12th Aug 2011 16:30
Overall exposure of HSBC
At 30 June 2011 | At 30 June 2010 | At 31 December 2010 | |||||||||
Carrying amount | Including sub-prime and Alt-A | Carrying amount | Including sub-prime and Alt-A | Carrying amount | Including sub-prime and Alt-A | ||||||
US$bn | US$bn | US$bn | US$bn | US$bn | US$bn | ||||||
ABSs ........................................................ | 72.9 | 8.1 | 72.6 | 9.4 | 73.9 | 8.5 | |||||
- fair value through profit or loss .............. | 10.1 | 0.3 | 10.8 | 0.5 | 10.8 | 0.3 | |||||
- available for sale33 .................................. | 54.7 | 6.8 | 53.2 | 7.5 | 54.7 | 7.1 | |||||
- held to maturity33 .................................. | 2.1 | 0.2 | 2.4 | 0.2 | 2.2 | 0.2 | |||||
- loans and receivables .............................. | 6.0 | 0.8 | 6.2 | 1.2 | 6.2 | 0.9 | |||||
Loans at fair value through profit or loss .. | 1.1 | 0.9 | 1.9 | 1.5 | 1.6 | 1.2 | |||||
Total ABS and direct lending at fair value through profit or loss ............................ | 74.0 | 9.0 | 74.5 | 10.9 | 75.5 | 9.7 | |||||
Less securities mitigated by credit derivatives with monolines and other financial institutions ............................. | (8.4) | (0.3) | (8.6) | (0.6) | (8.3) | (0.4) | |||||
65.6 | 8.7 | 65.9 | 10.3 | 67.2 | 9.3 | ||||||
Leveraged finance loans ........................... | 3.7 | - | 5.2 | - | 4.9 | - | |||||
- fair value through profit or loss .............. | 0.1 | - | 0.2 | - | 0.3 | - | |||||
- loans and receivables .............................. | 3.6 | - | 5.0 | - | 4.6 | - | |||||
69.3 | 8.7 | 71.1 | 10.3 | 72.1 | 9.3 | ||||||
Exposure including securities mitigated by credit derivatives with monolines and other financial institutions .................... | 77.7 | 9.0 | 79.7 | 10.9 | 80.4 | 9.7 | |||||
For footnote, see page 146.
ABSs classified as available for sale
Our principal holdings of available-for-sale ABSs are in GB&M through special purpose entities ('SPE's) which were established from the outset with the benefit of external investor first loss protection support, together with positions held directly and by Solitaire Funding Limited ('Solitaire'), where we have first loss risk.
The following table summarises our exposure to ABSs classified as available for sale.
Available-for-sale asset-backed securities exposure
At 30 June 2011 | At 30 June 2010 | At 31 December 2010 | |||||||||||||||
Directly held/ Solitaire34 | SPEs | Total | Directly held/ Solitaire34 | SPEs | Total | Directly held/ Solitaire34 | SPEs | Total | |||||||||
US$m | US$m | US$m | US$m | US$m | US$m | US$m | US$m | US$m | |||||||||
Total carrying amount of netprincipal exposure ................. | 41,685 | 12,992 | 54,677 | 39,391 | 13,774 | 53,165 | 41,106 | 13,586 | 54,692 | ||||||||
Notional principal value ofsecurities impaired ................. | 3,426 | 2,371 | 5,797 | 2,710 | 2,372 | 5,082 | 3,015 | 2,399 | 5,414 | ||||||||
Carrying value of capital notesliability ................................. | - | (333) | (333) | - | (320) | (320) | - | (254) | (254) | ||||||||
For footnote, see page 146.
Movement in the available-for-sale ('AFS') reserve
Half-year to 30 June 2011 | Half-year to 30 June 2010 | Half-year to 31 December 2010 | |||||||||||||||
Directly held/ Solitaire34 | SPEs | Total | Directly held/ Solitaire34 | SPEs | Total | Directly held/ Solitaire34 | SPEs | Total | |||||||||
US$m | US$m | US$m | US$m | US$m | US$m | US$m | US$m | US$m | |||||||||
AFS reserve at beginningof period ....................... | (4,102) | (2,306) | (6,408) | (7,349) | (4,864) | (12,213) | (4,914) | (3,168) | (8,082) | ||||||||
Increase in fair value of securities ....................... | 618 | 355 | 973 | 1,678 | 1,051 | 2,729 | 497 | 492 | 989 | ||||||||
Impairment charge: | |||||||||||||||||
- borne by HSBC .......... | 238 | - | 238 | 277 | - | 277 | 167 | - | 167 | ||||||||
- allocated to capitalnote holders35 ........ | - | 137 | 137 | - | 488 | 488 | - | 43 | 43 | ||||||||
Repayment of capital ........ | 142 | 94 | 236 | 301 | 88 | 389 | 239 | 99 | 338 | ||||||||
Other movements ............. | 5 | (24) | (19) | 179 | 69 | 248 | (91) | 228 | 137 | ||||||||
AFS reserve at end of period | (3,099) | (1,744) | (4,843) | (4,914) | (3,168) | (8,082) | (4,102) | (2,306) | (6,408) | ||||||||
For footnotes, see page 146.
Securities investment conduits
The total carrying amount of ABSs held through SPEs in the above table represents holdings in which significant first loss protection is provided through capital notes issued by SICs, excluding Solitaire.
At each reporting date, we assess whether there is any objective evidence of impairment in the value of the ABSs held by SPEs. Impairment charges incurred on these assets are offset by a credit to the impairment line for the amount of the loss allocated to capital note holders.
The economic first loss protection remaining at 30 June 2011 amounted to US$2.2bn (30 June 2010: US$2.2bn; 31 December 2010: US$2.2bn). On an IFRSs accounting basis, the carrying value of the liability for the capital notes at 30 June 2011 amounted to US$0.3bn (30 June 2010: US$0.3bn; 31 December 2010: US$0.3bn). The impairment charge recognised during the first half of 2011 amounted to US$137m (first half of 2010: US$488m; second half of 2010: US$43m).
At 30 June 2011, the available-for-sale reserve in respect of securities held by the SICs was a deficit of US$2.0bn (30 June 2010: US$3.4bn; 31 December 2010: US$2.7bn). Of this, US$1.7bn related to ABSs (30 June 2010: US$3.2bn; 31 December 2010: US$2.3bn).
Impairments recognised during the first half of 2011 from assets held directly or within Solitaire, in recognition of the first loss protection of US$1.2bn we provide through credit enhancement and from drawings against the liquidity facility weprovide, were US$238m (30 June 2010: US$277m; 31 December 2010: US$167m). The reduction in impairment charges compared with the first half of 2010 was due to the falling default rates in the underlying collateral pools. The level of impairment recognised in comparison with the deficit in the available-for-sale reserve was a reflection of the credit quality and seniority of the assets held.
Sub-prime and Alt-A residential mortgage-backed securities
The assets which are most sensitive to possible future impairment are sub-prime and Alt-A residential MBSs. Available-for-sale holdings in these higher risk categories where HSBC does not benefit from significant first loss protection amounted to US$3.5bn at 30 June 2011 (30 June 2010: US$4.2bn; 31 December 2010: US$3.8bn). For these securities the cumulative fair value losses not recognised in the income statement at 30 June 2011 was US$1.2bn (30 June 2010: losses of US$3.3bn; 31 December 2010: losses of US$1.6bn). Other holdings in these higher risk categories classified as available-for-sale are held in vehicles where third party first loss protection exists, as described in the section on SICs, above.
Impairment methodologies
The accounting policy for impairment and indicators of impairment is set out on page 259 and for available-for-sale ABSs on page 131 of the Annual Report and Accounts 2010.
Impairment and cash loss projections
At 31 December 2010, management undertook a stress analysis to estimate further potential impairments and expected cash losses on the available-for-sale ABS portfolio. This exercise comprised a shift of projections of future loss severities, default rates and prepayment rates. The results of the analysis indicated that further impairment charges of some US$950m and expected cash losses of some US$250m could arise over the next two to three years.
At 30 June 2011, management re‑performed the stress test. Management now estimates that accounting impairments of US$900m and cash losses of US$400m may arise over the remaining duration. The result reflects the deterioration in the outlook for the US economy at large and the US housing market in particular compared with previous stress projections. For example, housing prices are now projected to continue to fall further and for a longer period of time, and recover more slowly.
For the purposes of identifying impairment at the reporting date, the future projected cash flows reflect the effect of loss events that have occurred at or prior to the reporting date. For the purposes of performing stress tests to estimate potential future impairment charges, the projected future cash flows reflect additional assumptions about future loss events after the balance sheet date.
This analysis makes assumptions in respect of the future behaviour of loss severities, default rates and prepayment rates. Movements in the parameters are not independent of each other. For example, increased default rates and increased loss severities, which would imply greater impairments, generally arise under economic conditions that give rise to reduced levels of prepayment, reducing the potential for impairment charges. Conversely, economic conditions which increase the rates of prepayment are generally associated with reduced default rates and decreased loss severities.
At 30 June 2011, the incurred and projected impairment charges, measured in accordance with accounting requirements, significantly exceeded the expected cash losses on the securities. Over the lives of the available-for-sale ABSs the cumulative impairment charges will converge towards the level of cash losses. In respect of the SICs, in particular, the capital notes held by third parties are expected to absorb the cash losses arising in the vehicles.
Carrying amount of HSBC's consolidated holdings of ABSs, and direct lending held at fair value through profit or loss
Trading | Available for sale | Held to maturity | Designated at fair value through profit | Loans and receivables | Total | Of whichheld through consolidated SPEs | |||||||
US$m | US$m | US$m | US$m | US$m | US$m | US$m | |||||||
At 30 June 2011 | |||||||||||||
Mortgage-related assets | |||||||||||||
Sub-prime residential | 1,022 | 2,556 | - | - | 598 | 4,176 | 2,696 | ||||||
- direct lending .... | 830 | - | - | - | - | 830 | 560 | ||||||
- MBSs and MBS CDOs36 ................ | 192 | 2,556 | - | - | 598 | 3,346 | 2,136 | ||||||
US Alt-A residential . | 163 | 4,231 | 177 | - | 255 | 4,826 | 3,417 | ||||||
- direct lending .... | 80 | - | - | - | - | 80 | - | ||||||
- MBSs36 ............. | 83 | 4,231 | 177 | - | 255 | 4,746 | 3,417 | ||||||
US Government agency and sponsored enterprises | |||||||||||||
- MBSs36 ............. | 217 | 22,570 | 1,933 | - | - | 24,720 | 17 | ||||||
Other residential ...... | 800 | 3,801 | - | - | 990 | 5,591 | 2,332 | ||||||
- direct lending .... | 188 | - | - | - | - | 188 | - | ||||||
- MBSs36 ............. | 612 | 3,801 | - | - | 990 | 5,403 | 2,332 | ||||||
Commercial property | |||||||||||||
- MBSs and MBS CDOs36 | 552 | 8,119 | - | 111 | 1,935 | 10,717 | 6,439 | ||||||
2,754 | 41,277 | 2,110 | 111 | 3,778 | 50,030 | 14,901 | |||||||
Leveraged finance-related assets | |||||||||||||
- ABSs and ABS CDOs36 .................... | 379 | 5,695 | - | - | 399 | 6,473 | 4,450 | ||||||
Student loan-related assets | |||||||||||||
- ABSs and ABS CDOs36 .................... | 137 | 5,110 | - | - | 151 | 5,398 | 4,411 | ||||||
Other assets | |||||||||||||
- ABSs and ABS CDOs36 .................... | 1,791 | 2,595 | - | 6,053 | 1,637 | 12,076 | 1,783 | ||||||
5,061 | 54,677 | 2,110 | 6,164 | 5,965 | 73,977 | 25,545 |
Trading | Available for sale | Held to maturity | Designatedat fair value through profit | Loans and receivables | Total | Of which held through consolidated SPEs | |||||||
US$m | US$m | US$m | US$m | US$m | US$m | US$m | |||||||
At 30 June 2010 | |||||||||||||
Mortgage-related assets | |||||||||||||
Sub-prime residential ... | 1,891 | 2,626 | - | - | 658 | 5,175 | 3,077 | ||||||
- direct lending .... | 1,438 | - | - | - | - | 1,438 | 883 | ||||||
- MBSs and MBS CDOs36 ................ | 453 | 2,626 | - | - | 658 | 3,737 | 2,194 | ||||||
US Alt-A residential . | 115 | 4,907 | 193 | - | 536 | 5,751 | 3,720 | ||||||
- direct lending .... | 102 | - | - | - | - | 102 | - | ||||||
- MBSs36 ............. | 13 | 4,907 | 193 | - | 536 | 5,649 | 3,720 | ||||||
US Government agency and sponsored enterprises | |||||||||||||
- MBSs36 ............. | 472 | 19,341 | 2,254 | - | - | 22,067 | 347 | ||||||
Other residential ...... | 1,243 | 4,063 | - | 59 | 1,303 | 6,668 | 2,771 | ||||||
- direct lending .... | 348 | - | - | - | - | 348 | 36 | ||||||
- MBSs36 ............. | 895 | 4,063 | - | 59 | 1,303 | 6,320 | 2,735 | ||||||
Commercial property | |||||||||||||
- MBSs and MBS CDOs36 ................ | 751 | 8,111 | - | 75 | 1,905 | 10,842 | 6,470 | ||||||
4,472 | 39,048 | 2,447 | 134 | 4,402 | 50,503 | 16,385 | |||||||
Leveraged finance-related assets | |||||||||||||
- ABSs and ABS CDOs36 .................... | 413 | 6,310 | - | - | 516 | 7,239 | 4,173 | ||||||
Student loan-related assets | |||||||||||||
- ABSs and ABS CDOs36 .................... | 141 | 5,241 | - | - | 144 | 5,526 | 4,192 | ||||||
Other assets | |||||||||||||
- ABSs and ABS CDOs36 .................... | 1,715 | 2,566 | - | 5,852 | 1,116 | 11,249 | 2,439 | ||||||
6,741 | 53,165 | 2,447 | 5,986 | 6,178 | 74,517 | 27,189 | |||||||
At 31 December 2010 | |||||||||||||
Mortgage-related assets | |||||||||||||
Sub-prime residential | 1,297 | 2,565 | - | - | 652 | 4,514 | 2,763 | ||||||
- direct lending .... | 1,078 | - | - | - | - | 1,078 | 632 | ||||||
- MBSs and MBS CDOs36 ................ | 219 | 2,565 | - | - | 652 | 3,436 | 2,131 | ||||||
US Alt-A residential . | 180 | 4,545 | 191 | - | 270 | 5,186 | 3,651 | ||||||
- direct lending .... | 96 | - | - | - | - | 96 | - | ||||||
- MBSs36 ............. | 84 | 4,545 | 191 | - | 270 | 5,090 | 3,651 | ||||||
US Government agency and sponsored enterprises | |||||||||||||
- MBSs36 ............. | 657 | 21,699 | 2,032 | - | - | 24,388 | 6 | ||||||
Other residential ...... | 1,075 | 4,024 | - | - | 1,111 | 6,210 | 2,669 | ||||||
- direct lending .... | 417 | - | - | - | - | 417 | - | ||||||
- MBSs36 ............. | 658 | 4,024 | - | - | 1,111 | 5,793 | 2,669 | ||||||
Commercial property | |||||||||||||
- MBSs and MBS CDOs36 ................ | 546 | 8,160 | - | 111 | 1,942 | 10,759 | 6,441 | ||||||
3,755 | 40,993 | 2,223 | 111 | 3,975 | 51,057 | 15,530 | |||||||
Leveraged finance-relatedassets | |||||||||||||
- ABSs and ABS CDOs36 .................... | 392 | 5,418 | - | - | 414 | 6,224 | 3,886 | ||||||
Student loan-related assets | |||||||||||||
- ABSs and ABS CDOs36 .................... | 163 | 5,178 | - | - | 150 | 5,491 | 4,251 | ||||||
Other assets | |||||||||||||
- ABSs and ABS CDOs36 .................... | 1,936 | 3,103 | - | 6,017 | 1,710 | 12,766 | 2,526 | ||||||
6,246 | 54,692 | 2,223 | 6,128 | 6,249 | 75,538 | 26,193 |
For footnote, see page 146.
The above table excludes leveraged finance transactions, which are shown separately on page 132.
HSBC's consolidated holdings of ABSs, and direct lending held at fair value through profit or loss
Half-year to 30 June 2011 | At 30 June 2011 | ||||||||||||||
Gross fair value movements | Realised | Credit | |||||||||||||
Income statement38 | Other compre- hensive income39 | gains/ (losses) in the income statement40 | Impair- ment | Reclassi- fied41 | Gross principal42 | default swap gross protection43 | Net principal exposure44 | Carrying amount45 | |||||||
US$m | US$m | US$m | US$m | US$m | US$m | US$m | US$m | US$m | US$m | US$m | |||||
Mortgage-related assets | |||||||||||||||
Sub-prime residential | |||||||||||||||
Direct lending .......... | (12) | - | 1 | - | 1,854 | - | 1,854 | 830 | |||||||
MBSs36 ..................... | (1) | 33 | - | 93 | 4,851 | 305 | 4,546 | 3,087 | |||||||
- high grade37 .......... | - | 37 | - | 7 | 1,480 | 180 | 1,300 | 1,125 | |||||||
- rated C to A .......... | (1) | (7) | - | 86 | 3,236 | 125 | 3,111 | 1,915 | |||||||
- not publicly rated .. | - | 3 | - | - | 135 | - | 135 | 47 | |||||||
MBS CDOs36 ............ | - | 3 | - | (1) | 78 | - | 78 | 21 | |||||||
- high grade37 .......... | - | - | - | - | 2 | - | 2 | 1 | |||||||
- rated C to A .......... | - | 3 | - | (1) | 76 | - | 76 | 20 | |||||||
- not publicly rated .. | - | - | - | - | - | - | - | - | |||||||
(13) | 36 | 1 | 92 | 6,783 | 305 | 6,478 | 3,938 | ||||||||
US Alt-A residential | |||||||||||||||
Direct lending .......... | 1 | - | - | - | 90 | - | 90 | 80 | |||||||
MBSs36 ..................... | - | 51 | 2 | 479 | 9,142 | 100 | 9,042 | 4,670 | |||||||
- high grade37 .......... | - | (4) | - | 5 | 531 | 100 | 431 | 376 | |||||||
- rated C to A .......... | - | 55 | 2 | 472 | 8,549 | - | 8,549 | 4,246 | |||||||
- not publicly rated .. | - | - | - | 2 | 62 | - | 62 | 48 | |||||||
1 | 51 | 2 | 479 | 9,232 | 100 | 9,132 | 4,750 | ||||||||
US Government agency and sponsored enterprises | |||||||||||||||
MBSs36 | |||||||||||||||
- high grade37 ........... | 1 | 75 | 2 | 68 | 23,815 | - | 23,815 | 24,720 | |||||||
Other residential | |||||||||||||||
Direct lending .......... | 30 | - | 21 | - | 187 | - | 187 | 188 | |||||||
MBSs36 ..................... | 2 | 44 | 1 | (7) | 6,135 | - | 6,135 | 5,403 | |||||||
- high grade37 .......... | - | 43 | 1 | (7) | 5,356 | - | 5,356 | 4,786 | |||||||
- rated C to A .......... | 2 | 1 | - | - | 613 | - | 613 | 492 | |||||||
- not publicly rated .. | - | - | - | - | 166 | - | 166 | 125 | |||||||
32 | 44 | 22 | (7) | 6,322 | - | 6,322 | 5,591 | ||||||||
Commercial property | |||||||||||||||
MBS and MBS CDOs36 ..................... | (1) | 311 | 2 | (51) | 12,217 | 395 | 11,822 | 10,442 | |||||||
- high grade37 .......... | (1) | 84 | - | (12) | 4,185 | - | 4,185 | 3,911 | |||||||
- rated C to A .......... | - | 228 | 2 | (41) | 7,903 | 395 | 7,508 | 6,432 | |||||||
- not publicly rated .. | - | (1) | - | 2 | 129 | - | 129 | 99 | |||||||
Leveraged finance-related assets | |||||||||||||||
ABSs and ABS CDOs36 . | - | 114 | - | (14) | 7,289 | 806 | 6,483 | 5,950 | |||||||
- high grade37 ............. | - | 122 | - | (12) | 6,382 | 384 | 5,998 | 5,507 | |||||||
- rated C to A ............ | - | (8) | - | (2) | 816 | 422 | 394 | 342 | |||||||
- not publicly rated .... | - | - | - | - | 91 | - | 91 | 101 | |||||||
Student loan-related assets | |||||||||||||||
ABSs and ABS CDOs36 . | 3 | 248 | 1 | 2 | 6,819 | 100 | 6,719 | 5,353 | |||||||
- high grade37 ............. | 3 | 59 | 1 | 4 | 3,754 | - | 3,754 | 3,339 | |||||||
- rated C to A ............ | - | 190 | - | (2) | 2,606 | 100 | 2,506 | 1,841 | |||||||
- not publicly rated .... | - | (1) | - | - | 459 | - | 459 | 173 | |||||||
Other assets | |||||||||||||||
ABS and ABS CDOs36 ... | 19 | 94 | 10 | 23 | 14,799 | 7,924 | 6,875 | 4,806 | |||||||
- high grade37 ............. | 6 | 11 | 1 | (5) | 10,056 | 7,255 | 2,801 | 2,146 | |||||||
- rated C to A ............ | 14 | 80 | 8 | 28 | 4,226 | 669 | 3,557 | 2,310 | |||||||
- not publicly rated .... | (1) | 3 | 1 | - | 517 | - | 517 | 350 | |||||||
Total ............................... | 42 | 973 | 40 | 592 | 87,276 | 9,630 | 77,646 | 65,550 | |||||||
Half-year to 30 June 2010 | At 30 June 2010 | ||||||||||||||
Gross fair value movements | Realised | Credit | |||||||||||||
Income statement38 | Other compre- hensive income39 | gains/ (losses) in the income statement40 | Impair- ment | Reclassi- fied41 | Gross principal42 | default swap gross protection43 | Net principal exposure44 | Carrying amount45 | |||||||
US$m | US$m | US$m | US$m | US$m | US$m | US$m | US$m | US$m | US$m | US$m | |||||
Mortgage-related assets | |||||||||||||||
Sub-prime residential | |||||||||||||||
Direct lending ............... | (15) | - | (14) | - | 2,064 | - | 2,064 | 1,438 | |||||||
MBSs36 .......................... | 329 | 186 | 52 | 315 | 5,268 | 456 | 4,812 | 3,142 | |||||||
- high grade37 ................ | 2 | 102 | 2 | 38 | 1,968 | 331 | 1,638 | 1,423 | |||||||
- rated C to A ............... | 327 | 84 | 50 | 277 | 3,194 | 125 | 3,068 | 1,717 | |||||||
- not publicly rated ....... | - | - | - | - | 106 | - | 106 | 2 | |||||||
MBS CDOs36 ................. | 9 | 3 | 52 | - | 676 | 14 | 662 | 31 | |||||||
- high grade37 ................ | - | 2 | 52 | - | 14 | - | 14 | 16 | |||||||
- rated C to A ............... | 9 | 1 | - | - | 524 | 14 | 510 | 13 | |||||||
- not publicly rated ....... | - | - | - | - | 138 | - | 138 | 2 | |||||||
323 | 189 | 90 | 315 | 8,008 | 470 | 7,538 | 4,611 | ||||||||
US Alt-A residential | |||||||||||||||
Direct lending ............... | - | - | - | - | 113 | - | 113 | 102 | |||||||
MBSs36 .......................... | - | 359 | 9 | 884 | 11,384 | 100 | 11,284 | 5,580 | |||||||
- high grade37 ................ | - | 29 | - | 30 | 818 | 100 | 718 | 610 | |||||||
- rated C to A ............... | - | 323 | 9 | 855 | 10,381 | - | 10,381 | 4,811 | |||||||
- not publicly rated ....... | - | 7 | - | (1) | 185 | - | 185 | 159 | |||||||
- | 359 | 9 | 884 | 11,497 | 100 | 11,397 | 5,682 | ||||||||
US Government agency and sponsored enterprises | |||||||||||||||
MBSs36 | |||||||||||||||
- high grade37 ................ | (2) | 415 | (3) | (63) | 21,271 | - | 21,271 | 22,067 | |||||||
Other residential | |||||||||||||||
Direct lending ............... | 40 | - | 16 | - | 341 | - | 341 | 348 | |||||||
MBSs36 .......................... | 116 | 108 | 22 | 4 | 7,141 | - | 7,141 | 6,320 | |||||||
- high grade37 ................ | 46 | 106 | 22 | 7 | 6,242 | - | 6,242 | 5,580 | |||||||
- rated C to A ............... | 70 | - | - | (3) | 705 | - | 705 | 633 | |||||||
- not publicly rated ....... | - | 2 | - | - | 194 | - | 194 | 107 | |||||||
156 | 108 | 38 | 4 | 7,482 | - | 7,482 | 6,668 | ||||||||
Commercial property | |||||||||||||||
MBS and MBS CDOs36 ... | (163) | 946 | (31) | 170 | 12,635 | 412 | 12,223 | 10,580 | |||||||
- high grade37 ................ | (174) | 601 | (47) | 119 | 8,682 | 100 | 8,582 | 7,644 | |||||||
- rated C to A ............... | 12 | 345 | 15 | 48 | 3,821 | 312 | 3,509 | 2,838 | |||||||
- not publicly rated ....... | (1) | - | 1 | 3 | 132 | - | 132 | 98 | |||||||
Leveraged finance-related assets | |||||||||||||||
ABSs and ABS CDOs36 ...... | 57 | 462 | 4 | 40 | 8,372 | 514 | 7,858 | 6,725 | |||||||
- high grade37 .................. | 57 | 328 | 1 | 23 | 6,943 | 346 | 6,598 | 5,815 | |||||||
- rated C to A .................. | - | 134 | 3 | 17 | 1,383 | 168 | 1,214 | 864 | |||||||
- not publicly rated .......... | - | - | - | - | 46 | - | 46 | 46 | |||||||
Student loan-related assets | |||||||||||||||
ABSs and ABS CDOs36 ...... | 3 | 132 | 2 | (3) | 7,317 | - | 7,317 | 5,438 | |||||||
- high grade37 .................. | 5 | 93 | 2 | (2) | 4,898 | - | 4,898 | 4,311 | |||||||
- rated C to A .................. | (2) | 46 | - | (1) | 1,649 | - | 1,649 | 835 | |||||||
- not publicly rated .......... | - | (7) | - | - | 770 | - | 770 | 292 | |||||||
Other assets | |||||||||||||||
ABS and ABS CDOs36 ........ | (204) | 118 | 64 | 55 | 12,775 | 7,076 | 5,699 | 4,160 | |||||||
- high grade37 .................. | (312) | (8) | 4 | 3 | 9,176 | 6,613 | 2,563 | 1,794 | |||||||
- rated C to A .................. | 107 | 131 | 50 | 52 | 2,784 | 463 | 2,321 | 1,758 | |||||||
- not publicly rated .......... | 1 | (5) | 10 | - | 815 | - | 815 | 608 | |||||||
Total .................................... | 170 | 2,729 | 173 | 1,402 | 89,357 | 8,572 | 80,785 | 65,931 | |||||||
HSBC's consolidated holdings of ABSs, and direct lending held at fair value through profit or loss (continued)
Half-year to 31 December 2010 | At 31 December 2010 | ||||||||||||||
Gross fair value movements | Realised | Credit | |||||||||||||
Income statement38 | Impair- ment | Other compre- hensive income39 | Impair- ment | gains/ (losses) in the income statement40 | Impair- ment | Reclassi- fied41 | Gross principal42 | default swap gross protection43 | Net principal exposure44 | Carrying amount45 | |||||
US$m | US$m | US$m | US$m | US$m | US$m | US$m | US$m | US$m | US$m | US$m | |||||
Mortgage-related assets | |||||||||||||||
Sub-prime residential | |||||||||||||||
Direct lending ......... | (20) | - | (6) | - | 2,233 | - | 2,233 | 1,078 | |||||||
MBSs36 ................... | (271) | 127 | (38) | 70 | 5,104 | 336 | 4,768 | 3,135 | |||||||
- high grade37 ......... | 4 | 49 | 3 | 14 | 1,996 | 292 | 1,704 | 1,458 | |||||||
- rated C to A ........ | (275) | 78 | (43) | 56 | 3,006 | 44 | 2,962 | 1,645 | |||||||
- not publicly rated | - | - | 2 | - | 102 | - | 102 | 32 | |||||||
MBS CDOs36 ........... | (9) | 4 | (52) | (3) | 90 | 12 | 78 | 17 | |||||||
- high grade37 ......... | - | (2) | (52) | - | 2 | - | 2 | 1 | |||||||
- rated C to A ........ | (9) | 5 | - | (3) | 86 | 12 | 74 | 14 | |||||||
- not publicly rated | - | 1 | - | - | 2 | - | 2 | 2 | |||||||
(300) | 131 | (96) | 67 | 7,427 | 348 | 7,079 | 4,230 | ||||||||
US Alt-A residential | |||||||||||||||
Direct lending ......... | (1) | - | - | - | 108 | - | 108 | 96 | |||||||
MBSs36 ................... | 4 | 216 | (6) | 680 | 9,957 | 100 | 9,857 | 5,013 | |||||||
- high grade37 ......... | - | 6 | 3 | 15 | 660 | 100 | 560 | 473 | |||||||
- rated C to A ........ | 4 | 216 | (9) | 665 | 9,254 | - | 9,254 | 4,503 | |||||||
- not publicly rated | - | (6) | - | - | 43 | - | 43 | 37 | |||||||
3 | 216 | (6) | 680 | 10,065 | 100 | 9,965 | 5,109 | ||||||||
US Government agency and sponsored enterprises | |||||||||||||||
MBSs36 | |||||||||||||||
- high grade37 ......... | 5 | (189) | (8) | 20 | 23,739 | - | 23,739 | 24,388 | |||||||
Other residential | |||||||||||||||
Direct lending ......... | 23 | - | 19 | - | 424 | - | 424 | 417 | |||||||
MBSs36 ................... | (110) | 55 | (18) | (11) | 6,571 | - | 6,571 | 5,793 | |||||||
- high grade37 ......... | (41) | 43 | (18) | (14) | 5,841 | - | 5,841 | 5,256 | |||||||
- rated C to A ........ | (69) | 14 | - | 3 | 648 | - | 648 | 450 | |||||||
- not publicly rated | - | (2) | - | - | 82 | - | 82 | 87 | |||||||
(87) | 55 | 1 | (11) | 6,995 | - | 6,995 | 6,210 | ||||||||
Commercial property | |||||||||||||||
MBS and MBS CDOs36 ................... | 208 | 420 | 37 | (58) | 12,625 | 421 | 12,204 | 10,493 | |||||||
- high grade37 ......... | 179 | (61) | 51 | (48) | 6,341 | 15 | 6,326 | 5,791 | |||||||
- rated C to A ........ | 28 | 481 | (13) | (12) | 6,201 | 406 | 5,795 | 4,637 | |||||||
- not publicly rated | 1 | - | (1) | 2 | 83 | - | 83 | 65 | |||||||
Leveraged finance-relatedassets .......................... | |||||||||||||||
ABSs and ABS CDOs36 | (52) | (9) | (4) | (22) | 7,148 | 788 | 6,360 | 5,721 | |||||||
- high grade37 ............ | (54) | (20) | (1) | (31) | 6,078 | 351 | 5,727 | 5,148 | |||||||
- rated C to A ........... | 2 | 11 | (3) | 9 | 971 | 437 | 534 | 472 | |||||||
- not publicly rated ... | - | - | - | - | 99 | - | 99 | 101 | |||||||
Student loan-related assets | |||||||||||||||
ABSs and ABS CDOs36 | 4 | 98 | 1 | (3) | 7,161 | 100 | 7,061 | 5,459 | |||||||
- high grade37 ............ | 4 | (49) | 1 | (2) | 4,080 | - | 4,080 | 3,626 | |||||||
- rated C to A ........... | - | 111 | - | (1) | 2,620 | 100 | 2,520 | 1,663 | |||||||
- not publicly rated ... | - | 36 | - | - | 461 | - | 461 | 170 | |||||||
Other assets | |||||||||||||||
ABS and ABS CDOs36 . | 206 | 267 | (63) | 12 | 15,497 | 7,765 | 7,732 | 5,622 | |||||||
- high grade37 ............ | 312 | 196 | (4) | (2) | 10,947 | 7,447 | 3,500 | 2,884 | |||||||
- rated C to A ........... | (105) | 57 | (49) | (6) | 4,059 | 318 | 3,741 | 2,379 | |||||||
- not publicly rated ... | (1) | 14 | (10) | 20 | 491 | - | 491 | 359 | |||||||
Total .............................. | (13) | 989 | (138) | 685 | 90,657 | 9,522 | 81,135 | 67,232 | |||||||
For footnotes, see page 146.
Analysis of exposures and significant movements
Sub-prime residential mortgage-related assets
Sub-prime residential mortage-related assets included US$2.8bn (30 June 2010: US$3.5bn; 31 December 2010: US$3.1bn) related to US‑originated assets and US$1.1bn (30 June 2010: US$1.1bn; 31 December 2010: US$1.1bn) relating to UK non-conforming residential mortgage-related assets. US-originated assets represented US$1.5bn (30 June 2010: US$1.5bn; 31 December 2010: US$1.5bn) of the non-high grade assets held of US$2.0bn (30 June 2010: US$1.7bn; 31 December 2010: US$1.7bn), reflecting the higher quality of the UK‑originated assets.
Gains on releases of impairment of US$2m on assets classified as available for sale were recognised in the first half of 2011 (30 June 2010: losses of US$100m; 31 December 2010: gains of US$52m). Of the above gains, first half gains of US$41m
(30 June 2010: losses of US$98m; 31 December 2010: gains of US$44m) occurred in the SICs and were allocated to the capital note holders.
US Alt-A residential mortgage-related assets
During the first half of 2011, further impairments of US$364m (30 June 2010: US$598m; 31 December 2010: US$286m) were recorded in respect of Alt-A mortgage-related assets. Of the impairment above, US$168m (30 June 2010: US$369m; 31 December 2010: US$81m) occurred in the SICs and was allocated to the capital note holders.
The following table shows the vintages of the collateral assets supporting our holdings of US sub‑prime and Alt-A MBSs. Market prices for these instruments generally incorporate higher discounts for later vintages. The majority of our holdings of US sub-prime MBSs originated pre-2007; holdings of US Alt-A MBSs are more evenly distributed between pre-2007 vintages and those from 2007.
Vintages of US sub-prime and Alt-A mortgage-backed securities
Gross principal42 of US sub-prime mortgage-backed securities at | Gross principal42 of US Alt-A mortgage-backed securities at | ||||||||||
30 June | 30 June | 31 December | 30 June | 30 June | 31 December | ||||||
2011 | 2010 | 2010 | 2011 | 2010 | 2010 | ||||||
US$m | US$m | US$m | US$m | US$m | US$m | ||||||
Mortgage vintage | |||||||||||
Pre-2006 ....................................... | 888 | 1,358 | 1,061 | 1,024 | 1,389 | 1,159 | |||||
2006 ............................................. | 1,687 | 2,074 | 1,822 | 4,361 | 5,499 | 5,147 | |||||
2007 ............................................. | 933 | 1,060 | 979 | 3,757 | 4,496 | 3,651 | |||||
3,508 | 4,492 | 3,862 | 9,142 | 11,384 | 9,957 | ||||||
For footnote, see page 146.
US Government agency and sponsored enterprises mortgage-related assets
During the first half of 2011, we increased our holdings of US Government agency and sponsored enterprises mortgage-related assets by US$0.3bn.
Other residential mortgage-related assets
The majority of our other residential mortgage-related assets were originated in the UK (30 June 2011: US$3.6bn; 30 June 2010: US$4.2bn; 31 December 2010: US$3.9bn). No impairments were recognised in respect of these UK-originated assets in the first half of 2011, nor throughout 2010, reflecting credit support within the asset portfolio.
Commercial property mortgage-related assets
Of our total of US$10.4bn (30 June 2010: US$10.6bn; 31 December 2010: US$10.5bn) of commercial property mortgage-related assets, US$4.9bn related to US originated assets (30 June 2010: US$5.4bn; 31 December 2010: US$5.2bn). Spreads continued to tighten on both US and non-US commercial property mortgage-related assets during the first half of 2011. Impairments of nil were recognised (30 June 2010: US$11m; 31 December 2010: write-backs of US$6m).
Leveraged finance-related assets
The majority of these assets related to US-originated exposures; 93% (30 June 2010: 86%; 31 December 2010: 90%) were high grade with no impairments recorded in the period.
Student loan-related assets
Our holdings in student loan-related assets were US$5.4bn (30 June 2010: US$5.4bn; 31 December 2010: US$5.5bn). No impairments were recorded on student loan-related assets in the first half of 2011, nor throughout 2010.
Transactions with monoline insurers
HSBC's exposure to derivative transactions entered into directly with monolines
Our principal exposure to monolines is through a number of OTC derivative transactions, mainly credit default swaps ('CDS's). We entered into these CDSs primarily to purchase credit protection against securities held at the time within the trading portfolio.
During the first half of 2011, the notional value of contracts with monolines was largely unchanged, but our overall credit exposure to monolines decreased as credit spreads narrowed. The table below sets out the fair value, essentially the replacement cost, of the derivative transactions at 30 June 2011, and hence the amount at risk if the CDS protection purchased were to be wholly ineffective because, for example, the monoline insurer was unable to meet its obligations. To further analyse that risk, the value of protection purchased is shown subdivided between those monolines that were rated by S&P at 'BBB- or above' at 30 June 2011, and those that were 'below BBB-' ('BBB-' is the S&P cut-off for an investment grade classification). The 'Credit risk adjustment' column indicates the valuation adjustment taken against the net exposures, and reflects our best estimate of the likely loss of value on purchased protection arising from the deterioration in creditworthiness of the monolines. These valuation adjustments, which reflect a measure of the irrecoverability of the protection purchased, have been charged to the income statement. During the first half of 2011, the credit risk adjustment on derivative contracts with monolines decreased as the exposures decreased.
HSBC's exposure to derivative transactions entered into directly with monoline insurers
Notional amount | Net exposure before credit risk adjustment46 | Credit risk adjustment47 | Net exposure after credit risk adjustment | ||||
US$m | US$m | US$m | US$m | ||||
At 30 June 2011 | |||||||
Derivative transactions with monoline counterparties | |||||||
Monolines - investment grade (BBB- or above) ..... | 5,269 | 846 | (85) | 761 | |||
Monolines - sub-investment grade (below BBB-) .... | 2,224 | 539 | (372) | 167 | |||
7,493 | 1,385 | (457) | 928 | ||||
At 30 June 2010 | |||||||
Derivative transactions with monoline counterparties | |||||||
Monolines - investment grade (BBB- or above) ..... | 5,103 | 920 | (92) | 828 | |||
Monolines - sub-investment grade (below BBB-) .... | 2,464 | 751 | (475) | 276 | |||
7,567 | 1,671 | (567) | 1,104 | ||||
At 31 December 2010 | |||||||
Derivative transactions with monoline counterparties | |||||||
Monolines - investment grade (BBB- or above) ..... | 5,179 | 876 | (88) | 788 | |||
Monolines - sub-investment grade (below BBB-) .... | 2,290 | 648 | (431) | 217 | |||
7,469 | 1,524 | (519) | 1,005 |
For footnotes, see page 146.
The above table can be analysed as follows. At 30 June 2011, HSBC had derivative transactions referenced to underlying securities with a notional value of US$7.5bn (30 June 2010: US$7.6bn; 31 December 2010: US$7.5bn), whose value at that date indicated a potential claim against the protection purchased from the monolines of some US$1.4bn (30 June 2010: US$1.7bn; 31 December 2010: US$1.5bn). On the basis of a credit assessment of the monolines, a provision of US$457m has been taken (30 June 2010: US$567m; 31 December 2010: US$519m), leaving US$928m exposed (30 June 2010: US$1.1bn; 31 December 2010: US$1.0bn), of which US$761m is recoverable from monolines rated investment grade at 30 June 2011 (30 June 2010: US$828m; 31 December 2010: US$788m). The provisions taken imply in aggregate that 90 cents in the dollar will be recoverable from investment grade monolines and 31 cents in the dollar from non-investment grade monolines (30 June 2010: 90 cents and 37 cents, respectively; 31 December 2010: 90 cents and 33 cents, respectively).
For the CDSs, market prices are generally not readily available. Therefore the CDSs are valued on the basis of market prices of the referenced securities.
The credit risk adjustment against monolines is determined by one of a number of methodologies, dependent upon the internal credit rating of the monoline. Our assignment of internal credit ratings is based upon detailed credit analysis, and may differ from external ratings.
Credit risk adjustments for monolines
·; For highly-rated monolines, the standard credit risk adjustment methodology (as described on page 190) applies, with the exception that the future exposure profile is deemed to be constant (equal to the current market value) over the weighted average life of the referenced security, and the credit risk adjustment cannot fall below 10% of the mark-to-market exposure.
·; In respect of monolines where default has either occurred or there is a strong possibility of default in the near term, the adjustment is determined based on the estimated probabilities of various potential scenarios, and the estimated recovery in each case.
·; For other monoline exposures, the credit risk adjustment follows the methodology for highly-rated monolines, adjusted to include the probability of a claim arising in respect of the referenced security, and applies implied probabilities of default where the likelihood of a claim is believed to be high.
HSBC's monoline credit risk adjustment calculation utilises a range of approaches depending on the credit quality of the monoline. The net effect of utilising the methodology adopted for 'highly-rated' monolines across all monolines would be to reduce the credit risk adjustment by US$117m (30 June 2010: US$14m; 31 December 2010: US$94m). The net effect of utilising a methodology based on credit default swap spreads would be an increase in credit risk adjustment of US$49m (30 June 2010: increase of US$52m; 31 December 2010: increase of US$8m).
At 30 June 2011, US$1.2bn (30 June 2010: US$1.6bn; 31 December 2010: US$1.4bn) notional value of securities referenced by monoline CDS transactions with a market value of US$0.9bn (30 June 2010: US$1.2bn; 31 December 2010: US$1.0bn) were held in the loans and receivables category, having been included in the reclassification of financial assets described in Note 10 on the Financial Statements. At the date of reclassification, the market value of the assets was US$1.0bn. The reclassification resulted in an accounting asymmetry between the CDSs, which continue to be held at fair value through profit and loss, and the reclassified securities, which are accounted for on an amortised cost basis. If the reclassifications had not occurred, the effect on the income statement for the half year to 30 June 2011 would have been an increase in profit of US$4m (first half of 2010: increase in profit of US$30m; second half of 2010: decrease in profit of US$33m). This amount represents the difference between the increase in market value of the securities during the first half of 2011 and the accretion recognised under the amortised cost method in the period.
HSBC's exposure to direct lending and irrevocable commitments to lend to monolines
HSBC had no liquidity facilities to monolines at 30 June 2011 (30 June 2010: nil; 31 December 2010: nil).
HSBC's exposure to debt securities which benefit from guarantees provided by monolines
Within both the trading and available-for-sale portfolios, we hold bonds that are 'wrapped' with a credit enhancement from a monoline. As the bonds are traded explicitly with the benefit of this enhancement, any deterioration in the credit profile of the monoline is reflected in market prices and, therefore, in the carrying amount of these securities at 30 June 2011. For wrapped bonds held in our trading portfolio, the mark-to-market movement has been reflected through the income statement. For wrapped bonds held in the available-for-sale portfolio, the mark-to-market movement is reflected in equity unless there is objective evidence of impairment, in which case the impairment loss is reflected in the income statement. No wrapped bonds were included in the reclassification of financial assets described in Note 10 on the Financial Statements.
HSBC's exposure to Credit Derivative Product Companies
CDPCs are independent companies that specialise in selling credit default protection on corporate exposures. At 30 June 2011, HSBC had purchased from CDPCs credit protection with a notional value of US$4.8bn (30 June 2010: US$5.0bn; 31 December 2010: US$4.9bn) which had a fair value of US$226m (30 June 2010: US$374m; 31 December 2010: US$235m), against which a credit risk adjustment (a provision) of US$49m (30 June 2010: US$98m; 31 December 2010: US$63m) was held. At 30 June 2011, none of the exposure was to CDPCs with investment grade ratings (30 June 2010: 23%; 31 December 2010: nil).
Leveraged finance transactions
Leveraged finance transactions include sub-investment grade acquisition or event-driven financing. The following table shows our exposure to leveraged finance transactions arising from primary transactions. Our additional exposure to leveraged finance loans through holdings of ABSs from our trading and investment activities is shown in the table on page 124.
HSBC's exposure to leveraged finance transactions
Exposures at 30 June 2011 | Exposures at 30 June 2010 | Exposures at 31 December 2010 | |||||||||||||||
Funded48 | Un- funded49 | Total | Funded48 | Un- funded49 | Total | Funded48 | Un- funded49 | Total | |||||||||
US$m | US$m | US$m | US$m | US$m | US$m | US$m | US$m | US$m | |||||||||
Europe ....................................... | 2,761 | 289 | 3,050 | 3,369 | 393 | 3,762 | 3,337 | 298 | 3,635 | ||||||||
Rest of Asia-Pacific ................... | - | - | - | 63 | 24 | 87 | 17 | 22 | 39 | ||||||||
North America .......................... | 489 | 127 | 616 | 1,204 | 184 | 1,388 | 1,066 | 185 | 1,251 | ||||||||
3,250 | 416 | 3,666 | 4,636 | 601 | 5,237 | 4,420 | 505 | 4,925 | |||||||||
Held within: | |||||||||||||||||
- loans and receivables .......... | 3,249 | 356 | 3,605 | 4,633 | 450 | 5,083 | 4,199 | 393 | 4,592 | ||||||||
- fair value throughprofit or loss ...................... | 1 | 60 | 61 | 3 | 151 | 154 | 221 | 112 | 333 | ||||||||
For footnotes, see page 146.
We held leveraged finance commitments of US$3.8bn at 30 June 2011 (30 June 2010: US$5.5bn; 31 December 2010: US$5.1bn), of which US$3.3bn (30 June 2010: US$4.9bn; 31 December 2010: US$4.6bn) was funded.
As described in Note 10 on the Financial Statements, certain leveraged finance loans were reclassified from held for trading to loans and receivables. As a result, these loans are held at amortised cost subject to impairment and are not marked to market, and no net gains (30 June 2010: net losses of US$0.3bn; 31 December 2010: net gains of US$0.1bn) were taken to the income statement in the first half of 2011.
At 30 June 2011, our principal exposures were to companies in two sectors: US$1.5bn to data processing (30 June 2010: US$3.1bn; 31 December 2010: US$2.8bn) and US$1.8bn to communications and infrastructure (30 June 2010: US$1.7bn; 31 December 2010: US$1.8bn). During the first half of 2011, 99% of the total fair value movement not recognised was against exposures in these two sectors (30 June 2010: 99%; 31 December 2010: 99%).
Representations and warranties related to mortgage sales and securitisation activities
We have been involved in various activities related to the sale and securitisation of residential mortgages, which are not recognised on our balance sheet. These activities include:
·; the purchase of US$24bn by HSBC Bank USA, substantially all of which were originated by non-HSBC entities, with a current outstanding balance of approximately US$9bn and securitisation of these by HSBC Securities (USA) Inc. ('HSI') between 2005 and 2007;
·; HSI acting as underwriter for third-party issuance of private label MBSs with an original issuance value of US$37bn and a current outstanding balance of approximately US$16bn, most of which were sub-prime, as well as underwriting US$6bn of MBSs issued by HSBC Finance; and
·; the origination and sale by HSBC Bank USA of mortgage loans, primarily to government sponsored entities.
In sales and securitisations of mortgage loans, various representations and warranties regarding the loans may be made to purchasers of the mortgage loans and MBSs. In respect of the purchase and securitisation of third party originated mortgages and the underwriting of third-party MBSs, the obligation to repurchase loans in the event of a breach of loan level representations and warranties resides predominantly with the organisation that originated the loan. While certain of these originators are or may become financially impaired and, therefore, unable to fulfil their repurchase obligations, we do not believe we have significant exposure for repurchases on these loans.
At 30 June 2011, a liability of US$237m was recognised in respect of various representations and warranties relating to the origination and sale by HSBC Bank USA of mortgage loans, primarily to government sponsored entities (30 June 2010:
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