Annual Financial Report - 22 of 41

RNS Number : 8625D

HSBC Holdings PLC

30 March 2011

Exposures to selected eurozone countries¹⁰

(Unaudited)

	At 31 December 2010
	Not held for trading			Held for trading
	Cash and lending to banks¹¹	Financial investments	Total balances	Net debt securities and loans	Derivatives¹²	Total balances	Total
	US$bn	US$bn	US$bn	US$bn	US$bn	US$bn	US$bn

Belgium
Sovereign and agencies ...............	0.2	0.7	0.9	0.6	-	0.6	1.5
Banks .........................................	5.8	0.3	6.1	1.5	1.2	2.7	8.8

	6.0	1.0	7.0	2.1	1.2	3.3	10.3

Greece
Sovereign and agencies ...............	-	0.3	0.3	0.8	-	0.8	1.1
Banks .........................................	-	-	-	0.6	-	0.6	0.6

	-	0.3	0.3	1.4	-	1.4	1.7

Ireland
Sovereign and agencies ...............	-	0.2	0.2	0.1	0.1	0.2	0.4
Banks .........................................	0.2	0.5	0.7	1.1	0.4	1.5	2.2

	0.2	0.7	0.9	1.2	0.5	1.7	2.6

Italy
Sovereign and agencies ...............	-	1.7	1.7	1.8	-	1.8	3.5
Banks .........................................	1.9	0.4	2.3	0.2	-	0.2	2.5

	1.9	2.1	4.0	2.0	-	2.0	6.0

Portugal
Sovereign and agencies ...............	-	0.1	0.1	-	-	-	0.1
Banks .........................................	0.3	0.1	0.4	0.1	-	0.1	0.5

	0.3	0.2	0.5	0.1	-	0.1	0.6

Spain
Sovereign and agencies ...............	0.1	0.9	1.0	0.7	0.1	0.8	1.8
Banks .........................................	0.8	0.2	1.0	1.4	-	1.4	2.4

	0.9	1.1	2.0	2.1	0.1	2.2	4.2

Total
Sovereign and agencies ...............	0.3	3.9	4.2	4.0	0.2	4.2	8.4
Banks .........................................	9.0	1.5	10.5	4.9	1.6	6.5	17.0

	9.3	5.4	14.7	8.9	1.8	10.7	25.4

For footnotes, see page 174.

under pressure, but for its specific political situation. Rating agencies downgraded the debt of a number of eurozone countries during 2010 and put some on review for possible downgrades. While the ECB continues to provide broad access to liquidity support for eurozone sovereign borrowers and banks, the availability of longer-term fiscal support from the EU for sovereigns is less certain and may lead to debt restructuring and increased private sector participation.

The eurozone as a whole retained substantial economic and financial strength despite the stresses from the financial crisis. However, concerns remained over the refinancing risks for sovereign borrowers and banks posed by the problems with market liquidity and the uncertainty surrounding support arrangements in the longer term. Eurozone policymakers have created two major facilities to counter short-term financing problems, the European Financial Stability Facility and the European Financial Stability Mechanism. This has been viewed as a positive development by the market and rating agencies, though implementation awaits disclosure of further details by the policymakers. We expect the ECB and eurozone countries will focus in 2011 on resolving intra-eurozone imbalances, rebuilding public finances, improving fiscal discipline, strengthening the banking system and managing cross-border risk.

We have closely managed our exposure to sovereign debt during 2010. At the end of the year, our exposure to the sovereign debt of Belgium, Greece, Ireland, Italy, Portugal and Spain was US$8.4bn and the overall quality of the portfolio was strong with most in-country and cross-border limits extended to countries with high-grade internal credit risk ratings. We regularly update our assessment of higher risk countries and adjust our risk appetite to reflect such changes.

European banks

In May 2010, an FSB review indicated that European banks would have to make additional loan impairment charges of up to US$143bn in 2011. Following the publication of this report, bond spreads on both European and US banks widened. The size of the financial sector's exposure to sovereign debt and doubts about economic conditions in parts of the eurozone raised fresh concerns about banks' credit ratings. In addition, uncertainty over liquidity, solvency, funding, changing regulation, capital requirements and taxation, and speculation over the stability of the euro, continued to cloud the future for European banking.

The banking sector in the eurozone remains under stress, mainly as a consequence of governments having to finance large budget deficits, troubles in property markets and weak credit growth. The Ireland bailout was a direct consequence of the failure of the Irish banking sector, largely driven by the domestic property price crash. Worries about the size and quality of eurozone banks' exposure to weaker eurozone countries are entwined with concerns about their ability to fund themselves. European banks share nearly three quarters of the public and private sector debt in Belgium, Greece, Ireland, Italy, Portugal and Spain. The regional and local banks in the eurozone are considered more vulnerable than well-diversified global banks.

During 2010, we were subject to the Committee of European Banking Supervisors (now the European Banking Authority) coordinated stress test of 91 EU financial institutions. Banks were required to meet a 6% minimum tier 1 target under stress. We passed the test satisfactorily, with a post-stress tier 1 ratio of 10.2% placing us in the top quartile of the institutions tested. Further stress testing is due to take place in 2011.

We expect that the pace of reforms outlined by various policymakers will gather speed in 2011, most notably the Basel III proposals. These regulations will require banks to hold more capital and a higher quality of capital and implement new liquidity rules, and are likely to result in a rise in the cost of funding and put pressure on credit pricing.

We continue to closely monitor and manage eurozone bank exposures, and are cautious in lending to this sector. We regularly update our assessment of higher-risk eurozone banks and adjust our risk appetite accordingly. We also, where possible, seek to play a positive role in maintaining credit and liquidity supply.

Middle East and North Africa

In 2009, Dubai World requested a standstill agreement with creditors in respect of the indebtedness of certain Dubai World group companies. The market disruption that ensued cut would-be borrowers off from the capital markets, although continued restructuring efforts throughout 2010 saw the return of significant positive sentiment from investors. As one of the long-term bankers to Dubai World and the various entities related to the Government of Dubai, the Group has worked closely during 2010 to address the prevailing issues. In October 2010, Dubai World obtained an agreement to restructure US$25bn of its debt subject to final documentation expected to be signed in the first half of 2011. The arrangement extends loan maturities for five to eight years at discounted rates, allowing Dubai World time to sell off its non-core assets while focusing on its core earnings. The Group's exposure to Dubai is primarily spread across operating companies within the emirate.

Political developments in the region are being monitored closely and action taken to mitigate their impact. It is too early to foresee how events may unfold; hitherto, our business in the region has for the most part operated without serious disruption. In the medium term, economic growth in the region may be adversely affected, with wider implications if the prices of oil, food and commodities rise significantly.

Commercial real estate

Our exposure in the commercial real estate sectors is concentrated in the UK, North America and Hong Kong. While there were some positive signs of recovery in markets in the UK and the US, in part supported by the low levels of interest rates, the slow speed of the recovery meant that financing and re‑financing activity in the sector remained subdued. In Hong Kong, the economy recovered robustly and the market was relatively buoyant in 2010, characterised by strong demand and continuing credit appetite.

On a constant currency basis, the aggregate of our commercial real estate and other property-related lending of US$107bn at 31 December 2010 was 7% higher than at 31 December 2009 and represented 11% of total loans and advances to customers. The increase in exposure was largely in Hong Kong, offset by a reduction in North America. In 2010, credit quality across this sector generally showed signs of stabilising but remained under stress in certain markets.

Across our portfolios, credit risk is mitigated by long-standing and conservative policies on asset origination which focus on relationships with long-term customers and limited initial leverage. We also set and monitor sector risk appetite limits at Group and regional levels to detect and prevent higher risk concentrations. While individual regions differ in their approach, typically origination loan to value ratios would be less than 65% across the Group.

Personal lending

(Unaudited)

We provide a broad range of secured and unsecured personal lending products to meet customer needs. Given the diverse nature of the markets in which we operate, the range is not standard across all countries but is tailored to meet the demands of individual markets while using appropriate distribution channels and, wherever possible, global IT platforms.

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

In 2010, credit quality in our personal lending portfolios improved, reflecting a recovery of economic conditions in most markets. Delinquency levels and loan impairment charges declined, particularly in those countries which had previously been most affected by rising unemployment and house price depreciation.

The commentary that follows is on an underlying basis.

At 31 December 2010, total personal lending was US$425bn, a decline of 2% from 31 December 2009 as the reduction in our US run-off portfolios continued, partly offset by notable growth in Hong Kong and the UK. Within our PFS business, total loan impairment charges and other credit risk provisions of US$11.3bn were 44% lower than in 2009, and were concentrated in North America (US$8.2bn) and, to a lesser extent, Europe (US$1.2bn) and Latin America (US$1.2bn).

In the UK, total personal lending was US$129bn, an increase of 4% compared with the end of 2009. The increase was due to growth in mortgage lending as a result of the enhancement of our product offerings, successful marketing and competitive pricing (UK mortgage lending is discussed in greater detail on page 108). This was partly offset by an 8% fall in other personal lending balances, reflecting a reduction in unsecured lending products as we tightened our underwriting criteria and some consumers reduced their indebtedness.

Total personal lending balances in the US at 31 December 2010 were US$109bn, a decrease of 19% compared with the end of 2009, reflecting the continued reduction in balances in our consumer finance run-off portfolios and lower balances in our Card and Retail Services business.

US residential mortgage lending balances fell by 12% to US$58bn, driven by the decisions taken in 2007 to close the Mortgage Services business and in March 2009 to close all Consumer Lending branches and run off the residual consumer finance balances. US mortgage lending is discussed in greater detail on page 108.

In PFS, total loan impairment charges and other credit risk provisions were 44% down on 2009.

Other personal lending balances in the US were US$52bn at 31 December 2010, 25% lower than at the end of 2009. Credit card balances declined by 14% reflecting a reduction in active customer accounts and an increased focus by our customers on reducing outstanding credit card debt.

In March we sold US$1.0bn of vehicle finance loans. This was followed in August by the sale of the residual vehicle finance loans (US$4.3bn) to the same purchaser.

In Hong Kong, total personal lending grew by 20% to US$57bn as a result of strong growth in residential mortgage lending. In the Rest of Asia-Pacific region, personal lending also grew strongly across many countries, notably Australia, Singapore and Malaysia, through successful marketing. This growth was partly offset by a managed reduction in unsecured personal lending balances in India.

In Latin America, total personal lending was broadly flat at US$22bn as moderate growth in residential mortgage lending, particularly in Brazil, was more than offset by a decline in other personal lending. The latter reflected falls in credit card lending in Mexico and other higher-risk portfolios in Mexico and Brazil as we continued to reduce higher-risk portfolios in the region and tighten our underwriting criteria.

For an analysis of loan impairment allowances and impaired loans, see page 119.

Total personal lending

(Unaudited)

	UK	Rest of Europe	US¹³	Rest of North America	Other regions¹⁴	Total
	US$m	US$m	US$m	US$m	US$m	US$m
At 31 December 2010
Residential mortgages ..................................	103,037	8,581	57,630	21,212	78,221	268,681

Other personal lending ................................	25,636	24,463	51,686	8,589	46,265	156,639
- motor vehicle finance ...........................	-	35	72	55	5,886	6,048
- credit cards ...........................................	11,612	1,916	33,744	1,334	13,778	62,384
- second lien mortgages ...........................	846	2	9,322	578	422	11,170
- other ....................................................	13,178	22,510	8,548	6,622	26,179	77,037


Total personal lending .................................	128,673	33,044	109,316	29,801	124,486	425,320

Impairment allowances
Residential mortgages ..............................	(275)	(58)	(3,592)	(25)	(297)	(4,247)

Other personal lending .............................	(1,348)	(467)	(4,436)	(179)	(1,616)	(8,046)
- motor vehicle finance .......................	-	(5)	-	-	(244)	(249)
- credit cards .......................................	(506)	(216)	(2,256)	(62)	(483)	(3,523)
- second lien mortgages .......................	(58)	-	(889)	(19)	-	(966)
- other ................................................	(784)	(246)	(1,291)	(98)	(889)	(3,308)

Total impairment allowances on personal lending .....................................................	(1,623)	(525)	(8,028)	(204)	(1,913)	(12,293)

- as a percentage of total personal lending	1.3%	1.6%	7.3%	0.7%	1.5%	2.9%

	US$m	US$m	US$m	US$m	US$m	US$m
At 31 December 2009
Residential mortgages ..................................	100,667	9,205	65,784	20,807	64,206	260,669

Other personal lending ................................	29,018	23,672	69,275	8,068	43,504	173,537
- motor vehicle finance ...........................	-	65	5,771	99	6,378	12,313
- credit cards ...........................................	12,427	1,820	39,374	1,118	13,319	68,058
- second lien mortgages ...........................	1,068	2	11,786	695	472	14,023
- other ....................................................	15,523	21,785	12,344	6,156	23,335	79,143


Total personal lending .................................	129,685	32,877	135,059	28,875	107,710	434,206

Impairment allowances
Residential mortgages ..............................	(151)	(41)	(4,416)	(7)	(233)	(4,848)

Other personal lending .............................	(1,443)	(552)	(7,691)	(206)	(2,349)	(12,241)
- motor vehicle finance .......................	-	(7)	(211)	(1)	(351)	(570)
- credit cards .......................................	(524)	(233)	(3,895)	(42)	(854)	(5,548)
- second lien mortgages .......................	(79)	-	(1,608)	(56)	-	(1,743)
- other ................................................	(840)	(312)	(1,977)	(107)	(1,144)	(4,380)

Total impairment allowances on personal lending .....................................................	(1,594)	(593)	(12,107)	(213)	(2,582)	(17,089)

- as a percentage of total personal lending	1.2%	1.8%	9.0%	0.7%	2.4%	3.9%

For footnotes, see page 174.

Mortgage lending

We offer a wide range of mortgage products designed to meet customer needs, including capital repayment mortgages subject to fixed or variable interest rates and products designed to meet demand for housing loans with more flexible payment structures. We underwrite both first lien residential mortgages and loans secured on second lien mortgages.

Interest-only mortgages are those for which customers make regular payments of interest during the life of the loan and repay the principal from the sale of their home or alternative sources of funds. Typically, with introductory interest-only mortgages, the interest-only element is for a fixed term at the start of the loan, after which principal repayments commence.

Affordability mortgages include all products where the customers' monthly payments are set at a low initial rate, either variable or fixed, before resetting to a higher rate once the introductory period is over. Offset mortgages are products linked to a current or savings account, where interest earned is used to repay mortgage debt.

UK mortgage lending

On a constant currency basis, total mortgage lending in the UK, comprising residential and second lien lending, increased by 7% to US$104bn at 31 December 2010. Growth was achieved largely through the enhancement of our product offerings, successful marketing and competitive pricing. Nonetheless, mortgage lending was constrained by the decline in re-mortgage activity due to the low interest rate environment and consumer concerns over future employment and higher interest rates.

Our UK mortgage portfolio remained of high quality, consisting primarily of lending to owner-occupiers. We restricted lending to purchase residential property for the purpose of rental and almost all new business was originated through our own salesforce, with the self-certification of income not permitted. The majority of mortgage lending was to existing customers holding current or savings accounts with HSBC; this facilitated and strengthened the underwriting process.

Loan impairment charges and delinquency levels in our UK mortgage book declined despite unemployment remaining high, mainly due to improving economic conditions and low interest rates, which helped make mortgages more affordable for customers. Our continuing enhancements in credit underwriting, credit policies and collection processes contributed to the reduction in delinquencies.

The percentage of loans that were 30 days or more delinquent declined from 1.6% at 31 December 2009 to 1.4% in 2010 in the HSBC Bank mortgage portfolio and remained at less than 1.0% in the First Direct portfolio.

In 2010, the average loan-to-value ratio for new business in the UK was 54%, an increase of a single percentage point on the previous year.

Interest-only mortgage balances increased by 4% to US$45bn compared with 2009. The majority of these mortgages were offset mortgages at First Direct for which delinquency rates remained at very low levels.

US mortgage lending

US mortgage lending balances, comprising residential and second lien lending, were US$67bn at 31 December 2010, a decline of 14% compared with the end of 2009.

Mortgage lending in HSBC Finance fell by 17% to US$51bn with declines in both the Consumer Lending and Mortgage Services portfolios from their planned run-off. See table on page 110 for a breakdown of mortgage lending in HSBC Finance.

Mortgage lending in the UK rose by 7% to US$104bn, while in the US balances declined by 14% to US$67bn.

Mortgage lending balances in HSBC Bank USA remained broadly unchanged at US$16bn. We continue to sell the majority of new origination to the secondary markets as a means of managing our interest rate risk and improving structural liquidity. This reduction was partly offset by an increase in originations to Premier customers with whom we already held a banking relationship. At 31 December 2010, approximately 32% of the HSBC Bank USA mortgage portfolio were fixed rate loans and 77% were first lien.

During 2010, state and federal officials announced investigations into the procedures followed by mortgage servicing companies and banks, including HSBC Finance and its affiliates, in relation to foreclosures. This included a joint examination by the Federal Reserve and the Office of the Comptroller of the Currency. Following the examination, our examiners issued supervisory letters noting deficiencies in our processing, preparation and signing of affidavits and other documents supporting foreclosures, and in the governance of and resources devoted to our foreclosure process. We have suspended foreclosures pending correction of the weaknesses. Management is reviewing all foreclosures which have not yet been completed, and will correct deficient documentation and refile documents where required.

As a result of the investigations, we expect that the scrutiny of documents will increase, and in some states additional verification of information may be required. If these trends continue after we reinstitute foreclosure, there could be additional delays in the process.

A discussion of credit trends in the US mortgage lending portfolio and the steps taken to mitigate risk is provided in 'US personal lending - credit quality' on page 110.

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

Mortgage lending products (Unaudited)
	UK	Rest of Europe	US¹³	Rest of North America	Other	Other regions¹⁴	Total
	US$m	US$m	US$m	US$m		US$m	US$m
At 31 December 2010
Residential mortgages .................................	103,037	8,581	57,630	21,212		78,221	268,681
Second lien mortgages .................................	846	2	9,322	578		422	11,170

Total mortgage lending ...............................	103,883	8,583	66,952	21,790		78,643	279,851

Second lien as a percentage of total mortgage lending .....................................	0.8%	0.0%	13.9%	2.7%		0.5%	4.0%

Impairment allowances
Residential mortgages ..............................	(275)	(58)	(3,592)	(25)		(297)	(4,247)
Second lien mortgages .............................	(58)	-	(889)	(19)		-	(966)

Total impairment allowances on mortgage lending ................................................	(333)	(58)	(4,481)	(44)		(297)	(5,213)

Interest-only (including endowment) mortgages ...............................................	45,039	51	-	908		1,282	47,280
Affordability mortgages, including ARMs ....	1,089	326	18,494	274		7,855	28,038
Other ..........................................................	102	-	-	-		183	285

Total interest-only and affordability mortgages ...............................................	46,230	377	18,494	1,182		9,320	75,603

- as a percentage of total mortgage lending ................................................	44.5%	4.4%	27.6%	5.4%		11.9%	27.0%

Negative equity mortgages¹⁵ .......................	2,436	-	15,199	103		291	18,029
Other loan-to-value ratios greater than 90%¹⁶ ............................................................	5,802	263	10,460	1,698		1,348	19,571

Total negative equity and other mortgages .	8,238	263	25,659	1,801		1,639	37,600

- as a percentage of total mortgage lending ................................................	7.9%	3.1%	38.3%	8.3%		2.1%	13.4%

At 31 December 2009
Residential mortgages .................................	100,667	9,205	65,784	20,807		64,206	260,669
Second lien mortgages .................................	1,068	2	11,786	695		472	14,023

Total mortgage lending ...............................	101,735	9,207	77,570	21,502		64,678	274,692

Second lien as a percentage of total mortgage lending .....................................	1.0%	-	15.2%	3.2%		0.7%	5.1%

Impairment allowances
Residential mortgages ..............................	(151)	(41)	(4,416)	(7)		(233)	(4,848)
Second lien mortgages .............................	(79)	-	(1,608)	(56)		-	(1,743)

Total impairment allowances on mortgage lending ................................................	(230)	(41)	(6,024)	(63)		(233)	(6,591)

Interest-only (including endowment) mortgages ...............................................	45,471	-	-	1,154		1,127	47,752
Affordability mortgages, including ARMs ....	2,681	1,084	21,024	232		5,921	30,942
Other ..........................................................	144	-	-	-		147	291

Total interest-only and affordability mortgages ...............................................	48,296	1,084	21,024	1,386		7,195	78,985

- as a percentage of total mortgage lending ................................................	47.5%	11.8%	27.1%	6.4%		11.1%	28.8%

Negative equity mortgages¹⁵ .......................	6,412	-	20,229	163		488	27,292
Other loan-to-value ratios greater than 90%¹⁶ ............................................................	10,522	-	13,695	1,887		1,451	27,555

Total negative equity and other mortgages .	16,934	-	33,924	2,050		1,939	54,847

- as a percentage of total mortgage lending ................................................	16.6%	-	43.7%	9.5%		3.0%	20.0%

For footnotes, see page 174.

HSBC Finance held approximately US$51bn of residential mortgage and second lien loans and advances to personal customers secured on real
estate at 31 December 2010, 12% of the Group's gross loans and advances to personal customers.

HSBC Finance US mortgage lending¹⁷ (Unaudited)
	At 31 December 2010				At 31 December 2009
	Mortgage Services	Consumer Lending	Other mortgage lending	Total	Mortgage Services	Consumer Lending	Other mortgage lending	Total
	US$m	US$m	US$m	US$m	US$m	US$m	US$m	US$m

Fixed-rate ...................	11,447	31,759	87	43,293	13,596	37,639	98	51,333
Other ..........................	6,122	1,517	2	7,641	8,168	1,867	6	10,041
Adjustable-rate ........	5,042	1,517	2	6,561	7,070	1,867	-	8,937
Interest-only (affordability mortgages)¹⁸ ........	1,080	-	-	1,080	1,098	-	6	1,104


	17,569	33,276	89	50,934	21,764	39,506	104	61,374

First lien .....................	15,300	29,950	66	45,316	18,710	34,913	77	53,700
Second lien ..................	2,269	3,326	23	5,618	3,054	4,593	27	7,674

	17,569	33,276	89	50,934	21,764	39,506	104	61,374

Stated income¹⁹ ...........	2,905	-	-	2,905	3,905	-	-	3,905
Negative equity mortgages¹⁵ .............	5,161	8,910	-	14,071	6,770	12,031	-	18,801

Impairment allowances	1,837	2,474	-	4,311	2,419	3,167	1	5,587
- as a percentage of total mortgage lending ................	10.5%	7.4%	-	8.5%	11.1%	8.0%	1.0%	9.1%

For footnotes, see page 174.

US personal lending

(Unaudited)

Credit quality

During 2010, economic conditions in the US generally improved, although the pace of improvement continued to be slow.

In the first half of 2010, house prices stabilised in many markets and began to recover in others, as the first time homebuyer tax credit and continued low interest rates favourably affected the housing market. However, in the second half of the year, house prices declined in many markets as the homebuyer tax credit ended and foreclosure levels rose.

Unemployment rates, which have been a major factor in the deterioration of credit quality, were 9.4% in December 2010, a decrease of 60 basis points since December 2009. Unemployment rates in 18 states were at or above the US national average and unemployment rates in 5 states were at or above 11%, including California and Florida, where more than 5% of HSBC Finance's total loan balances are based.

Ongoing improvement in the US economy will be dependent on a sustained recovery in the housing market and unemployment rates, as well as the continuation of low interest rates. Renewed weakening in these factors and in consumer confidence may adversely affect consumer payment patterns and credit quality.

HSBC Finance: geographical concentration of US lending^{17, 20}

(Unaudited)

	Mortgage lending as a percentage of:		Other personal lending as a percentage of:
	total lending	total mortgage lending	total lending	total other personal lending	percentage of total lending
	%	%	%	%	%

California .................................................................	6	10	4	10	10
New York ...................................................................	4	7	3	7	7
Florida .......................................................................	4	6	2	5	6
Pennsylvania ............................................................	3	6	2	5	6
Texas ..........................................................................	2	4	3	7	5
Ohio ...........................................................................	3	6	2	5	5

For footnotes, see page 174.

Mortgage lending

In 2010, we reduced our non-prime mortgage exposure as balances continued to run-off in our Consumer Lending and Mortgage Services portfolios in HSBC Finance. At 31 December 2010, residential mortgage lending balances were US$58bn, a decline of 12% compared with the end of 2009.

In both our Consumer Lending and Mortgage Services mortgage portfolios, two months or more delinquent balances declined as balances ran-off and economic conditions improved. In addition, written-off balances were replaced with lower levels of new delinquency volumes as the portfolios continue to season. First lien two months or more delinquent balances in our Consumer Lending portfolio declined from US$5.4bn at 31 December 2009 to US$4.9bn at 31 December 2010 and, in our Mortgage Services portfolio, from US$3.1bn at 31 December 2009 to US$2.8bn at 31 December 2010. In each case, lending balances liquidated at a faster pace than delinquency. As a result, two months or more delinquency rates on first lien loans in our Consumer Lending portfolio increased from 15.4% at 31 December 2009 to 16.2%, while in our Mortgage Services portfolio, two months or more delinquency rates increased from 16.5% to 18.0%.

At HSBC Bank USA, we continued to sell the majority of new mortgage loan originations to the secondary markets. These decreases were partly offset by increases to the portfolio from new lending to our Premier relationship customers. Two months or more delinquency rates decreased from 8.6% to 7.9% at 31 December 2010, while delinquent balances remained flat at US$1.0bn.

Second lien mortgage loans have a risk profile characterised by higher loan-to-value ratios because, in the majority of cases, the loans were taken out to complete the refinancing or purchase of properties. Loss experience on default of second lien loans has typically approached 100% of the amount owed, as any equity in the property is initially applied to the first lien loan. In the Mortgage Services second lien portfolio, outstanding balances declined by 26% to US$2.3bn and two months or more delinquency rates decreased to 10.8% at 31 December 2010. In the Consumer Lending second lien portfolio, outstanding balances declined by 28% to US$3.3bn, and two months or more delinquency rates decreased to 12.7% at 31 December 2010.

At HSBC Bank USA, second lien balances declined by 10% to US$3.7bn, and two months or more delinquency rates increased from 4.0% at 31 December 2009 to 4.8% at 31 December 2010 due to the effects of high unemployment levels.

Stated-income mortgages are underwritten on the basis of borrowers' representations of annual income and are not verified by supporting documents and, as a result, represent a higher than average level of risk. Stated income balances in HSBC Finance declined from US$3.9bn to US$2.9bn as the portfolio continued to run off. Two months or more delinquency rates increased to 24.0% at 31 December 2010. In HSBC Bank USA, stated-income balances were unchanged at US$2.1bn while delinquency rates decreased from 11.1% at 31 December 2009 to 10.6% at 31 December 2010.

At 31 December 2010, HSBC Finance had US$7.6bn of affordability mortgages, a decline of 24% compared with 31 December 2009, as the portfolio continued to run off. At HSBC Bank USA, affordability mortgage balances of US$10.9bn at 31 December 2010 compared with US$11.1bn at 31 December 2009.

Real estate markets in the majority of the US have been and will continue to be, affected by stagnation or declines in property values. As a result, loan-to-value ratios for our real estate secured loans have generally deteriorated since origination. Loans with a loan-to-value of 100% or more have historically had a greater likelihood of becoming delinquent. At 31 December 2010 loans in negative equity were US$14bn, compared with US$19bn at the end of 2009.

At HSBC Finance, the number of foreclosed properties at 31 December 2010 increased compared with the end of 2009. The rise reflected the improvement in the processing of foreclosures as backlogs and action taken by local governments and certain states had lengthened proceedings in previous years. The average loss on sale of foreclosed properties decreased compared with 2009 though the average loss increased in the second half of 2010, as house prices in many markets showed signs of deterioration due to a rise in the number of foreclosed properties and the expiration of the homebuyer tax credit. We continued to assist customers in restructuring their debts to avoid foreclosure, including by modifying their loans when it was decided that they could be serviced on revised terms. For more details on the investigation into US foreclosure practices, see page 83.

HSBC Finance foreclosed properties in the US (Unaudited)
		Quarter ended
	2010	31 Dec 2010	30 Sep 2010	30 Jun 2010	31 Mar 2010	2009

Number of foreclosed properties at end of period .........	10,940	10,940	9,798	8,394	6,961	6,188
Number of properties added to foreclosed inventory in the year/quarter ....................................................	20,489	5,763	5,413	5,096	4,217	14,845
Average loss on sale of foreclosed properties²¹ ............	9%	15%	10%	4%	4%	12%
Average total loss on foreclosed properties²² ...............	51%	54%	52%	49%	49%	51%
Average time to sell foreclosed properties (days) .........	161	165	158	156	170	193

For footnotes, see page 174.

Credit cards

In our credit card and private label portfolios two months or more delinquency balances declined markedly, reflecting actions taken to improve credit quality, and our customer payment rates benefited from an increased focus by consumers on reducing outstanding credit card debt. Two months or more delinquent balances in our credit card portfolio declined from US$1.8bn to US$1.0bn, while in percentage terms they declined from 7.4% at 31 December 2009 to 4.7% at 31 December 2010. In the private label cards portfolio, two months or more delinquent balances declined from US$622m to US$404m while in percentage terms delinquency decreased from 4.1% at 31 December 2009 to 3.0% at 31 December 2010.

Motor vehicle finance

In 2010, we sold our vehicle finance loan portfolio and vehicle finance servicing operations. See page 106 for details.

Other personal lending

In the US unsecured lending portfolio, two months or more delinquency rates declined as balances continued to run off, economic conditions generally improved, and actions taken previously to tighten underwriting and reduce risk in this portfolio continued to have a favourable effect on credit quality.

Loan delinquency

Trends in two months and over contractual delinquency in the US

(Unaudited)

	Quarter ended
	31 Dec 2010	30 Sep 2010	30 Jun 2010	31 Mar 2010	As reported 31 Dec 2009	Ex. period change 31 Dec 2009		30 Sep 2009	30 Jun 2009	31 Mar 2009
	US$m	US$m	US$m	US$m	US$m		US$m	US$m	US$m	US$m
In Personal Financial Services in the US
Residential mortgages	8,632	8,885	8,591	8,960	9,551		11,519	10,834	10,070	9,892
Second lien mortgage lending ................	847	907	930	1,011	1,194		1,628	1,631	1,676	1,772
Vehicle finance .......	-	-	152	194	267		267	295	310	269
Credit card ..............	957	1,066	1,201	1,511	1,798		1,798	1,834	1,864	1,992
Private label ...........	404	445	478	510	622		622	639	636	659
Personal non-credit card .....................	811	953	987	1,194	1,548		2,619	2,680	2,709	2,855

Total ......................	11,651	12,256	12,339	13,380	14,980		18,453	17,913	17,265	17,439

	%²³	%²³	%²³	%²³	%²³		%²³	%²³	%²³	%²³

Residential mortgages	15.00	14.97	14.02	14.12	14.54		17.03	15.39	13.89	12.82
Second lien mortgage lending ................	9.10	9.23	8.98	9.17	10.14		13.35	12.71	12.35	12.59
Vehicle finance .......	-	-	3.59	3.96	4.63		4.63	4.61	3.97	2.79
Credit card ..............	4.69	5.23	5.65	6.84	7.38		7.38	7.28	7.25	7.14
Private label ...........	3.03	3.56	3.80	3.78	4.12		4.12	4.38	4.08	4.28
Personal non-credit card .....................	9.49	10.15	9.60	10.75	12.55		19.77	18.73	18.02	18.30

Total ......................	10.67	10.99	10.28	10.61	11.09		13.34	12.47	11.49	10.92

	Quarter ended
	31 Dec 2010	30 Sep 2010	30 Jun 2010	31 Mar 2010	As reported 31 Dec 2009	Ex. period change 31 Dec 2009		30 Sep 2009	30 Jun 2009	31 Mar 2009
In Mortgage Services and Consumer Lending²⁴	US$m	US$m	US$m	US$m	US$m		US$m	US$m	US$m	US$m
In Mortgage Services and Consumer Lending²⁴
Mortgage Services: ..	3,002	3,117	3,067	3,236	3,477		4,456	4,250	4,257	4,535
- first lien ...........	2,757	2,850	2,788	2,928	3,093		3,900	3,688	3,642	3,824
- second lien .......	245	267	279	308	384		556	562	615	711

Consumer Lending: .	5,284	5,495	5,278	5,493	6,022		7,445	7,131	6,514	6,203
- first lien ...........	4,861	5,022	4,795	4,970	5,380		6,541	6,241	5,640	5,322
- second lien .......	423	473	483	523	642		904	890	874	881

	%²³	%²³	%²³	%²³	%²³		%²³	%²³	%²³	%²³
Mortgage Services:
- first lien ...........	18.02	17.73	16.50	16.38	16.53		20.00	18.09	17.13	17.24
- second lien .......	10.80	10.93	10.63	10.87	12.57		17.25	16.36	16.35	17.44
- total .................	17.09	16.83	15.71	15.62	15.98		19.61	17.84	17.01	17.27

Consumer Lending:
- first lien ...........	16.23	16.16	14.85	14.79	15.41		18.15	16.75	14.72	13.52
- second lien .......	12.72	13.16	12.44	12.25	13.98		18.64	17.49	16.17	15.43
- total .................	15.88	15.85	14.59	14.51	15.24		18.21	16.84	14.90	13.76

For footnotes, see page 174.

Forbearance strategies and renegotiated loans

(Audited)

A range of forbearance strategies are employed in order to improve the management of customer relationships, maximise collection opportunities and, if possible, avoid foreclosure or repossession. Our policies and practices are based on criteria which, in the judgement of local management, indicate that repayment is likely to continue.

Forbearance arrangements include extended payment terms, a reduction in interest or principal repayments, approved external debt management plans, the deferral of foreclosures, other modifications, and loan restructures. These management policies and practices typically provide the customer with terms and conditions that are more favourable than those provided initially. Such arrangements could include cases where an account is brought up-to-date without full repayment of all the arrears.

Our most common forbearance arrangements are loan restructures applied to real estate loans within consumer finance portfolios in the US. Our credit risk management policy sets out restrictions on the number and frequency of restructures, the minimum period an account must have been opened before any restructure can be considered, and the number of qualifying payments that must be received before an account may be considered restructured and up-to-date. The application of this policy varies according to the nature of the market, the product and the management of customer relationships through the occurrence of exceptional events.

Loans that are subject to restructuring may only be classified as restructured and up-to-date once a specified number and/or amount of qualifying payments have been received. These qualifying payments are set at a level appropriate to the nature of the loan and the customer's ability to make the repayment going forward. Typically the receipt of two or more qualifying payments is required within a certain period, generally 60 days (in the case of HSBC Finance, in certain circumstances, for example where debt has been restructured in bankruptcy proceedings, fewer or no payments may be required). Loans that have been restructured and would otherwise have been past due or impaired are classified as renegotiated.

Renegotiated loans are segregated from other parts of the loan portfolio for collective impairment assessment, to reflect the higher rates of losses often encountered in this segment of the portfolio. When empirical evidence indicates an increased propensity to default and higher losses on such accounts, the use of roll rate methodology ensures these factors are taken into account when calculating impairment allowances. The carrying amount of loans that have been classified as renegotiated retain this classification until maturity or derecognition. Interest is recorded on renegotiated loans on the basis of new contractual terms following renegotiation.

Renegotiated loans totalled US$35bn at 31 December 2010 (2009: US$39bn). The largest concentration was in the US and amounted to US$28bn (2009: US$33bn) or 82% (2009: 86%) of our total renegotiated loans, substantially all of which was held by HSBC Finance.

HSBC Finance loan modifications and re‑ageing

(Unaudited)

HSBC Finance continued to refine its customer account management policies and practices, including account modification and re-age programmes. Modification occurs when the terms of a loan are modified either temporarily or permanently. Modification may also lead to a re‑ageing of the account. In 2010, HSBC Finance modified 42,500 loans with an aggregate balance of US$6.0bn in Consumer Lending and Mortgage Services through the foreclosure avoidance and account modification programmes.

At 31 December 2010, the total balance outstanding on HSBC Finance real estate secured accounts which have been re-aged or modified was US$26.7bn, compared with US$30.2bn at the end of 2009. US$10.6bn relates to loans that had been re‑aged without modification to the terms (2009: US$11.1bn), and US$13.9bn relates to loans whose terms have been modified and have been re-aged (2009: US$15.7bn). These amounts are included in the renegotiated loans balance disclosed above. In addition, US$2.2bn of loans have been modified but not re-aged (2009: US$3.4bn) and as such do not meet the definition of a renegotiated loan as the impairment or past-due status of the loans did not change on modification. At 31 December 2010, 62% of modified or re-aged real estate loans remained up-to-date or past due less than 30 days (2009: 61%) and 26% were two or more months delinquent (2009: 26%).

Collateral and other credit enhancements obtained

(Audited)

We obtained assets by taking possession of collateral held as security, or calling upon other credit enhancements, as follows:

	Carrying amount obtained in:
	2010	2009
	US$m	US$m
Nature of assets
Residential property ................	2,052	1,587
Commercial and industrial property ..............................	61	93
Other ......................................	119	355

	2,232	2,035

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 either to repay other secured lenders with lower priority or are returned to the customer. We do not generally occupy repossessed properties for our business use.

Credit quality of financial instruments

(Audited)

The five credit quality classifications defined below each encompass a range of more granular internal credit rating grades assigned to wholesale and retail lending business, as well as the external ratings attributed by external agencies to debt securities. There is no direct correlation between the internal and external ratings at a granular level, except to the extent each falls within a single quality classification.

Risk rating scales

Credit quality classification

(Unaudited)

	Debt securities and other bills	Wholesale lending and derivatives		Retail lending
Quality classification	External credit rating	Internal credit rating	Probability of default %	Internal credit rating²⁵	Expected loss %

Strong ......................	A- and above	CRR1 to CRR2	0 - 0.169	EL1 to EL2	0 - 0.999
Good ........................	BBB+ to BBB-	CRR3	0.170 - 0.740	EL3	1.000 - 4.999
Satisfactory .............	BB+ to B+ and unrated	CRR4 to CRR5	0.741 - 4.914	EL4 to EL5	5.000- 19.999
Sub-standard .............	B and below	CRR6 to CRR8	4.915 - 99.999	EL6 to EL8	20.000 - 99.999
Impaired ..................	Impaired	CRR9 to CRR10	100	EL9 to EL10	100+ or defaulted²⁶

For footnotes, see page 174.

Quality classification definitions

· 'Strong': exposures demonstrate a strong capacity to meet financial commitments, with negligible or low probability of default and/or low levels of expected loss. Retail accounts operate within product parameters and only exceptionally show any period of delinquency.

· 'Good': exposures require closer monitoring and demonstrate a good capacity to meet financial commitments, with low default risk. Retail accounts typically show only short periods of delinquency, with any losses expected to be minimal following the adoption of recovery processes.

· 'Satisfactory': exposures require closer monitoring and demonstrate an average to fair capacity to meet financial

commitments, with moderate default risk. Retail accounts typically show only short periods of delinquency, with any losses expected to be minor following the adoption of recovery processes.

· 'Sub-standard': exposures require varying degrees of special attention and default risk is of greater concern. Retail portfolio segments show longer delinquency periods of generally up to 90 days past due and/or expected losses are higher due to a reduced ability to mitigate these through security realisation or other recovery processes.

· 'Impaired': exposures have been assessed, individually or collectively, as impaired.

The Customer Risk Rating ('CRR') 10-grade scale above summarises a more granular underlying 23‑grade scale (2009: 22-grade scale) of obligor probability of default ('PD'). The 23-grade scale was introduced in September 2010 following the harmonisation of PDs for three asset classes (banks, sovereigns and corporates) into one scale which required an additional PD band. All distinct HSBC customers are rated using the 10 or 23-grade scale, depending on the degree of sophistication of the Basel II approach adopted for the exposure.

The Expected Loss ('EL') 10-grade scale for retail business summarises a more granular underlying EL scale for these customer segments; this combines obligor and facility/product risk factors in a composite measure.

For debt securities and certain other financial instruments, external ratings have been aligned to the five quality classifications. The ratings of Standard and Poor's are cited, with those of other agencies being treated equivalently. Debt securities with short-term issue ratings are reported against the long-term rating of the issuer of those securities. If major rating agencies have different ratings for the same debt securities, a prudent rating selection is made in line with regulatory requirements.

Additional credit quality information in respect of our consolidated holdings of ABSs is provided on pages 134 and 135.

For the purpose of the following disclosure, retail loans which are past due up to 89 days and are not otherwise classified as EL9 or EL10, are not disclosed within the EL grade to which they relate, but are separately classified as past due but not impaired.

Financial instruments by credit quality

2010 compared with 2009

Financial instruments on which credit quality has been assessed increased by 4% to US$2,297bn due to strong growth in lending, mainly in Asia. At December 2010, US$1,550bn or 67% was classified as 'strong' in line with the end of 2009, reflecting the continued actions by management to mitigate the Group's exposure to credit risk. The proportion of financial instruments classified as 'good' and 'satisfactory' were broadly unchanged at 16% and 12% respectively. The proportion of 'sub-standard' financial instruments was 2%.

Loans and advances on which credit quality has been assessed increased by 8% to US$1,167bn, driven by growth in commercial and personal lending in Asia as generally economic conditions improved, while loans and advances to banks also rose. The growth was in balances classified as 'strong' and 'good', while balances classified as 'sub-standard' and 'past due but not impaired' declined.

Derivative assets on which credit quality has been assessed grew by 4% to US$261bn from 31 December 2009, with growth in balances being classified as 'strong'. The increase was mainly in interest rate derivatives, reflecting a downward shift in yield curves.

At 31 December 2010, financial investments on which credit quality has been assessed increased by 9% compared with the end of 2009, to US$393bn. Substantially all this growth was in assets classified as 'strong', reflecting increased investment of excess liquidity into low-risk government issued or government guaranteed bonds.

Trading assets on which credit quality has been assessed decreased by 11%, with the decline being in assets rated as 'strong'. This reflected the de-consolidation of the Constant Net Asset Value funds.

The following tables set out 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 allowances²⁷	Total
	Strong	Good	Satisfactory		Sub- standard	but not impaired	Impaired	ment allowances²⁷	Total
	US$m	US$m		US$m	US$m	US$m	US$m	US$m	US$m
At 31 December 2010
Cash and balances at central banks ........	51,682	3,100		2,461	140				57,383
Items in the course of collection from other banks ..........	5,631	101		340	-				6,072
Hong Kong Government certificates of indebtedness .........	19,057	-		-	-				19,057

Trading assets²⁸ ........	256,576	41,620		43,278	2,492				343,966
- treasury and other eligible bills ..........................	23,663	1,000		957	-				25,620
- debt securities ....	141,837	8,254		17,222	955				168,268
- loans and advances to banks ..........................	55,534	9,980		4,865	77				70,456
- loans and advances to customers ..........	35,542	22,386		20,234	1,460				79,622

Financial assets designated at fair value²⁸ ...........	8,377	4,640		6,536	40				19,593
- treasury and other eligible bills ..........................	158	-		1	-				159
- debt securities ....	7,310	4,368		6,530	40				18,248
- loans and advances to banks ..........................	38	272		5	-				315
- loans and advances to customers ..........	871	-		-	-				871

Derivatives²⁸ ............	199,920	45,042		13,980	1,815				260,757

Loans and advances held at amortised cost ......................	653,248	251,265		186,704	37,057	30,320	28,284	(20,241)	1,166,637
- loans and advances to banks ..........................	166,943	33,051		6,982	1,152	108	193	(158)	208,271
- loans and advances to customers²⁹ .......	486,305	218,214		179,722	35,905	30,212	28,091	(20,083)	958,366

Financial investments .................................	345,265	23,253		17,168	4,479	16	2,591		392,772
- treasury and other similar bills ..........................	52,423	2,702		1,882	115	-	7		57,129
- debt securities ....	292,842	20,551		15,286	4,364	16	2,584		335,643

Other assets .............	9,752	6,067		12,212	1,510	513	317		30,371
- endorsements and acceptances .......	2,074	3,305		4,227	493	9	8		10,116
- accrued income and other .............	7,678	2,762		7,985	1,017	504	309		20,255


Total financial instruments ..............	1,549,508	375,088		282,679	47,533	30,849	31,192	(20,241)	2,296,608

	Neither past due nor impaired					Past due but not impaired			Impair-
					Sub- standard		Impaired	ment allowances²⁷		Total
	Strong	Good	Satisfactory		Sub- standard		Impaired	ment allowances²⁷		Total
	US$m	US$m		US$m	US$m	US$m	US$m		US$m	US$m
At 31 December 2009
Cash and balances at central banks .........	55,355	3,414		1,589	297					60,655
Items in the course of collection from other banks ............	5,922	20		453	-					6,395
Hong Kong Government certificates of indebtedness ...........	17,463	-		-	-					17,463

Trading assets²⁸ .........	306,481	37,911		39,457	2,221					386,070
- treasury and other eligible bills .........	21,747	315		169	115					22,346
- debt securities .....	180,876	7,499		12,360	863					201,598
- loans and advances to banks ..............	59,152	14,213		4,572	189					78,126
- loans and advances to customers .......	44,706	15,884		22,356	1,054					84,000

Financial assets designated at fair value²⁸ .............	11,163	3,834		7,122	79					22,198
- treasury and other eligible bills .........	223	-		-	-					223
- debt securities .....	9,701	3,834		7,104	79					20,718
- loans and advances to banks ..............	336	-		18	-					354
- loans and advances to customers .......	903	-		-	-					903

Derivatives²⁸ .............	169,430	60,759		15,688	5,009					250,886

Loans and advances held at amortised cost .......................	570,357	231,394		185,167	43,820	40,078	30,845		(25,649)	1,076,012
- loans and advances to banks ..............	130,403	34,646		13,154	1,434	12	239		(107)	179,781
- loans and advances to customers²⁹ .....	439,954	196,748		172,013	42,386	40,066	30,606		(25,542)	896,231

Financial investments	316,604	20,080		15,359	5,602	-	2,389			360,034
- treasury and other similar bills ..........	54,158	1,458		2,315	498	-	5			58,434
- debt securities .....	262,446	18,622		13,044	5,104	-	2,384			301,600

Other assets ...............	13,454	6,968		12,477	1,718	908	848			36,373
- endorsements and acceptances .........	1,349	3,200		4,161	512	12	77			9,311
- accrued income and other ...............	12,105	3,768		8,316	1,206	896	771			27,062


Total financial instruments ...............	1,466,229	364,380		277,312	58,746	40,986	34,082		(25,649)	2,216,086

For footnotes, see page 174.

Past due but not impaired gross financial instruments

(Audited)

Examples of exposures past due but not impaired include overdue loans fully secured by cash collateral; mortgages that are individually assessed for impairment, and that are in arrears more than 90 days, but where the value of collateral is sufficient to repay both the principal debt and all potential interest for at least one year; and short‑term trade facilities past due more than 90 days for technical reasons such as delays in documentation, but where there is no concern over the creditworthiness of the counterparty.

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

(Audited)

	Europe	Hong Kong	Rest of Asia- Pacific	Middle East	North America	Latin America	Total
	US$m	US$m	US$m	US$m	US$m	US$m	US$m

At 31 December 2010 ...............................	2,518	1,158	2,092	1,351	20,227	2,974	30,320
At 31 December 2009 .................................	3,759	1,165	1,996	1,661	27,989	3,508	40,078

Past due but not impaired loans and advances to customers and banks by industry sector

(Audited)

	At 31 December
	2010	2009
	US$m	US$m

Banks ......................................................................................................................................	108	12

Customers ...............................................................................................................................	30,212	40,066
Personal ..............................................................................................................................	24,824	34,306
Corporate and commercial ..................................................................................................	5,292	5,522
Financial .............................................................................................................................	96	238


	30,320	40,078

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 2010
Loans and advances held at amortised cost .................	19,481	6,915	3,281	482	161	30,320
- loans and advances to banks .................................	108	-	-	-	-	108
- loans and advances to customers ..........................	19,373	6,915	3,281	482	161	30,212

Financial investments
- debt securities ......................................................	16	-	-	-	-	16

Other assets ................................................................	262	123	57	26	45	513
- endorsements and acceptances .............................	7	-	-	1	1	9
- other ...................................................................	255	123	57	25	44	504


	19,759	7,038	3,338	508	206	30,849

At 31 December 2009
Loans and advances held at amortised cost .................	24,330	9,920	5,259	355	214	40,078
- loans and advances to banks .................................	12	-	-	-	-	12
- loans and advances to customers ..........................	24,318	9,920	5,259	355	214	40,066

Other assets ................................................................	609	130	63	24	82	908
- endorsements and acceptances .............................	9	1	-	1	1	12
- other ...................................................................	600	129	63	23	81	896


	24,939	10,050	5,322	379	296	40,986

Impaired loans and advances

Impaired loans and advances to customers and banks by industry sector

(Audited)

	Impaired loans and advances at 31 December 2010			Impaired loans and advances at 31 December 2009
	Individually assessed	Collectively assessed	Total	Individually assessed	Collectively assessed	Total
	US$m	US$m	US$m	US$m	US$m	US$m

Banks ..................................................	193	-	193	239	-	239

Customers ............................................	15,201	12,890	28,091	14,767	15,839	30,606
Personal ...........................................	2,121	12,592	14,713	1,977	15,451	17,428
Corporate and commercial ...............	11,964	298	12,262	11,839	387	12,226
Financial ..........................................	1,116	-	1,116	951	1	952


	15,394	12,890	28,284	15,006	15,839	30,845

Impairment allowances on loans and advances to customers and banks

(Audited)

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	Middle East	North America	Latin America	Total
	US$m	US$m	US$m	US$m	US$m	US$m	US$m
At 31 December 2010
Gross loans and advances
Individually assessed impaired loans³⁰ ...............	8,831	637	1,185	2,137	1,632	779	15,201

Collectively assessed³¹ ......................................	432,631	140,683	108,505	24,141	198,070	59,218	963,248
Impaired loans³⁰ ...........................................	1,726	23	139	296	9,095	1,611	12,890
Non-impaired loans³² ....................................	430,905	140,660	108,366	23,845	188,975	57,607	950,358


Total gross loans and advances .........................	441,462	141,320	109,690	26,278	199,702	59,997	978,449

Impairment allowances
Individually assessed ......................................	3,563	345	629	1,163	390	367	6,457
Collectively assessed .....................................	2,100	284	330	489	8,780	1,643	13,626

Total impairment allowances ...........................	5,663	629	959	1,652	9,170	2,010	20,083

Net loans and advances .....................................	435,799	140,691	108,731	24,626	190,532	57,987	958,366

	%	%	%	%	%	%	%
Individually assessed allowances as a percentage of individually assessed loans and advances .................................................	40.3	54.2	53.1	54.4	23.9	47.1	42.5
Collectively assessed allowances as a percentage of collectively assessed loans and advances .................................................	0.5	0.2	0.3	2.0	4.4	2.8	1.4
Total allowances as a percentage of total gross loans and advances ...............................	1.3	0.4	0.9	6.3	4.6	3.4	2.1

	US$m	US$m	US$m	US$m	US$m	US$m	US$m
At 31 December 2009
Gross loans and advances
Individually assessed impaired loans³⁰ ................	8,800	823	1,006	1,310	1,990	838	14,767

Collectively assessed³¹ ......................................	436,816	99,362	80,033	22,912	218,539	49,344	907,006
Impaired loans³⁰ ...........................................	1,922	18	194	336	11,256	2,113	15,839
Non-impaired loans³² ....................................	434,894	99,344	79,839	22,576	207,283	47,231	891,167


Total gross loans and advances .........................	445,616	100,185	81,039	24,222	220,529	50,182	921,773

Impairment allowances
Individually assessed ......................................	3,742	490	508	688	650	416	6,494
Collectively assessed .....................................	2,393	314	488	690	13,026	2,137	19,048

Total impairment allowances ...........................	6,135	804	996	1,378	13,676	2,553	25,542

Net loans and advances .....................................	439,481	99,381	80,043	22,844	206,853	47,629	896,231

	%	%	%	%	%	%	%
Individually assessed allowances as a percentage of individually assessed loans and advances .................................................	42.5	59.5	50.5	52.5	32.7	49.7	44.0
Collectively assessed allowances as a percentage of collectively assessed loans and advances .................................................	0.5	0.3	0.6	3.0	6.0	4.3	2.1
Total allowances as a percentage of total gross loans and advances ...............................	1.4	0.8	1.2	5.7	6.2	5.1	2.8

For footnotes, see page 174.

Movement in impairment allowances on loans and advances to customers and banks

(Audited)

	Banks	Customers
	Individually assessed⁸	Individually assessed	Collectively assessed	Total
	US$m	US$m	US$m	US$m
2010
At 1 January ...........................................................	107	6,494	19,048	25,649
Amounts written off ...............................................	(9)	(2,441)	(16,850)	(19,300)
Recoveries of loans and advances written off in previous years ....................................................	2	143	875	1,020
Charge to income statement ...................................	12	2,613	10,923	13,548
Exchange and other movements .............................	46	(352)	(370)	(676)

At 31 December ......................................................	158	6,457	13,626	20,241

Customers
Personal ..............................................................		615	11,678	12,293
Corporate and commercial ..................................		5,274	1,863	7,137
Financial .............................................................		568	85	653

	%	%	%	%

Impairment allowances as a percentage of loans and advances^33,34 ......................................................	0.11	0.70	1.49	1.91

	US$m	US$m	US$m	US$m
2009
At 1 January ...........................................................	63	3,284	20,625	23,972
Amounts written off ...............................................	(35)	(1,563)	(23,242)	(24,840)
Recoveries of loans and advances written off in previous years ....................................................	6	128	756	890
Charge to income statement ...................................	70	4,388	20,484	24,942
Exchange and other movements .............................	3	257	425	685

At 31 December ......................................................	107	6,494	19,048	25,649

Customers
Personal ..............................................................		572	16,517	17,089
Corporate and commercial ..................................		5,528	2,354	7,882
Financial .............................................................		394	177	571

	%	%	%	%

Impairment allowances as a percentage of loans and advances^33,34 ......................................................	0.09	0.75	2.21	2.63

For footnotes, see page 174.

Movement in impairment allowances by industry sector

(Audited)

	2010	2009	2008	2007	2006
	US$m	US$m	US$m	US$m	US$m

Impairment allowances at 1 January .................................	25,649	23,972	19,212	13,585	11,366

Amounts written off .........................................................	(19,300)	(24,840)	(17,955)	(12,844)	(9,473)
Personal² ......................................................................	(16,458)	(22,703)	(16,625)	(11,670)	(8,281)
- residential mortgages² ............................................	(4,163)	(4,704)	(2,110)	(930)	(628)
- other personal² ......................................................	(12,295)	(17,999)	(14,515)	(10,740)	(7,653)

Corporate and commercial ............................................	(2,789)	(1,984)	(1,294)	(1,163)	(1,153)
- commercial, industrial and international trade ........	(1,050)	(1,093)	(789)	(897)	(782)
- commercial real estate and other property-related .	(1,280)	(327)	(115)	(98)	(111)
- other commercial ...................................................	(459)	(564)	(390)	(168)	(260)

Financial³⁵ ....................................................................	(53)	(153)	(36)	(11)	(39)

Recoveries of amounts written off in previous years .........	1,020	890	834	1,005	779
Personal ........................................................................	846	712	686	837	605
- residential mortgages ..............................................	93	61	19	19	19
- other personal ........................................................	753	651	667	818	586

Corporate and commercial ............................................	156	170	142	157	163
- commercial, industrial and international trade ........	92	123	76	74	88
- commercial real estate and other property-related .	21	9	6	29	21
- other commercial ...................................................	43	38	60	54	54

Financial³⁵ ....................................................................	18	8	6	11	11

Charge to income statement³⁶ ..........................................	13,548	24,942	24,131	17,177	10,547
Personal ........................................................................	11,187	19,781	20,950	15,968	9,929
- residential mortgages ..............................................	3,461	4,185	5,000	1,840	1,096
- other personal ........................................................	7,726	15,596	15,950	14,128	8,833

Corporate and commercial ............................................	2,198	4,711	2,879	1,176	664
- commercial, industrial and international trade ........	909	2,392	1,573	897	503
- commercial real estate and other property-related .	660	1,492	755	152	75
- other commercial ...................................................	629	827	551	127	86

Financial³⁵ ....................................................................	163	450	302	36	(9)
Governments ................................................................	-	-	-	(3)	(37)

Exchange and other movements .......................................	(676)	685	(2,250)	289	366

At 31 December² ............................................................	20,241	25,649	23,972	19,212	13,585

Impairment allowances against banks:
- individually assessed ...................................................	158	107	63	7	7
Impairment allowances against customers:
- individually assessed ...................................................	6,457	6,494	3,284	2,699	2,565
- collectively assessed² ..................................................	13,626	19,048	20,625	16,506	11,013

At 31 December² ..............................................................	20,241	25,649	23,972	19,212	13,585

	%	%	%	%	%
Impairment allowances against customers as a percentage of loans and advances to customers:
- individually assessed ...................................................	0.66	0.70	0.34	0.27	0.29
- collectively assessed ...................................................	1.39	2.07	2.16	1.65	1.25
²
At 31 December ...............................................................	2.05	2.77	2.50	1.92	1.54

For footnotes, see page 174.

Movement in impairment allowances by industry sector and by geographical region

(Audited)

	2010
	Europe	Hong Kong	Rest of Asia- Pacific	Middle East	North America	Latin America	Total
	US$m	US$m	US$m	US$m	US$m	US$m	US$m

Impairment allowances at 1 January .................	6,227	804	996	1,393	13,676	2,553	25,649

Amounts written off .........................................	(3,001)	(265)	(678)	(386)	(12,601)	(2,369)	(19,300)
Personal ........................................................	(1,447)	(150)	(561)	(375)	(12,070)	(1,855)	(16,458)
- residential mortgages ................................	(49)	(1)	(10)	-	(4,027)	(76)	(4,163)
- other personal ..........................................	(1,398)	(149)	(551)	(375)	(8,043)	(1,779)	(12,295)

Corporate and commercial .............................	(1,539)	(109)	(110)	(11)	(507)	(513)	(2,789)
- commercial, industrial and international trade .........................................................	(385)	(90)	(46)	(10)	(174)	(345)	(1,050)
- commercial real estate and other property-related ......................................................	(1,022)	(18)	(18)	-	(194)	(28)	(1,280)
- other commercial .....................................	(132)	(1)	(46)	(1)	(139)	(140)	(459)

Financial³⁵ .....................................................	(15)	(6)	(7)	-	(24)	(1)	(53)

Recoveries of amounts written off in previous years ..............................................................	287	39	188	57	182	267	1,020
Personal ........................................................	251	32	168	53	134	208	846
- residential mortgages ................................	29	4	3	-	30	27	93
- other personal ..........................................	222	28	165	53	104	181	753

Corporate and commercial .............................	33	7	7	4	46	59	156
- commercial, industrial and international trade .........................................................	16	7	5	2	19	43	92
- commercial real estate and other property-related ......................................................	6	-	-	-	11	4	21
- other commercial .....................................	11	-	2	2	16	12	43

Financial³⁵ .....................................................	3	-	13	-	2	-	18

Charge to income statement³⁶ ..........................	2,532	137	428	623	8,304	1,524	13,548
Personal ........................................................	1,263	78	297	226	8,138	1,185	11,187
- residential mortgages ................................	153	(17)	11	46	3,189	79	3,461
- other personal ..........................................	1,110	95	286	180	4,949	1,106	7,726

Corporate and commercial .............................	1,080	72	146	304	269	327	2,198
- commercial, industrial and international trade .........................................................	395	21	100	165	25	203	909
- commercial real estate and other property-related ......................................................	360	(7)	12	117	178	-	660
- other commercial .....................................	325	58	34	22	66	124	629

Financial³⁵ .....................................................	189	(13)	(15)	93	(103)	12	163

Exchange and other movements .......................	(305)	(86)	25	(18)	(327)	35	(676)

At 31 December .............................................	5,740	629	959	1,669	9,234	2,010	20,241

Impairment allowances against banks:
- individually assessed ...................................	77	-	-	17	64	-	158
Impairment allowances against customers:
- individually assessed ...................................	3,563	345	629	1,163	390	367	6,457
- collectively assessed³⁷ ................................	2,100	284	330	489	8,780	1,643	13,626

At 31 December ...............................................	5,740	629	959	1,669	9,234	2,010	20,241

	%	%	%	%	%	%	%
Impairment allowances against customers as a percentage of loans and advances to customers:
- individually assessed ...................................	0.81	0.24	0.57	4.43	0.20	0.61	0.66
- collectively assessed³⁷ ................................	0.48	0.20	0.30	1.86	4.40	2.74	1.39
²
At 31 December ...............................................	1.29	0.44	0.87	6.29	4.60	3.35	2.05

	2009
	Europe	Hong Kong	Rest of Asia- Pacific	Middle East	North America	Latin America	Total
	US$m	US$m	US$m	US$m	US$m	US$m	US$m

Impairment allowances at 1 January ..............	3,922	733	813	414	16,090	2,000	23,972

Amounts written off .....................................	(2,781)	(357)	(850)	(384)	(17,792)	(2,676)	(24,840)
Personal .....................................................	(1,876)	(240)	(787)	(376)	(17,204)	(2,220)	(22,703)
- residential mortgages ............................	(41)	(1)	(9)	-	(4,610)	(43)	(4,704)
- other personal ......................................	(1,835)	(239)	(778)	(376)	(12,594)	(2,177)	(17,999)

Corporate and commercial .........................	(810)	(117)	(63)	(8)	(534)	(452)	(1,984)
- commercial, industrial and international trade .....................................................	(438)	(114)	(50)	(8)	(228)	(255)	(1,093)
- commercial real estate and other property-related ....................................	(148)	(1)	(3)	-	(163)	(12)	(327)
- other commercial .................................	(224)	(2)	(10)	-	(143)	(185)	(564)

Financial³⁵ ..................................................	(95)	-	-	-	(54)	(4)	(153)

Recoveries of amounts written off in previous years ..........................................................	265	34	132	27	93	339	890
Personal .....................................................	200	32	123	25	60	272	712
- residential mortgages ............................	28	6	1	-	7	19	61
- other personal ......................................	172	26	122	25	53	253	651

Corporate and commercial .........................	57	2	9	2	33	67	170
- commercial, industrial and international trade .....................................................	52	2	7	2	16	44	123
- commercial real estate and other property-related ....................................	5	-	1	-	2	1	9
- other commercial .................................	-	-	1	-	15	22	38

Financial³⁵ ..................................................	8	-	-	-	-	-	8

Charge to income statement³⁶ .......................	4,409	450	874	1,333	15,372	2,504	24,942
Personal .....................................................	1,995	206	654	593	14,390	1,943	19,781
- residential mortgages ............................	158	(16)	14	20	3,955	54	4,185
- other personal ......................................	1,837	222	640	573	10,435	1,889	15,596

Corporate and commercial .........................	2,163	244	220	706	818	560	4,711
- commercial, industrial and international trade .....................................................	963	164	154	413	309	389	2,392
- commercial real estate and other property-related ....................................	958	70	29	106	288	41	1,492
- other commercial .................................	242	10	37	187	221	130	827

Financial³⁵ ..................................................	251	-	-	34	164	1	450

Exchange and other movements ...................	412	(56)	27	3	(87)	386	685

At 31 December ............................................	6,227	804	996	1,393	13,676	2,553	25,649

Impairment allowances against banks:
- individually assessed ................................	92	-	-	15	-	-	107
Impairment allowances against customers:
- individually assessed ................................	3,742	490	508	688	650	416	6,494
- collectively assessed³⁷ .............................	2,393	314	488	690	13,026	2,137	19,048

At 31 December ............................................	6,227	804	996	1,393	13,676	2,553	25,649

	%	%	%	%	%	%	%
Impairment allowances against customers as a percentage of loans and advances to customers:
- individually assessed ................................	0.84	0.49	0.63	2.84	0.29	0.83	0.70
- collectively assessed³⁷ .............................	0.54	0.31	0.60	2.85	5.91	4.26	2.07
²
At 31 December ............................................ ..................................................................	1.38	0.80	1.23	5.69	6.20	5.09	2.77

For footnotes, see page 174.

Impairment charge to the income statement

Individually and collectively assessed impairment charge to income statement by industry segment

(Unaudited)

	2010			2009
	Individually assessed US$m	Collectively assessed US$m	Total US$m	Individually assessed US$m	Collectively assessed US$m	Total US$m

Banks ..........................................................	12	-	12	70	-	70
Personal ......................................................	180	11,007	11,187	316	19,465	19,781
Residential mortgages ..............................	137	3,324	3,461	171	4,014	4,185
Other personal .........................................	43	7,683	7,726	145	15,451	15,596

Corporate and commercial ..........................	2,190	8	2,198	3,699	1,012	4,711
Commercial, industrial and international trade ....................................................	997	(88)	909	1,681	711	2,392
Commercial real estate and other property-related ..................................	680	(20)	660	1,330	162	1,492
Other commercial ....................................	513	116	629	688	139	827

Financial .....................................................	243	(92)	151	373	7	380

Total charge to income statement ...............	2,625	10,923	13,548	4,458	20,484	24,942

Net loan impairment charge to the income statement

(Unaudited)

	2010	2009	2008	2007	2006
	US$m	US$m	US$m	US$m	US$m

Individually assessed impairment allowances .....................	2,625	4,458	2,064	796	458
New allowances .............................................................	3,617	5,173	2,742	1,533	1,297
Release of allowances no longer required .......................	(847)	(581)	(565)	(608)	(711)
Recoveries of amounts previously written off ...............	(145)	(134)	(113)	(129)	(128)

Collectively assessed impairment allowances .....................	10,923	20,484	22,067	16,381	10,089
New allowances net of allowance releases ......................	11,798	21,240	22,788	17,257	10,740
Recoveries of amounts previously written off ...............	(875)	(756)	(721)	(876)	(651)


Total charge for impairment losses ...................................	13,548	24,942	24,131	17,177	10,547
Banks ...........................................................................	12	70	54	-	(3)
Customers ....................................................................	13,536	24,872	24,077	17,177	10,550


	%	%	%	%	%
Charge for impairment losses as a percentage of closing gross loans and advances ...............................................	1.14	2.26	2.17	1.39	0.99

	US$m	US$m	US$m	US$m	US$m
At 31 December
Impaired loans² .................................................................	28,284	30,845	25,422	19,594	15,086
Impairment allowances² ....................................................	20,241	25,649	23,972	19,212	13,585

For footnote, see page 174.

Net loan impairment charge to the income statement by geographical region

(Unaudited)

	Europe	Hong Kong	Rest of Asia- Pacific	Middle East	North America	Latin America	Total
	US$m	US$m	US$m	US$m	US$m	US$m	US$m
2010
Individually assessed impairment allowances .....	1,445	45	198	502	348	87	2,625
New allowances .............................................	1,874	111	311	561	580	180	3,617
Release of allowances no longer required .......	(394)	(54)	(84)	(55)	(196)	(64)	(847)
Recoveries of amounts previously written off	(35)	(12)	(29)	(4)	(36)	(29)	(145)

Collectively assessed impairment allowances ....	1,087	92	230	121	7,956	1,437	10,923
New allowances net of allowance releases ......	1,339	119	389	174	8,102	1,675	11,798
Recoveries of amounts previously written off	(252)	(27)	(159)	(53)	(146)	(238)	(875)


Total charge for impairment losses ..................	2,532	137	428	623	8,304	1,524	13,548
Banks ...........................................................	2	-	-	2	8	-	12
Customers ....................................................	2,530	137	428	621	8,296	1,524	13,536


	%	%	%	%	%	%	%
Charge for impairment losses as a percentage of closing gross loans and advances ..............	0.49	0.08	0.29	1.75	3.79	1.74	1.14

	US$m	US$m	US$m	US$m	US$m	US$m	US$m
At 31 December 2010
Impaired loans ..................................................	10,663	665	1,324	2,453	10,789	2,390	28,284
Impairment allowances .....................................	5,740	629	959	1,669	9,234	2,010	20,241

2009
Individually assessed impairment allowances .....	2,248	242	244	580	916	228	4,458
New allowances .............................................	2,573	315	341	598	1,052	294	5,173
Release of allowances no longer required .......	(255)	(64)	(82)	(16)	(112)	(52)	(581)
Recoveries of amounts previously written off	(70)	(9)	(15)	(2)	(24)	(14)	(134)

Collectively assessed impairment allowances ....	2,161	208	630	753	14,456	2,276	20,484
New allowances net of allowance releases ......	2,356	233	747	778	14,525	2,601	21,240
Recoveries of amounts previously written off	(195)	(25)	(117)	(25)	(69)	(325)	(756)


Total charge for impairment losses ..................	4,409	450	874	1,333	15,372	2,504	24,942
Banks ...........................................................	55	-	-	15	-	-	70
Customers ....................................................	4,354	450	874	1,318	15,372	2,504	24,872


	%	%	%	%	%	%	%
Charge for impairment losses as a percentage of closing gross loans and advances ..............	0.86	0.33	0.75	4.08	6.52	3.64	2.26

	US$m	US$m	US$m	US$m	US$m	US$m	US$m
At 31 December 2009
Impaired loans ..................................................	10,873	846	1,201	1,666	13,308	2,951	30,845
Impairment allowances .....................................	6,227	804	996	1,393	13,676	2,553	25,649

Charge for impairment losses as a percentage of average gross loans and advances to customers²

(Unaudited)

	2010	2009	2008	2007	2006
	%	%	%	%	%

New allowances net of allowance releases ..........................	1.65	2.92	2.54	2.09	1.49
Recoveries ........................................................................	(0.12)	(0.10)	(0.09)	(0.12)	(0.10)

Total charge for impairment losses ...................................	1.53	2.82	2.45	1.97	1.39

Amount written off net of recoveries ...............................	2.08	2.71	1.75	1.36	1.15

For footnote, see page 174.

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

(Unaudited)

	Europe	Hong Kong	Rest of Asia- Pacific	Middle East	North America	Latin America	Total
	%	%	%	%	%	%	%
2010
New allowances net of allowance releases .........	0.74	0.15	0.66	2.71	4.02	3.41	1.65
Recoveries ........................................................	(0.07)	(0.03)	(0.20)	(0.23)	(0.09)	(0.51)	(0.12)

Total charge for impairment losses ..................	0.67	0.12	0.46	2.48	3.93	2.90	1.53

Amount written off net of recoveries ...............	0.71	0.19	0.53	1.32	5.89	4.01	2.08

2009
New allowances net of allowance releases .........	1.19	0.49	1.31	5.25	6.24	6.11	2.92
Recoveries ........................................................	(0.07)	(0.03)	(0.17)	(0.11)	(0.04)	(0.73)	(0.10)

Total charge for impairment losses ..................	1.12	0.46	1.14	5.14	6.20	5.38	2.82

Amount written off net of recoveries ...............	0.63	0.33	0.94	1.40	7.14	5.03	2.71

2010 compared with 2009

(Unaudited)

Loan impairment charges of US$13.5bn declined by 46% on both a reported and an underlying basis compared with 2009. Reported impaired loans were US$28.3bn at 31 December 2010, a decrease of 8% on both bases. The following commentary is on a constant currency basis.

New allowances for loan impairment charges were US$15.4bn, a decline of 42% compared with 2009, while releases and recoveries of US$1.9bn were 23% higher.

Impaired loans were 2.4% of total gross loans and advances at 31 December 2010, compared with 2.8% at 31 December 2009.

In Europe, new loan impairment allowances were US$3.2bn, 34% lower than in 2009, reflecting a more stable credit environment across many countries in the region. Individually assessed loan impairment allowances declined, mainly in the UK, reflecting an improvement in credit conditions. Significantly, impairment charges in 2009 against specific customers in the property sector did not recur. Collectively assessed loan impairment allowances also declined due to a fall in delinquency levels as our customers continued to benefit from the low interest rate environment and the general improvement in economic conditions. In our personal lending portfolios, new collectively assessed loan impairment allowances declined, reflecting lower levels of unsecured lending and tightened underwriting criteria. Impaired loans of US$10.7bn were 3% higher than at the end of 2009.

In Europe, releases and recoveries increased by 32% to US$681m.

In Hong Kong, new loan impairment allowances declined by 58% to US$230m and impaired loans fell by 21% from the end of 2009 to US$665m. New loan impairment allowances declined in both the personal and commercial lending portfolios, reflecting the economic recovery and improvement in credit conditions in the territory and fewer customer downgrades, partly offset by an increase in lending balances.

Releases and recoveries in Hong Kong were US$93m, 5% lower than in 2009.

New loan impairment allowances in Rest of Asia-Pacific declined by 40% to US$700m. The decline reflected lower new collective impairment allowances in India due to improved delinquency rates and lower balances as certain unsecured portfolios and higher risk elements of the credit card portfolio were managed down. In addition, new individually assessed impairment allowances also declined, mainly in India, due to the non-recurrence of large impairments, notably on certain technology-related exposures. These were partly offset by a significant loan impairment charge against a single customer. Impaired loans in the region increased by 3% to US$1.3bn at the end of 2010.

Releases and recoveries in the region rose by 19% due to releases in the construction and software industries in India and higher recoveries of amounts previously written off, notably in Australia.

In the Middle East, new loan impairment allowances were US$735m, 47% lower than in 2009. The decrease was largely due to a decline in new collectively assessed loan impairment allowances net of allowance releases against the personal and commercial lending portfolios as delinquency rates improved, with a decline in personal balances in line

with the managing down of our exposure to higher risk unsecured personal lending. The lower allowances also reflected an overall improvement in economic conditions across the region. There were also declines in new individually assessed loan impairment charges as new charges for 2010 were restricted to a small number of large corporate exposures. Impaired loans rose by 47% from 31 December 2009 to US$2.5bn due to credit deterioration in a small number of specific exposures, and debt restructuring in the UAE.

Releases and recoveries in the Middle East more than doubled from 2009 to US$112m due to the release of judgemental impairment allowances reflecting improved economic conditions during 2010.

In North America, new loan impairment allowances declined markedly, reducing by 44% to US$8.7bn. In our HSBC Finance portfolios, lower new loan impairment allowances in Card and Retail Services reflected a reduction in lending balances and an improvement in delinquency rates. In our Consumer Lending and Mortgage Services portfolios, new loan impairment allowances also fell as the portfolio continued to run-off. In addition, total loss severities on foreclosed loans improved compared with 2009 reflecting the increase in the number of properties for which we accepted a deed-in-lieu of foreclosure, or a short sale, both of which result in lower losses compared with loans which are subjected to a formal foreclosure process.

In our corporate and commercial portfolios in North America, new loan impairment allowances declined, reflecting lower balances due to customer deleveraging and improved credit quality which, along with the improved economy, resulted in credit upgrades on certain accounts and fewer customer downgrades.

In North America, impaired loans decreased by 19% from the end of 2009 to US$10.8bn, while releases and recoveries rose by 80% compared with 2009 to US$378m.

In Latin America, new loan impairment allowances declined by 42% to US$1.9bn, while impaired loans declined by 23% to US$2.4bn as economic conditions in the region improved. Lower new loan impairment allowances in the personal lending portfolios were due to lower credit card balances in Mexico as we repositioned the portfolio to target higher quality customers and, to a lesser extent, in Brazil, due to the managed reduction in consumer finance balances. In addition, in the commercial lending portfolios in Brazil lower new impairment allowances reflected an improvement in economic conditions.

Releases and recoveries in Latin America declined by 21% from 2009 to US$331m.

For an analysis of loan impairment charges and other credit risk provisions by customer group, see page 48.

HSBC Holdings

(Audited)

Credit risk in HSBC Holdings primarily arises from transactions with Group subsidiaries and from guarantees issued in support of obligations assumed by certain Group operations in the normal conduct of their business.

These risks are reviewed and managed within regulatory and internal limits for exposures by our Global Risk function, which provides high-level centralised oversight and management of our credit risks worldwide.

HSBC Holdings' maximum exposure to credit risk at 31 December 2010 is shown below. Its financial assets principally represent claims on Group subsidiaries in Europe and North America. No collateral or other credit enhancements were held by HSBC Holdings in respect of its transactions with subsidiaries.

HSBC Holdings - maximum exposure to credit risk

(Audited)

	2010	2009
	US$m	US$m

Cash at bank and in hand:
- balances with HSBC undertakings ......................................................................................	459	224
Derivatives .............................................................................................................................	2,327	2,981
Loans and advances to HSBC undertakings ..............................................................................	21,238	23,212
Financial investments .............................................................................................................	2,025	2,455
Financial guarantees and similar contracts ...............................................................................	46,988	35,073
Loan and other credit-related commitments ............................................................................	2,720	3,240

	75,757	67,185

This information is provided by RNS

The company news service from the London Stock Exchange

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