Riesgos identificados

Comparative figure presented with the consolidated income statement and the consolidated financial position have been reclassified to conform with the current year’s presentation format. The key reclassification relates to the fact that during the current year, the local group reclassified certain contracts from within insurance contract liabilities to investment contact liabilities. The impact of this reclassification on liabilities as at 31 December 2014 amounts to €10,334,000. In view of the nature and magnitude of this reclassification, disclosure of the impact on the group’s financial position at 1 January 2014 was not deemed necessary.

H S B C B A N K M A L T A P . L . C .

Additional Regulatory Disclosures

a Overview

These Additional Regulatory Disclosures (ARDs) are aimed at providing the local group’s stakeholders further insight to the local group’s capital structure, adequacy and risk management practices. The disclosures outlined below have been prepared by the local group in accordance with the Pillar 3 quantitative and qualitative disclosure requirements as governed by Banking Rule BR/07: Publication of Annual Report and Audited Financial Statements of Credit Institutions authorised under the Banking Act, 1994, issued by the Malta Financial Services Authority (MFSA). Banking Rule BR/07 follows the disclosure requirements of Directive 2013/36/EU (Capital Requirements Directive) and EU Regulation No 575/2013 (Capital Requirements Regulation) of the European Parliament and of the Council of 26 June 2013.

In light of the fact that the local group is considered a significant subsidiary of HSBC Holdings plc, consolidated supervision at the level of HSBC Holdings plc, the local group is exempt from full disclosure requirements laid down in Part Eight of the CRR. It is however subject to disclosure requirements in terms of article 13 of the CRR.

The basis of consolidation for the purpose of financial reporting under International Financial Reporting Standards (IFRSs), described in Note 3 of the Annual Report, differs from that used for regulatory purposes. For regulatory reporting purposes, subsidiaries engaged in insurance activities are excluded from the regulatory consolidation and deducted from regulatory capital subject to thresholds. On the basis of Article 43(a) of the CRR, the investment in HSBC Life Assurance (Malta) Limited is deemed to be significant for the purposes of capital requirements.

The local group publishes these disclosures on an annual basis as part of the Annual Report. As outlined in the requirements of banking regulations, these disclosures are not subject to an external audit, except to the extent that any disclosures are equivalent to those made in the Financial Statements, which have been prepared in accordance with the International Financial Reporting Standards (IFRS) as adopted by the EU. The local group, through its internal verification procedures, is satisfied that these ARDs are presented fairly.

b Capital management

The local group’s approach to capital management is driven by its strategic and organisational requirements, taking into account the regulatory, economic and commercial environment in which it operates. It is the local group’s objective is to maintain a strong capital base to support the risks inherent in its business and to meet regulatory capital requirements at all times. To achieve this, the local group manages capital within the context of an annual capital plan which is approved by the Board and which determines the optimal amount and mix of capital required to support planned business growth and meet regulatory capital requirements. Capital generated in excess of planned requirements is returned to shareholders in the form of dividends.

The impact of the local group’s capital plan on shareholder returns is therefore recognised by the level of equity capital employed for which the local group seeks to maintain a prudent balance between the advantages and flexibility afforded by a strong capital position and the higher returns on equity from increased leverage.

The local group manages its capital requirements based on internal targets, which are set above the prescribed minimum levels established within the CRR.

i Own funds

For regulatory purposes, the bank’s capital base is divided into CET1 capital and Tier 2 capital. The bank’s CET1 capital includes the following items:

– called up share capital; – retained earnings;

– reserve for general banking risks; and

– other regulatory adjustments relating to items that are included in equity but are treated differently for capital adequacy purposes, including the treatment of investments in financial sector entities, deferred tax assets, deductions relating to amounts pledged in favour of the Depositor Compensation Scheme and deductions relating to intangible assets.

Additional Regulatory Disclosures (continued)

b Capital management (continued)

i Own funds (continued)

The bank’s Tier 2 capital consists of: – subordinated liabilities;

– revaluation reserves made up of the surplus on the revaluation of property, net of defered taxation, and gains on the fair valuation of available-for-sale financial investments, net of deferred taxation; and

– other regulatory adjustments under Article 66(d) and 69 of the CRR.

The following describes the terms and conditions of called up share capital and subordinated liabilities, which are included in the local group’s total own funds.

Capital Instruments Main Features HSBC Ordinary shares @ par

4.6% HSBC Bank Malta p.l.c. Subordinated Bonds 2017 @ par 5.9% HSBC Bank Malta p.l.c. Subordinated Bonds 2018 @ par Unique identifier MT0000030107 MT0000031220 MT0000031238

Governing Law(s) of the instrument Maltese Law Maltese Law Maltese Law

Regulatory Treatment

Transitional CRR rules Common Equity Tier 1 Tier 2 Tier 2

Post-transitional CRR rules Common Equity Tier 1 Tier 2 Tier 2

Eligible at solo/(sub)consolidated

/solo & (sub)consolidated Solo & (Sub) consolidated Solo & (Sub) consolidated Solo & (Sub) consolidated Amount recognised in regulatory capital 108,091,800 11,540,230 16,850,150

Nominal amount of instrument 108,091,800 58,234,390 30,000,000

Issue Price N/A (€100 per bond)At par (€100 per bond)At par

Redemption Price N/A At €100 At €100

Accounting classification Share Equity amortised costLiability – amortised costLiability – Original date of issuance 27 January 1993* 12 February 2007 16 October 2008

Perpetual or dated N/A Dated Dated

Original maturity date No 01 February 2017 07 August 2018

Issuer call subject to prior supervisory approval No No Yes

Coupons/dividends

Fixed or floating dividend coupon Floating Fixed Fixed

Coupon rate and any related index N/A 4.60% 5.90%

Existence of dividend stopper No No No

Fully discretionary, partially discretionary

or mandatory (in terms of timing) Fully discretionary Mandatory Mandatory Fully discretionary, partially discretionary

or mandatory (in terms of amount) Partially discretionary Mandatory Mandatory

Existence of step up or other incentive to redeem N/A No No

Non-cumulative or cumulative Non-cumulative Non-cumulative Non-cumulative Convertible or non-convertible Non-convertible Non-convertible Non-convertible

Write-down features No No No

Position in subordination hierarchy in liquidation

Subordinated to HSBC Subordinated Bonds Subordinated to senior creditors and depositors Subordinated to senior creditors and depositors

b Capital management (continued)

i Own funds (continued)

Further to the above, the local group’s total own funds include other items the terms of which are described below. a Retained earnings

The retained earnings represent earnings not paid out as dividends. Interim profits form part of Own funds only if those profits have been verified by the local group’s independent external auditor. The local group may only make distributions out of profits available for this purpose.

Retained earnings includes an amount of €30,831,000 pledged in favour of the Depositor Compensation Scheme as at 31 December 2015, that are not available to the local group for unrestricted and immediate use to cover risk of losses as soon as they occur. The Depositor Compensation Scheme Reserve is excluded for the purposes of the Own Funds calculation.

Moreover, an amount of €8,000,000 is also included in retained earnings relating to the reserve for general banking risks, since the local group is required to allocate funds to this reserve in accordance with the revised Banking Rule BR/09: ‘Measures Addressing Credit Risks Arising from the Assessment of the Quality of Asset Portfolios of Credit Institutions authorised under the Banking Act, 1994’. This reserve refers to the amount allocated by the bank from its retained earnings, to a non-distributable reserve against potential risks linked to the local group’s non-performing loans and advances. During the year ended 31 December 2015 the local group allocated an amount of €988,000 to the reserve as a Pillar 2 measure. b Revaluation reserves

Property revaluation reserve

This represents the surplus arising on the revaluation of the local group’s property net of related deferred tax effects. This reserve is not available for distribution.

Available-for sale financial investments reserve

This represents the cumulative net change in fair values of available-for-sale financial investments held by the local group, net of related deferred tax effects.

In accordance with article 492 of the CRR, the local group is required to complete a transitional disclosure template during the phasing in of regulatory adjustments from 1 January 2014 to 31 December 2017. The transitional disclosure template is set out below.

As at 31 December 2015

______________

€000