonthoseassetsandliabilitiesatthereportingdate.Theseestimationsandassumptionsarebasedonhistoricalexperienceandexpectationoffutureeventsandarereviewedperiodicallyasactualresultsmaydifferfromtheseestimates.

Pensions

Actuarialassumptionsaremadeinvaluingdefinedbenefitobligationsassetout innote30andareupdatedperiodically.

Taxes

Determiningincometaxprovisionsinvolvesjudgementonthefuturetaxtreatmentofcertaintransactions.Deferredtaxliabilitiesarerecognisedonalltemporarydifferencesanddeferredtaxassetsarerecognisedontemporarydifferenceswhereitisprobablethattherewillbetaxablerevenueagainstwhichthesecanbeoffset.Managementhasmadejudgementsastotheprobabilityoffuturetaxablerevenuesbeinggeneratedagainstwhichtaxlosseswillbeavailableforoffset.



42 Significant accounting estimates and judgements (continued)

Fair value of financial instruments

Notes2(i)and38providefurtherinformationontheBank’sfairvalueaccountingpolicyandprocess.

Impairment of financial assets

Policiesonimpairmentoffinancialassetsaresetoutinnote2(k).

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 2016

Uptothedateofissueoftheconsolidatedfinancialstatements,theHKICPA/IASBhasissuedanumberofamendmentsandnewstandardswhicharenotyeteffectivefortheaccountingyearended31December2016andwhichhavenotbeenadoptedinthesefinancialstatements.

Theseinclude:

– HKFRS9/IFRS9,Financial instruments (effectiveon1January2018)

– HKFRS15/IFRS15,Revenue from contracts with customers (effectiveon1January2018)

– HKFRS16/IFRS16,Leases (effectiveon1January2019)

– AmendmentstoHKAS12/IAS12,Income taxes(effectiveon1January2017)

– AmendmentstoHKAS7/IAS7,Statement of cash flows(effectiveon1January2017)

– AmendmentstoHKFRS4/IFRS4,Insurance contracts(effectiveon1January2018)

– AmendmentstoHKFRS2/IFRS2,Share-based payment(effectiveon1January2018)

TheBankanditssubsidiariesareintheprocessofmakinganassessmentofwhattheimpactoftheseamendmentsandnewstandardsisexpectedtobeintheperiodofinitialapplication.SofartheBankanditssubsidiarieshaveidentifiedsomeaspectsofthenewstandardswhichmayhaveasignificantimpactontheconsolidatedfinancialstatements.Furtherdetailsoftheexpectedimpactisdiscussedbelow.As theBankand itssubsidiarieshavenotcompleted itsassessment, further impactmaybeidentifiedinduecourseandwillbetakenintoconsiderationwhendeterminingwhethertoadoptanyofthesenewrequirementsbeforetheireffectivedateandwhichtransitionalapproachtotake,wheretherearealternativeapproachesallowedunderthenewstandards.



43 Possible impact of amendments, new standards and interpretations issued but not yet effective for the annual accounting period ended 31 December 2016 (continued)

HKFRS 9/IFRS 9, Financial instruments

HKFRS9/IFRS9willreplacethecurrentstandardonaccountingforfinancialinstruments,HKAS39/IAS39,Financialinstruments:Recognitionandmeasurement.HKFRS9/IFRS9introducesnewrequirementsforclassificationandmeasurementoffinancialassets,calculationofimpairmentoffinancialassetsandhedgeaccounting.Ontheotherhand,HKFRS9/IFRS9incorporateswithoutsubstantivechangestotherequirementsofHKAS39/IAS39 for recognitionandde-recognitionoffinancial instrumentsandtheclassificationoffinancialliabilities.

TheBankanditssubsidiariestakeactiveparticipationinthegloballylaunchedIFRS9programmeledbyitsultimateparentcompany,StandardCharteredPLC.TheprogrammeimplementationisjointlyrunbyFinanceandRiskandoverseenbyaProjectSteeringCommittee,whichcomprisesseniormanagementfromtheRisk,FinanceandTechnologydepartments.

TheexpectedimpactofthenewrequirementsontheBankanditssubsidiaries’consolidatedfinancialstatementsareasfollows:

(a) Classificationandmeasurement

HKFRS9/IFRS9containsthreeprincipalclassificationcategoriesforfinancialassets:measuredat(1)amortisedcost,(2)fairvaluethroughprofitorloss(FVTPL)and(3)fairvaluethroughothercomprehensiveincome(FVOCI)asfollows:

• Theclassificationfordebt instruments isdeterminedbasedontheentity’sbusinessmodel formanagingthefinancialassetsandthecontractualcashflowcharacteristicsoftheasset.IfadebtinstrumentisclassifiedasFVOCItheneffectiveinterest,impairmentsandgains/lossesondisposalwillberecognisedinprofitorloss.

• Forequitysecurities,theclassificationisFVTPLregardlessoftheentity’sbusinessmodel.TheonlyexceptionisiftheequitysecurityisnotheldfortradingandtheentityirrevocablyelectstodesignatethatsecurityasFVOCI.IfanequitysecurityisdesignatedasFVOCIthenonlydividendincomeonthatsecuritywillberecognisedinprofitorloss.Gains,lossesandimpairmentsonthatsecuritywillberecognisedinothercomprehensiveincomewithoutrecycling.

TheBankanditssubsidiarieshavecompletedaninitialassessmentofitsbusinessmodeland,wherethebusinessmodelis“holdtocollect”or“holdtocollectandsell”,havecompletedtheinitialanalysisofthecashflowcharacteristicsofproductswithinthoseportfolios.Inassessingthebusinessmodels,theBankanditssubsidiarieshaveconsidered,amongstotherfactors,whattheobjectiveofthebusinessis,howperformanceismanagedandhowstaffarerewarded.Inassessingthecashflowcharacteristicsofproducts,theBankanditssubsidiarieshavereviewedtheunderlyingcontractualtermstodeterminewhetherthecashflowaresolelypaymentsofprincipalandinterest.

TheBankand itssubsidiariesdonotcurrentlyanticipate that therewillbeamaterialchange in themeasurementclassificationunderHKFRS9/IFRS9comparedtoHKAS39/IAS39andthatthemajorityofloansandadvancestobanksandcustomerswillcontinuetobemeasuredatamortisedcost.DebtsecuritiesclassifiedasavailableforsalewillbeclassifiedeitherasFVOCIoramortisedcosts,dependingonthebusinessmodel.EquityinstrumentswillbeheldasFVTPL;theBankanditssubsidiariesarenotcurrentlyproposingtodesignateanyequityinstrumentsasFVOCI.



43 Possible impact of amendments, new standards and interpretations issued but not yet effective for the annual accounting period ended 31 December 2016 (continued)

(b) Impairment

ThenewimpairmentmodelinHKFRS9/IFRS9replacesthe“incurredloss”modelinHKAS39/IAS39withan“expectedcreditloss”(“ECL”)model.Undertheexpectedcreditlossmodel,itwillnolongerbenecessaryforalosseventtooccurbeforeanimpairmentlossisrecognised.Instead,anentityisrequiredtorecogniseandmeasureexpectedcreditlossesaseither12-monthexpectedcreditlossesorlifetimeexpectedcreditlosses,dependingontheassetandthefactsandcircumstances.Inordertomeetthenew requirements, the Bank and its subsidiaries have adopted use of sophisticated approach todeterminingexpectedcreditlossesthatmakeextensiveuseofcreditmodellingand/orbasedonhistoricalrollratesor lossrates.ThesophisticatedcreditmodelsthatareusedtoderiveECLhavethreemaincomponents–forward-lookingprobabilityofdefault,lossgivendefaultandexposureatdefault.ThisnewimpairmentmodelmayresultinanearlierrecognitionofcreditlossesontheBankanditssubsidiaries’financialassets thatarecarriedatamortisedcostandFVOCI.However,amoredetailedanalysis isrequiredtodeterminetheextentoftheimpact.

(c) Hedgeaccounting

HKFRS9/IFRS9doesnotfundamentallychangetherequirementsrelatingtomeasuringandrecognisingineffectivenessunderHKAS39/IAS39.However,greaterflexibilityhasbeenintroducedtothetypesoftransactionseligibleforhedgeaccounting.TheBankanditssubsidiaries’currentexpectationisthatitwillcontinuetoapplyexistinghedgeaccountingrequirementsinHKAS39/IAS39untilthereisfurtherclarificationonthe“macrohedgeaccounting”projectbytheHKICPA/IASB.



44 Statement of financial position as at 31 December 2016

2016 2015HK$’M HK$’M

Assets

Cashandbalanceswithbanks,centralbanksandotherfinancialinstitutions 15,289 48,763Placementswithbanksandotherfinancialinstitutions 156,744 119,648HongKongSARGovernmentcertificatesofindebtedness 42,211 38,031Tradingassets 15,634 18,597Financialassetsdesignatedatfairvalue 370 666Investmentsecurities 207,471 210,572Advancestocustomers 438,182 412,619Amountsduefromimmediateholdingcompany 45,569 29,749Amountsduefromfellowsubsidiaries 16,047 15,687AmountsduefromsubsidiariesoftheBank 40,445 39,684InvestmentsinsubsidiariesoftheBank 886 853Interestinassociates 3,168 3,570Property,plantandequipment 3,046 3,053Goodwillandintangibleassets 1,118 1,075Currenttaxassets 107 550Deferredtaxassets 268 306Otherassets 10,917 8,596

997,472 952,019

Liabilities

HongKongSARcurrencynotesincirculation 42,211 38,031Depositsandbalancesofbanksandotherfinancialinstitutions 19,674 24,655Depositsfromcustomers 778,242 745,701Tradingliabilities 8,289 8,847Financialliabilitiesdesignatedatfairvalue 9,568 13,724Debtsecuritiesinissue 2,173 1,209Amountsduetoimmediateholdingcompany 42,204 27,397Amountsduetofellowsubsidiaries 11,932 8,314AmountsduetosubsidiariesoftheBank 1,477 2,114Otherliabilities 18,233 14,332Subordinatedliabilities 6,088 10,093

940,091 894,417

Equity

Sharecapital 20,256 20,256Reserves 37,125 37,346

Shareholders’equity 57,381 57,602

997,472 952,019

ApprovedandauthorisedforissuebytheBoardofDirectorson24February2017.

Tan Siew Boi Ling Fou TsongDirector Director



45 Statement of changes in equity for the year ended 31 December 2016

Sharecapital

Cash flowhedge

reserve

Available-for-sale

investmentreserve

Retainedprofits

Shareoptionequity

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

At1January2015 20,256 51 255 36,461 319 57,342Totalcomprehensiveincome – (33) (332) 8,753 – 8,388Dividendpaid – – – (8,032) – (8,032)Movementinrespectofshare-based

compensationplans – – – – (96) (96)

At31December2015 20,256 18 (77) 37,182 223 57,602

Totalcomprehensiveincome – (210) (201) 6,707 – 6,296Dividendpaid – – – (6,392) – (6,392)Movementinrespectofshare-based

compensationplans – – – – (125) (125)

At31December2016 20,256 (192) (278) 37,497 98 57,381

Duringtheyearended31December2016,thedirectorshaddeclaredandpaidanordinarydividendofHK$3.17479(2015:HK$4.0214)pereach‘A’and‘B’ordinarysharetotallingHK$6,150million(2015:HK$7,790million).AtotaldividendofHK$242million(2015:HK$242million)waspaidinrespectoftheUS$500million6.25%perpetualnon-cumulativeconvertiblepreferencesharesclassifiedasequity.

46 Assets held for sale

TheBank’sinterestinoneoftheassociates,AsiaCommercialJointStockBankhasbeenpresentedasheldforsale.Thecompletiondateofthetransactionisexpectedtobewithin12monthsfromthedateofreclassification.

InaccordancewithHKFRS5/IFRS5,theinterestinassociateisclassifiedasheldforsaleandmeasuredatthelowerofitscarryingamountandfairvaluelesscosttosell.

Analysisoftheresultofassetsheld-for-saleisasfollows:

2016

HK$’M

(a) Shareoftheassociate’snetassetclassifiedasheldforsale(inclusiveofstockdividenddeclaredsubsequently,recognisedatfairvalueofHK$4million) 1,020

(b) Shareoftheassociate’sprofitsclassifiedasheldforsale 61(c) Cumulativecurrencytranslationmovementandotherreservesmovement

recognizedduringtheyearinothercomprehensiveincomerelatingtotheinterestinassociateheldforsale (12)

47 Comparative figures

Certaincomparativefigureshavebeenrestatedtoconformwiththecurrentyear’spresentation(seenote9).


Appendix I: 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)fortheyearended31December2016and31December2015areasfollows:

Analysis of remuneration split between fixed and variable compensation

2016 2015

SeniorManagement KeyPersonnel SeniorManagement KeyPersonnel

HK$’000 HK$’000 HK$’000 HK$’000

Fixedcompensation 21,686 47,125 22,383 24,502Variablecompensation–Upfrontcash 5,349 15,606 9,565 9,308–Upfrontshares 2,144 5,000 3,194 7,140–Deferredcash 1,110 3,102 1,055 4,159–Deferredshares: –Restrictedshares 1,829 2,686 6,843 13,744 –Performanceshares 13,792 18,960 – –

Total 45,910 92,479 43,040 58,853

Numberofstaffat31December 8 18 8 13


Appendix I: 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)

2016 2015


HK$’000 HK$’000 HK$’000 HK$’000

At1January 25,600 38,214 33,049 42,090Adjustedforrightsissue – – (4) (6)Awardedduringtheyear 16,731 24,748 7,899 17,903Paidoutduringtheyear (9,003) (7,599) (5,845) (8,602)Vestedandlapsedduringtheyear – – – (403)Notvestedduetoperformance

adjustment (3,690) (4,161) (4,503) (3,305)

At31December 29,638 51,202 30,596 47,677

Vestedduringtheyear 5,898 9,984 7,256 12,860

Analysis of total amount of outstanding deferred remuneration

2016 2015


HK$’000 HK$’000 HK$’000 HK$’000

At31December–Vested 3,226 10,518 6,089 7,246–Not-vested 26,412 40,684 24,507 40,431

29,638 51,202 30,596 47,677

At31December–Cash 2,396 5,703 1,287 7,205–Shares 27,242 45,499 29,309 40,472

29,638 51,202 30,596 47,677

Totalamountofremunerationexposedtoexpostexplicitand/orimplicitadjustments(note3)

– Deferredremuneration(outstanding) 29,638 51,202 30,596 47,677

– Retainedremuneration – 2,982 – –


Appendix I: 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

2016 2015


HK$’000 HK$’000 HK$’000 HK$’000

Totalamountofadjustmentsduringthefinancialyeardueto

–expostexplicitadjustments (3,690) (4,161) (4,503) (3,305) –expostimplicitadjustments 4,267 6,645 (8,928) (13,484)

Analysis of guaranteed bonuses, sign-on awards and severance payments during the year

2016 2015


HK$’000 HK$’000 HK$’000 HK$’000

Guaranteedbonusesawarded – – – –Sign-onawardsmade – – – –Severancepaymentsawarded

andmade – – 3,101 215Highestseverancepayments

awarded – – 2,210 215

Numberofbeneficiariesofguaranteedbonusesawarded – – – –

Numberofbeneficiariesofsign-onawardsmade – – – –

Numberofbeneficiariesofseverancepaymentsawardedandmade – – 2 1

Note 1: As defined in the CG-5 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 2016 differs from that of 2015 .

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


Appendix II: directors of the Bank’s subsidiaries

ThenamesofalldirectorswhohaveservedontheboardofthesubsidiariesoftheBankduringtheyearandupto24February2017:

* TANSiewBoi* LINGFouTsong AACHIVinod* SamiABDELKAFI* SanjeevAGRAWAL* NigelANTON StanBARNES* StephenJohnBARNHAM* GarryBURKE* PeterWilliamBURNETT* PaulStuartCHAMBERS CHANEricsonLapMing* CHENPoonisAnnie* CHEUNGWaiHing* CHEUNGYupFan* CHUNGByungHo* KieranCORR* ChristopherJohnDANIELS AndrewWilliamDAWSON CarlosRuizDELUZURIAGA* JamesDOLPHIN* JeremyEAST* JeanFERNANDES* FUNGAlanJoiLun* MichaelAndresGORRIZ SridharKANTHADAI HONSauYee,Kenneth* JonathanDaveyHOWARD HUIHelenS* GuyRolandISHERWOOD* KONGPikTung* NilsKristianKOVDAL* DineshKUMAR* LAIDarcyTat-Sze* LAIYanHong* LAMHuiYip* LAWHeungYee,Nita* LEEHoiKeung PatrickLEE LIMHanSiangPeter# TimLORD* MAIWaiLam* WilliamMCCALLUM* PeterMOYLAN PeterNAGLE* NGChauShingDantes* NGChiMing* MatthewAdamNORRIS* IvoLaurencePHILIPPS


Appendix II: directors of the Bank’s subsidiaries (continued)

* WayneRobertPORRITT* AmitKumarPURI PradeepRANA SanderJohanWillemSCHEEPENS MadhavSHANKAR# AllisonHelenSTRACHAN* SZETOHoYinJeffrey* AmitKishorchandraTANNA*^ TiaraLtd* SamVILO* WANGJamesYin* JimWANG* ZHANGXiaoLei

# Alternatedirector^ Corporatedirector* DirectorsservingtheBoardasat24February2017

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