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Annual Financial Report - 26 of 48

3rd Apr 2013 16:42

RNS Number : 3816B
HSBC Holdings PLC
03 April 2013
 



The proportion of financial investments categorised as 'strong' remained high at 86% and 87%, at 31 December 2012 and 31 December 2011 respectively, as the year-on-year increase in balances was mainly due to the deployment of surplus liquidity into highly-rated government, quasi-government and supranational debt securities in North America and Hong Kong.

The proportion of cash and balances at central banks considered 'strong' remained high at 98%, reflecting deployment of surplus liquidity into central banks in Europe, Hong Kong and Rest of Asia-Pacific.

The proportion of loans and advances held at amortised cost and categorised as 'strong' remained broadly flat compared with the end of 2011 at 54%. Derivative balances classified as 'strong' declined marginally from 81% to 79%; the movement in balances was mainly in Europe reflecting fair value movements of existing contracts.

The following table shows our distribution of financial instruments by measures of credit quality:

Distribution of financial instruments by credit quality

(Audited)

Neither past due nor impaired

Past due

Impair-

Strong

Good

Satisfactory

Sub-

standard

but not

impaired

Impaired

ment

allowances10

Total

US$m

US$m

US$m

US$m

US$m

US$m

US$m

US$m

At 31 December 2012

Cash and balances at central banks ...............................

138,124

3,235

147

26

141,532

Items in the course ofcollection from other banks

6,661

203

439

-

7,303

Hong Kong Government certificates of indebtedness

22,743

-

-

-

22,743

Trading assets11 ...................

237,078

60,100

66,537

3,462

367,177

- treasury and othereligible bills ................

20,793

4,108

1,340

41

26,282

- debt securities ...............

106,453

16,685

20,931

608

144,677

- loans and advances:to banks ....................

49,133

21,018

7,418

702

78,271

to customers ..............

60,699

18,289

36,848

2,111

117,947

Financial assets designated atfair value11 .......................

6,186

5,884

401

243

12,714

- treasury and other eligible bills ...........................

54

-

-

-

54

- debt securities ...............

6,089

5,830

391

241

12,551

- loans and advances:to banks ....................

43

-

10

2

55

to customers ..............

-

54

-

-

54

Derivatives11 .......................

284,115

46,214

24,877

2,244

357,450

Loans and advances held at amortised cost .................

625,091

246,323

213,241

23,996

18,911

38,776

(16,169)

1,150,169

- to banks ........................

117,220

23,921

10,575

772

10

105

(57)

152,546

- to customers12 ..............

507,871

222,402

202,666

23,224

18,901

38,671

(16,112)

997,623

Financial investments ..........

357,452

27,428

21,143

6,759

-

2,530

415,312

- treasury and other similar bills ...........................

80,320

3,818

1,957

1,455

-

-

87,550

- debt securities ...............

277,132

23,610

19,186

5,304

-

2,530

327,762

Assets held for sale ..............

2,425

3,287

2,311

314

387

1,286

(718)

9,292

- disposal groups ..............

2,033

1,118

1,789

268

118

82

(49)

5,359

- non-current assets heldfor sale ......................

392

2,169

522

46

269

1,204

(669)

3,933

Other assets .........................

9,679

6,007

13,845

1,759

231

462

31,983

- endorsements and acceptances ...............

1,995

4,344

5,195

483

7

8

12,032

- accrued income and other

7,684

1,663

8,650

1,276

224

454

19,951

Total financial instruments ..

1,689,554

398,681

342,941

38,803

19,529

43,054

(16,887)

2,515,675

 

Distribution of financial instruments by credit quality (continued)

Neither past due nor impaired

Past due

Impair-

Strong

Good

Satisfactory

Sub-

standard

but not

impaired

Impaired

ment

allowances10

Total

US$m

US$m

US$m

US$m

US$m

US$m

US$m

US$m

At 31 December 2011

Cash and balances at central banks ...............................

126,926

2,678

263

35

129,902

Items in the course ofcollection from other banks

7,707

150

350

1

8,208

Hong Kong Government certificates of indebtedness

20,922

-

-

-

20,922

Trading assets11 ...................

231,594

37,182

39,171

1,502

309,449

- treasury and othereligible bills ................

33,199

538

564

8

34,309

- debt securities ...............

103,163

8,497

18,188

639

130,487

- loans and advances:to banks ....................

49,021

20,699

5,186

619

75,525

to customers ..............

46,211

7,448

15,233

236

69,128

Financial assets designated atfair value11 .......................

7,176

4,728

830

192

12,926

- treasury and other eligible bills ...........................

123

-

-

-

123

- debt securities ...............

6,148

4,728

767

191

11,834

- loans and advances:to banks ....................

55

-

63

1

119

to customers ..............

850

-

-

-

850

Derivatives11 .......................

279,557

45,858

18,627

2,337

346,379

Loans and advances held at amortised cost .................

609,081

245,352

194,661

28,210

20,009

41,739

(17,636)

1,121,416

- to banks ........................

144,815

28,813

6,722

568

39

155

(125)

180,987

- to customers12 ..............

464,266

216,539

187,939

27,642

19,970

41,584

(17,511)

940,429

Financial investments ..........

340,173

24,757

22,139

3,532

-

2,233

392,834

- treasury and other similar bills ...........................

58,627

3,348

3,144

104

-

-

65,223

- debt securities ...............

281,546

21,409

18,995

3,428

-

2,233

327,611

Assets held for sale ..............

14,365

12,587

7,931

536

2,524

1,479

(1,614)

37,808

- disposal groups ..............

14,317

12,587

7,931

536

2,522

1,467

(1,614)

37,746

- non-current assets heldfor sale ......................

48

-

-

-

2

12

-

62

Other assets .........................

11,956

6,526

12,379

1,193

421

517

32,992

- endorsements and acceptances ...............

1,789

4,075

4,629

504

10

3

11,010

- accrued income and other

10,167

2,451

7,750

689

411

514

21,982

Total financial instruments ..

1,649,457

379,818

296,351

37,538

22,954

45,968

(19,250)

2,412,836

For footnotes, see page 249.

Past due but not impaired gross financial instruments

(Audited)

Past due but not impaired loans are those in respect of which the customer is in the early stages of delinquency and has failed to make a payment or a partial payment in accordance with the contractual terms of the loan agreement. This is typically when a loan is less than 90 days past due and there are no other indicators of impairment.

Further examples of exposures past due but not impaired include individually assessed mortgages that are in arrears more than 90 days, but there are no other indicators of impairment and the value of collateral is sufficient to repay both the principal debt and all potential interest for at least one year, or short‑term trade facilities past due more than 90 days for technical reasons such as delays in documentation but there is no concern over the creditworthiness of the counterparty. When groups of loans are collectively assessed for impairment, collective impairment allowances are recognised for loans classified as past due but not impaired.

At 31 December 2012, US$19bn of loans and advances held at amortised cost were classified as past due but not impaired (2011: US$20bn). The largest concentration of these balances was in HSBC Finance. The decrease in 2012 was primarily in

North America in the CML portfolio, due to the reclassification of non-real estate personal loan balances to 'Assets held for sale' as well as the continued run-off of the lending balances. This was partly offset by increases in Rest of Asia-Pacific relating to a number of corporate exposures across the region. The rise in Latin America was mainly in Panama in the corporate and commercial sector across various industries. In Europe, the increase in past due but not impaired loans mainly related to business expansion in Turkey. In Hong Kong, the rise was mainly in overdrafts and term lending.

 

Past due but not impaired loans and advances to customers and banks by geographical region

(Audited)

Europe

Hong

Kong

Rest of Asia-

Pacific

MENA

North America

Latin America

Total

US$m

US$m

US$m

US$m

US$m

US$m

US$m

31 December 2012

Banks ......................................................

-

-

10

-

-

-

10

Customers ................................................

2,339

1,311

2,964

975

7,721

3,591

18,901

Personal ..................................................

1,416

638

1,961

248

5,806

2,198

12,267

Corporate and commercial .......................

909

579

953

726

1,910

1,360

6,437

Financial (non-bank financial institutions)

14

94

50

1

5

33

197

2,339

1,311

2,974

975

7,721

3,591

18,911

31 December 2011

Banks ......................................................

-

38

1

-

-

-

39

Customers ................................................

1,990

1,069

2,318

1,165

10,216

3,212

19,970

Personal ..................................................

1,362

715

1,626

166

7,941

2,141

13951

Corporate and commercial .......................

614

346

680

997

2,159

1,059

5855

Financial (non-bank financial institutions)

14

8

12

2

116

12

164

1,990

1,107

2,319

1,165

10,216

3,212

20,009

Ageing analysis of days past due but not impaired gross financial instruments

(Audited)

Up to 29 days

30-59 days

60-89 days

90-179 days

180 days

and over

Total

US$m

US$m

US$m

US$m

US$m

US$m

At 31 December 2012

Loans and advances held at amortised cost .................

14,236

3,189

1,262

200

24

18,911

- to banks ...............................................................

10

-

-

-

-

10

- to customers ........................................................

14,226

3,189

1,262

200

24

18,901

Assets held for sale .....................................................

251

84

48

2

2

387

- disposal groups .....................................................

87

17

11

1

2

118

- non-current assets held for sale ............................

164

67

37

1

-

269

Other assets ................................................................

122

37

24

12

36

231

- endorsements and acceptances .............................

6

1

-

-

-

7

- other ...................................................................

116

36

24

12

36

224

14,609

3,310

1,334

214

62

19,529

At 31 December 2011

Loans and advances held at amortised cost .................

14,239

3,680

1,727

223

140

20,009

- to banks ...............................................................

39

-

-

-

-

39

- to customers ........................................................

14,200

3,680

1,727

223

140

19,970

Assets held for sale .....................................................

1,563

644

307

8

2

2,524

- disposal groups .....................................................

1,563

644

307

7

1

2,522

- non-current assets held for sale ............................

-

-

-

1

1

2

Other assets ................................................................

225

80

37

22

57

421

- endorsements and acceptances .............................

7

2

-

1

-

10

- other ...................................................................

218

78

37

21

57

411

16,027

4,404

2,071

253

199

22,954

 

Renegotiated loans and forbearance

(Audited)

Current policies and procedures regarding renegotiated loans and forbearance are described in the Appendix to Risk on page 254.

 

The contractual terms of a loan may be modified for a number of reasons, which include changing market conditions, customer retention and other factors not related to the current or potential credit deterioration of a customer. Loans are classified as 'renegotiatedloans' when their contractual payment terms have been modified because we have significant concerns about the borrowers' ability to meet contractual payments when due. For the purposes of this disclosure, the term 'forbearance' is synonymous with the renegotiation of loans for these reasons.

The following tables show the gross carrying amounts of the Group's holdings of renegotiated loans and advances to customers by industry sector, geography and credit quality classification.

 

Renegotiated loans and advances to customers

(Audited)

At 31 December 2012

At 31 December 2011

 

Neither past due nor impaired

Past due but not impaired

Impaired

Total

Neither past due nor impaired

Past due but not impaired

Impaired

Total

US$m

US$m

US$m

US$m

US$m

US$m

US$m

US$m

Personal ............................

7,952

3,524

18,279

29,755

8,133

4,401

19,125

31,659

First lien residentialmortgages ..................

5,861

2,828

15,459

24,148

5,916

3,560

15,932

25,408

Other personal1 ..............

2,091

696

2,820

5,607

2,217

841

3,193

6,251

Corporate and commercial..

4,608

295

6,892

11,795

6,338

472

6,756

13,566

Manufacturing and international tradeservices ......................

2,381

154

3,012

5,547

2,396

255

2,755

5,406

Commercial real estate and other property-related ........................

1,796

10

3,484

5,290

2,949

122

3,550

6,621

Governments .................

177

-

-

177

113

2

132

247

Other commercial9 .........

254

131

396

781

880

93

319

1,292

Financial ............................

255

-

422

677

249

-

491

740

12,815

3,819

25,593

42,227

14,720

4,873

26,372

45,965

Total renegotiated loans and advances to customers as a percentageof total gross loans and advances to customers .....................

4.2%

4.8%

For footnotes, see page 249.

Renegotiated loans and advances to customers by geographical region

(Audited)

Europe

Hong

Kong

Rest of Asia-

Pacific

MENA

North America

Latin America

Total

US$m

US$m

US$m

US$m

US$m

US$m

US$m

31 December 2012

Personal ..................................................

2,817

245

248

190

25,474

781

29,755

First lien residential mortgages .............

1,896

68

78

112

21,896

98

24,148

Other personal1 ....................................

921

177

170

78

3,578

683

5,607

Corporate and commercial .......................

6,829

147

300

1,859

685

1,975

11,795

Manufacturing and international tradeservices ............................................

3,002

22

193

659

191

1,480

5,547

Commercial real estate and otherproperty-related ...............................

3,641

25

37

899

486

202

5,290

Governments .......................................

-

-

-

2

-

175

177

Other commercial9 ...............................

186

100

70

299

8

118

781

Financial ..................................................

328

-

4

340

3

2

677

9,974

392

552

2,389

26,162

2,758

42,227

Total impairment allowances onrenegotiated loans ................................

1,547

16

96

546

3,864

485

6,554

Individually assessed .............................

1,545

15

63

543

39

213

2,418

Collectively assessed ............................

2

1

33

3

3,825

272

4,136

 

Europe

Hong

Kong

Rest of Asia-

Pacific

MENA

North America

Latin America

Total

US$m

US$m

US$m

US$m

US$m

US$m

US$m

31 December 2011

Personal ..................................................

2,524

285

267

220

27,773

590

31,659

First lien residential mortgages..............

1,630

86

85

93

23,442

72

25,408

Other personal1 ....................................

894

199

182

127

4,331

518

6,251

Corporate and commercial .......................

8,453

157

181

2,198

700

1,877

13,566

Manufacturing and internationaltrade services ...................................

3,013

32

104

887

174

1,196

5,406

Commercial real estate and otherproperty-related ...............................

4,897

29

45

913

522

215

6,621

Governments .......................................

-

-

-

5

-

242

247

Other commercial9 ...............................

543

96

32

393

4

224

1,292

Financial ..................................................

487

5

-

237

2

9

740

11,464

447

448

2,655

28,475

2,476

45,965

Total impairment allowances onrenegotiated loans ................................

1,821

20

64

300

5,017

448

7,670

Individually assessed .............................

1,760

19

41

300

44

147

2,311

Collectively assessed ............................

61

1

23

-

4,973

301

5,359

For footnotes, see page 249.

2012 compared with 2011

(Unaudited)

Renegotiated loans totalled US$42bn at 31 December 2012 (2011: US$46bn). North America accounted for the largest volume of renegotiated loans which amounted to US$26bn or 62% of total renegotiated loans at 31 December 2012 (2011: US$28bn or 62%), most of which were first lien residential mortgages held by HSBC Finance. Of the total renegotiated loans in North America, US$17bn were impaired at 31 December 2012 (2011: US$18bn). The ratio of total impairment allowances to impaired loans at 31 December 2012 was 23% (2011: 28%). This decrease was driven by a reduction in both impaired loans and impairment allowances as we continued to run-off the CML portfolio. As the portfolio has been closed to new business since 2007, the volume of first time renegotiations has reduced significantly.

In Europe, renegotiated loans at 31 December 2012 amounted to US$10bn (2011: US$11bn), constituting 24% of total renegotiated loans (2011: 25%). Of the total renegotiated loans in Europe, US$5.7bn were impaired at 31 December 2012 (2011: US$6.0bn), and the ratio of total impairment allowances to impaired loans at 31 December 2012 was 27% (2011: 30%). This decline was driven by a reduction in both impaired loans and impairment allowances due to releases and write-offs of a number of non-performing loans as well as the sale of a number of exposures. The renegotiated loans in Europe largely consisted of commercial real estate and other property-related sector lending of 37% (2011: 43%) mainly in the UK, and manufacturing and international trade services sector lending of 30% (2011: 26%).

Forbearance within Latin America (primarily in Mexico and Brazil) was predominantly undertaken in the manufacturing and international trade services sector. The largest increase in renegotiated loans compared with 2011 was in this sector in Mexico. In addition, renegotiation activity in the personal lending portfolios increased in Brazil, where a collections campaign led to a significant increase in both the refinancing and debt consolidation portfolios.

In the Middle East and North Africa, renegotiated loans decreased compared with 2011, mainly in the corporate and commercial sector due to repayments and reduced exposures. Forbearance activity in Hong Kong and Rest of Asia-Pacific remained insignificant.

HSBC Finance loan modifications and re‑ageing

(Unaudited)

HSBC Finance maintains loan modification and re‑age ('loan renegotiation') programmes in order to manage customer relationships, improve collection opportunities and, if possible, avoid foreclosure.

Since 2006, HSBC Finance has implemented an extensive loan renegotiation programme, and a significant portion of its loan portfolio has been subject to renegotiation at some stage in the life of the customer relationship as a consequence of the economic conditions in the US and the nature of HSBC Finance's customer base.

The volume of loans that qualify for modification has reduced significantly in recent years. We expect this trend to continue as HSBC Finance believes the percentage of its customers with unmodified loans who would benefit from loan modification in a way that would avoid non-payment of future cash flows is decreasing. In addition, volumes of new loan modifications are expected to decrease due to gradual improvements in economic conditions, the cessation of new real estate secured and personal non-credit card receivables originations and the continued run-off of the CML portfolio.

Types of loan renegotiation programme in HSBC Finance

·; A temporary modification is a change to the contractual terms of a loan that results in the giving up of a right to contractual cash flows over a pre-defined period. With a temporary modification the loan is expected to revert back to the original contractual terms, including the interest rate charged, after the modification period. An example is reduced interest payments.

A substantial number of HSBC Finance modifications involve interest rate reductions. These modifications lower the amount of interest income HSBC Finance is contractually entitled to receive in future periods. Historically, modifications have generally been for six months, although extended modification periods are now more common.

Loans that have been re-aged are classified as impaired with the exception of first-time loan re-ages that were less than 60 days past due at the time of re-age. These remain classified as impaired until they have demonstrated a history of payment performance against their original contracted terms for at least 12 months.

·; A permanent modification is a change to the contractual terms of a loan that results in giving up a right to contractual cash flows over the life of the loan. An example is a permanent reduction in the interest rate charged.

Permanent or long-term modifications which are due to an underlying hardship event remain classified as impaired for their full life.

·; The term 're-age' describes a renegotiation by which the contractual delinquency status of a loan is reset to current after demonstrating payment performance. The overdue principal and/or interest is deferred and paid at a later date. Loan re-ageing enables customers who have been unable to make a small number of payments to have their loan delinquency status reset to current so that their credit score is not affected by the overdue balances.

Loans that have been re-aged remain classified as impaired until they have demonstrated a history of payment performance against the original contractual terms for at least 12 months.

A temporary or permanent modification may also lead to a re‑ageing of a loan although a loan may be re-aged without any modification to its original terms and conditions.

Where loans have been granted multiple concessions, subject to the qualifying criteria discussed below, the concession is deemed to have been made due to concern regarding the borrower's ability to pay, and the loan is disclosed as impaired. The loan remains disclosed as impaired from that date forward until the borrower has demonstrated a history of repayment performance for the period of time required for either modifications or re-ages, as described above.

 

Qualifying criteria

For an account to qualify for renegotiation it must meet certain criteria. However, HSBC Finance retains the right to decline a renegotiation. The extent to which HSBC Finance renegotiates accounts that are eligible under its existing policies will vary depending upon its view of prevailing economic conditions and other factors which may change from year to year. In addition, exceptions to policies and practices may be made in specific situations in response to legal or regulatory agreements or orders.

Renegotiated real estate secured and personal lending receivables are not eligible for a subsequent renegotiation for twelve or six months, respectively, with a maximum of five renegotiations permitted within a five-year period. Borrowers must be approved for a modification and generally make two minimum qualifying monthly payments within 60 days to activate a modification.

In certain circumstances where the debt has been restructured in bankruptcy proceedings, fewer or no payments may be required. Accounts whose borrowers are subject to a Chapter 13 plan filed with a bankruptcy court generally may be re-aged upon receipt of one qualifying payment, whereas accounts whose borrowers have filed for Chapter 7 bankruptcy protection may be re-aged upon receipt of a signed reaffirmation agreement. In addition, for some products, accounts may be re-aged without receipt of a payment in certain special circumstances (e.g. in the event of a natural disaster or a hardship programme).

2012 compared with 2011

At 31 December 2012, renegotiated real estate secured accounts in HSBC Finance represented 86% (2011: 86%) of North America's total renegotiated loans; US$14bn (2011: US$16bn) of these renegotiated real estate secured loans were classified as impaired. This decline was mainly due to lower lending balances as we continued to run-off the CML portfolio. A significant portion of HSBC Finance's renegotiated portfolio has received multiple renegotiations. Consequently, a significant proportion of loans included in the table below have undergone multiple re-ages or modifications. In this regard, multiple modifications have remained consistent at 75% to 80% of total modifications. Further details of HSBC Finance's real estate secured accounts and renegotiation programmes are provided below.

Gross loan portfolio of HSBC Finance real estate secured balances

(Unaudited)

Re-aged13

Modified

and re-aged

Modified

Total re-

negotiated

loans

Total non-

renegotiated

loans

Total

gross

loans

Total

impair-

ment

allowances

Impair-

ment

allowances/

gross loans

US$m

US$m

US$m

US$m

US$m

US$m

US$m

%

31 December 2012 ...

9,640

11,660

1,121

22,421

16,261

38,743

4,481

12

31 December 2011 .....

10,265

12,829

1,494

24,588

19,540

44,128

5,088

12

For footnote, see page 249.

Movement in HSBC Finance renegotiated real estate balances

(Unaudited)

2012

US$m

At 1 January ................................................................................................................................................

24,588

Additions ............................................................................................................................................................

1,221

Payments ...........................................................................................................................................................

(1,133)

Write-offs ..........................................................................................................................................................

(1,796)

Transfer to 'Assets held for sale' and 'Other assets' ...........................................................................................

(459)

At 31 December ...........................................................................................................................................

22,421

Number of renegotiated real estate secured accounts remaining in HSBC Finance's portfolio

(Unaudited)

Number of renegotiated loans (000s)

Total number of loans (000s)

Re-aged

Modified

and re-aged

Modified

Total

31 December 2012 ...............................................

117

107

11

235

427

31 December 2011 .................................................

121

112

14

246

469

 

During 2012, the aggregate number of renegotiated loans reduced due to the run-off of the portfolio. Within the constraints of our Group credit policy, HSBC Finance's policies allow for multiple renegotiations under certain circumstances, and a significant number of accounts received a second (or further) renegotiation during the year which does not appear in the statistics tabulated above because they present a loan as an addition to the volume of renegotiated loans on its first renegotiation only. At 31 December 2012, renegotiated loans were 58% (2011: 56%) of the total portfolio of HSBC Finance's real estate secured accounts.

Corporate and commercial forbearance

(Unaudited)

For the current policies and procedures regarding forbearance in the corporate and commercial sector, see the Appendix to Risk on page 257.

 

Renegotiated loan balances in the corporate and commercial sector decreased by US$1.8bn. The majority of the decrease was due to falling renegotiated loan balances in the commercial real estate and other property-related sector in 2012, which fell by US$1.3bn. This was primarily in Europe although the commercial real estate sector, particularly in the UK, continued to experience weaker property values, with fewer financial institutions financing commercial real estate lending, renegotiated loan balances fell as refinements in forbearance identification procedures reduced the renegotiated loan balances in UK commercial real estate and other property-related lending. Excluding the change in basis of reporting renegotiated loans, total renegotiated loans in the commercial real estate and other property-related sector remained broadly unchanged.

Within the commercial real estate and other property-related loans, the balances classified as 'impaired' declined marginally compared with 2011. Balances classified as 'past due but not impaired' declined by US$112m, mainly in the Middle East and North Africa relating to a small number of exposures in the UAE. Balances classified as 'neither past due nor impaired' declined by 39%, mainly in Europe reflecting the reduction in balances in the commercial real estate sector described above.

The commercial real estate mid-market sector continued to experience higher levels of renegotiation activity than larger corporates, where borrowers remained generally better capitalised with access to wider funding market opportunities. When considering acceptable restructuring terms for commercial real estate loans in Europe, we take into account the ability of the customer to service the revised interest payments as a prerequisite. Similarly, for principal payment modifications, we require the customer to be capable of complying with the revised terms as a necessary pre-condition. When principal payments are modified and permanent forgiveness results, or when it is otherwise considered that there is no longer a realistic prospect of recovering outstanding principal, the affected balances are written off. When principal repayments are postponed, the customer is expected to be able to pay in line with the renegotiated terms, including meeting the postponed principal repayment if due from refinancing. In all cases, a loan renegotiation is only granted when it is expected that the customer will be able to meet the revised terms.

Renegotiated loan balances in the manufacturing and international trade services sector increased in 2012, mainly in Latin America from the restructuring of a small number of loans in Mexico. In the Middle East and North Africa, renegotiated loan balances decreased, partly due to the repayment of a significant loan in the UAE.

Impaired loans

(Audited)

Impaired loans and advances are those that meet any of the following criteria:

·; loans and advances classified as CRR 9, CRR 10, EL 9 or EL 10 (a description of our internal credit rating grades is provided on page 253);

·; retail exposures 90 days or more past due, unless individually they have been assessed as not impaired; or

·; renegotiated loans and advances that have been subject to a change in contractual cash flows as a result of a concession which the lender would not otherwise consider, and where it is probable that without the concession the borrower would be unable to meet its contractual payment obligations in full, unless the concession is insignificant and there are no other indicators of impairment. Renegotiated loans remain classified as impaired until there is sufficient evidence to demonstrate a significant reduction in the risk of non-payment of future cash flows, and there are no other indicators of impairment.

For loans that are assessed for impairment on a collective basis, the evidence to support reclassification as no longer impaired typically comprises a history of payment performance against the original or revised terms, depending on the nature and volume of forbearance and the credit risk characteristics surrounding the renegotiation. For loans that are assessed for impairment on an individual basis, all available evidence is assessed on a case by case basis.

In HSBC Finance, where a significant majority of HSBC's loan forbearance activity occurs, the history of payment performance is assessed with reference to the original terms of the contract, reflecting the higher credit risk characteristics of this portfolio. The payment performance periods are monitored to ensure they remain appropriate to the levels of recidivism observed within the portfolio.

Further disclosure about loans subject to forbearance is provided on page 254. Renegotiated loans and forbearance disclosures are subject to evolving industry practice and regulatory guidance.

Movement in impaired loans by geographical region

(Unaudited)

Europe

Hong Kong

Rest of Asia-

Pacific

MENA

North America

Latin America

Total

US$m

US$m

US$m

US$m

US$m

US$m

US$m

Impaired loans at 1 January 2012 .....................

11,819

608

1,070

2,445

22,758

3,039

41,739

Personal .......................................................

2,797

190

388

428

21,094

1,646

26,543

Corporate and commercial ............................

8,113

372

667

1,798

1,517

1,391

13,858

Financial2 .....................................................

909

46

15

219

147

2

1,338

Classified as impaired during the year ................

3,482

292

924

648

8,130

4,507

17,983

Personal .......................................................

933

169

549

73

7,363

2,807

11,894

Corporate and commercial ............................

2,481

123

375

531

739

1,696

5,945

Financial2 .....................................................

68

-

-

44

28

4

144

Transferred from impaired to unimpairedduring the year ..............................................

(1,164)

(47)

(85)

(321)

(4,223)

(1,765)

(7,605)

Personal .......................................................

(279)

(38)

(69)

(32)

(4,124)

(1,124)

(5,666)

Corporate and commercial ............................

(858)

(5)

(15)

(289)

(99)

(640)

(1,906)

Financial2 .....................................................

(27)

(4)

(1)

-

-

(1)

(33)

Amounts written off ........................................

(1,891)

(217)

(564)

(264)

(3,514)

(2,112)

(8,562)

Personal .......................................................

(632)

(127)

(373)

(96)

(3,227)

(1,521)

(5,976)

Corporate and commercial ............................

(1,212)

(90)

(191)

(143)

(202)

(590)

(2,428)

Financial2 .....................................................

(47)

-

-

(25)

(85)

(1)

(158)

Net repayments and other.................................

(1,101)

(159)

(198)

(34)

(2,806)

(481)

(4,779)

Personal .......................................................

(353)

(22)

(56)

(5)

(2,380)

(228)

(3,044)

Corporate and commercial ............................

(466)

(133)

(136)

(26)

(363)

(253)

(1,377)

Financial2 .....................................................

(282)

(4)

(6)

(3)

(63)

-

(358)

At 31 December 2012 ....................................

11,145

477

1,147

2,474

20,345

3,188

38,776

Personal .......................................................

2,466

172

439

368

18,726

1,580

23,751

Corporate and commercial ............................

8,058

267

700

1,872

1,592

1,604

14,093

Financial2 .....................................................

621

38

8

234

27

4

932

For footnote, see page 249.

Collateral

Collateral and other credit enhancements held

(Audited)

Loans and advances held at amortised cost

Although collateral can be an important mitigant of credit risk, it is the Group's practice to lend on the basis of the customer's ability to meet their obligations out of cash flow resources rather than rely on the value of security offered. Depending on the customer's standing and the type of product, facilities may be provided unsecured. However, for other lending a charge over collateral is obtained and considered in determining the credit decision and pricing. In the event of default, the bank may utilise the collateral as a source of repayment.

Depending on its form, collateral can have a significant financial effect in mitigating our exposure to credit risk.

The tables below provide a quantification of the value of fixed charges we hold over a borrower's specific asset (or assets) where we have a history of enforcing, and are able to enforce, the collateral in satisfying a debt in the event of the borrower failing to meet its contractual obligations, and where the collateral is cash or can be realised by sale in an established market. The collateral valuation in the tables below excludes any adjustments for obtaining and selling the collateral.

We may also manage our risk by employing other types of collateral and credit risk enhancements, such as second charges, other liens and unsupported guarantees, but the valuation of such mitigants is less certain and their financial effect has not been quantified. In particular, loans shown in the tables below as not collateralised or partially collateralised may benefit from such credit mitigants.

Certain credit mitigants are used strategically in portfolio management activities. While single name concentrations arise in portfolios managed by Global Banking and Corporate Banking, it is only in Global Banking that their size requires the use of portfolio level credit mitigants. Across Global Banking risk limits and utilisations, maturity profiles and risk quality are monitored and managed pro-actively. This process is key to the setting of risk appetite for these larger, more complex, geographically distributed customer groups. While the principal form of risk management continues to be at the point of exposure origination, through the lending decision-making process, Global Banking also utilises loan sales and credit default swap ('CDS') hedges to manage concentrations and reduce risk. These transactions are the responsibility of a dedicated Global Banking portfolio management team. Hedging activity is carried out within agreed credit parameters, and is subject to market risk limits and a robust governance structure. CDS mitigants are held at portfolio level and are not reported in the presentation below.

 

Personal lending

Residential mortgage loans including loan commitments by level of collateral

(Audited)

Europe

Hong Kong

Rest ofAsia-Pacific

MENA

North America

Latin

America

Total

US$m

US$m

US$m

US$m

US$m

US$m

US$m

At 31 December 2012

Fully collateralised .................

141,673

53,478

43,662

2,106

59,799

5,193

305,911

Loan to value ('LTV') ratio:

- less than 25% ..................

11,733

8,090

4,438

125

3,703

319

28,408

- 25% to 50% ....................

36,038

30,155

12,752

623

10,934

1,522

92,022

- 51% to 75% ....................

60,395

12,770

19,625

1,001

26,582

2,295

122,668

- 76% to 90% ....................

27,118

1,931

6,195

189

12,307

871

48,611

- 91% to 100% ..................

6,389

532

652

168

6,273

186

14,200

Partially collateralised:

- greater than 100% LTV ...

2,967

2

376

85

10,210

16

13,656

- collateral value ................

2,565

1

323

76

8,684

12

11,661

Total residential mortgages ....

144,640

53,480

44,038

2,191

70,009

5,209

319,567

At 31 December 2011

Fully collateralised .................

125,702

46,532

38,381

1,761

60,794

4,891

278,061

LTV ratio:

- less than 25% .................

9,898

5,364

2,383

58

3,576

282

21,561

- 25% to 50% ....................

31,601

19,643

9,978

336

10,593

1,350

73,501

- 51% to 75% ....................

52,656

17,748

18,006

895

25,138

2,221

116,664

- 76% to 90% ....................

23,919

2,884

7,624

304

13,590

876

49,197

- 91% to 100% ..................

7,628

893

390

168

7,897

162

17,138

Partially collateralised:

- greater than 100% LTV ...

3,275

484

295

174

12,503

102

16,833

- collateral value ................

2,821

466

37

135

10,566

24

14,049

Total residential mortgages ....

128,977

47,016

38,676

1,935

73,297

4,993

294,894

 

The above table shows residential mortgage lending including off-balance sheet loan commitments by level of collateral. Off-balance sheet commitments include loans that have been approved but which the customer has not yet drawn, and the undrawn portion of loans that have a flexible drawdown facility such as the offset mortgage product. The collateral included in the table above consists of first charges on real estate.

The LTV ratio is calculated as the gross on-balance sheet carrying amount of the loan and any off-balance sheet loan commitment at the balance sheet date divided by the value of collateral. The methodologies for obtaining residential property collateral values vary throughout the Group, but are typically determined through a combination of professional appraisals, house price indices or statistical analysis. Valuations must be updated on a regular basis and, as a minimum, at intervals of every three years. Valuations are conducted more frequently when market conditions or portfolio performance are subject to significant change or when a loan is identified and assessed as impaired.

The LTV ratio bandings are consistent with our internal risk management reporting. While we do have mortgages in the higher LTV bands, our appetite for such lending is restricted and the larger portion of our portfolio is concentrated in the lower risk LTV bandings of 75% and below.

Other personal lending

Other personal lending consists primarily of overdrafts, credit cards and second lien mortgage portfolios. Second lien lending is supported by collateral but the claim on the collateral is subordinate to the first lien charge. The majority of our second lien portfolios were originated in North America where loss experience on defaulted second lien loans has typically approached 100%; consequently, we do not generally attach any significant financial value to this type of collateral. Credit cards and overdrafts are usually unsecured.

Corporate, commercial and financial (non-bank) lending

Collateral held is analysed separately below for commercial real estate and for other corporate, commercial and financial (non-bank) lending. This reflects the difference in collateral held on the portfolios. In each case, the analysis includes off-balance sheet loan commitments, primarily undrawn credit lines.

Commercial real estate loans and advances including loan commitments by level of collateral

(Audited)

Europe

Hong Kong

Rest ofAsia-Pacific

MENA

North America

Latin

America

Total

US$m

US$m

US$m

US$m

US$m

US$m

US$m

At 31 December 2012

Rated CRR/EL 1 to 7

Not collateralised

7,068

10,790

3,647

569

181

2,083

24,338

Fully collateralised ........................

23,450

17,355

6,106

92

9,054

1,846

57,903

Partially collateralised (A)..................

3,088

1,476

1,150

33

1,063

903

7,713

- collateral value on A ...............

2,780

1,179

464

29

401

423

5,276

33,606

29,621

10,903

694

10,298

4,832

89,954

Rated CRR/EL 8 to 10

Not collateralised

418

-

-

14

34

105

571

Fully collateralised ........................

1,261

2

60

8

408

141

1,880

LTV ratio:

- less than 25% ...................

34

-

1

-

25

10

70

- 25% to 50%

119

1

55

7

86

8

276

- 51% to 75%

437

-

2

-

69

28

536

- 76% to 90%

501

-

1

-

58

63

623

- 91% to 100% ...................

170

1

1

1

170

32

375

Partially collateralised (B) ..................

1,585

-

51

204

377

24

2,241

- collateral value on B ...............

938

-

15

111

265

13

1,342

3,264

2

111

226

819

270

4,692

Total commercial real estateloans and advances .........

36,870

29,623

11,014

920

11,117

5,102

94,646

At 31 December 2011

Rated CRR/EL 1 to 7

Not collateralised

5,730

12,552

2,973

631

97

2,136

24,119

Fully collateralised ........................

24,547

11,734

6,929

65

8,506

1,706

53,487

Partially collateralised (C) ..................

3,099

916

1,032

50

1,635

999

7,731

- collateral value on C ...............

1,775

591

280

39

311

559

3,555

33,376

25,202

10,934

746

10,238

4,841

85,337

Rated CRR/EL 8 to 10

Not collateralised

434

2

10

55

135

127

763

Fully collateralised ........................

1,413

2

23

74

521

196

2,229

LTV ratio:

- less than 25% ...................

24

-

-

-

65

9

98

- 25% to 50%

140

2

-

-

5

21

168

- 51% to 75%

935

-

1

-

217

28

1,181

- 76% to 90%

159

-

2

74

61

117

413

- 91% to 100% ...................

155

-

20

-

173

21

369

Partially collateralised (D) .................

1,921

-

42

181

401

3

2,548

- collateral value on D ...............

1,083

-

26

89

246

1

1,445

3,768

4

75

310

1,057

326

5,540

Total commercial real estateloans and advances .........

37,144

25,206

11,009

1,056

11,295

5,167

90,877

 

The collateral included in the table above consists of fixed first charges on real estate and charges over cash for commercial real estate. These facilities are disclosed as not collateralised if they are unsecured or benefit from credit risk mitigation from guarantees, which are not quantified for the purposes of this disclosure. In Hong Kong, market practice is for lending to major property companies to be typically secured by guarantees or unsecured. In Europe, facilities of a working capital nature are generally not secured by a first fixed charge and are therefore disclosed as not collateralised.

The value of commercial real estate collateral is determined through a combination of professional and internal valuations and physical inspection. Due to the complexity of valuing collateral for commercial real estate, local valuation policies determine the frequency of review based on local market conditions. Revaluations are sought with greater frequency when, as part of the regular credit assessment of the obligor, material concerns arise in relation to the transaction which may reflect on the underlying performance of the collateral, or in circumstances where an obligor's credit quality has declined sufficiently to cause concern that the principal payment source may not fully meet the obligation (i.e. the obligor's credit quality classification indicates it is at the lower end, that is sub‑standard, or approaching impaired). Where such concerns exist the revaluation method selected will depend upon the loan-to-value relationship, the direction in which the local commercial real estate market has moved since the last valuation and, most importantly, the specific characteristics of the underlying commercial real estate which is of concern.

Other corporate, commercial and financial (non-bank) loans and advances including loan commitments by level of collateral rated CRR/EL 8 to 10 only

(Audited)

Europe

Hong Kong

Rest ofAsia-Pacific

MENA

North America

Latin

America

Total

US$m

US$m

US$m

US$m

US$m

US$m

US$m

At 31 December 2012

Not collateralised

5,110

260

572

1,186

533

1,023

8,684

Fully collateralised ........................

1,463

82

146

132

478

284

2,585

LTV ratio:

- less than 25% ...................

77

3

11

-

11

68

170

- 25% to 50%

192

4

62

6

49

84

397

- 51% to 75%

290

39

31

33

131

61

585

- 76% to 90%

196

24

11

18

96

17

362

- 91% to 100% ...................

708

12

31

75

191

54

1,071

Partially collateralised (A)..................

1,106

84

251

828

753

273

3,295

- collateral value on A ...............

628

41

89

124

359

108

1,349

7,679

426

969

2,146

1,764

1,580

14,564

At 31 December 2011

Not collateralised

5,583

349

795

1,695

801

1,546

10,769

Fully collateralised ........................

1,765

63

147

60

441

602

3,078

LTV ratio:

- less than 25% ...................

173

4

10

3

16

106

312

- 25% to 50%

274

47

29

3

38

74

465

- 51% to 75%

587

11

32

31

51

96

808

- 76% to 90%

153

-

32

20

128

21

354

- 91% to 100% ...................

578

1

44

3

208

305

1,139

Partially collateralised (B)...................

1,367

100

156

498

1,206

390

3,717

- collateral value on B ...............

558

55

76

103

541

214

1,547

8,715

512

1,098

2,253

2,448

2,538

17,564

 

The collateral used in the assessment of the above lending primarily includes first legal charges over real estate and charges over cash in the commercial and industrial sector, and charges over cash and marketable financial instruments in the financial sector. Government sector lending is generally unsecured.

It should be noted that the table above excludes other types of collateral which are commonly taken for corporate and commercial lending such as unsupported guarantees and floating charges over the assets of a customer's business. While such mitigants have value, often providing rights in insolvency, their assignable value is insufficiently certain and they are assigned no value for disclosure purposes.

As with commercial real estate, the value of real estate collateral included in the table above is generally determined through a combination of professional and internal valuations and physical inspection. The frequency of revaluation is undertaken on a similar basis to commercial real estate loans and advances; however, for financing activities in corporate and commercial lending that are not predominantly commercial real estate-oriented, collateral value is not as strongly correlated to principal repayment performance. Collateral values will generally be refreshed when an obligor's general credit performance deteriorates and it is necessary to assess the likely performance of secondary sources of repayment should reliance upon them prove necessary. For this reason, the table above reports values only for customers with CRR 8 to 10, recognising that these loans and advances generally have valuations which are comparatively recent. For the table above, cash is valued at its nominal value and marketable securities at their fair value.

The difference between the collateral value and the value of partially collateralised lending disclosed in the tables above cannot be directly compared with any impairment allowances recognised in respect of impaired loans, as the loans may be performing in accordance with their contractual terms. When loans are not performing in accordance with their contractual terms, the recovery of cash flows may be affected by other cash resources of the customer, or other credit risk enhancements not quantified for the tables above. The Group's policy for determining impairment allowances, including the effect of collateral on these impairment allowances, is described on page 258.

Loans and advances to banks

The following table shows loans and advances to banks, including off-balance sheet loan commitments by level of collateral.

 

Loans and advances to banks including loan commitments by level of collateral

(Audited)

Europe

Hong Kong

Rest ofAsia-Pacific

MENA

North America

Latin

America

Total

US$m

US$m

US$m

US$m

US$m

US$m

US$m

At 31 December 2012

Not collateralised ...................

36,043

24,622

40,694

7,290

9,050

12,838

130,537

Fully collateralised .................

25,496

2,294

5,667

-

811

3,691

37,959

Partially collateralised (A)......

62

1,459

1,207

-

-

-

2,728

- collateral value on A ........

61

1,452

1,135

-

-

-

2,648

61,601

28,375

47,568

7,290

9,861

16,529

171,224

At 31 December 2011

Not collateralised ...................

25,896

34,892

42,586

9,337

14,132

19,516

146,359

Fully collateralised .................

31,515

1,365

6,927

32

978

1,238

42,055

Partially collateralised (B).......

146

50

445

-

784

114

1,539

- collateral value on B ........

104

50

207

-

702

88

1,151

57,557

36,307

49,958

9,369

15,894

20,868

189,953

 

The collateral used in the assessment of the abovelending relates primarily to cash and marketable securities. Loans and advances to banks are typically unsecured. Certain products such as reverse repos and stock borrowing are effectively collateralised and have been included in the above as fully or partly collateralised. The fully collateralised loans and advances to banks for Europe in the table above consist primarily of reverse repo agreements and stock borrowing.

Derivatives

The International Swaps and Derivatives Association ('ISDA') Master Agreement is our preferred agreement for documenting derivatives activity. It provides the contractual framework within which dealing activity across a full range of over-the-counter ('OTC') products is conducted, and contractually binds both parties to apply close-out netting across all outstanding transactions covered by an agreement if either party defaults or another pre-agreed termination event occurs. It is common, and our preferred practice, for the parties to execute a Credit Support Annex ('CSA') in conjunction with the ISDA Master Agreement. Under a CSA, collateral is passed between the parties to mitigate the counterparty risk inherent in outstanding positions. The majority of our CSAs are with financial institutional clients.

We manage our counterparty exposure arising due to market risk on OTC derivative contracts through the use of collateral agreements with counterparties and netting agreements. We do not currently undertake active management of our general OTC derivative counterparty exposure in the credit markets, although we may manage individual exposures in certain circumstances.

A description of the derivative offset amount in the 'Maximum exposure to credit risk' table is provided on page 145.

Other credit risk exposures

In addition to collateralised lending described above, other credit enhancements are employed and methods used to mitigate credit risk arising from financial assets. These are described in more detail below.

Securities issued by governments, banks and other financial institutions may benefit from additional credit enhancement, notably through government guarantees that reference these assets. Details of government guarantees are included in Notes 6, 10 and 12 on the Financial Statements. Corporate issued debt securities are primarily unsecured. Debt securities issued by banks and financial institutions include ABSs and similar instruments, which are supported by underlying pools of financial assets. Credit risk associated with ABSs is reduced through the purchase of CDS protection. Disclosure of the Group's holdings of ABSs and associated CDS protection is provided on page 184.

Trading assets include loans and advances held with trading intent, the majority of which consist of reverse repos and stock borrowing which, by their nature, are collateralised. Collateral accepted as security that the Group is permitted to sell or repledge under these arrangements is described in Note 36 on the Financial Statements. Trading assets also include money market term placements, which are unsecured.

The Group's maximum exposure to credit risk includes financial guarantees and similar arrangements that we issue or enter into, and loan commitments that we are irrevocably committed to. Depending on the terms of the arrangement, we may have recourse to additional credit mitigation in the event that a guarantee is called upon or a loan commitment is drawn and subsequently defaults. Further information about these arrangements is provided in Note 40 on the Financial Statements.

Collateral and other credit enhancements obtained 

(Audited)

The carrying amount of assets obtained by taking possession of collateral held as security, or calling upon other credit enhancements, is as follows:

Carrying amount at31 December

2012

2011

US$m

US$m

Nature of assets

Residential property ................

353

420

Commercial and industrialproperty ..............................

88

64

Other ......................................

3

17

444

501

The significant reduction in residential properties was due to the suspension of foreclosure activities at the end of 2011 and during the first half of 2012 (see page 151).

We make repossessed properties available for sale in an orderly fashion, with the proceeds used to reduce or repay the outstanding indebtedness. If excess funds arise after the debt has been repaid, they are made available to repay other secured lenders with lower priority or returned to the customer. We do not generally occupy repossessed properties for our business use.

Impairment of loans and advances

(Audited)

A summary of our current policies and practices regarding impairment assessment is provided in the Appendix to Risk on page 258.

The tables below analyse by geographical region the impairment allowances recognised for impaired loans and advances that are either individually assessed or collectively assessed, and collective impairment allowances on loans and advances classified as not impaired.

Impairment allowances on loans and advances to customers by geographical region

(Audited)

Europe

Hong Kong

Rest of Asia-

Pacific

MENA

North America

Latin America

Total

US$m

US$m

US$m

US$m

US$m

US$m

US$m

At 31 December 2012

Gross loans and advances to customers

Individually assessed impaired loans14 (A) ....

9,959

398

1,019

2,251

1,849

1,295

16,771

Collectively assessed15 (B) ...........................

458,802

173,688

137,846

27,629

144,523

54,476

996,964

Impaired loans14 .......................................

1,121

79

128

197

18,482

1,893

21,900

Non-impaired loans16 ...............................

457,681

173,609

137,718

27,432

126,041

52,583

975,064

Total (C) .....................................................

468,761

174,086

138,865

29,880

146,372

55,771

1,013,735

Impairment allowances (C) ..........................

5,321

473

746

1,794

5,616

2,162

16,112

Individually assessed (A) ...........................

3,781

192

442

1,323

428

406

6,572

Collectively assessed (B) ..........................

1,540

281

304

471

5,188

1,756

9,540

Net loans and advances ................................

463,440

173,613

138,119

28,086

140,756

53,609

997,623

%

%

%

%

%

%

%

Allowances as a percentage of loans and advances:

- individually assessed (A) ........................

38.0

48.2

43.4

58.8

23.1

31.4

39.2

- collectively assessed (B) ........................

0.3

0.2

0.2

1.7

3.6

3.2

1.0

- total (C) ................................................

1.1

0.3

0.5

6.0

3.8

3.9

1.6

US$m

US$m

US$m

US$m

US$m

US$m

US$m

At 31 December 2011

Gross loans and advances to customers

Individually assessed impaired loans14 (E) .....

10,490

519

963

2,187

1,832

563

16,554

Collectively assessed15 (F) ............................

429,088

157,727

123,687

25,402

148,096

57,386

941,386

Impaired loans14 .......................................

1,261

85

106

238

20,864

2,476

25,030

Non-impaired loans16 ...............................

427,827

157,642

123,581

25,164

127,232

54,910

916,356

Total (G) .....................................................

439,578

158,246

124,650

27,589

149,928

57,949

957,940

Impairment allowances (G) ..........................

5,242

581

782

1,714

7,181

2,011

17,511

Individually assessed (E) ...........................

3,754

288

505

1,250

416

324

6,537

Collectively assessed (F) ...........................

1,488

293

277

464

6,765

1,687

10,974

Net loans and advances ................................

434,336

157,665

123,868

25,875

142,747

55,938

940,429

%

%

%

%

%

%

%

Allowances as a percentage of loans and advances:

- individually assessed (E) ........................

35.8

55.5

52.4

57.2

22.7

57.4

39.5

- collectively assessed (F) ........................

0.3

0.2

0.2

1.8

4.6

2.9

1.2

- total (G) ................................................

1.2

0.4

0.6

6.2

4.8

3.5

1.8

For footnotes, see page 249.

Net loan impairment charge to the income statement by geographical region

(Unaudited)

Europe

Hong Kong

Rest of Asia-

Pacific

MENA

North America

Latin America

Total

US$m

US$m

US$m

US$m

US$m

US$m

US$m

2012

 

 

Individually assessed impairment allowances .....

1,387

(8)

97

205

258

200

2,139

New allowances .............................................

1,960

32

239

369

380

292

3,272

Release of allowances no longer required .......

(516)

(34)

(117)

(133)

(85)

(49)

(934)

Recoveries of amounts previously written off

(57)

(6)

(25)

(31)

(37)

(43)

(199)

Collectively assessed impairment allowances ....

487

92

243

50

3,204

1,945

6,021

New allowances net of allowance releases ......

839

117

368

94

3,296

2,254

6,968

Recoveries of amounts previously written off

(352)

(25)

(125)

(44)

(92)

(309)

(947)

Total charge for impairment losses ..................

1,874

84

340

255

3,462

2,145

8,160

Customers ....................................................

1,874

84

340

255

3,462

2,145

8,160

2011

 

 

Individually assessed impairment allowances .....

1,262

18

67

199

243

126

1,915

New allowances .............................................

1,670

79

207

328

398

222

2,904

Release of allowances no longer required .......

(378)

(41)

(114)

(80)

(111)

(74)

(798)

Recoveries of amounts previously written off

(30)

(20)

(26)

(49)

(44)

(22)

(191)

Collectively assessed impairment allowances ....

640

99

207

93

6,807

1,744

9,590

New allowances net of allowance releases ......

1,181

126

366

147

6,894

2,111

10,825

Recoveries of amounts previously written off

(541)

(27)

(159)

(54)

(87)

(367)

(1,235)

 

 

Total charge for impairment losses ..................

1,902

117

274

292

7,050

1870

11,505

Banks ...........................................................

(11)

-

-

-

(5)

-

(16)

Customers ....................................................

1,913

117

274

292

7,055

1,870

11,521

 

2012 compared with 2011

(Unaudited)

The following commentary is on a constant currency basis.

Loan impairment allowances were US$16.2bn, a decline of 9% compared with 2011, reflecting lower lending balances in our US CML portfolio which included the reclassification of impairment allowances on non-real estate personal loan balances to 'Assets held for sale'. Releases and recoveries of US$2.1bn were 3% lower, mainly in North America due to lower customer repayments in the corporate and commercial sector, as well as the non-recurrence of a number of releases and recoveries incurred in 2011 in Hong Kong and Rest of Asia-Pacific.

Impaired loans were 3% of total gross loans and advances at the end of 2012, compared with 4% at 31 December 2011.

In Europe, new loan impairment allowances were US$2.8bn, broadly unchanged compared with 2011. New collectively assessed loan impairment allowances declined by 28%, mainly in the UK personal lending book, as we focused our lending growth on higher quality assets and continued to pro‑actively identify and monitor customers facing financial hardship. This resulted in lower delinquency rates across both the secured and unsecured lending portfolios. Individually assessed new loan impairment allowances increased by 21% across a range of sectors reflecting the challenging economic conditions in the UK, Greece, Spain and Turkey. In addition, a rise in impairments in Turkey was due to strong balance sheet growth in customer loans and advances in RBWM, notably in credit cards and personal loans, driven by business expansion. Impaired loans of US$11.1bn were 9% lower than at 31 December 2011, mainly due to increased focus on higher quality loans, lower delinquency rates and the continued low interest rate environment.

Releases and recoveries in Europe were US$925m, broadly unchanged on 2011.

In Hong Kong, new individually assessed loan impairment allowances fell by 28% compared with 2011 due to lower specific impairment charges in CMB. New collectively assessed loan impairment allowances also declined as delinquency rates continued to improve, reflecting stable loan growth and sound underlying economic conditions. Impaired loans declined by 22% from 31 December 2011, as a number of corporate loans in the international trade sector were written off or upgraded following repayments, and delinquency rates reduced.

Releases and recoveries in Hong Kong were US$65m, 27% lower than at the end of 2011 when an allowance relating to a loan in GB&M that was no longer considered impaired was released.

New loan impairment allowances in Rest of Asia-Pacific increased by 8% to US$607m. This reflected higher new collectively assessed loan impairment allowances, mainly from the growth in Singapore of RBWM's credit card portfolio. New individually assessed loan impairment allowances also increased, as a result of the impairment of a corporate exposure in Australia and individual charges on a small number of corporate exposures in India. Impaired loans in the region increased by 4% to US$1.1bn in 2012 due to the downgrade of a number of customers in Australia and Taiwan, partly offset by the restructuring of a significant loan in Singapore following the renegotiation of terms, which is therefore regarded as no longer impaired.

Releases and recoveries in the region decreased by 7%, mainly in India as the cards portfolio continued to run off, and in Thailand following the sale of the RBWM business. These were partly offset by an impairment allowance release in Singapore compared with a charge in 2011.

In the Middle East and North Africa, new loan impairment allowances decreased by 2% to US$463m in 2012. New collectively assessed loan impairment allowances declined, primarily in the UAE, due to the improvement in credit quality reflecting the repositioning of the book towards higher quality lending in previous years. New individually assessed loan impairment allowances rose due to significant loan impairment charges recorded for a small number of large exposures in GB&M. Impaired loans remained broadly unchanged compared with 31 December 2011.

Releases and recoveries in the region increased by 14% to US$208m in 2012, mainly relating to a small number of exposures in UAE.

In North America, new loan impairment allowances fell sharply, reducing by 50% to US$3.7bn. New collectively assessed loan impairment allowances declined, largely in the CML portfolio due to the reclassification of impairment allowances on non-real estate personal loan balances to 'Assets held for sale' as well as the continued run-off in the residential portfolios. This was partly offset by a portfolio risk factor adjustment of US$225m which was made to increase the collective loan impairment allowances for our US mortgage lending portfolios. The adjustment was made following a review completed in the fourth quarter of 2012 which concluded that the estimated average period of time from current status to write-off was ten months for real estate loans (previously a period of seven months was used). During 2013, this revised estimate will be incorporated into the statistical impairment allowance models. It was also partly offset by new loan impairment allowances by HSBC Bank Bermuda on a small number of exposures. Releases and recoveries in North America declined by 11% to US$214m. This reflected lower levels of impairments being booked due to improving market conditions within the corporate and commercial sector.

Impaired loans decreased by 11% in 2012 to US$20.3bn, due to the continued run‑off of the CML portfolio which included the reclassification of certain non-real estate personal loan balances to held for sale.

In Latin America, new loan impairment allowances increased by 23% to US$2.5bn. The increase in new collectively assessed loan impairment allowances was mainly in Brazil, driven by higher delinquency rates in RBWM and CMB, particularly in the Business Banking portfolio, reflecting lower economic growth in 2012. Impaired loans were 9% higher than at the end of 2011, driven by past growth in the CMB portfolio in Brazil.

Releases and recoveries in Latin America decreased by 2% from the end of 2011 to US$401m, mainly in Brazil.

For an analysis of loan impairment charges and other credit risk provisions by global business, see page 76.

 

 

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