2008 Interim Report Section 1

4th Aug 2008 18:12



Risk management

All HSBC's activities involve, to varying degrees, the analysis, evaluation, acceptance and management of risks or combinations of risks. The most important risk categories that the Group is exposed to are credit risk (including cross-border country risk), liquidity risk, market risk, operational risk, reputational risk and insurance risk. Market risk includes foreign exchange, interest rate and equity price risks.

HSBC's risk management policies are designed to identify and analyse these risks, to set appropriate risk limits and controls, and to monitor the risks and adherence to limits by means of reliable and up-to-date administrative and information systems. HSBC regularly reviews its risk management policies and systems to reflect changes in markets, products and emerging best practice. Individual responsibility and accountability, instilled through training, are designed to deliver a disciplined, conservative and constructive culture of risk management and control.

The Group Management Board ('GMB'), under authority delegated by the Board of Directors, formulates high-level Group risk management policy. A separately convened Risk Management Meeting of GMB monitors risk and receives reports which allow it to review the effectiveness of HSBC's risk management policies. 

The management of all HSBC's significant risks was discussed in detail in the Annual Report and Accounts 2007. There have been no changes to the Group's risk management methodology since 31 December 2007 which are material to understanding the current reporting period.

The insurance businesses manage their own credit, liquidity and market risk, along with insurance risk, separately from the rest of HSBC, due to the different nature of their businesses.

Credit risk

HSBC's credit risk management and internal control procedures are designed for all stages of economic and financial cycles, including the current protracted and challenging period of market volatility and downturn. The Credit Risk function continues to focus on regular dialogue with business origination teams to set priorities, refine risk appetite, and monitor and report higher-risk exposures. It is also actively enhancing credit risk management methodologies and policies as experience gained from the Group's roll-out of its advanced internal ratings-based approach to the adoption of Basel II (see 'Capital Management' on page 197) feeds back into capital and risk management processes.

As explained on page 197 of the Annual Report and Accounts 2007, the fundamental credit risk governance structures and control frameworks that the Group judges appropriate for its business are in place; there were no material changes during the first half of 2008, as the framework already encompassed stress test scenarios with characteristics similar to the market conditions experienced. The Credit Risk function continues to refine 'early warning' indicators and reporting, stress testing scenarios and economic capital measurement on the basis of current experience. These risk management tools are embedded within the Group's business planning processes. Action has been taken, where necessary, to improve the Group's resilience to risks in the current market conditions by selectively discontinuing business lines or products, tightening underwriting criteria and investing in improved fraud prevention technologies (see 'Areas of Special Interest - Credit Risk' on page 161 ). 

Credit exposure

HSBC's exposure to credit risk is spread over several asset classes, including trading assets, loans to customers, loans to banks and financial investments. The balance of exposure across the Group has not changed significantly since 31 December 2007, although the growth in loans and advances was more restrained than in other asset classes, reflecting a marginal decline in lending to the personal sector, primarily in the US. Derivatives exposure is shown gross under IFRSs, and movement in credit spreads and increased volatility caused both derivative assets and liabilities to move markedly higher. Trading assets increased, reflecting primarily the growth of collateralised lending business and the strong demand for Rates products in Europe. The proportion of total assets deployed in loans and advances to customers therefore decreased by half of one per cent, as the proportion represented by derivative assets rose by 2 percentage points while that of trading assets declined marginally.

Within loans and advances to customers, the proportion of lending to personal customers fell slightly compared with 31 December 2007, although the share of residential mortgages within total personal lending increased slightly. Amounts due from non-bank financial institutions increased by 15 per cent, primarily reflecting settlement accounts arising from the higher trading volumes in Global Markets as well as higher levels of secured lending through reverse repos. Loans and advances to banks and financial investments amounted to approximately the same proportion of total assets at 30 June 2008 as they did at 31 December 2007.

The most significant factor affecting HSBC's exposure to credit risk during the first half of 2008 was the continued deterioration in credit conditions in the US mortgage market. Consequently, loss experience is concentrated in the personal lending portfolios, primarily in the US. Thus, in the first half of 2008, 93 per cent of loan impairment charges arose in Personal Financial Services, broadly in line with 2007. In the UK, while there has been a significant deterioration in the housing market as a whole, the credit quality of HSBC's mortgage business remained broadly stable to date. A full discussion of these issues can be found in 'Areas of Special Interest - Credit Risk'on page 161.

The following table presents the maximum exposure to credit risk from balance sheet and off-balance sheet financial instruments, before taking account of any collateral held or other credit enhancements (unless such credit enhancements meet offsetting requirements). For financial assets recognised on the balance sheet, the exposure to credit risk equals their carrying amount. For financial guarantees granted, the maximum exposure to credit risk is the maximum amount that HSBC would have to pay if the guarantees were called upon. For loan commitments and other credit-related commitments that are irrevocable over the life of the respective facilities, the maximum exposure to credit risk is the full amount of the committed facilities.

Maximum exposure to credit risk

	At 30 June 2008						At 30 June 2007						At 31 December 2007
Maximum  exposure			Offset		Net  exposure  to credit   risk1		Maximum  exposure		Offset		Net  exposure  to credit   risk1		Maximum  exposure		Offset		Net  exposure  to credit   risk1
	US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m
Items in the course of collection from other banks	16,719		-		16,719		23,152		-		23,152		9,777		-		9,777
Trading assets	430,929		(21,015)		409,914		389,158		(6,776)		382,382		394,492		(12,220)		382,272
- treasury and other eligible bills	7,417		-		7,417		10,407		-		10,407		16,439		-		16,439
- debt securities	191,482		-		191,482		176,636		(830)		175,806		178,834		(1,417)		177,417
- loans and advances  to banks	95,359		(542)		94,817		95,710		(12)		95,698		100,440		(994)		99,446
- loans and advances to customers	136,671		(20,473)		116,198		106,405		(5,934)		100,471		98,779		(9,809)		88,970
Financial assets designated at fair value	24,018		-		24,018		16,530		-		16,530		21,517		-		21,517
- treasury and other eligible bills	240		-		240		206		-		206		181		-		181
- debt securities	23,356		-		23,356		15,832		-		15,832		21,150		-		21,150
- loans and advances  to banks	421		-		421		356		-		356		178		-		178
- loans and advances to customers	1		-		1		136		-		136		8		-		8
Derivatives	260,664		(164,749)		95,915		149,181		(109,910)		39,271		187,854		(121,709)		66,145
Loans and advances held at amortised cost	1,306,181		(105,321)		1,200,860		1,142,746		(82,656)		1,060,090		1,218,914		(66,983)		1,151,931
- loans and advances  to banks	256,981		(277)		256,704		214,645		(443)		214,202		237,366		(278)		237,088
- loans and advances to customers	1,049,200		(105,044)		944,156		928,101		(82,213)		845,888		981,548		(66,705)		914,843
Financial investments	265,269		-		265,269		223,698		-		223,698		270,406		-		270,406
- treasury and other  similar bills	27,928		-		27,928		26,077		-		26,077		30,104		-		30,104
- debt securities	237,341		-		237,341		197,621		-		197,621		240,302		-		240,302
Other assets	26,468		(273)		26,195		22,909		(209)		22,700		25,291		(226)		25,065
- endorsements and acceptances	13,289		(273)		13,016		10,911		(209)		10,702		12,248		(226)		12,022
- other	13,179		-		13,179		11,998		-		11,998		13,043		-		13,043
Financial guarantees	59,742		-		59,742		51,874		-		51,874		56,440		-		56,440
Loan commitments and other credit-related commitments2	758,926		-		758,926		764,721		-		764,721		764,457		-		764,457
	3,148,916		(291,358)		2,857,558		2,783,969		(199,551)		2,584,418		2,949,148		(201,138)		2,748,010

1 Excluding the value of any collateral held or other credit enhancements.

2 The amount of the loan commitments reflects, where relevant, the expected level of take-up of pre-approved loan offers made by mailshots to personal customers. In addition to those amounts, there is a further maximum possible exposure to credit risk of US$ 318,071 million (30 June 2007: US$319,380 million; 31 December 2007: US$317,834 million), reflecting the full take-up of such irrevocable loan commitments. The take-up of such offers is generally at modest levels.

Note 9 on the Financial Statements gives more information on credit risk exposure to derivatives counterparties.

HSBC typically has legally enforceable rights to offset certain credit exposures against amounts owing to the same counterparty. In normal circumstances there would be no intention of settling net, nor of realising the financial assets and settling the financial liabilities simultaneously. Consequently, for reporting purposes the financial assets are not offset against the respective financial liabilities. However, the exposure to credit risk relating to the respective financial assets is reduced as tabulated above.

Concentration of exposure

Concentrations of credit risk exist when a number of counterparties are engaged in similar activities, or operate in the same geographical areas or industry sectors and have comparable economic characteristics, so that their ability to meet contractual obligations is uniformly affected by changes in economic, political or other conditions.

Financial investments

At US$265 billion, total financial investments excluding equity securities were 2 per cent lower at 30 June 2008 than at 31 December 2007. Debt securities, at US$237 billion, represented the largest concentration of financial investments at 89 per cent of the total, compared with US$240 billion (89 per cent) at 31 December 2007. HSBC's holdings of corporate debt and other securities were spread across a wide range of issuers and geographical regions, with 49 per cent invested in securities issued by banks and other financial institutions. Investors in Cullinan Finance Ltd and Asscher Finance Ltd, two SIVs managed by HSBC and consolidated in 2007, were offered the opportunity to exchange their investments for notes in new SIVs, and during the first half of 2008 most of them accepted. More information on these SIVs and the underlying assets is available on pages 137 to 141. In total, holdings in ABSs decreased by US$15 billion due to a combination of asset sales, amortisations and write-downs.

Investments in governments and government agencies of US$95 billion were 34 per cent of overall financial investments, 2 percentage points higher than at 31 December 2007. US$28 billion of these investments comprised treasury and other eligible bills.

A more detailed analysis of financial investments is set out in Note 10 on the Financial Statements and an analysis by rating agency designation is provided on page 222.

At 30 June 2008, the insurance businesses held diversified portfolios of debt and equity securities designated at fair value of US$32 billion (31 December 2007: US$34 billion). 

Derivatives 

Derivative assets at 30 June 2008 were US$261 billion, a rise of 39 per cent from 31 December 2007, primarily across foreign exchange, interest rate and credit derivatives. The main drivers of growth were the mark-to-market movement across the entire portfolio arising from volatility and movements in interest rates and credit spreads, as well as new transactions during the period.

Securities held for trading

Total securities held for trading within trading assets were US$242 billion at 30 June 2008 (31 December 2007: US$247 billion). The largest concentration of these assets was to government and government agency securities, which amounted to US$123 billion, or 51 per cent of overall trading securities (31 December 2007: US$115 billion, 46 per cent). This included US$7 billion (31 December 2007: US$16 billion) of treasury and other eligible bills. Corporate debt and other securities were US$57 billion or 24 per cent of overall trading securities, in line with the level at 31 December 2007 of US$59 billion, or 24 per cent. Included within total securities held for trading were US$62 billion (31 December 2007: US$70 billion) of debt securities issued by banks and other financial institutions.

A more detailed analysis of securities held for trading is set out in Note 7 on the Financial Statements and an analysis by rating agency designation is provided on page 217.

Loans and advances

Loans and advances were well diversified across industry sectors and jurisdictions.

At constant exchange rates, gross loans and advances to customers (excluding the financial sector and settlement accounts) at 30 June 2008 grew by US$47 billion or 5 per cent from 31 December 2007. On the same basis, personal lending of US$498 billion comprised 52 per cent of HSBC's loan portfolio.

Personal lending represented 47 per cent of total loans and advances to customers including the financial sector and settlement accounts. Residential mortgages of US$271 billion represented 25 per cent of total advances to customers, the Group's largest concentration in a single exposure type.

Corporate, commercial and financial lending, including settlement accounts, amounted to 53 per cent of gross lending to customers at 30 June 2008. The largest industry concentrations were in non-bank financial institutions and commercial real estate lending at 10 per cent and 8 per cent, respectively, of total gross lending to customers.

Lending to non-bank financial institutions principally comprises secured lending on trading accounts, primarily repo facilities. Commercial, industrial and international trade lending grew strongly in the period, increasing its proportion of total lending by 3 percentage points to 23 per cent of total gross loans and advances to customers. Within this category, the largest concentration of lending was to the service sector, which amounted to 6 per cent of total gross lending to customers. Advances to banks primarily represent amounts owing on trading account and HSBC's placing of its own liquidity on short-term deposit. Such lending was widely distributed across major institutions, with no single exposure exceeding 5 per cent of total advances to banks.

Gross loans and advances by industry sector

	At  31 December 2007		Constant currency effect		Movement on a constant currency basis		At  30 June 2008
	US$m		US$m		US$m		US$m
Gross loans and advances to customers
Personal	500,834		2,123		(4,892)		498,065
Residential mortgages1	269,068		36		1,517		270,621
Other personal2	231,766		2,087		(6,409)		227,444
Corporate and commercial	400,771		4,443		52,240		457,454
Commercial, industrial and international trade	202,038		2,246		36,894		241,178
Commercial real estate	72,345		834		7,539		80,718
Other property-related	33,907		131		(1,290)		32,748
Government	5,708		124		1,683		7,515
Other commercial3	86,773		1,108		7,414		95,295
Financial	99,148		2,175		12,938		114,261
Non-bank financial institutions	96,781		2,171		11,521		110,473
Settlement accounts	2,367		4		1,417		3,788
Gross loans and advances to customers	1,000,753		8,741		60,286		1,069,780
Gross loans and advances to banks	237,373		4,648		14,967		256,988
	1,238,126		13,389		75,253		1,326,768
	At  31 December 2007		Constant currency effect		Movement on a constant currency basis		At  30 June 2008
	US$m		US$m		US$m		US$m
Gross loans and advances to customers
Personal	500,834		2,123		(4,892)		498,065
Residential mortgages1	269,068		36		1,517		270,621
Other personal2	231,766		2,087		(6,409)		227,444
Corporate and commercial	400,771		4,443		52,240		457,454
Commercial, industrial and international trade	202,038		2,246		36,894		241,178
Commercial real estate	72,345		834		7,539		80,718
Other property-related	33,907		131		(1,290)		32,748
Government	5,708		124		1,683		7,515
Other commercial3	86,773		1,108		7,414		95,295
Financial	99,148		2,175		12,938		114,261
Non-bank financial institutions	96,781		2,171		11,521		110,473
Settlement accounts	2,367		4		1,417		3,788
Gross loans and advances to customers	1,000,753		8,741		60,286		1,069,780
Gross loans and advances to banks	237,373		4,648		14,967		256,988
	1,238,126		13,389		75,253		1,326,768

1 Including Hong Kong Government Home Ownership Scheme loans of US$3,959 million at 30 June 2008.

2 Other personal loans and advances include second lien mortgages and other personal property-related lending.

3 Other commercial loans and advances include advances in respect of agriculture, transport, energy and utilities.

The commentary below analyses, on a constant currency basis, the changes in lending noted in the table above, compared with the position at 31 December 2007. On this basis, loans and advances to personal, corporate and commercial customers rose by 5 per cent, and total gross loans and advances increased by 6 per cent. 

Total lending to personal customers was concentrated in North America (US$214 billion), the UK (US$132 billion), and Hong Kong (US$46 billion). Collectively these regions accounted for 79 per cent of total personal lending, unchanged from the level reported at 31 December 2007.

Residential mortgages rose slightly to US$271 billion at 30 June 2008, comprising 25 per cent of total loans and advances to customers including the financial sector and settlement accounts. Modest increases in mortgage lending in Hong Kong, Rest of Asia-Pacific, Latin America and Europe more than offset a 7 per cent fall in the value of the mortgage lending book in North America. 

In Europe, residential mortgage balances rose by 6 per cent to US$102 billion. Mortgage lending rose by 8 per cent in the UK with the successful launch of the RateMatcher campaign contributing to an increase in HSBC's market share in mortgages. This was partly offset by a fall of 17 per cent in mortgage lending in France due to the reclassification of the assets of the regional banks as held for sale. Excluding the reclassification, mortgage lending rose. Mortgage lending in Turkey was broadly in line with the second half of 2007. 

In Hong Kong, residential mortgage lending increased by 7 per cent owing to the continued strength of the local economy.

In Rest of Asia-Pacific, mortgage lending balances rose by 4 per cent, driven by strong growth in mainland China as the branch network expanded, in the Middle East as favourable economic conditions resulted in higher originations, and in Taiwan following the acquisition of the assets, liabilities and operations of The Chinese Bank in March 2008.

In North America, residential mortgage balances declined by 7 per cent. In the US, the level of mortgage lending stood at US$90 billion at 30 June 2008, a fall of 9 per cent since 31 December 2007. Balances in the mortgage services business fell by 13 per cent as no new originations were made and the remainder of the portfolio continued to run-off. In consumer lending, balances fell by 2 per cent, driven by actions taken to reduce risk in the portfolio including tightening underwriting criteria and increasing collateral requirements for new originations. In the US retail bank, balances fell by 17 per cent as the majority of loan originations were sold in the secondary markets, while the existing loan portfolio declined through run-off and the sale of approximately US$4 billion of prime adjustable-rate mortgages ('ARMs') in May 2008 to the US Government-sponsored enterprises. In Canada, balances rose by 4 per cent as higher originations in the retail bank were driven by the continued strength of the Canadian economy and rising house prices. 

In Latin America, balances rose by 13 per cent. In Mexico, an increase in fixed rate mortgages contributed to a rise in mortgage lending balances.

Other personal lending declined by 3 per cent to US$227 billion at 30 June 2008, representing 

21 per cent of total loans and advances to customers including the financial sector and settlement accounts. 

In Europe, other personal lending fell by 5 per cent from the end of 2007 to US$70 billion. This was driven by a decline in the UK, where tightened underwriting criteria in HSBC Bank constrained originations as the UK economy weakened in the first half of 2008. Lower lending in France reflected the reclassification of the assets of the regional banks as held for sale. In Turkey, customer acquisition was driven by the credit card business, which grew as the branch network expanded and the Black and Rouge and Pegasus cards were successfully launched in February 2008. 

In Hong Kong, other personal lending rose by 7 per cent to US$14 billion, caused by the reclassification of vehicle finance within Personal Financial Services.

In Rest of Asia-Pacific, other personal lending rose by 14 per cent, driven by higher loan balances and increased numbers of credit cards in circulation in the Middle East as a result of enhanced marketing activity and strong economic growth. Elsewhere, growth was spread across the region, with notable increases in India and Taiwan, the latter primarily due to the acquisition of the assets, liabilities and operations of The Chinese Bank.

In North America, other personal lending balances declined by 7 per cent. In the US, consumer finance business and credit card lending fell due to the effect of tighter underwriting criteria and lower marketing expenditure. Non-credit card personal lending declined, driven by the decision to cease new business in guaranteed direct mail loans and personal homeowner loans in the second half of 2007, and tighter underwriting criteria applied to the remainder of the portfolio. In the mortgage services business, second lien mortgage balances fell due to the continued run-off of the portfolio following the cessation of originations in 2007. In the US retail bank, other personal lending fell, driven by the discontinuation of originations of indirect vehicle finance loans. This was partly offset by higher second lien mortgage lending following the success of a Home Equity campaign channelled through the branch network in the first half of 2008. In Canada, the tightening of credit underwriting criteria in the consumer finance business in line with a reduced risk appetite led to lower balances.

In Latin America, other personal lending balances rose by 7 per cent to US$20 billion. In 

Brazil, vehicle and payroll lending drove other personal lending 9 per cent higher as demand for credit increased due to rising average household incomes and a positive economic outlook. In Mexico, balances were broadly stable as management directed the product offering towards customers of higher credit quality, in line with the refined asset growth strategy. Further growth was constrained through closing payroll loans to new originations and tightening underwriting criteria on cards, leading to a sharp reduction in the number of new cards issued in the first half of 2008.

Loans and advances to corporate and commercial customers rose by 12 per cent to US$457 billion, with strong growth in most regions. Lending was primarily concentrated in Europe, where it accounted for 57 per cent of advances to this sector, of which more than 43 per cent were in the UK.

In Europe, corporate and commercial advances rose by 14 per cent. In the UK, lending rose by 18 per cent, driven by growth in overdrafts, particularly to large corporates. Elsewhere in Europe, strong lending growth was experienced in Germany in a number of industrial sectors, as the product offering was expanded, and in Greece due to asset growth in the small and mid-market sectors. This was partly offset by lower balances in France due to the reclassification of the assets of the regional banks as held for sale.

In Hong Kong, corporate and commercial lending rose by 6 per cent, driven by trade finance products as the local economy continued to experience robust growth.

In Rest of Asia-Pacific, strong commercial lending growth was experienced in the Middle East and Singapore, which rose by 15 per cent and 39 per cent respectively and, to a lesser extent, in India and Taiwan, the latter due to the acquisition of The Chinese Bank in March 2008. In the Middle East, the corporate loan book continued to grow, reflecting the buoyant economic conditions in the region. In Singapore, lending rose, driven by the successful launch of a trade finance campaign in April 2008 and commercial real estate lending as the property market remained strong. Lending in mainland China fell slightly as restrictions on local currency lending imposed by the People's Bank of China took effect. This partly offset strong growth elsewhere in the region.

In North America, corporate and commercial lending grew by 4 per cent, driven by growth in Canada and, to a lesser extent, the US retail bank. In Canada, corporate and commercial lending rose by 7 per cent, driven by robust economic conditions in Western Canada. In the US retail bank, higher lending to corporate and commercial clients reflected the targeted expansion of middle market activities and drawdown of commitments, partly offset by a decline in commercial real estate activity as the bank managed down its lending exposures in light of lower risk appetite and a deterioration in market conditions.

In Latin America, corporate and commercial lending rose by 19 per cent, mainly in Brazil where corporate and commercial lending rose as a result of strong growth in the trade loans portfolio and working capital products. Rising consumption due to increasing household income, sales and repricing initiatives and longer loan maturity periods were all contributory factors.

Loans and advances to the financial sector rose by 13 per cent to US$114 billion, driven by strong growth in Europe, which was up 27 per cent due to the increased provision of secured funding facilities through capital-efficient client-driven reverse repo business. This was partly offset in North America, where balances fell by 6 per cent due to a reduction in activities in light of the continued credit market dislocation.

Loans and advances to banks increased by 6 per cent to US$257 billion with growth experienced in most regions, particularly Hong Kong and Rest of Asia-Pacific as liquidity was concentrated in lower risk placements. Lending to banks in North America rose, as higher customer deposit balances, in part from growth in HSBC's online savings proposition, were invested in Federal funds and certificates of deposit. In Europe, lending to banks fell by 12 per cent, driven by HSBC Bank, as reverse repo balances and money market term lending fell. 

The following tables analyse loans by industry sector and by the location of the principal operations of the lending subsidiary or, in the case of the operations of The Hongkong and Shanghai Banking Corporation Limited, HSBC Bank plc, HSBC Bank Middle East Limited and HSBC Bank USA N.A., by the location of the lending branch.

Loans and advances to customers by industry sector and by geographical region

	Europe		Hong Kong		Rest of Asia- Pacific		North  America		Latin  America		Gross loans and advances to  customers		Gross loans by industry  sector as a % of total gross loans
	US$m		US$m		US$m		US$m		US$m		US$m		%
At 30 June 2008
Personal	171,711		46,077		40,471		214,427		25,379		498,065		46.6
Residential mortgages1	101,620		31,774		21,786		110,373		5,068		270,621		25.3
Other personal	70,091		14,303		18,685		104,054		20,311		227,444		21.3
Corporate and commercial	259,547		50,472		68,683		50,210		28,542		457,454		42.7
Commercial, industrial and international trade	147,452		21,427		41,216		14,540		16,543		241,178		22.5
Commercial real estate	40,779		13,793		8,642		15,018		2,486		80,718		7.5
Other property-related	9,542		8,673		5,759		8,349		425		32,748		3.1
Government	1,797		244		2,156		264		3,054		7,515		0.7
Other commercial2	59,977		6,335		10,910		12,039		6,034		95,295		8.9
Financial	81,441		3,565		5,568		21,040		2,647		114,261		10.7
Non-bank financial  institutions	79,336		2,949		5,400		20,302		2,486		110,473		10.3
Settlement accounts	2,105		616		168		738		161		3,788		0.4
Total gross loans and advances  to customers3	512,699		100,114		114,722		285,677		56,568		1,069,780		100.0
Percentage of loans and advances by geographical region	47.9%		9.4%		10.7%		26.7%		5.3%		100.0%
Impaired loans	5,889		438		1,117		8,912		2,673		19,029
- as a percentage of gross loans and advances to customers	1.1%		0.4%		1.0%		3.1%		4.7%		1.8%
Impairment allowances on  impaired loans	2,901		145		552		8,137		1,519		13,254
- as a percentage of impaired loans	49.3%		33.1%		49.4%		91.3%		56.8%		69.7%
At 30 June 2007
Personal	163,962		43,800		33,793		228,698		18,623		488,876		51.9
Residential mortgages1	94,792		28,448		18,958		120,621		4,005		266,824		28.3
Other personal	69,170		15,352		14,835		108,077		14,618		222,052		23.6
Corporate and commercial	213,600		41,565		50,832		40,392		21,842		368,231		39.1
Commercial, industrial and international trade	106,209		16,699		30,243		11,844		11,356		176,351		18.7
Commercial real estate	31,706		11,584		6,788		13,115		1,145		64,338		6.8
Other property-related	9,541		7,585		3,767		6,634		1,346		28,873		3.1
Government	1,981		356		1,076		256		3,895		7,564		0.8
Other commercial2	64,163		5,341		8,958		8,543		4,100		91,105		9.7
Financial	54,189		4,888		4,489		19,919		1,832		85,317		9.0
Non-bank financial institutions	52,683		3,671		3,969		19,287		1,759		81,369		8.6
Settlement accounts	1,506		1,217		520		632		73		3,948		0.4
Total gross loans and advances  to customers3	431,751		90,253		89,114		289,009		42,297		942,424		100.0
Percentage of loans and advances by geographical region	45.8%		9.6%		9.4%		30.7%		4.5%		100.0%
Impaired loans	5,849		467		1,209		5,226		1,804		14,555
- as a percentage of gross loans and advances to customers	1.4%		0.5%		1.4%		1.8%		4.3%		1.5%
Impairment allowances on  impaired loans4	2,883		128		607		4,600		1,309		9,527
- as a percentage of impaired loans4	49.3%		27.4%		50.2%		88.0%		72.6%		65.5%

For footnotes, see page 159.

	Europe		Hong Kong		Rest of Asia- Pacific		North  America		Latin  America		Gross loans and advances to  customers		Gross loans by industry  sector as a % of total gross loans
	US$m		US$m		US$m		US$m		US$m		US$m		%
At 31 December 2007
Personal	168,549		43,033		36,910		230,562		21,780		500,834		50.1
Residential mortgages1	95,665		29,689		20,397		118,993		4,324		269,068		26.9
Other personal	72,884		13,344		16,513		111,569		17,456		231,766		23.2
Corporate and commercial	225,282		43,716		60,442		48,898		22,433		400,771		40.0
Commercial, industrial and international trade	120,359		17,740		36,461		13,937		13,541		202,038		20.1
Commercial real estate	36,672		12,301		7,592		14,561		1,219		72,345		7.2
Other property-related	11,275		8,168		4,664		8,000		1,800		33,907		3.4
Government	2,299		332		1,667		248		1,162		5,708		0.6
Other commercial2	54,677		5,175		10,058		12,152		4,711		86,773		8.7
Financial	62,375		3,265		5,426		22,380		5,702		99,148		9.9
Non-bank financial institutions	61,216		2,483		5,191		22,252		5,639		96,781		9.7
Settlement accounts	1,159		782		235		128		63		2,367		0.2
Total gross loans and advances  to customers3	456,206		90,014		102,778		301,840		49,915		1,000,753		100 .0
Percentage of loans and advances by geographical region	45.6%		9.0%		10.2%		30.2%		5.0%		100.0%
Impaired loans	6,254		433		1,088		8,384		2,145		18,304
- as a percentage of gross loans and advances to customers	1.4%		0.5%		1.1%		2.8%		4.3%		1.8%
Impairment allowances on  impaired loans	3,049		144		552		7,176		1,366		12,287
- as a percentage of impaired loans	48.8%		33.3%		50.7%		85.6%		63.7%		67.1%

1 Includes Hong Kong Government Home Ownership Scheme loans of US$3,959 million (30 June 2007: US$3,972 million; (31 December 2007: US$3,942 million).

2 Other commercial loans and advances include advances in respect of agriculture, transport, energy and utilities.

3 Includes credit card lending of US$80,262 million (30 June 2007: US$76,211 million; 31 December 2007: US$82,854 million).

4 Disclosures previously made in respect of 30 June 2007 have been amended to comply with the presentation at 31 December 2007 by excluding collective impairment allowances on loans and advances not classified as impaired.

Loans and advances to banks by geographical region

	Europe		Hong  Kong		Rest of Asia- Pacific		North   America		Latin   America		Gross loans and advances  to banks		Impairment  allowances
	US$m		US$m		US$m		US$m		US$m		US$m		US$m
At 30 June 2008	94,802		73,461		51,739		19,794		17,192		256,988		(7)
At 30 June 2007	79,824		68,162		34,678		18,643		13,345		214,652		(7)
At 31 December 2007	104,534		63,737		39,861		16,566		12,675		237,373		(7)

Gross loans and advances to customers by country within Rest of Asia-Pacific and Latin America

	Residential mortgages US$m		Other personal US$m		Property- related US$m		Commercial, international trade and other US$m		Total US$m
At 30 June 2008
Rest of Asia-Pacific
Australia	4,872		1,101		2,294		4,432		12,699
India	1,338		1,765		433		4,184		7,720
Indonesia	29		569		18		1,372		1,988
Japan	33		181		665		3,835		4,714
Mainland China	1,243		6		2,883		8,571		12,703
Malaysia	2,740		1,574		918		4,173		9,405
Middle East (excluding Saudi Arabia)	1,491		5,253		3,146		15,385		25,275
Egypt	-		243		156		1,902		2,301
United Arab Emirates	1,298		3,550		2,278		9,405		16,531
Other Middle East	193		1,460		712		4,078		6,443
Singapore	3,971		3,789		2,607		3,386		13,753
South Korea	2,342		883		74		3,304		6,603
Taiwan	2,599		979		87		1,777		5,442
Other	1,128		2,585		1,276		9,431		14,420
	21,786		18,685		14,401		59,850		114,722
Latin America
Argentina	47		792		84		1,878		2,801
Brazil	437		12,295		781		11,362		24,875
Mexico	2,736		5,027		982		10,671		19,416
Panama	1,099		1,039		577		1,665		4,380
Other	749		1,158		487		2,702		5,096
	5,068		20,311		2,911		28,278		56,568
At 30 June 2007
Rest of Asia-Pacific
Australia	4,114		846		1,896		3,009		9,865
India	1,538		1,429		331		2,987		6,285
Indonesia	21		405		3		928		1,357
Japan	17		125		536		2,906		3,584
Mainland China	382		7		1,647		4,804		6,840
Malaysia	2,441		1,343		649		3,687		8,120
Middle East (excluding Saudi Arabia)	678		3,702		2,072		10,863		17,315
Egypt	-		154		73		1,014		1,241
United Arab Emirates	577		2,385		1,446		6,610		11,018
Other Middle East	101		1,163		553		3,239		5,056
Singapore	3,347		3,217		1,346		2,889		10,799
South Korea	2,769		888		49		2,763		6,469
Taiwan	2,174		767		16		1,020		3,977
Other	1,477		2,106		2,010		8,910		14,503
	18,958		14,835		10,555		44,766		89,114
Latin America
Argentina	54		498		74		1,524		2,150
Brazil	253		8,204		308		6,234		14,999
Mexico	2,031		4,057		1,040		9,504		16,632
Panama	1,132		866		591		1,516		4,105
Other	535		993		478		2,405		4,411
	4,005		14,618		2,491		21,183		42,297

At 31 December 2007
Australia	4,376		922		2,065		3,998		11,361
India	1,545		1,721		339		3,723		7,328
Indonesia	24		497		12		1,171		1,704
Japan	29		126		566		3,541		4,262
Mainland China	500		6		1,746		9,443		11,695
Malaysia	2,632		1,508		787		4,024		8,951
Middle East (excluding Saudi Arabia)	1,036		4,441		2,870		13,536		21,883
Singapore	3,946		3,403		1,712		2,471		11,532
South Korea	2,596		880		61		3,608		7,145
Taiwan	2,061		648		-		1,072		3,781
Other	1,652		2,361		2,098		7,025		13,136
	20,397		16,513		12,256		53,612		102,778
Argentina	47		611		75		1,841		2,574
Brazil	329		10,110		426		8,601		19,466
Mexico	2,208		4,696		1,434		10,476		18,814
Panama	1,098		963		593		1,585		4,239
Other	642		1,076		491		2,613		4,822
	4,324		17,456		3,019		25,116		49,915
	Residential mortgages US$m		Other personal US$m		Property- related US$m		Commercial, international trade and other US$m		Total US$m
At 31 December 2007
Rest of Asia-Pacific
Australia	4,376		922		2,065		3,998		11,361
India	1,545		1,721		339		3,723		7,328
Indonesia	24		497		12		1,171		1,704
Japan	29		126		566		3,541		4,262
Mainland China	500		6		1,746		9,443		11,695
Malaysia	2,632		1,508		787		4,024		8,951
Middle East (excluding Saudi Arabia)	1,036		4,441		2,870		13,536		21,883
Egypt	-		196		126		1,575		1,897
United Arab Emirates	895		2,936		2,159		8,222		14,212
Other Middle East	141		1,309		585		3,739		5,774
Singapore	3,946		3,403		1,712		2,471		11,532
South Korea	2,596		880		61		3,608		7,145
Taiwan	2,061		648		-		1,072		3,781
Other	1,652		2,361		2,098		7,025		13,136
	20,397		16,513		12,256		53,612		102,778
Latin America
Argentina	47		611		75		1,841		2,574
Brazil	329		10,110		426		8,601		19,466
Mexico	2,208		4,696		1,434		10,476		18,814
Panama	1,098		963		593		1,585		4,239
Other	642		1,076		491		2,613		4,822
	4,324		17,456		3,019		25,116		49,915

Areas of special interest - credit risk

Personal lending

HSBC provides a broad range of secured and unsecured personal lending products to meet customer needs. Given the diverse nature of the markets in which HSBC operates, the range is not standardised in all countries but is tailored to meet the demands of individual markets while using appropriate distribution channels and, wherever possible, common global IT platforms. 

Personal lending includes advances to customers for asset purchase, such as residential property and motor vehicles, where the loans are typically secured on the assets being acquired. HSBC also offers loans secured on existing assets, such as first and second liens on residential property; unsecured lending products such as overdrafts, credit cards and payroll loans; and debt consolidation loans which may be secured or unsecured.

Various underwriting controls are applied before a loan is issued, and delinquency is managed through collection and customer management procedures. Lending is managed on a risk-adjusted basis, recognising that credit losses are an inherent part of any lending business, where risk management is focused on estimating the probability of loss and the severity of loss should default occur, and pricing appropriately on a portfolio basis for such exposure. The expected occurrence and degree of delinquency varies according to the type of loan and the customer segment. Delinquency levels tend to increase in the course of normal portfolio ageing. As a result, loan impairment charges usually relate to lending originated in earlier accounting periods.

The commentary that follows is on a constant currency basis.

At 30 June 2008, total personal lending was US$498 billion, broadly unchanged from the balance at 31 December 2007. In the first half of 2008, personal lending represented 93 per cent of the Group's loan impairment charge. Within personal lending, total impairment charges of US$9.4 billion were concentrated in North America (US$7.0 billion), the UK (US$849 million) and Latin America (US$1.1 billion). These loan impairment charges represented, respectively, 31 per cent, 4 per cent and 5 per cent of total Personal Financial Services net operating income before loan impairment charges. Personal lending balances and credit quality in the US and the UK lending portfolio are discussed in greater detail below.

In Latin America, asset balances rose strongly, with gross loans and advances to personal customers increasing by 8 per cent to US$25 billion. Residential mortgage lending increased by 13 per cent, and other personal lending by 7 per cent. In Mexico, HSBC's other personal lending balances at 30 June 2008 were US$5.0 billion, a rise of 1 per cent from 31 December 2007, mainly due to growth in credit card balances. 

Loan impairment charges in Personal Financial Services in Mexico rose by 76 per cent to US$553 million in the first half of 2008, compared with the first half of 2007 driven by strong growth in loan balances, a deterioration in credit delinquency and portfolio seasoning.

Total gross personal lending
	At  30 June  2008		At 30 June 2007		At  31 December 2007
	US$m		US$m		US$m
Total personal lending in the US	184,211		201,360		199,336
US residential mortgages1	89,985		102,563		98,816
Motor vehicle finance	12,777		13,205		13,266
MasterCard and Visa credit cards	30,534		30,393		32,223
Private label cards	16,184		15,942		17,411
Other personal lending	34,731		39,257		37,620
Personal lending in North America excluding the US	30,216		27,338		31,226
Residential mortgages	20,388		18,058		20,177
Other personal lending	9,828		9,280		11,049
Total personal lending in North America	214,427		228,698		230,562
Total personal lending in UK	132,420		130,211		128,400
Residential mortgages	91,522		85,827		85,356
Other personal lending	40,898		44,384		43,044
Total personal lending in other geographical regions	151,218		129,967		141,872
Residential mortgages	68,726		60,376		64,719
Other personal lending	82,492		69,591		77,153
	498,065		488,876		500,834

1 Includes residential mortgages of HSBC Bank USA and HSBC Finance.

US personal lending - portfolio review

Total US personal lending at 30 June 2008 declined by 8 per cent to US$184 billion from the end of 2007. Residential mortgage balances fell by 9 per cent to US$90 billion due to the impact of decisions taken in 2007 to end new correspondent originations in mortgage services and limit new loans in the consumer lending business, as well as portfolio run-off and charge-offs, including a US$4 billion sale of a portfolio of loans by the US retail bank. 

Other personal lending fell by 8 per cent to US$35 billion as tightened underwriting criteria and lower marketing expenditure matched HSBC's reduced appetite for risk and constrained new originations. For similar reasons, card balances declined by 5 per cent to US$31 billion. Motor vehicle finance loans declined by 4 per cent to US$13 billion, as growth in the direct-to-consumer channel was offset by a decline in loans sold through dealerships as risk appetite was adjusted to reflect, in part, changed vehicle purchase preferences in the US as fuel prices rose markedly. HSBC ended relationships with a number of dealers in the first half of 2008.

In late July 2008 HSBC decided to cease originating new business within a 90 day period in the North America vehicle finance business of HSBC Finance Corporation. While credit quality in the vehicle finance business had improved during the first half of 2008, management considered that the business was sub-scale and did not have sufficient market strength for it to provide an acceptable level of risk adjusted returns. HSBC will manage an orderly run-off of the portfolio of US$12.5 billion. The estimated costs associated with the decision to exit the vehicle finance business are US$25 million, a substantial portion of which are expected to be recognised in the second half of 2008.

Mortgage lending - portfolio review

The Group offers a wide range of mortgage products designed to meet customer needs. The range includes capital or principal repayment mortgages subject to fixed or variable interest rates, and products designed to meet demand for housing loans with more flexible payment structures. HSBC underwrites both first lien residential mortgages and loans secured by second lien mortgages; the latter are reported within 'Other personal lending' in the market sector analysis on page 156. The bulk of the mortgage lending products sold in the US consumer lending branch network are for refinancing and debt consolidation, rather than for house purchase.

Interest-only mortgages are those where customers make regular payments of interest during the life of the loan and repay the principal from the sale of their home or alternative sources of funds such as an endowment or other investment policy.

Introductory interest-only mortgages are typically where the interest-only element is for a fixed term at the start of the loan, after which principal repayments commence. Affordability mortgages include all products where the customer's monthly payments are set at a low initial rate, either variable or fixed, before resetting to a higher rate once the introductory period is over. These include ARMs, loans on which the interest rate is periodically changed based on a reference price.

HSBC has not offered, and does not expect to offer, ARMs with self-select payment options or other negative amortisation products.

Affordability mortgages are primarily offered in the US and the UK. Under the HFC and Beneficial brands, HSBC Finance and HFC UK offer a range of products and delivery channels designed for the needs of customers with non-standard or less favourable credit profiles. In the US, these mortgages continue to experience heightened levels of delinquency that began to emerge in late 2006. In 2008, management continued to tighten underwriting criteria, reducing loan to value ratios, with tighter restrictions in certain states to respond to these elevated levels of delinquency. These actions contributed to the reduction in HSBC Finance's mortgage balances to US$83 billion at 30 June 2008 (31 December 2007: US$89 billion) as set out in the table on page 164. 

In the UK, affordability mortgages have shown significantly lower levels of delinquency due to the different credit profiles of the customers to those in the US, tighter underwriting criteria and less marked weakness in house prices to date.

US mortgage lending

US mortgage lending, comprising residential mortgage and second lien lending, made up 21 per cent of the Group's gross loans and advances to personal customers at 30 June 2008.

Balances declined by 9 per cent from 31 December 2007, reflecting decisions made in the consumer finance business to run down the mortgage services portfolio and tighten underwriting standards in the consumer lending portfolio. The retail bank sold a US$4 billion portfolio of loans in the first half of 2008, and continued to sell newly originated residential mortgages to the US government-sponsored mortgage agencies.

UK mortgage lending

The UK mortgage business increased balances while maintaining overall credit quality, despite a significant deterioration in the housing market as a whole. The withdrawal of some competitors from the market and the consequent repricing of risk allowed HSBC Bank to expand its share of the new lending market while staying within its targeted customer segments.

Total mortgage lending rose from US$87 billion at 31 December 2007 to US$93 billion at 30 June 2008. The increase reflected a US$3 billion rise in first lien prime mortgages at HSBC Bank, driven by the success of the RateMatcher mortgage campaign in the first half of 2008 in generating new business, and a US$3 billion increase at First Direct as a result of a similar campaign.

HSBC Bank only accepts new originations through its own salesforce and carries out no business through third parties. The vast majority of lending is to existing customers holding a current account relationship with the bank. At 30 June 2008 only a low percentage of the bank's book consisted of lending to purchase property for rent to third parties, for which the bank applies higher collateral requirements.

Interest-only mortgage balances rose from US$32 billion at 31 December 2007 to US$37 billion at 30 June 2008, driven by the increase in First Direct balances. The vast bulk of First Direct mortgages are offset mortgages linked to a current account and are classified as interest-only, using the categories described above.

Second lien balances, which were all held by HFC UK, declined from US$1.9 billion at 31 December 2007 to US$1.8 billion at 30 June 2008 due to tighter underwriting criteria restricting originations. In the first half of 2008, HFC UK ceased originating loans through brokers.

UK mortgage credit quality remained broadly stable. The portion of mortgages with a loan to value ratio greater than 90 per cent declined as virtually no new loans were originated in this category, in line with measures initiated in 2007 and extended in 2008. The average loan to value ratio for new business in the first half of 2008, at 56 per cent, was at its lowest for four years.

Despite the weakening in the housing market, delinquency rates on mortgages in the UK increased only gradually. At the retail bank 30 days or more delinquency rates rose from 1.8 per cent at 31 December 2007 to 1.9 per cent at 30 June 2008. Credit quality at First Direct remained high, with delinquency rates less than 0.1 per cent, marking a slight increase from a very low base. Delinquencies on second lien mortgages offered through HFC UK increased in 2008. There was a small increase in loan impairment charges on mortgages, reflecting the weaker economic environment and less liquid property market.

The following table shows the levels of mortgage lending products in the various portfolios in the US and the UK, together with the rest of the HSBC Group.

Mortgage lending products

	US$m		US$m		US$m		US$m		US$m		US$m
	US		Rest  of North  America		UK		Rest  of  Europe		Other		Total
	US$m		US$m		US$m		US$m		US$m		US$m
At 30 June 2008
Residential mortgages	90,096		20,277		91,522		10,098		58,628		270,621
Second lien mortgages	16,136		1,266		1,754		-		519		19,675
Total mortgage lending	106,232		21,543		93,276		10,098		59,147		290,296
Second lien as a percentage of total mortgage lending	15.2%		5.9%		1.9%		-		0.9%		6.8%
Interest-only (including endowment) mortgages	-		1,408		37,270		532		1,115		40,325
Affordability mortgages, including ARMs	31,995		-		8,304		820		4,961		46,080
Other	-		-		392		-		287		679
Total interest-only and affordability mortgages	31,995		1,408		45,966		1,352		6,363		87,084
- as a percentage of total mortgage lending	30.1%		6.5%		49.3%		13.4%		10.8%		30.0%
Negative equity mortgages	9,673		46		913		-		127		10,759
Other loan to value ratios greater than  90 per cent	39,098		1,726		10,242		151		666		51,883
	48,771		1,772		11,155		151		793		62,642
- as a percentage of total mortgage lending	45.9%		8.2%		12.0%		1.5%		1.3%		21.6%
At 31 December 2007
Residential mortgages	98,928		20,065		85,356		10,309		54,410		269,068
Second lien mortgages	17,590		1,256		1,930		-		748		21,524
Total mortgage lending	116,518		21,321		87,286		10,309		55,158		290,592
Second lien as a percentage of total mortgage lending	15.1%		5.9%		2.2%		-		1.4%		7.4%
Interest-only (including endowment) mortgages	-		174		32,314		602		1,335		34,425
Affordability mortgages, including ARMs	40,201		219		8,695		685		4,993		54,793
Other1	-		274		241		27		621		1,163
Total interest-only and affordability mortgages	40,201		667		41,250		1,314		6,949		90,381
- as a percentage of total mortgage lending	34.5%		3.1%		47.3%		12.7%		12.6%		31.1%
Negative equity mortgages	11,079		107		646		-		525		12,357
Other loan to value ratios greater than  90 per cent	42,246		679		10,969		211		1,333		55,438
	53,325		786		11,615		211		1,858		67,795
- as a percentage of total mortgage lending	45.8%		3.7%		13.3%		2.0%		3.4%		23.3%

1 December 2007 has been restated to exclude mortgages in the UK that are fixed for a period of time before reverting to a standard variable rate.

HSBC Finance held approximately US$83 billion of residential mortgage and second lien loans and advances to personal customers secured on real estate at 30 June 2008, 17 per cent of the Group's gross loans and advances to personal customers.

HSBC Finance mortgage lending1

	At 30 June 2008						At 30 June 2007						At 31 December 2007
	US				Other		US				Other		US				Other
	Mortgage		Consumer		mortgage		Mortgage		Consumer		mortgage		Mortgage		Consumer		mortgage
	services		lending		lending2		services		lending		lending2,3		services		lending		lending2,3
	US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m
Fixed rate	18,180		46,320		1,963		22,391		45,369		2,114		20,146		47,254		2,254
Adjustable-rate and introductory rate	13,265		2,714		130		18,991		3,406		102		16,070		2,970		147
	31,445		49,034		2,093		41,382		48,775		2,216		36,216		50,224		2,401
First lien	26,049		42,582		1,048		33,137		42,234		1,000		29,475		43,366		1,108
Second lien	5,396		6,452		1,045		8,245		6,541		1,216		6,741		6,858		1,293
	31,445		49,034		2,093		41,382		48,775		2,216		36,216		50,224		2,401
Adjustable-rate	10,638		2,714		128		14,402		3,406		102		12,361		2,970		145
Introductory interest-only	2,627		-		2		4,589		-		-		3,709		-		2
	13,265		2,714		130		18,991		3,406		102		16,070		2,970		147
Stated income4	6,814		-		-		9,429		-		-		8,292		-		-

1 Management basis.

2 Includes balances in Canada.

3 Balances restated to exclude UK business transferred in May 2008. 

4 Stated income lending forms a subset of total mortgage services lending across all categories.

US personal lending - portfolio trends and management actions

The cycle of declining house prices, reduced availability of mortgage finance and growing customer delinquency and default that began in 2006 continued and intensified in the first half of 2008 as house price depreciation became more pronounced, the economy weakened, and the outlook for employment deteriorated. These pressures on the consumer were compounded by a sharp rise in retail prices for fuel and food, which partly offset the effect of rebate payments from the federal government stimulus package.

The rate of house price depreciation increased markedly in 2008, the S&P/Case-Shiller 10-City Composite Index showing a record decline in house prices of 17 per cent in the year to May 2008. Two months or more delinquencies rose most rapidly in those states including California, Florida and Arizona which had previously demonstrated superior credit performance, the greatest rate of appreciation and the highest home values. 

The unprecedented turmoil in the mortgage lending market continued into 2008. Rising levels of delinquencies in 2007 had led investors to question the reliability of credit ratings, not only for residential MBSs but for a wide range of structured credit products. Investors became increasingly unwilling to purchase securitised credit, leading to a sharp contraction in flows of credit through the affected channels. Liquidity concerns and capital constraints developed across the financial industry. The exit of a number of participants in the sub-prime mortgage industry, together with a tightening of underwriting criteria by remaining providers, led to progressively fewer refinancing options for customers. This created particular problems for borrowers with affordability mortgages who faced a considerable increase in their monthly repayments at the end of their discounted introductory periods. 

It is clear that, for some time, equity withdrawal has been the principal source of credit available to sub-prime borrowers dealing with unforeseen financial needs. With this source of funds heavily constrained, and facing rises in loan repayment costs as discount periods ended as well as general price rises, consumers faced increasing difficulty in keeping current with contractual payment schedules.

As a result, credit quality in the sub-prime portfolio continued to deteriorate in 2008, with some evidence that the wider economic deterioration was leading to a rise in delinquencies in portfolios of higher credit quality. Delinquencies continued to rise in credit cards, which until the second half of 2007 had been relatively resilient. The increase in delinquency rates was matched by a rise in loss severities as falling house prices led to a reduction in the recoverable amount in the event of a default that led to repossession.

Within the sub-prime mortgage portfolio, loans originated in 2005, 2006 and early 2007 experienced worse credit performance than earlier vintages. High delinquency rates occurred in second lien loans, where a significant number had underlying ARMs that faced repricing in the near term. As the interest rate adjustments occurred in an environment of lower house prices and tightening credit, the probability of default was greater than generally experienced prior to 2007. Second lien loans have a heightened risk profile, for the reasons noted above. These loans often have higher loan-to-value ratios because, in many cases, the second lien loan was necessary to complete the purchase of the property. For consumer finance second lien mortgages, the proportion of customers two months or more behind on contractual payments rose from 11.15 per cent at 31 December 2007 to 12.47 per cent at 30 June 2008. Loss on default of second lien loans approaches 100 per cent of the amount owed as any collateral in the property is applied initially to the first lien loan.

HSBC Finance: geographical concentration of US lending1

	Mortgage lending as a percentage of:				Other personal lending as a percentage of:
	total lending		total mortgage lending		total lending		total other personal lending		Percentage of total lending
	%		%		%		%		%
California	6		12		6		12		12
Florida	4		7		3		7		7
New York	3		6		3		6		6
Texas	2		3		4		8		6
Ohio	3		5		2		5		5
Pennsylvania	3		5		2		4		5

1 By states which individually account for 5 per cent or more of HSBC Finance's US customer loan portfolio.

Stated-income mortgages are also of above average risk as these were underwritten on the basis of borrowers' representations of annual income, not verified by receipt of supporting documentation. In HSBC Finance mortgage services, two months or more delinquency rates on stated-income loans rose from 19.01 per cent at 31 December 2007 to 23.64 per cent at 30 June 2008. The percentage rise was mainly due to a decline in loan balances from US$8.3 billion at 31 December 2007 to US$6.8 billion at 30 June 2008 as the mortgage loan portfolio is run off.

In the mortgage services business, the deterioration in credit performance first reported in 2006 continued into the first half of 2008 as the portfolio continued to season and progress as expected into later stages of delinquency and charge off. After rising initially in early 2008, amounts of two months or more delinquency in mortgage services have decreased over recent months to stand at US$4.1 billion at 30 June 2008, in line with the position at 31 December 2007. However, these represented an increased proportion of a reducing portfolio, rising from 11.24 per cent to 12.95 per cent.

During this period, HSBC took several management actions to reposition the US consumer finance business, building on its decisions in March 2007 to cease purchasing mortgages from third party correspondents, in September 2007 to close the wholesale business, Decision One, thereby ending new originations for the mortgage services business and, in the fourth quarter of 2007, to downsize the branch network to approximately 1,000 branches.

The branch-based consumer lending business continued to experience rising delinquency levels, particularly on first lien loans in the states most exposed to falling house prices and rising unemployment; 50 per cent of the increase in amounts of two months or more contractual delinquency is concentrated in nine states. After relative stability in the portfolio throughout 2006 and into the first half of 2007, delinquencies began to rise across all vintages but particularly in loans which were originated in 2006 and the first half of 2007, to levels above those previously experienced. This trend was also experienced by the rest of the industry. Two months or more delinquencies rose from 4.18 per cent of loans and advances at 31 December 2007 to 5.66 per cent at 30 June 2008. Delinquent balances increased to US$2.8 billion. In this environment, HSBC took further measures to tighten underwriting standards, including decreasing the loan to value ratio for residential mortgages, ceasing to underwrite certain products and raising the credit requirements for some risk factors. As a consequence, originations fell to some 30 per cent of the levels experienced in the first half of 2007. As part of an ongoing branch optimisation programme, a further 100 branches were closed in the first half of 2008.

At the US retail bank, prime and second lien mortgages experienced a rise in delinquencies. Two months or more delinquencies in prime mortgages rose from 1.03 per cent at 31 December 2007 to 1.78 per cent of loans and advances at 30 June 2008, the increase partly reflecting the US$4 billion asset sale in the first half of 2008. Management took action to increase collateral requirements and tighten credit criteria.

The US retail bank also experienced an increase in delinquency in its US$2.4 billion portfolio of stated-income loans. Two months or more delinquencies rose from 3.66 per cent at 31 December 2007 to 5.79 per cent at 30 June 2008. In response, the US retail bank stopped originating these products through the wholesale channel, curtailed certain stated income products and tightened underwriting criteria. 

In the US credit card portfolio, delinquencies of two months or more declined marginally from 5.68 per cent at 31 December 2007 to 5.57 per cent of balances at 30 June 2008. Improvements in collections and the effects of tax rebates and the federal stimulus tax payments credit were broadly offset by an increase in bankruptcy filings, rising unemployment rates and a weakening US economy, as discussed above. There was also the effect of change in product mix, as originations in the sub-prime and near-prime parts of the portfolio grew at faster rates than the overall portfolio. 

Higher delinquencies were also experienced in unsecured lending excluding credit cards. In the consumer lending personal non-credit card portfolio, credit quality deteriorated in all vintages, particularly in those markets most exposed to the slowdown in house prices and economic activity.

In vehicle finance, two months or more delinquencies moved favourably from 3.68 per cent at 31 December 2007 to 3.48 per cent at 30 June 2008. HSBC continued to tighten underwriting criteria in the vehicle finance business in both the dealer and direct-to-consumer channels, and reposition the business towards originating through the direct channel, where loans are of higher credit quality. A number of dealer relationships were terminated in 2008, particularly in the Northeast, and certain products were discontinued.

HSBC has been proactive in approaching customers to provide financial assistance in restructuring their debts to avoid foreclosure. As a consequence, HSBC restructured and modified loans that it believed could be serviced on revised terms. In particular, customers with ARM loans approaching the first reset were contacted in order to assess their ability to make the higher payments and, where appropriate, to refinance or modify their loans. The duration of loan modification periods available was also expanded, with some modifications given for two and five years. HSBC increased its collections capacity and reorganised operations to increase efficiency. As a result, in the first half of 2008 HSBC modified more than 33,000 loans with an aggregate balance of more than US$5.1 billion, bringing the total modified since inception of the ARM re-set programme to some 44,000 loans, with an aggregate value of US$6.7 billion. 

In the first half of 2008, approximately US$0.7 billion of ARM loans reached their first interest rate reset. In 2008 as a whole, approximately US$2.8 billion of ARMs will reach their first interest rate reset, of which US$1.4 billion relates to HSBC Bank USA and US$1.4 billion to HSBC Finance. Within the latter, US$0.8 billion is in mortgage services; the remainder in consumer lending. ARMs in the US retail bank are largely prime balances. 

US personal lending - loan delinquency

Two months and over contractual delinquency ratios in the second quarter of 2008 increased compared with both the first quarter of the year and the fourth quarter of 2007. The overall delinquency ratio in the period was negatively affected by lower balances resulting from portfolio run-off, and lower origination volumes resulting from the risk mitigation efforts and changes to product offerings which began in the second half of 2007 and continued into 2008. 

Delinquency ratios were also affected by the continued deterioration in the marketplace and broader economic conditions, portfolio seasoning and higher non-prime lending in some portfolios. Delinquencies in dollar terms increased modestly in the second quarter of 2008, tempered by improvements in domestic collections as a result of an extended seasonal benefit due to the federal stimulus rebate cheques issued during the second quarter of 2008, increased collection capacity and increases in the volume of loan restructures and modifications. 

The table below sets out the trends in two months and over contractual delinquencies.

Two months and over contractual delinquency in Personal Financial Services in the US

	Quarter ended
	30 June 2008		31March 2008	31 December 2007		30 September 2007			30 June  2007		31 March 2007	31 December 2006		30 September 2006
	US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m
Residential mortgages	6,213		5,892		5,404		3,868		2,992		2,703		2,733		2,335
Second lien mortgage lending	1,584		1,630		1,589		1,240		941		855		810		580
Vehicle finance	445		370		488		451		384		302		415		421
Credit card	1,700		1,782		1,830		1,581		1,314		1,274		1,312		1,217
Private label	590		591		598		536		434		429		471		444
Personal non-credit card	2,606		2,650		2,634		2,238		2,000		1,881		1,888		1,696
Total	13,138		12,915		12,543		9,914		8,065		7,444		7,629		6,693
	%1		%1		%1		%1		%1		%1		%1		%1
Residential mortgages	6.90		6.09		5.47		3.83		2.92		2.54		2.54		2.19
Second lien mortgage lending	9.83		9.71		9.02		6.81		5.02		4.35		3.97		2.79
Vehicle finance	3.48		2.83		3.68		3.40		2.91		2.29		3.16		3.21
Credit card	5.57		5.81		5.68		5.09		4.32		4.43		4.48		4.46
Private label	3.65		3.66		3.43		3.28		2.72		2.65		2.83		2.88
Personal non-credit card	14.00		13.71		13.16		10.88		9.69		9.33		9.05		8.23
Total	7.13		6.70		6.29		4.95		4.00		3.64		3.67		3.28

Two months and over mortgage contractual delinquency in mortgage services and consumer lending

	Quarter ended
	30 June 2008		31 March 2008	31 December 2007		30 September 2007			30 June  2007		31 March 2007	31 December 2006		30 September 2006
	US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m
Mortgage services:
- first lien	3,175		3,221		3,033		2,345		1,909		1,695		1,728		1,489
- second lien	897		1,020		1,038		832		660		595		570		405
Total mortgage services	4,072		4,241		4,071		3,177		2,569		2,290		2,298		1,894
Consumer lending:
- first lien	2,194		1,954		1,622		1,259		907		832		820		677
- second lien	583		530		478		346		236		220		200		143
Total consumer lending	2,777		2,484		2,100		1,605		1,143		1,052		1,020		820
	%1		%1		%1		%1		%1		%1		%1		%1
Mortgage services:
- first lien	12.19		11.56		10.29		7.46		5.76		4.53		4.39		3.68
- second lien	16.62		16.85		15.40		11.16		7.87		6.40		5.60		3.61
Total mortgage services	12.95		12.51		11.24		8.17		6.19		4.90		4.64		3.67
Consumer lending:
- first lien	5.15		4.52		3.74		2.92		2.15		2.03		2.08		1.85
- second lien	9.04		7.96		6.97		5.03		3.60		3.34		3.08		2.45
Total consumer lending	5.66		4.98		4.18		3.21		2.34		2.21		2.22		1.93

1 Expressed as a percentage of loans and advances in Personal Financial Services in the US. 

Analysis of Group credit quality

The following tables set out the Group's distribution of loans and advances by measures of credit quality, notably identifying and analysing loans and advances that were past due but not impaired. 

These analyses demonstrate credit quality across the majority of the Group's businesses that is broadly stable in terms of impairment compared with 31 December 2007. However, there is clear evidence of weakening economic fundamentals in many markets which, although not translating to impairment at 30 June 2008, is likely to lead to higher impaired loans in subsequent periods. The proportion of total loans and advances to customers that were neither past due nor impaired rose marginally, to 93 per cent. Within this picture, the deterioration in quality of US mortgage portfolios and the relative stability of the UK mortgage portfolio are fully commented on in 'Areas of Special Interest - Credit Risk' on page 161. The credit quality of loans and advances to banks remained high.

Compared with 31 December 2007, there was no material change in the profile of the ageing analysis of past due loans and advances. A small increase in unimpaired loans and advances past due under 30 days was partly offset by a decline in those past due under 60 days. The coverage ratio of impairment allowances to impaired loans remained at a similar high level to that reached at 31 December 2007. There was a modest increase in total impaired loans, further details of which, with their related individual and collective impairment allowances, are provided below.

For details of impairment incurred on available-for-sale debt and equity securities, see 'Accounting policies' on page 115.

Distribution of loans and advances by credit quality

	At 30 June 2008				At 30 June 2007				At 31 December 2007
	Loans and  advances to customers		Loans and advances to banks		Loans and   advances to customers		Loans and  advances to  banks		Loans and advances to   customers		Loans and  advances to  banks
	US$m		US$m		US$m		US$m		US$m		US$m
Loans and advances:
- neither past due nor impaired	999,217		256,860		885,815		214,277		931,872		237,339
- past due but not impaired	51,534		112		42,054		363		50,577		22
- impaired	19,029		16		14,555		12		18,304		12
	1,069,780		256,988		942,424		214,652		1,000,753		237,373
	At 30 June 2008				At 30 June 2007				At 31 December 2007
	Loans and  advances to customers		Loans and advances to banks		Loans and   advances to customers		Loans and  advances to  banks		Loans and advances to   customers		Loans and  advances to  banks
	US$m		US$m		US$m		US$m		US$m		US$m
Loans and advances:
- neither past due nor impaired	999,217		256,860		885,815		214,277		931,872		237,339
- past due but not impaired	51,534		112		42,054		363		50,577		22
- impaired	19,029		16		14,555		12		18,304		12
	1,069,780		256,988		942,424		214,652		1,000,753		237,373

Loans and advances which were past due but not impaired 

	At 30 June 2008				At 30 June 2007				At 31 December 2007
	Loans and  advances to customers1		Loans and advances to banks		Loans and   advances to customers1		Loans and  advances to  banks		Loans and  advances to customers1		Loans and  advances to  banks
	US$m		US$m		US$m		US$m		US$m		US$m
Past due up to 29 days	35,534		112		29,243		363		33,909		22
Past due 30 - 59 days	9,496		-		7,766		-		10,546		-
Past due 60 - 89 days	3,934		-		3,014		-		3,992		-
	48,964		112		40,023		363		48,447		22
Past due 90 - 179 days2	2,407		-		1,733		-		1,767		-
Past due over 180 days2	163		-		298		-		363		-
	51,534		112		42,054		363		50,577		22
	At 30 June 2008				At 30 June 2007				At 31 December 2007
	Loans and  advances to customers1		Loans and advances to banks		Loans and   advances to customers1		Loans and  advances to  banks		Loans and  advances to customers1		Loans and  advances to  banks
	US$m		US$m		US$m		US$m		US$m		US$m
Past due up to 29 days	35,534		112		29,243		363		33,909		22
Past due 30 - 59 days	9,496		-		7,766		-		10,546		-
Past due 60 - 89 days	3,934		-		3,014		-		3,992		-
	48,964		112		40,023		363		48,447		22
Past due 90 - 179 days2	2,407		-		1,733		-		1,767		-
Past due over 180 days2	163		-		298		-		363		-
	51,534		112		42,054		363		50,577		22

1 The majority of the loans and advances to customers that are operating within revised terms following restructuring, for details of which see 'Renegotiated loans' below, are excluded from this table.

2 Loans and advances past due 90 days or more, but unimpaired, include such transactions as loans fully secured by cash collateral, residential mortgages where the value of collateral is sufficient to repay both principal and all interest for at least one year, short-term trade facilities technically overdue but where there is no concern over the creditworthiness of the counterparty and certain accruing credit card receivable balances that have been appropriately provided for.

This aging analysis includes loans and advances on which collective impairment allowances have been assessed, though at their early stage of arrears there is no identifiable impairment as such. 

Certain loans and advances are individually assessed for impairment and, if found to be impaired, have impairment allowances assigned to them on an individual basis. It is not practicable to individually identify impaired loans and advances within portfolios of homogeneous loans which are assessed on a collective basis for impairment. In practice, such loans and advances are not individually identified as impaired until the time each impaired loan is written off. It is therefore necessary to estimate the carrying value of impaired loans and advances within these portfolios.

The approach adopted by HSBC to estimating the carrying value of impaired loans and advances within portfolios of homogeneous loans that are collectively assessed for impairment is to classify these loans and advances as impaired when the balances are 90 days or more past due, except for US vehicle loans which are classified as impaired when 60 days or more past due, and except for certain other balances on which the level of recoverability is judged to be adequate. All other collectively assessed loans and advances, including those which are less than 90 days past due (less than 60 days for US vehicle loans), are classified as not impaired and reported either as past due but not impaired or, if they are up to date, neither past due nor impaired. 

Collective impairment allowances are recognised in relation to losses that are likely to have been incurred at each reporting date on loans collectively assessed for impairment which are classified as unimpaired, typically, these would represent a small percentage of the unimpaired loans and advances. 

Loans and advances to customers and impairment allowances by geographical region

The table below presents an analysis of the impairment allowances recognised for impaired loans and advances that are either individually assessed or collectively assessed, and an analysis of collective impairment allowances on loans and advances classified as not impaired.

Loans and advances to customers and impairment allowances by geographical region

	Individually assessed loans and advances to customers						Collectively assessed loans and advances to customers1						Total
	Individual  impairment  allowances		Gross  loans and  advances				Collective  impairment  allowances		Gross  loans and  advances				Total  impairment  allowances		Gross  loans and  advances
	US$m		US$m		%		US$m		US$m		%		US$m		US$m		%
At 30 June 2008
Impaired loans and advances2	2,404		6,061		39.7		10,850		12,968		83.7		13,254		19,029		69.7
Europe	1,567		4,113		38.1		1,334		1,776		75.1		2,901		5,889		49.3
Hong Kong	133		380		35.0		12		58		20.7		145		438		33.1
Rest of Asia-Pacific	340		636		53.5		212		481		44.1		552		1,117		49.4
North America	160		486		32.9		7,977		8,426		94.7		8,137		8,912		91.3
Latin America	204		446		45.7		1,315		2,227		59.0		1,519		2,673		56.8
Collectively assessed loans and advances not impaired3							7,326		1,050,751		0.7		7,326		1,050,751		0.7
Europe							838		506,810		0.2		838		506,810		0.2
Hong Kong							228		99,676		0.2		228		99,676		0.2
Rest of Asia-Pacific							413		113,605		0.4		413		113,605		0.4
North America							5,050		276,765		1.8		5,050		276,765		1.8
Latin America							797		53,895		1.5		797		53,895		1.5
	2,404		6,061		39.7		18,176		1,063,719		1.7		20,580		1,069,780		1.9

	Individually assessed loans and advances to customers						Collectively assessed loans and advances to customers1						Total
	Individual  impairment  allowances		Gross  loans and  advances				Collective  impairment  allowances		Gross  loans and  advances				Total  impairment  allowances		Gross  loans and  advances
	US$m		US$m		%		US$m		US$m		%		US$m		US$m		%
At 30 June 2007
Impaired loans and advances2	2,614		6,052		43.2		6,913		8,503		81.3		9,527		14,555		65.5
Europe	1,771		4,146		42.7		1,112		1,705		65.2		2,883		5,849		49.3
Hong Kong	118		414		28.5		10		53		18.9		128		467		27.4
Rest of Asia-Pacific	392		711		55.1		215		498		43.2		607		1,209		50.2
North America	115		485		23.7		4,485		4,740		94.6		4,600		5,226		88.0
Latin America	218		296		73.6		1,091		1,507		72.4		1,309		1,804		72.6
Collectively assessed loans and advances not impaired3							4,796		927,869		0.5		4,796		927,869		0.5
Europe							760		425,902		0.2		760		425,902		0.2
Hong Kong							207		89,786		0.2		207		89,786		0.2
Rest of Asia-Pacific							333		87,905		0.4		333		87,905		0.4
North America							3,114		283,783		1.1		3,114		283,783		1.1
Latin America							382		40,493		0.9		382		40,493		0.9
	2,614		6,052		43.2		11,709		936,372		1.3		14,323		942,424		1.5
At 31 December 2007
Impaired loans and advances2	2,699		6,477		41.7		9,588		11,827		81.1		12,287		18,304		67.1
Europe	1,846		4,558		40.5		1,203		1,696		70.9		3,049		6,254		48.8
Hong Kong	132		378		34.9		12		55		21.8		144		433		33.3
Rest of Asia-Pacific	349		678		51.5		203		410		49.5		552		1,088		50.7
North America	119		421		28.3		7,057		7,963		88.6		7,176		8,384		85.6
Latin America	253		442		57.2		1,113		1,703		65.4		1,366		2,145		63.7
Collectively assessed loans and advances not impaired3							6,918		982,449		0.7		6,918		982,449		0.7
Europe							882		449,952		0.2		882		449,952		0.2
Hong Kong							232		89,581		0.3		232		89,581		0.3
Rest of Asia-Pacific							374		101,690		0.4		374		101,690		0.4
North America							4,804		293,456		1.6		4,804		293,456		1.6
Latin America							626		47,770		1.3		626		47,770		1.3
	2,699		6,477		41.7		16,506		994,276		1.7		19,205		1,000,753		1.9

1 Collectively assessed loans and advances comprise homogeneous groups of loans that are not considered individually significant, and loans subject to individual assessment where no impairment has been identified on an individual basis, but on which a collective impairment allowance has been calculated to reflect losses which have been incurred but not yet identified.

2 Impaired loans and advances are those identified as impaired on an individual basis and collectively assessed loans classified as impaired based on number of days past due.

3 Collectively assessed loans and advances not impaired are predominantly those under 90 days past due (less than 60 days for US vehicle loans).

Total impaired loans to customers were US$19 billion at 30 June 2008, an increase of 4 per cent since the end of 2007. At constant currency, the increase was 2 per cent. Impaired loans were 2 per cent of gross customer loans and advances, broadly in line with 31 December 2007.

The commentary that follows compares balances at 30 June 2008 with those at 31 December 2007 at constant exchange rates.

In Europe, impaired loans at US$5.9 billion were 8 per cent less than at the end of 2007, mainly due to the reclassification of the French regional banks as held for sale. Despite house price depreciation, credit quality in the UK remained resilient, helping to offset an increase in impaired loans in Turkey caused by strong balance sheet growth coupled with increased delinquency rates.

In Hong Kong, despite an increase in balances, impaired loans were flat at US$438 million reflecting favourable credit conditions due to the strong local economy.

In Rest of Asia-Pacific, impaired loans increased slightly as a rise in impaired loans in India and Australia, were partly offset by a decline in Taiwan, where credit quality improved in credit cards.

In North America, impaired loan balances rose by 6 per cent to US$8.9 billion from 31 December 2007. Credit performance in the consumer finance business continued to deteriorate. Loan portfolios seasoned and progressed as expected into later stages of delinquency and charge-off as the economy weakened, house prices continued to fall and unemployment rose. The broader decline in the economy spread to the US retail bank which experienced a rise in impairment on second lien mortgages. Delinquency ratios deteriorated in most categories, partly due to lower balances because of portfolio run-off and lower origination volumes as risk appetite was restricted. Delinquency balances benefited from the federal stimulus tax rebates made in the second quarter of 2008, enhanced collection efforts and increases in restructuring and modification of loans to assist customers to avoid foreclosures. A full discussion of these developments and their effect on credit quality is provided in 'Areas of Special Interest - Credit Risk' on page 161 and under 'Renegotiated loans' below.

In Latin America, impaired loans increased by 15 per cent to US$2.7 billion, primarily in Brazil, where there was strong growth in balances and credit quality deteriorated in vehicle finance and store loans.

Renegotiated loans 

Restructuring activity is designed to manage customer relationships, maximise collection opportunities and, if possible, help customers avoid foreclosure or repossession. Such activities include extended payment arrangements, approved external debt management plans, deferring foreclosure, modification, loan rewrites and/or deferral of payments pending a change in circumstances. Following restructuring, an overdue consumer account is normally reset from delinquent to current status. Restructuring policies and practices are based on indicators or criteria which, in the judgement of local management, indicate that repayment will probably continue. These policies are required to be kept under continual review and their application varies according to the nature of the market, the product, and the availability of empirically based data. Criteria vary between products, but typically include: receipt of one or more qualifying payments within a certain period, a minimum lapse of time from origination before restructuring may occur, and restrictions on the number and/or frequency of successive restructurings. When empirical evidence indicates an increased propensity to default on restructured accounts, the use of roll rate methodology ensures this factor is taken into account when calculating impairment allowances.

Renegotiated loans that would otherwise be past due or impaired totalled US$31 billion at 30 June 2008 (US$28 billion at 31 December 2007). Restructuring is most commonly applied to consumer finance portfolios. The largest concentration was in the US and amounted to US$27 billion (31 December 2007: US$24 billion) or 87 per cent (31 December 2007: 86 per cent) of the Group's total renegotiated loans at 30 June 2008. The increase was due to a significant deterioration in credit quality in the US. Most restructurings in the US related to loans secured on real estate.

Impairment allowances and charges

Movement in allowance accounts for total loans and advances

	Individually assessed		Collectively assessed		Total
	US$m		US$m		US$m
At 1 January 2008	2,706		16,506		19,212
Amounts written off	(370)		(8,436)		(8,806)
Recoveries of loans and advances written off in previous years	58		421		479
Charge to income statement	332		9,625		9,957
Exchange and other movements	(315)		60		(255)
At 30 June 2008	2,411		18,176		20,587
At 1 January 2007	2,572		11,013		13,585
Amounts written off	(390)		(5,673)		(6,063)
Recoveries of loans and advances written off in previous years	57		287		344
Charge to income statement	385		5,943		6,328
Exchange and other movements	(3)		139		136
At 30 June 2007	2,621		11,709		14,330
At 1 July 2007	2,621		11,709		14,330
Amounts written off	(507)		(6,274)		(6,781)
Recoveries of loans and advances written off in previous years	72		589		661
Charge to income statement	411		10,438		10,849
Exchange and other movements	109		44		153
At 31 December 2007	2,706		16,506		19,212

Net loan impairment charge to the income statement by geographical region

	Europe US$m		Hong  Kong US$m		Rest of Asia- Pacific US$m		North America US$m		Latin America US$m		Total US$m
Half-year to 30 June 2008
Individually assessed impairment allowances
New allowances	476		30		62		160		22		750
Releases of allowances no longer required	(253)		(14)		(48)		(31)		(14)		(360)
Recoveries of amounts previously written off	(16)		(6)		(15)		(17)		(4)		(58)
	207		10		(1)		112		4		332
Collectively assessed impairment allowances
New allowances net of allowance releases	1,195		81		423		7,017		1,330		10,046
Recoveries of amounts previously written off	(154)		(14)		(57)		(32)		(164)		(421)
	1,041		67		366		6,985		1,166		9,625
Total charge for impairment losses	1,248		77		365		7,097		1,170		9,957
Banks	-		-		-		-		-		-
Customers	1,248		77		365		7,097		1,170		9,957
	%		%		%		%		%		%
Charge for impairment losses as a percentage  of closing gross loans and advances (annualised)	0.41		0.09		0.44		4.67		3.19		1.51
	US$m		US$m		US$m		US$m		US$m		US$m
At 30 June 2008
Impaired loans	5,905		438		1,117		8,912		2,673		19,045
Impairment allowances	3,746		373		965		13,187		2,316		20,587

	Europe US$m		Hong  Kong US$m		Rest of Asia- Pacific US$m		North America US$m		Latin America US$m		Total US$m
Half-year to 30 June 2007
Individually assessed impairment allowances
New allowances	406		40		130		122		77		775
Releases of allowances no longer required	(228)		(10)		(53)		(25)		(17)		(333)
Recoveries of amounts previously written  off	(17)		(6)		(15)		(15)		(4)		(57)
	161		24		62		82		56		385
Collectively assessed impairment allowances
New allowances net of allowance releases	1,310		72		291		3,763		794		6,230
Recoveries of amounts previously written  off	(131)		(14)		(45)		(17)		(80)		(287)
	1,179		58		246		3,746		714		5,943
Total charge for impairment losses	1,340		82		308		3,828		770		6,328
Banks	-		-		-		-		-		-
Customers	1,340		82		308		3,828		770		6,328
	%		%		%		%		%		%
Charge for impairment losses as a percentage  of closing gross loans and advances (annualised)	0.53		0.10		0.50		2.51		2.79		1.10
	US$m		US$m		US$m		US$m		US$m		US$m
At 30 June 2007
Impaired loans	5,861		467		1,209		5,226		1,804		14,567
Impairment allowances	3,650		335		940		7,714		1,691		14,330
Half-year to 31 December 2007
Individually assessed impairment allowances
New allowances	375		63		81		106		133		758
Releases of allowances no longer required	(160)		(22)		(43)		(29)		(21)		(275)
Recoveries of amounts previously written off	(21)		(8)		(17)		(11)		(15)		(72)
	194		33		21		66		97		411
Collectively assessed impairment allowances
New allowances net of allowance releases	1,382		112		332		8,236		965		11,027
Recoveries of amounts previously written off	(373)		(15)		(47)		(19)		(135)		(589)
	1,009		97		285		8,217		830		10,438
Total charge for impairment losses	1,203		130		306		8,283		927		10,849
Banks	-		-		-		-		-		-
Customers	1,203		130		306		8,283		927		10,849
	%		%		%		%		%		%
Charge for impairment losses as a percentage  of closing gross loans and advances (annualised)	0.43		0.17		0.43		5.16		2.94		1.74
	US$m		US$m		US$m		US$m		US$m		US$m
At 31 December 2007
Impaired loans	6,266		433		1,088		8,384		2,145		18,316
Impairment allowances	3,938		376		926		11,980		1,992		19,212

Impairment allowances as a percentage of loans and advances to customers

	At  30 June  2008		At  30 June  2007		At  31 December  2007
	%		%		%
Total impairment allowances to gross lending1
Individually assessed impairment allowances	0.24		0.29		0.28
Collectively assessed impairment allowances	1.80		1.30		1.73
	2.04		1.59		2.01

1 Net of reverse repo transactions, settlement accounts and stock borrowings.

Loan impairment charges increased to US$10.1 billion in the first half of 2008, a rise of 58 per cent compared with the first half of 2007. The commentary that follows is on a constant currency basis.

New allowances for loan impairment charges rose by 51 per cent in the first half of 2008 compared with the first half of 2007, to US$10.8 billion. Releases and recoveries of allowances rose by 16 per cent to US$839 million.

In Europe, new loan impairment charges were US$1.7 billion, a decline of 4 per cent compared with the first half of 2007. Credit charges in Europe remained stable despite emerging economic and housing market weakness, particularly in the UK. In the UK retail bank, new loan impairment charges were in line with the first half of 2007 as lower new charges following the sale of a non-core portion of the cards portfolio in October 2007 were offset by the impact of balance growth in commercial lending. In the UK consumer finance business, new loan impairment charges fell following a methodology change which resulted in a one-off increase in new charges in the first half of 2007 and reduced balances. Elsewhere in Europe, new loan impairment charges rose due to growth in personal and credit card lending and higher delinquency rates in Turkey as some consumers encountered difficulties repaying their existing debts in the current economic climate. In France, new loan impairment charges rose reflecting a reduction in limits for recognising impairment on unauthorised overdrafts at the end of 2007 in accordance with new guidelines issued by the Commission Bancaire. 

Releases and recoveries in Europe were US$423 million, an increase of 7 per cent, as the non-recurrence of higher recoveries in Global Banking and Markets in the UK in the first half of 2007 was more than offset by recoveries in Personal Financial Services and Commercial Banking in the UK retail bank.

In Hong Kong, new loan impairment charges were US$111 million, a decline of 2 per cent from the first half of 2007, reflecting the strong economy and rising asset prices. 

Releases and recoveries in Hong Kong rose by 13 per cent from the first half of 2007 to US$34 million.

In Rest of Asia-Pacific, new loan impairment charges rose by 10 per cent to US$485 million. Balances grew strongly, particularly in lending to corporate and commercial clients and banks, reflecting buoyant economic conditions in the region. New loan impairment charges in India rose as a result of a more challenging credit environment for personal customers in which debt repayment was adversely affected by high inflation and interest rates, as well as balance sheet growth in cards, consumer finance, and personal loans. In the Middle East, increased delinquencies in the credit cards portfolio reflected balance growth, resulting in higher new loan impairment charges. This was partly offset in Taiwan, where new loan impairment charges fell due to the continued recovery from the 2006 credit crisis that had previously resulted in substantial new charges following regulatory intervention. In Thailand, new loan impairment charges also fell as a result of managing out of higher risk commercial banking relationships, as efforts were made to reduce risk in the portfolio.

Releases and recoveries in Rest of Asia-Pacific were broadly in line with the first half of 2007 at US$120 million. 

New loan impairment charges in North America rose by 85 per cent to US$7.2 billion, notwithstanding a decline in balances due to portfolio run-off and the effect of tighter credit underwriting standards and the continuing effect of management actions taken in 2007 to curtail new originations. The significant deterioration in US credit quality against the prior year period was driven by rising unemployment rates, accelerating house price declines and increased bankruptcy filings. The ability of many US consumers to refinance debt was constrained as a result of reductions in housing equity and the tightening of underwriting criteria by most lenders. Combined with a general weakening of the economy and portfolio run-off, these factors resulted in higher delinquency rates across the portfolio. Delinquency rates rose in the mortgage services and consumer lending businesses because of the problems discussed above. Asset quality declined in certain portfolios within the US retail bank, particularly within the Home Equity Line of Credit and Home Equity Loan portfolios of the second lien lending book, which resulted in higher new loan impairment charges. The prime residential mortgage portfolio also showed some increased delinquency but impairment remained low. New loan impairment charges rose in the credit cards business following increased delinquency rates as a result of the deterioration in the US economy, higher levels of non-prime lending, portfolio seasoning and growth in bankruptcy filings. In the personal non-credit card business, new loan impairment charges rose as delinquency rates increased, driven by rising unemployment and economic weakness. 

Releases and recoveries in North America rose by 38 per cent from the first half of 2007 to US$80 million, driven by higher releases in the US in the first half of 2008.

In Latin America, new loan impairment charges rose by 37 per cent to US$1.4 billion. Mexico was the main driver of the increase, with balance growth and higher delinquency rates in its credit card and personal loan portfolios as recent strong growth seasoned and credit experience in the market deteriorated. The increase in new loan impairment charges is seen as a cost of building strong market share in an area where HSBC was previously under-represented. New loan impairment charges in Brazil also rose, driven by balance growth and a deterioration in credit quality in vehicle finance and store loans. 

Releases and recoveries in Latin America rose by 54 per cent to US$182 million due to higher releases in Brazil as a result of the sale of an impaired loan portfolio in Personal Financial Services in March 2008.

Charge for impairment losses as a percentage of average gross loans and advances to customers

	Europe		Hong Kong		Rest of Asia- Pacific		North America		Latin America		Total
	%		%		%		%		%		%
Half-year to 30 June 2008
New allowances net of allowance releases	0.66		0.20		0.80		4.89		5.07		2.14
Recoveries	(0.08)		(0.04)		(0.14)		(0.04)		(0.64)		(0.10)
Total charge for impairment losses	0.58		0.16		0.66		4.85		4.43		2.04
Amount written off net of recoveries	0.52		0.16		0.56		3.98		3.74		1.71
Half-year to 30 June 2007
New allowances net of allowance releases	0.89		0.24		0.89		2.74		4.41		1.61
Recoveries	(0.08)		(0.04)		(0.14)		(0.02)		(0.42)		(0.08)
Total charge for impairment losses	0.81		0.20		0.75		2.72		3.99		1.53
Amount written off net of recoveries	0.83		0.24		0.60		2.40		3.07		1.39
Half-year to 31 December 2007
New allowances net of allowance releases	0.89		0.34		0.83		5.69		5.03		2.64
Recoveries	(0.22)		(0.04)		(0.14)		(0.02)		(0.71)		(0.16)
Total charge for impairment losses	0.67		0.30		0.69		5.67		4.32		2.48
Amount written off net of recoveries	0.56		0.24		0.77		2.74		3.07		1.39

Risk elements in the loan portfolio

The disclosure of credit risk elements under the following headings reflects US accounting practice and classifications:

loans accounted for on a non-accrual basis;

accruing loans contractually past due 90 days or more as to interest or principal; and

troubled debt restructurings not included in the above.

Troubled debt restructurings

The SEC requires separate disclosure of any loans whose terms have been modified, because of problems with the borrower, to grant concessions other than are warranted by market conditions. These are classified as 'troubled debt restructurings' and are distinct from the normal restructuring activities in personal loan portfolios described in 'Renegotiated loans' on page 172. Classification as a troubled debt restructuring may be discontinued after the first year if the debt performs in accordance with the new terms.

Troubled debt restructurings increased by 29 per cent in the first half of 2008, as more long-term modifications were offered to customers experiencing payment difficulties, particularly in the real estate secured portfolios in the US. 

Unimpaired loans past due 90 days or more

Unimpaired loans contractually past due 90 days or more increased by 21 per cent. The rise was mainly due to the US consumer finance business, where credit quality deteriorated.

Impaired loans

In accordance with IFRSs, HSBC recognises interest income on assets after they have been written down as a result of an impairment loss. In the following tables, HSBC represents information on its impaired loans and advances which are designated in accordance with the policy described above.

Potential problem loans

Credit risk elements also cover potential problem loans. These are loans where information on possible credit problems among borrowers causes management to seriously doubt their ability to comply with the loan repayment terms. There are no potential problem loans other than those identified in the table of risk elements set out below, and as discussed in 'Areas of special interest - credit risk' above, including ARMs and stated-income products. 

Analysis of risk elements in the loan portfolio by geographical region

	At30 June 2008 US$m		At30 June 2007 US$m		At 31 December 2007 US$m
Impaired loans
Europe	5,905		5,861		6,266
Hong Kong	438		467		433
Rest of Asia-Pacific	1,117		1,209		1,088
North America	8,912		5,226		8,384
Latin America	2,673		1,804		2,145
	19,045		14,567		18,316
Troubled debt restructurings
Europe	602		601		648
Hong Kong	125		162		146
Rest of Asia-Pacific	35		47		34
North America	4,456		2,232		3,322
Latin America	1,212		796		848
	6,430		3,838		4,998
Unimpaired loans contractually past due 90 days or more as to  principal or interest
Europe	345		193		202
Hong Kong	38		58		49
Rest of Asia-Pacific	240		135		156
North America	1,722		1,327		1,302
Latin America	225		318		421
	2,570		2,031		2,130
Trading loans classified as impaired
North America	897		130		675
Risk elements on loans
Europe	6,852		6,655		7,116
Hong Kong	601		687		628
Rest of Asia-Pacific	1,392		1,391		1,278
North America	15,987		8,915		13,683
Latin America	4,110		2,918		3,414
	28,942		20,566		26,119
Assets held for resale
Europe	82		48		59
Hong Kong	23		28		29
Rest of Asia-Pacific	18		16		7
North America	1,262		1,106		1,172
Latin America	120		93		101
	1,505		1,291		1,368
Total risk elements
Europe	6,934		6,703		7,175
Hong Kong	624		715		657
Rest of Asia-Pacific	1,410		1,407		1,285
North America	17,249		10,021		14,855
Latin America	4,230		3,011		3,515
	30,447		21,857		27,487
	%		%		%
Loan impairment allowances as a percentage of risk elements on loans, excluding those trading loans classified as impaired	73.4		70.1		75.5

ENDMSCUSSNRWNRWRAR

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