HSBC SFH (France) Investor Presentation

Transcription

1 September 2015 HSBC SFH (France) Investor Presentation

2 Disclaimer This document is issued by HSBC SFH (France) SA ( HSBC SFH ). HSBC SFH is authorised and regulated by the Autorité du Contrôle Prudentiel et de Résolution ( ACPR ) and is a member of the HSBC Group of companies. The information contained in this document is derived from sources that have not been independently verified. Except in the case of fraudulent misrepresentation, no responsibility or liability is accepted by the Issuer or by any of its officers, employees, affiliates or agents in relation to the accuracy, completeness or sufficiency of any information contained herein or any other written or oral information made available by the Issuer in connection therewith or any data which any such information generates, or for any loss whatsoever arising from or in connection with the use of or reliance on this document and any such liability is expressly disclaimed. The Issuer gives no undertaking and is under no obligation to provide the recipient with access to any additional information or to update this document or to correct any inaccuracies in it which may become apparent, and it reserves the right, without giving reasons, at any time and in any respect to amend or terminate the proposal(s) described herein. HSBC SFH has recorded the Base Prospectus with the Autorité des Marchés Financiers ( AMF ). This Base Prospectus and the Supplement(s) will be published on the websites of (i) HSBC France ( and (ii) the AMF Your attention is drawn to the information contained in this Base Prospectus, including the risk factors described therein. You are solely responsible for making your own independent analysis of the characteristics and risks of the securities issued by HSBC SFH. Neither HSBC nor any of its affiliates are responsible for providing you with legal, tax, accounting or other specialist advice and you should make your own arrangements in respect of this accordingly. The issuance of and details contained in this document, which is not for public circulation, does not constitute an offer or solicitation for, or advice that you should enter into, the purchase or sale of any security, commodity or other investment product or investment agreement, or any other contract, agreement or structure whatsoever. This document and subsequent discussion may contain projection, forecast, estimate or other forward-looking statements, with respect to the financial condition, results of operations and business of the Group. These forward-looking statements represent the Group s expectations or beliefs concerning hypothetical performance under specified assumptions of events or conditions, which may include (but are not limited to) prepayment expectations, interest rates, collateral and volatility, future events or targets and involve known and unknown risks and uncertainty that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Any such projections, estimates, forecasts, targets, prospects, returns or other forward-looking statements are not a reliable indicator of future performance. The document may include figures related to past performance or simulated past performance (together past performance ). Past performance cannot be relied on as a guide to future performance. The Issuer disclaims any obligation to update their view of such risks and uncertainties or to publicly announce the result of any revisions to the forward-looking statements made herein, except where they would be required to do so under applicable law. This document is for the exclusive use of the person to whom it is provided by HSBC, and is intended for the use of clients who are professional clients or eligible counterparties, as provided in MiFID (Directive 2004/39/EC) only, and is not intended for retail clients. The recipient agrees to keep confidential at all times this document and information contained in it or made available by HSBC in connection with it. This document is intended to be distributed in its entirety. Reproduction of this document, in whole or in part, or disclosure of any of its contents, without the prior consent of HSBC or any associate, is prohibited. Unless governing law permits otherwise, you must contact a HSBC Group member in your home jurisdiction if you wish to use HSBC Group services in effecting a transaction in any investment mentioned in this document. HSBC SFH (France) Société Anonyme au capital social de euros 15, rue Vernet, Paris RCS Paris Member HSBC Group 2

3 Table of Contents 1 Executive summary 2 HSBC Holdings 3 HSBC France 4 French Home Loan Market 5 HSBC SFH (France) within the SFH legal framework 6 Conclusion Appendices I Covered Bond Programme Structure II Supplementary information III Contacts 3

4 Section 1 Executive summary

5 Executive summary Overview HSBC France HSBC France is one of the HSBC Group s principal banking operations in Europe Senior unsecured debt ratings of AA- (stable) by S&P, A2 (stable) by Moody s, and AA- (stable) by Fitch 1 Strong Global Banking and Markets platforms and substantial Commercial Banking operations Retail focus on affluent and high net worth individuals HSBC SFH (France) (the Issuer ) A specialised credit institution licensed as a Société de Financement de l'habitat and regulated by the European Central Bank (ECB) and the Autorité de Contrôle Prudentiel et de Résolution (ACPR) Full recourse obligation of the Issuer against HSBC France AAA/Aaa rated issuances by S&P and Moody s 1 Covered bonds issued under Obligations de Financement de l'habitat ( OH ) legal framework ECBC Covered Bond Label and Capital Requirements Regulation (CRR) compliant Current Cover Pool Prime residential mortgages and Crédit Logement guaranteed home loans 100% originated by HSBC France 100% income verification Current weighted average LTV of 68.7%; weighted average indexed LTV of 68.3%; weighted average seasoning of 39 months (as of 30 th June 2015) 1. As of 30 June

6 Executive summary Highlights Programme terms Current cover pool 1 Issuer HSBC SFH (France) Pool Notional EUR6.8bn Programme size EUR8.0bn Collateral 100% prime home loans Ratings AAA/Aaa (S&P/Moody s) 2 Number of Loans 47.9k loans Maximum LTV Minimum Contractual overcollateralisation 80% 108.1% Average Loan Balance Max Loan Amount EUR142k EUR1m Currency Specific Controller Asset Monitor Listing Any Cailliau Dedouit & Associés KPMG Audit plc Euronext Paris for the OH Breakdown Weighted Average Seasoning Weighted Average Remaining Term 85% Crédit Logement, 15% Mortgages 39 months 164 months Law French Ability to issue German law governed Namensschuldverschreibungen Weighted Average Current LTV Weighted Average Indexed LTV 68.7% 68.3% 1. HSBC SFH Investor Report, Selection on 30 June As of 30 June

7 Section 2 HSBC Holdings

8 HSBC Holdings Group Strategy Actions to capture value from our global presence in a changed world 1 1. Reduce Group RWA by at least 25% and re-deploy towards higher performing businesses; return GB&M to Group target profitability 2 2. Sell operations in Turkey and Brazil 1 ; continued application of six filter process Group financial targets ROE >10% 3. Rebuild NAFTA profitability 4. Set up UK Ring-Fenced Bank 5. Realise USD4.5-5bn cost savings, deliver flat costs by end Deliver growth above GDP from international network Jaws Positive (adjusted 2, excluding cost to achieve) 7 7. Capture growth opportunities in Asia: Pearl River Delta, ASEAN, Asset Management, Insurance Dividend Progressive 3 8. Extend leadership in RMB internationalisation 9. Complete Global Standards implementation 10 Complete Headquarters review by end of Plan to maintain a presence in Brazil to serve large corporate clients with respect to their international needs 2. Excludes currency translation and significant items; excluding cost to achieve 3. Progression of dividends should be consistent with the growth of the overall profitability of the Group and is predicated on the ability to meet all capital requirements in a timely manner 8

9 HSBC Holdings Fixed Income Overview Conservative Balance Sheet 1 30 June 2015 Trading Assets 4 Assets Insurance Derivatives Reverse Repos 3,4 Derivatives Repos Trading liabilities 6 Other 6 Total USD2.6trn Equity Debt securities 5 Assets managed by Balance Sheet Management 2 Liabilities and equity Other 4 Customer accounts 1. Source: HSBC Holdings plc Interim Report These primarily include financial investments, cash and balances at central banks and reverse repurchase agreements non-trading 3. Reverse repurchase agreements non-trading. Excludes agreements managed by Balance Sheet Management 4. Excludes some assets managed by Balance Sheet Management. Excludes Insurance in Other 5. Includes all financial liabilities designated at fair value and subordinated liabilities 6. Excludes Debt securities in issue Loans to customers 4 9

10 HSBC Holdings Fixed income overview Simplified structure chart Principal entities in Priority growth markets 1 HSBC Holdings plc UK Holding company Intermediate holding company Operating company HSBC Latin America Holdings (UK) Limited HSBC Latin America BV 99% HSBC Overseas Holdings (UK) Limited HSBC Bank Canada HSBC Bank plc UK HSBC Private Banking Holdings (Suisse) S.A. HSBC Bank Egypt S.A.E. 94% HSBC Holdings BV Associate HSBC Bank Argentina S.A. HSBC North America Holdings Inc. HSBC Private Bank (Suisse) S.A. The Saudi British Bank 40% HSBC Bank Brasil S.A. HSBC Investments (North America) Inc. HSBC Finance Corporation USA 99% HSBC France HSBC Bank Middle East Limited HSBC Asia Holdings (UK) Limited The Hongkong and Shanghai Banking Corporation Ltd HK HSBC Bank (China) Co. Limited 99% HSBC Mexico SA HSBC Securities (USA) Inc. 80% HSBC Trinkaus & Burkhardt AG HSBC Bank Malaysia Berhad HSBC Bank (Taiwan) Limited HSBC USA Inc. HSBC Bank USA, N.A. Germany HSBC Bank A.S. Turkey HSBC Bank Australia Limited 62% 19% Bank of Communications Co Limited PRC Hang Seng Bank Limited Hang Seng Bank (China) Limited HK Latin America North America Europe MENA 2 Asia 1. At 31 December All entities wholly owned unless shown otherwise (part ownership rounded down to nearest per cent). Excludes other Associates, Insurance companies and Special Purpose Entities 2. Middle East and North Africa 10

11 HSBC Holdings Fixed income overview Management estimate of required CET1 ratio in 2019 of 12-13% 2019 end-point basis Common Equity Tier 1 ratio, Pillar 2A and buffers 1 % CET1 CRD IV minimum 4.5 Regulatory requirements Emerging clarity on broad regulatory agenda Pillar 2 and other capital buffers Pillar 2A Pillar 2A subject to change over time; PRA revised framework will apply from 1 Jan 2016 Leverage ratio Revised Counterparty Credit Risk Standardised and Securitisation framework Capital Conservation Buffer 2.5 Countercyclical Capital Buffer (CCyB) and other macroprudential requirements Ring-fencing and Bank Structural Reform G-SII Hong Kong CCyB rate of 0.625% from January 2016, possibly up to 2.5% over time Sectoral Capital Requirements Certain regulatory uncertainty and headwinds remain Other regulatory and management buffer Management estimate of CET1 requirement (end-point basis) Pillar 2B / PRA buffer 4 generally allowed to be offset by Capital Conservation and G-SII buffers with potential residual subjective charge 11.6% 10.6% Known and quantifiable CET1% requirement (end-point) HSBC CET1 ratio as at 1H15 (end-point) Basel revisions to the RWA framework Capital floors and other macroprudential measures TLAC and G-SIB ongoing developments For footnotes refer to Appendix II 11

12 HSBC Holdings Fixed income overview TLAC requirements 1 Group PRA basis RWA mix by resolution entity (including Associates) 3 The Hongkong and Shanghai Banking Corporation Limited HSBC Bank plc c.80% Subsidiary proforma TLAC as a proportion of RWAs, with shortfalls to 21% and 25% 2 %, USDbn Potential shortfall, USDbn Senior debt % % 5.4% 25% 21% Under an MPE resolution strategy TLAC will be applied to subsidiary resolution entities based on local RWAs TLAC is subject to future capital and RWA developments HSBC USA Inc. Local regulatory capital 13.8% 15.7% 15.8% Existing senior debt would need to be refinanced to be TLAC compliant Other entities HSBC Group c.20% 4 Local RWAs, USDbn HSBC The Hongkong Bank plc and Shanghai Banking Corporation Limited HSBC USA Inc Cost of compliance (at the lower end of the 21-25% range) estimated to be USD m p.a. 5 For footnotes, refer to Appendix II Note: 21% / 25% correspond to TLAC requirements of 16% / 20% + 5% (Systemic and Capital Conservation Buffers) 12

13 HSBC Holdings Financial performance 1H15 Financial highlights Financial highlights USDbn 1H14 2H14 1H15 1H15 vs. 1H14 1H15 vs. 2H14 Reported PBT Adjusted 1 PBT H14 2H14 1H15 Target (if applicable) Return on average ordinary shareholders equity % 4.0% 10.6% > 10% Return on average tangible equity % 4.7% 12.0% n/a Jaws (adjusted) - - (2.9)% Positive Advances to deposits ratio 74.0% 72.2% 71.4% n/a Common equity tier 1 ratio (end point basis) 11.3% 11.1% 11.6% n/a 1. Excludes currency translation and significant items 2. Return on average ordinary shareholders equity (ROE) and Return on average tangible equity (ROTE) are calculated on an annualised basis 13

14 HSBC Holdings Financial Performance Reported to Adjusted Currency translation and significant items USDm 1H14 2H14 1H15 Currency translation Significant items: Revenue (Loss) / gain on sale of several tranches of real estate secured accounts in the US (15) Gain on the partial sale of shareholding in Industrial Bank - - 1,372 Favourable / (adverse) debit valuation adjustment on derivative contracts (155) (177) 165 Adverse fair value movements on non-qualifying hedges (322) (219) (45) (Provisions) / releases arising from the ongoing review of compliance with the Consumer Credit Act in the UK (367) (265) 12 Own credit spread (215) Gain on sale of shareholding in Bank of Shanghai Impairment of our investment in Industrial Bank - (271) - Acquisition, disposals and dilutions 31 (22) - (615) (139) 2,171 Loan impairment charges and other credit risk provisions (2) 2 - Operating expenses Charge in relation to settlement agreement with Federal Housing Finance Authority - (550) - Regulatory provisions in GPB - (65) (147) Settlements and provisions in connection with legal matters - (1,187) (1,144) UK customer redress programmes (234) (1,041) (137) Restructuring and other related costs (82) (196) (117) Acquisition, disposals and dilutions (35) (5) - (351) (3,044) (1,545) Currency translation and significant items (382) (3,047)

15 HSBC Holdings Financial performance Capital Adequacy Strong capital base with a common equity tier 1 ratio of 11.6% CRD IV End-point 1 Common equity tier 1 ratio movement Movement in common equity tier 1 capital % USDbn At 31 December Capital generation from profit 5.6 Profit for the period (including regulatory adjustments) of which USD1.4bn gain on the partial sale of our 8.2 shareholding in Industrial Bank including fair value gains reclassified to the income statement Dividends net of scrip 2,3 (0.7) Second interim dividend 2 (net of planned scrip) (1.9) Partial sale of shareholding in Industrial Bank including fair value gains reclassified to the income statement and lower allowable non-controlling interests (3.6) Foreign currency translation differences (1.8) Other movements 1.9 At 30 June Movement in RWAs USDbn At December ,220 Regulatory changes 6 RWA initiatives (50) Business growth 22 Movement in associates 8 Foreign currency translation differences (14) Other movements 1 At 30 June , Dec 2014 Profit for the period net of dividends 4 RWA initiatives (excl. partial sale of Industrial Bank) Partial sale of Industrial Bank Business growth Movements Regulatory Other in associates changes movements and foreign currency translation differences 30 June From 1 January 2015 the CRD IV transitional CET1 and end-point CET1 capital ratios became aligned for HSBC Holdings plc due to recognition of unrealised gains on investment property and available-for-sale securities 2. This includes dividends on ordinary shares, quarterly dividends on preference shares and coupons on capital securities, classified as equity 3. Dividends net of scrip are in respect of the 2015 first interim dividend and an update for a higher 2014 fourth interim dividend scrip take-up in excess of plan 4. Including regulatory adjustments and excluding the gain on partial sale of Industrial Bank separately disclosed 15

16 Section 3 HSBC France

17 HSBC France France within the HSBC Group A Long-Standing Actor on the French Market Organised around Four Global Businesses 1894 The Banque Suisse et Française (BSF) is founded, which will become the Crédit Commercial de France (CCF) 1987 CCF is privatised 2000 CCF joins the HSBC Group 2008 HSBC France disposes of its regional banking subsidiaries 2009 HSBC France absorbs its remaining retail banking subsidiaries 2011 HSBC Private Bank France merges with HSBC France RBWM CMB GBM GPB Retail Banking and Wealth Management: Personal Financial Services, Asset Management and Insurance activities Commercial Banking: banking products and services for businesses Global Banking and Markets: banking and market support for large corporates, institutional investors and governments Global Private Banking 2013 HSBC France acquires HSBC Assurances Vie (France) HSBC France is given high credit ratings by all major rating agencies 1 AA- (stable) by S&P A2 (stable) by Moody s AA- (stable) by Fitch and Differentiated through Specific Positioning Wholly-owned by a UK-regulated entity: HSBC Bank plc One of the Priority Markets for the HSBC Group Acting as the HSBC Group s Global Markets centre of excellence in euro rate products and equity derivatives Positioned as the largest foreign bank on the French market A strategy focused on Wealth retail customers, international SMEs and MMEs and Large Corporates 1. As of 30 June

18 HSBC France Financial results Consolidated Statement of Income Reported revenues EURm, as of H Revenues 1,366 Loan Impairment Charges (52) Operating Expenses (834) Profit Before Taxes 480 Increase in Reported Results as well as in adjusted results excluding volatile items (NQH, credit spread, DVA) ,200 1,400 RBWM Customers Loans and Advances EURbn 1 +5% Rise in loans balances, esp. in RBWM home loans June 2014 June 2015 Source: HSBC France Reference Document H On a reported basis / legal perimeter 18

19 HSBC France Position in France and retail approach A personal banking (RBWM) business focused on mass affluent clients HSBC RBWM France current Footprint versus Premium market potential ~835,000 customers 1 ~400,000 HSBC Premier customers 1 (i.e. high net worth segment), increasing from 2013 Retail network oriented to the main urban centres in France Product offering and distribution aligned with customer segments Structured approach for wealth management advice and dedicated Premier centres Training and accreditation levels of Premier customer advisers Structured products, optimization products and advice Tailoring to internationally-minded customers (for instance: integrated online banking with other HSBC entities around the world) 1. Source: HSBC France Reference Document 2014 HSBC branches Premium market potential France communes 0 to to to to 1,000 1,

20 HSBC France Funding strategy Motivation for Covered Bonds Issuance HSBC SFH Covered Bonds Balance at Year Ends 1 Fund asset growth Refinance maturing debt EUR bn, as at 30 June EUR CHF Manage Asset and Liabilities profile Diversify investor base Reduce overall cost of funds Current Covered Bonds Issuance Strategy Mainly public benchmark series on various medium and long term maturities HSBC SFH Covered Bonds Redemption Profile 1 EUR bn, as at 30 June 2015 Hard Bullet Soft Bullet Issuance mainly in EUR denominated units, with the ability to issue in other major currencies Hard or soft bullets Source: HSBC SFH Investor Web Site (see appendix 2) 20

21 Section 4 French Home Loan Market

22 French Home Loan Market French Home Loan Market Typical Loan Characteristics French Market Home Loan Security Type 1 Fixed rate for the entire length of the home loan Fully amortising, not re-advanceable Underwriting criteria primarily based on the creditworthiness of the borrower Compulsory life and disability insurance Institutional guarantees available in addition to traditional mortgages Low delinquency Regulated product environment Mortgage 2 Guarantee 2 Other % 35.0% 35.7% 35.4% 34.7% 50.3% 51.2% 51.2% 51.6% 52.7% 14.7% 13.9% 13.1% 13.0% 12.6% French Market Home Loan Interest Rate Production in % Fixed rate Floating rate and other Average Loss 3 on Home Loans French Market % 0.69% 0.49% 0.42% 0.53% 0.37% 0.36% 0.37% 0.41% 0.37% 0.38% 0.42% 0.47% 92% 1. Source: Annual study of the French Autorité de Contrôle Prudentiel et de Résolution on Home loans Mortgage: 1 st lien mortgage Guarantee: Commitment to bear the credit risk provided by a credit institution or an insurance company Other: Other types of security (eg. pledge of securities portfolio) and no security 3. Ratio of doubtful home loans multiplied by the loan loss provision rate

23 French Home Loan Market French Home Loan Market Market dynamics Production and Outstanding Balance of Home Loans 1 Home prices continued their slow correction with a decrease by -2.4% during 2014, after a -1.9% decrease in This France-wide average results from a slower reduction in Paris (-2.2%) and its region (-2.0%) than in the rest of France The outstanding balance of French home financing grew by +2.4% to EUR802bn as of end of New lending fell to EUR122bn (vs. EUR141bn in 2013) 2, driven by a decrease in the number of home purchase transactions (-3.5% in 2014) Production Outstanding The credit risk increased slightly with LICs observed on average at 0.09% of outstanding loan balances in French Home Price Index (base 100 in 2008 Q1) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q Source: Annual study of the French Autorité de Contrôle Prudentiel et de Résolution on Home loans Source: INSEE Indice de prix des notaires (notary index on home prices) 23

24 French Home Loan Market French Home Loan Market Specificity of the French Home Loan Market Guaranteed Home Loans Home loans which are secured by a guarantee provided either by a selected financial institution or a selected insurance company represent the majority of the French home loan market (52.7% of outstanding home loans in and 58.7% of the 2014 production 2 ) There are various reasons for the popularity of guaranteed home loans in France From the borrower's perspective Lower costs: mortgage registration costs are in general between 2.2% and 2.5% vs. a below 1% home loan guarantee fee The administrative process is simplified at loan inception and maturity Up to 75% of the guarantee fee is paid back to the borrower at maturity, if there is no payment incident during the life of the loan From the lender's perspective Mainly used for well known customers, low risk loans and loans below EUR1m The lending bank may call the guarantee after three unpaid instalments and is immediately fully indemnified by the guarantor The recovery process is then fully managed by the guarantor The administrative process is simplified at signing of the loan and at maturity of the loan 1. Source: Annual study of the French Autorité de Contrôle Prudentiel et de Résolution on Home loans Annual Report Crédit Logement

25 French Home Loan Market Crédit Logement Crédit Logement is a major partner in the French home loan guarantee market Security agreements are the most popular residential guarantee on the French housing market with 58.7% 1 market share of 2014 guaranteed loan production Crédit Logement has a strong market presence Crédit Logement is a financial institution specialised in guarantees of residential property loans originated by banks Crédit Logement has guaranteed loans for more than 35 years In 2014, its market share was stable at c.30% 3 of the total French residential property market (excl. renegotiations). On 31 December 2014, it had a portfolio of outstanding guarantees of EUR254.3bn 1 on three million loans 1 Crédit Logement maintains its credit strength Shareholder funds of EUR7.0bn, including EUR4.1bn of mutual guarantee funds (MGF) 1 Long-term rating of Aa3 (stable) by Moody's and of AA (negative) by DBRS 2 Equity participation from all the major French banks Shareholders commitment to rebuild capital in proportion to their share if ever necessary Crédit Logement brings value to its customers Administratively and financially advantageous for HSBC and its customers Pays out a guaranteed loan within one month of loan default Crédit Logement Average Probability of Default % 0.40% 0.30% 0.30% 0.30% 0.26% 0.25% 0.24% 0.20% 0.20% 0.20% Crédit Logement Shareholders 1 % 33.0% 3.0% 6.0% 9.5% 15.5% HSBC France Banque Postale Crédit Mutuel/CIC BPCE/Crédit Foncier Société Générale BNP Paribas Crédit Agricole/LCL % 16.5% 1. Annual Report Crédit Logement Source: Bloomberg on 30 th June Guarantees enforced in 2014 (Annual Report Crédit Logement 2014) / New lending in 2014 (Annual study of the French Autorité de Contrôle Prudentiel et de Résolution on Home loans 2014) 25

26 Section 5 - HSBC SFH (France)

27 HSBC SFH (France) Main characteristics of the programme HSBC SFH (France) is a specialised credit institution licensed as a Société de Financement de l'habitat and is regulated by the European Central Bank (ECB) and the Autorité de Contrôle Prudentiel et de Résolution (ACPR - French financial regulator). All covered bonds issued by HSBC SFH (France) are Obligations de Financement de l Habitat (OH) and benefit from the Privilege created by the Art. L of the French Monetary and Financial Code (FMFC) A Specific Controller (Cailliau Dedouit & Associés) monitors the Issuer on a monthly basis and ensures that all regulatory and legal constraints are complied with. The Specific Controller also performs on an annual basis an audit of the cover pool Minimum legal overcollateralisation of 5% under the legal coverage ratio and 180-day legal liquidity coverage Minimum contractual overcollateralization of 8.1% Cover pool composed of 100% French prime home loans originated by HSBC France (1st lien mortgages or Crédit Logement guaranteed) Strong credit ratings: AAA (S&P) / Aaa (Moody s) OH fully complies with: The UCITS Directive (in particular with the dispositions of Article 52-4, i.e. requirement of a specific legal framework) ECBC Covered Bond Label criteria CRR preferential treatment 1 criteria (public series) and underlying assets criteria 1. The issuer believes that, at the time of its issuance and based on transparency data made publicly available by the issuer, these covered bonds would satisfy the eligibility criteria for Article 129(7) of the Capital Requirements Regulation (EU) 648/2012. It should be noted, however, that whether or not exposures in the form of covered bonds are eligible to preferential treatment under Regulation (EU) 648/2012 is ultimately a matter to be determined by a relevant investor institution and its relevant supervisory authority and the issuer does not accept any responsibility in this regard 27

28 HSBC SFH (France) Main characteristics of the programme HSBC France Borrower Administrator Issuer Calculation Agent Collateral Security Borrower Advances to HSBC France Loan Receivables HSBC SFH (France) The Issuer Covered Bonds Cash Investors 28

29 HSBC SFH (France) Cover pool statistics 1 Pool Notional EUR 6.8bn Regional Distribution 1 Greater Paris Collateral 100% prime home loans 11.6% North East North West South East Number of Loans 47.9k loans 19.7% South West 52.9% Average Loan Balance EUR 142k 8.0% Max Loan Amount EUR1m 7.8% Weighted Average Seasoning 39 months Security Type Distribution 1 Weighted Average Remaining Term 164 months Crédit Logement Mortgage Weighted Average Current LTV 68.7% 84.7% 15.3% Weighted Average Indexed LTV 68.3% 1. HSBC SFH Investor Report, Selection on 30 June 2015 Greater Paris = Ile-de-France North East = Alsace, Bourgogne, Champagne-Ardenne, Franche-Comté, Lorraine, Nord-Pas-de-Calais North West = Basse-Normandie, Bretagne, Haute-Normandie, Pays-de-la-Loire, Picardie South East = Auvergne, Corse, Limousin, Provence-Alpes-Côte d'azur, Rhône-Alpes, South West = Aquitaine, Centre, Languedoc-Roussillon, Midi-Pyrénées, Poitou-Charentes 29

30 Section 6 Conclusions

31 Conclusions AAA investment in HSBC France Issuer fully regulated by the Autorité de Contrôle Prudentiel et de Résolution with the status of SFH Full recourse to HSBC France Secured by prime French residential home loans originated by HSBC France All home loans either guaranteed by Crédit Logement or secured by a first lien mortgage 31

32 Appendix I: Covered Bond Programme Structure

33 Appendix I: Covered Bond Programme Structure Legal features To ensure insolvency protection and security enforcement in case of bankruptcy of HSBC France, the Covered Bond Programme relies on the legal framework of the Sociétés de Crédit Foncier (SCF) (articles L513-2 to L of the FMFC) and of the Sociétés de Financement de l Habitat (SFH) (articles L to L of the FMFC) and the use of the collateral provisions of the articles L to L of the FMFC where asset segregation is provided without having to transfer the assets off balance sheet To ensure the bankruptcy-remoteness of the issuer, HSBC SFH (France) is a specialized credit institution whose sole activity is to provide HSBC France with funding by issuing covered bonds 33

34 Appendix I: Covered Bond Programme Structure Key features of the SFH legal framework Key provisions of SFH law Requirement to cover all liquidity needs for the next 180 day period on an ongoing basis Minimum 5% legal overcollateralisation of the cover assets Possibility for the issuers to use up to 10% of outstanding issued covered bonds for direct repo operations with ECB Guaranteed home loans: The rating of the guarantor directly impacts the weighting of such home loans in the cover pool valuation Guaranteed home loans secured by an "internal guarantee (i.e. when the guarantor is at least 20% owned by the sponsor bank) are applied an additional 20% weighting haircut OH investors benefit from the Privilege (statutory priority right of payment) over all the assets and revenues of the Issuer Guarantor Rating External Guarantor OH are subject to strict criteria in terms of asset eligibility, supervision, control and license requirements Internal Guarantor A- 100% 80% BBB- and BBB+ 80% 60% < BBB- or not rated 0% 0% The control over cover pool assets and guarantors are further tightened under the OH regime with the appointment of the specific controller, who publishes a yearly report to the Directors of HSBC SFH (France) on (i) the governance of the issuer, (ii) its ALM procedures, (iii) the eligibility of cover assets and (iv) the compliance with any other aspects of the law. This report is directly sent by the specific controller to the regulator. Moreover, the specific controller must certify any regulatory reporting sent to ACPR 34

35 Appendix I: Covered Bond Programme Structure Asset cover test The Asset Cover Test (ACT) is designed to ensure that the collateral constituted by home loans, cash and other collateral is able to meet the future cash flows (interest and principal) on the covered bonds (performed monthly by the calculation agent) Asset Cover Ratio = Adjusted Aggregate Asset Amount Aggregate Covered Bond Outstanding Principal Amount 1 Whereby Lower of: Adjusted Aggregate Asset Amount = Adjusted Home Loan Outstanding Principal Amount And (Sum of all Unadjusted Home Loan Outstanding Principal Amounts Applicable Deemed reductions) X Less Asset Percentage Plus Cash + Aggregate Eligible Substitution Assets Amount + Aggregate Value of Permitted Investments Less Zero Or Potential financing costs of the swap Plus Weighted Average Maturity x Covered Bond Outstanding Principal Amount x Carrying Cost Note: Please refer to section Asset Monitoring of the prospectus for the detailed definitions 35

36 Appendix I: Covered Bond Programme Structure Amortisation test The Amortisation Test is designed to ensure that the Issuer has the capacity to meet its commitments following the enforcement of the Borrower Event of Default. Compliance with the Amortisation Test requires compliance with the Amortisation Ratio (RA) Amortisation Ratio = Transferred Aggregate Asset Amount Aggregate Covered Bond Outstanding Principal Amount 1 Whereby Sum of all: Transferred Aggregate Asset Amount = Transferred Home Loan Outstanding Principal Amount 1 X M (M=1 if loan less than 3 months in arrears; M=0.7 if loan 3 months or more in arrears) Plus Cash + Aggregate Eligible Substitution Assets Amount + Aggregate Value of Permitted Investments Less Weighted Average Maturity x Covered Bond Outstanding Principal Amount x Carrying Cost 2 1. All Home Loans title to which has been transferred to the Issuer upon enforcement of the Borrower Collateral Security following the enforcement of a Borrower Event of Default 2. Please refer to section Asset Monitoring of the prospectus for the detailed definitions 36

37 Appendix I: Covered Bond Programme Structure Hedging strategies Before a default event, the Issuer is not exposed to any risk of an interest or currency rate mismatch arising between the payments received on the Borrower Advances and the payments to be made under the Covered Bonds Upon the occurrence of a Hedging Rating Trigger Event, the Issuer will enter into Hedging Agreements Issuer Hedging Agreements Derivative agreement(s) concluded by the Issuer with Eligible Hedging Providers (Issuer Hedging Agreements) to hedge any currency and interest rate mismatch between the Covered Bonds and the Cover Pool Borrower Hedging Agreement Derivative agreement concluded by the Issuer with HSBC France (Borrower Hedging Agreement) to hedge mismatches between the Cover Pool and Borrower Advances Hedging Rating Trigger Event means the event in which the senior unsecured, unsubordinated and unguaranteed debt obligations of HSBC France become rated below A (long term) by S&P or P1 (short term) or A2 (long term) by Moody s Upon the occurrence of a Borrower Event of Default, and the subsequent transfer in favour of the Issuer of title to the Home Loans, the Issuer will: Maintain its rights and obligations under the existing Issuer Hedging Agreements Terminate immediately the Borrower Hedging Agreements 37

38 Appendix I: Covered Bond Programme Structure Structural highlights Pre-Maturity Test Designed to ensure that the Borrower can provide sufficient liquidity in case of a downgrade If, 270 days before the maturity of any series of hard bullet Covered Bonds, the Borrower s rating is below A (long term) by S&P or P-1 (short term) by Moody s, the Borrower must fund the cash collateral account to a sufficient level calculated by the Issuer Security agent as the Covered Bond Principal Amount + Costs A non-compliance with the Pre-Maturity Test will prevent the Issuer from issuing any further series of Covered Bonds as long as it remains un-remedied. A failure to fund the cash collateral account to the required level within 30 calendar days of receipt of a notice of non-compliance will result in a Borrower Event of Default Liquidity Support Monthly payment under the Covered Bond Swap after the occurrence of the Hedging Rating Trigger Event Funds held by the highly rated Covered Bond Swap provider until the annual payment of interest Accounts Agreement HSBC France provides bank accounts to the Issuer as long as it is an eligible bank for the rating agencies Asset Servicing HSBC France will perform the Asset Servicing and will provide HSBC SFH (France) with Asset Reporting HSBC SFH (France) will use reasonable effort to enter into a master servicing agreement with an eligible servicer if HSBC France is downgraded below BBB by S&P or Baa2 by Moody s Commingling Risk A cash collateral reserve will be placed under a specific account (the Collection Loss Reserve Account ) in case of downgrade of HSBC France below BBB (long term) by S&P or P-1(short term) by Moody s 38

39 Appendix I: Covered Bond Programme Structure Key events Borrower event of default The occurrence of any of the following events will constitute a Borrower Event of Default Default in the payment of principal or interest on any Borrower Facility not remedied within 3 business days after the due date Breach of Pre-Maturity Test Breach of Asset Cover Test Breach of Collection Loss Reserve Funding requirement Any material representation or warranties made by the Borrower is incorrect in any material aspect Failure to comply with any of the Borrower s material obligations Occurrence of Insolvency Event Any of the Borrower s material obligations becomes unlawful or ceases to be legal, valid and binding Failure to enter into any Hedging Agreement within 30 days following a Hedging Rating Trigger Event A Borrower Event of Default will result in a Borrower Enforcement Notice No further Borrower advances shall be available Borrower advances become due and payable Enforcement of the Borrower Facility with a transfer of assets to the Issuer 39

40 Appendix I: Covered Bond Programme Structure Key events Issuer event of default The occurrence of any of the following events will constitute an Issuer Event of Default Breach of Amortisation Test Default in the payment of principal or interest on any Covered Bond not remedied within 5 business days after the due date Default in the performance or observance of any of its other material obligations not remedied within 30 days after receipt by Fiscal Agent Covered Bonds Cross Acceleration Event Order made for the liquidation or winding up the Issuer Occurrence of Insolvency Event The Issuer ceases to carry on all or a material part of business Failure to enter into any Hedging Agreement within 30 days following a Hedging Rating Trigger Event An Issuer Event of Default will result in an Issuer Enforcement Notice An Issuer Enforcement Notice causes the principal amount of all Covered Bonds of such Series to become due and payable, subject to the relevant Payment Priority Order 40

41 Appendix I: Covered Bond Programme Structure Key events No further issuance The Issuer undertakes not to issue any new Covered Bonds under the Programme As from the date a Borrower Enforcement Notice has been served As from the date an Issuer Enforcement Notice has been served For so long as Non-Compliance with Asset Cover Test has occurred and is not remedied For so long as Non-Compliance with Amortization Test has occurred and is not remedied For so long as, regarding the Pre-Maturity Test and the Legal Liquidity Test, a Non-Compliance Notice has been delivered and is not withdrawn 41

42 Appendix I: Covered Bond Programme Structure Cash flow priorities Pre-Enforcement Priority Payment Order Controlled Post-Enforcement Priority Payment Order Accelerated Post-Enforcement Priority Payment Order Prior to any enforcement notice being served In the event of service by the Issuer to the Borrower of a Borrower Enforcement Notice An Issuer Event of Default will result in an Issuer Enforcement Notice and an Accelerated Post-Enforcement Priority Payment Order 1. Hedging Costs, if any, (other than Hedging Termination Costs) 2. Interest amounts due on the Covered Bonds 3. Principal amounts due on the Covered Bonds 4. Hedging Termination costs, if any 5. Fees due and payable to the Administrator and the Servicer 6. Amounts due and payable to the Cash Collateral Provider 7. Other administrative and tax costs 8. Dividend to the Issuer s shareholders and any payment under the subordinated loan 1. Hedging Costs, if any, (other than Hedging Termination Costs) 2. Interest amounts due on the Covered Bonds 3. Principal amounts due on the Covered Bonds 4. Hedging Termination costs (only after full repayment of any outstanding Covered Bonds) 5. Fees due and payable to the Administrator and the Servicer 6. Amounts due and payable to the Cash Collateral Provider 7. Other administrative and tax costs 8. Subject to full repayment of any outstanding Covered Bonds, distribution of remaining enforcement proceeds to the Borrower and payment of dividend to the Issuer s shareholders and any payment under the subordinated loan 1. Hedging Costs, if any, (other than Hedging Termination Costs) 2. Interest amounts due on the Covered Bonds 3. All principal outstanding amounts under the Covered Bonds 4. Hedging Termination costs (only after full repayment of any outstanding Covered Bonds) 5. Fees due and payable to the Administrator and the Servicer 6. Amounts due and payable to the Cash Collateral Provider 7. Other administrative and tax costs 8. Subject to full repayment of any outstanding Covered Bonds, distribution of remaining enforcement proceeds to the Borrower and payment of dividend to the Issuer s shareholders and any payment under the subordinated loan To be paid on any Payment Date In the event of service by the Issuer Instruction to pay to be given within three business days of receipt of Issuer Enforcement Notice 42

43 Appendix I: Covered Bond Programme Structure Home loan eligibility criteria a. All lending criteria and conditions precedent as applied by the originator of the Home Loan pursuant to its customary lending procedures were satisfied b. The purpose of the Home Loan is either to buy, to renovate, to build or to refinance a residential real estate property c. The underlying property is located in France d. The Home Loan is governed by French law e. The Home Loan is denominated in Euro f. All sums due under the Home Loan (including interest and costs) are secured by a fully effective Home Loan Security g. When the relevant Home Loan is guaranteed by a Home Loan Guarantee, the borrower is contractually prevented from constituting a Mortgage on the underlying property without the previous consent of the originator h. On the relevant Selection Date, the current principal balance of such Home Loan is no more than EUR1m i. On the relevant Selection Date, the loan-to-value of the Home Loan is no more than 100% j. When the relevant Home Loan is guaranteed by a Home Loan Guarantee, on the date upon which it has been made available to the borrower thereof, the loan-to-income ratio (taux d effort) of this borrower was not above 33%; k. On the relevant Selection Date, the remaining term for the Home Loan is less than 30 years l. On the relevant Selection Date, the borrower under the Home Loan has paid at least 1 instalment in respect of the Home Loan m. the borrower under the relevant Home Loan is either (i) an individual who is not an employee of the originator of such relevant Home Loan or (ii) a SCI patrimoniale (provided that the shareholders of such SCI shall only be individuals) n. The Home Loan is current (i.e. does not present any arrears) as at the relevant Selection Date o. The Home Loan is either monthly or quarterly amortizing as at the relevant Selection Date p. The borrower under the Home Loan does not benefit from a contractual right of set-off q. The opening by the borrower under the Home Loan of a bank account dedicated to payments due under the Home Loan is not a condition precedent to the originator of the Home Loan making the Home Loan available to the borrower under the Home Loan r. Except where prior Rating Affirmation has been obtained, no amount drawn under the Home Loan is capable of being redrawn by the borrower thereof (i.e. the Home Loan is not flexible) 43

44 Appendix II: Supplementary information

45 Appendix II: Supplementary information Footnotes to slide 11 Management estimate of required CET1 ratio in 2019 of 12-13% 1. A Capital Conservation Buffer (CCB) of 2.5% and a Global systemically important institution (G-SII) buffer of 2.5% will phase-in from January The Systemic Risk Buffer has not yet been set it is to be applied to the ring fenced bank from January 2019; if applied at the group level, we expect the higher of the G-SII and Systemic Risk buffer to apply. The Countercyclical Capital Buffer (CCyB) is currently 0% and is dependent on the buffer rates set by regulators applicable at the time; impact of announced rates (0.625% for Hong Kong from January 2016; 1% for Norway and Sweden from October 2015) currently estimated as not significant. Sectoral Capital Requirements (SCR) are currently not deployed in the UK. A residential mortgage floor is currently applied in Hong Kong. The requirements for G-SII, SCR, CCyB and PRA buffer are subject to change, dependent on circumstances at the time. 2. Pillar 2A guidance is a point in time assessment of the amount of capital the PRA consider the bank should hold, to meet the overall financial adequacy rule and is subject to change, pending periodic assessment and supervisory review process; Individual Capital Guidance ( ICG ) was recently revised and a total Pillar 2A of 2% of RWAs is in effect from February 2015, of which 1.1% (56% of total P2A) is to be met with CET1 capital. 3. G-SII is the CRD IV equivalent of the Basel Committee s / FSB G-SIB buffer. 4. As per PRA s consultation paper CP1 / 15 Assessing capital adequacy under Pillar 2 (issued in January 2015), to the extent there is duplication of risks being covered, the PRA buffer would be offset by some of the CRD IV buffers namely, the G-SII and CCB. The risk management and governance scalar, if implemented and where applicable, would not be allowed to offset. Final Pillar 2 rules are expected in July

46 Appendix II: Supplementary information Footnotes to slide 12 - TLAC requirements 1. TLAC estimates are based on our interpretation of how the Financial Stability Board s ( FSB ) November 2014 consultation document on the Adequacy of lossabsorbing capacity of global systemically important banks in resolution ( the FSB Consultation ) will be implemented in the main jurisdictions in which HSBC s subsidiaries operate. Finalised TLAC requirements and local implementation of these may differ materially from the FSB Consultation. 2. The individual HSBC subsidiary entity estimates are based on 31 December 2014 balance sheets and reflect certain assumptions, these include but are not limited to: a. That HSBC would be resolved via a Multiple Point of Entry ( MPE ) strategy and that the subsidiaries represented in the chart would be resolution entities (as defined in the FSB Consultation) in such an MPE strategy b. That TLAC has been applied to resolution entities based on local RWAs. Local RWAs can differ materially from Group RWAs, which are prepared on a PRA basis. The local RWAs for The Hongkong Shanghai Banking Corporation are materially different from the equivalent RWAs on a PRA basis due to the different treatment of the investment in Bank of Communications Co. Limited; on a local basis the investment is deducted from capital, on a PRA basis the RWAs are proportionately consolidated c. That there would be no consolidated HSBC Group TLAC requirement d. That the CET1 buffers for the resolution entities are aligned to the requirements applicable to the HSBC Group on an end-point basis i.e. 2.5% GSIB and 2.5% capital conservation buffers. Actual requirements in each local jurisdiction could be materially different e. That liabilities included in our estimation of TLAC are: regulatory capital less regulatory deductions (on a transitional basis); and senior unstructured and unsecured debt with a residual maturity greater than 1 year, this includes debt which is not governed by the local law of the resolution entity f. That senior debt issued by operating banks is included. If the finalised proposals include a subordination requirement, this would need to be refinanced g. That no structured senior debt instruments have been included in the estimates h. That for certain liabilities further guidance will be necessary, these include but are not limited to: senior debt not governed by the local law of the resolution entity and structured notes i. That the analysis of TLAC deficits does not include any management mitigating actions j. That there is no Pillar 2 TLAC requirement or management buffer, these would be incremental if included k. That the TLAC leverage requirement is 6%, based on twice the Basel III Tier 1 leverage ratio of 3%. A 6% TLAC leverage ratio does not result in any additional requirements above the risk based requirements included in the chart l. That the analysis does not reflect any future changes to the corporate structure of the HSBC Group, such as ring-fencing in the UK m. That the analysis does not reflect any future changes to capital rules, including new RWA requirements n. That potential future increases in CET1 capital have not been included, although higher CET1 capital in future would potentially reduce the TLAC gap. o. That no deductions have been made for holdings in possible TLAC of other G-SIBs p. The Banking Recovery and Resolution Directive includes a requirement for EU banks to have a minimum amount of liabilities eligible for bail-in. Our analysis is based on the FSB Consultation, final implementation of minimum bail-in requirements in the EU may differ materially from the proposals in the FSB Consultation q. These assumptions may change as future regulatory guidance is received and the overall resolution strategy of the HSBC Group and its subsidiaries is determined and agreed by our regulators 3. Group 3 rd party RWAs on a PRA basis as at 31 December 2014; Associates are included on a proportionate basis 4. Other entities includes HSBC Finance Corporation (in run-off and comprising approximately 4% of Group RWAs) and other subsidiary banking entities 5. This is an indicative analysis for illustration only. It uses current market pricing observations and other assumptions and does not factor in any potential credit spread widening as a result of increased issuance or other future factors. Final costs of TLAC could be materially different from this estimate 46

47 Appendix III: Contacts