Annual Financial Report - 22x of 44

RNS Number : 1474A

HSBC Holdings PLC

27 March 2012

with central banks considered strong, the proportion of balances classified as strong increased from 90% to 98%.

Loans and advances held at amortised cost, on which credit quality has been assessed, decreased by 4% to US$1,121bn. The decline was mainly in North America, following the reclassification of certain lending balances to assets held for sale. Despite the reclassification of balances, the proportion of the Group's loans and advances held at amortised cost and categorised as strong and good were broadly in line with the end of 2010, at 54% and 22% respectively.

Trading assets, on which credit quality has been assessed, decreased by 10% to US$309bn in 2011. This reflected a reduction in our holdings of government and highly-rated corporate debt securities and equity positions, notably in Europe. Despite the decline in balances, the proportion of balances classified as strong remained stable at 75%.

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 allowances¹⁹	Total
	Strong	Good	Satisfactory		Sub- standard	but not impaired	Impaired	ment allowances¹⁹	Total
	US$m	US$m		US$m	US$m	US$m	US$m	US$m	US$m
At 31 December 2011
Cash and balances at central banks ...............................	126,926	2,678		263	35				129,902
Items in the course of collection from other banks	7,707	150		350	1				8,208
Hong Kong Government certificates of indebtedness	20,922	-		-	-				20,922

Trading assets²⁰ ...................	231,594	37,182		39,171	1,502				309,449
- treasury and other eligible bills ...................	33,199	538		564	8				34,309
- debt securities ...............	103,163	8,497		18,188	639				130,487
- loans and advances to banks ............................	49,021	20,699		5,186	619				75,525
- loans and advances to customers ......................	46,211	7,448		15,233	236				69,128

Financial assets designated at fair value²⁰ .......................	7,176	4,728		830	192				12,926
- treasury and other eligible bills ...............................	123	-		-	-				123
- debt securities ...............	6,148	4,728		767	191				11,834
- loans and advances to banks ............................	55	-		63	1				119
- loans and advances to customers ......................	850	-		-	-				850

Derivatives²⁰ .......................	279,557	45,858		18,627	2,337				346,379

Loans and advances held at amortised cost .................	609,081	245,352		194,661	28,210	20,009	41,739	(17,636)	1,121,416
- loans and advances to banks ............................	144,815	28,813		6,722	568	39	155	(125)	180,987
- loans and advances to customers²¹ ...................	464,266	216,539		187,939	27,642	19,970	41,584	(17,511)	940,429

Financial investments ..........	340,173	24,757		22,139	3,532	-	2,233		392,834
- treasury and other similar bills ...............................	58,627	3,348		3,144	104	-	-		65,223
- debt securities ...............	281,546	21,409		18,995	3,428	-	2,233		327,611

Assets held for sale ..............	14,365	12,587		7,931	536	2,524	1,479	(1,614)	37,808
- disposal groups ..............	14,317	12,587		7,931	536	2,522	1,467	(1,614)	37,746
- non-current assets held for sale ..........................	48	-		-	-	2	12	-	62

Other assets .........................	11,956	6,526		12,379	1,193	421	517		32,992
- endorsements and acceptances ...................	1,789	4,075		4,629	504	10	3		11,010
- accrued income and other	10,167	2,451		7,750	689	411	514		21,982


Total financial instruments ..	1,649,457	379,818		296,351	37,538	22,954	45,968	(19,250)	2,412,836

Distribution of financial instruments by credit quality (continued)

	Neither past due nor impaired⁸					Past due		Impair-
	Strong	Good	Satisfactory		Sub- standard	but not impaired⁸	Impaired⁸	ment allowances¹⁹	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 assets²⁰ .................	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 value²⁰ .....................	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

Derivatives²⁰ .....................	199,920	45,042		13,980	1,815				260,757

Loans and advances held at amortised cost ................	646,296	250,393		183,165	37,231	22,729	47,064	(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 customers²¹ .................	479,353	217,342		176,183	36,079	22,621	46,871	(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	1,542,556	374,216		279,140	47,707	23,258	49,972	(20,241)	2,296,608

For footnotes, see page 185.

Past due but not impaired gross financial instruments

(Audited)

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

Further examples of exposures past due but not impaired include individually assessed mortgages that are in arrears more than 90 days where there are no other indicators of impairment, 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. Where groups of loans are collectively assessed for impairment, collective impairment allowances are recognised for loans classified as past due but not impaired.

At 31 December 2011, US$20.0bn of loans and advances held at amortised cost were classified as past due but not impaired (2010: US$22.7bn). The largest concentration of these balances is in HSBC Finance. The decrease compared with 2010 was primarily due to the reclassification of the Card and Retail Services business to held for sale and the continued run-off of the CML portfolio.

Past due but not impaired loans and advances to customers and banks by geographical region⁸

(Audited)

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

At 31 December 2011 ...........................	1,990	1,107	2,319	1,165	10,216	3,212	20,009
At 31 December 2010 .............................	2,516	1,158	2,092	1,318	12,751	2,894	22,729

Past due but not impaired loans and advances to customers and banks by industry sector⁸

(Audited)

	At 31 December
	2011	2010
	US$m	US$m

Banks ......................................................................................................................................	39	108

Customers ...............................................................................................................................	19,970	22,621
Personal ..............................................................................................................................	13,951	17,258
Corporate and commercial ..................................................................................................	5,855	5,267
Financial .............................................................................................................................	164	96


	20,009	22,729

For footnote, see page 185.

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 2011
Loans and advances held at amortised cost⁸ ................	14,239	3,680	1,727	223	140	20,009
- loans and advances to banks .................................	39	-	-	-	-	39
- loans and advances to customers ..........................	14,200	3,680	1,727	223	140	19,970

Assets held for sale .....................................................	1,563	644	307	8	2	2,524
- disposal groups .....................................................	1,563	644	307	7	1	2,522
- non-current assets held for sale ............................	-	-	-	1	1	2

Other assets ................................................................	225	80	37	22	57	421
- endorsements and acceptances .............................	7	2	-	1	-	10
- other ...................................................................	218	78	37	21	57	411


	16,027	4,404	2,071	253	199	22,954

At 31 December 2010
Loans and advances held at amortised cost⁸ ................	15,576	4,272	2,238	482	161	22,729
- loans and advances to banks .................................	108	-	-	-	-	108
- loans and advances to customers ..........................	15,468	4,272	2,238	482	161	22,621


Other assets ................................................................	278	123	57	26	45	529
- endorsements and acceptances .............................	7	-	-	1	1	9
- other ...................................................................	271	123	57	25	44	520


	15,854	4,395	2,295	508	206	23,258

For footnote, see page 185.

Renegotiated loans and forbearance

(Audited)

Current policies and procedures regarding renegotiated loans and forbearance are described in the Appendix to Risk on page 188.

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

In the Annual Report and Accounts 2011, the Group has separately presented all renegotiated loans by credit quality classification and has adopted a more stringent impaired loan disclosure convention for portfolios with significant levels of forbearance as described on page 133.

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

Renegotiated loans and advances to customers

(Audited)

	At 31 December 2011				At 31 December 2010
	Neither past due nor impaired	Past due but not impaired	Impaired	Total		Neither past due nor impaired	Past due but not impaired	Impaired	Total
	US$m	US$m	US$m	US$m		US$m	US$m	US$m	US$m

Retail ...................................	8,133	4,401	19,125	31,659		7,690	4,339	23,406	35,435
Residential Mortgages........	5,916	3,560	15,932	25,408		5,244	3,381	18,137	26,762
Other personal .................	2,217	841	3,193	6,251		2,446	958	5,269	8,673

Commercial real estate..........	2,793	9	3,248	6,050		2,877	12	2,401	5,290
Corporate and commercial....	3,432	461	3,376	7,269		4,125	186	2,501	6,812
Financial ..............................	249	-	491	740		17	-	565	582
Governments ........................	113	2	132	247		51	-	7	58

	14,720	4,873	26,372	45,965		14,760	4,537	28,880	48,177

Total renegotiated loans and advances to customers as a percentage of total gross loans and advances to customers .........................				4.8%					5.0%

Renegotiated loans and advances to customers by geography

(Unaudited)

	2011	2010
	US$m	US$m


Europe ...................................................................................................................................................	11,464	10,692
Hong Kong ............................................................................................................................................	447	420
Rest of Asia-Pacific ................................................................................................................................	448	679
Middle East and North Africa .................................................................................................................	2,655	1,866
North America .......................................................................................................................................	28,475	31,990
Latin America ........................................................................................................................................	2,476	2,530

Total ......................................................................................................................................................	45,965	48,177

Total impairment allowances on renegotiated loans ...............................................................................	7,670	7,482
Individually assessed ...........................................................................................................................	2,311	1,657
Collectively assessed ...........................................................................................................................	5,359	5,825

2011 compared with 2010

(Unaudited)

Renegotiated loans totalled US$46.0bn at 31 December 2011 (2010: US$48.1bn). The most significant volume of renegotiation activity took place in North America and, at 31 December 2011, amounted to US$28.5bn or 62% of total renegotiated loans (2010: US$32.0bn or 66%), substantially all of which were retail loans held by HSBC Finance. Of the total renegotiated loans in North America, US$17.8bn were presented as impaired at 31 December 2011 (2010: US$22.0bn), and the ratio of total impairment allowances to impaired loans at 31 December 2011 was 28% (2010: 25%).

Europe was the next largest region for renegotiation activity which, at 31 December 2011, amounted to US$11.5bn (2010: US$10.7bn), constituting 25% of total renegotiated loans (2010: 22%). Of the total renegotiated loans in Europe, US$6.0bn were presented as impaired at 31 December 2011 (2010: US$4.8bn), and the ratio of total impairment allowances to impaired loans at 31 December 2011 was 30% (2010: 28%). The renegotiated loans in Europe were largely concentrated in the commercial real estate sector 41% (2010: 39%) and the corporate and commercial sector 32% (2010: 31%). The commercial real estate sector, particularly in the UK, faced a weakening in property values and a reduction in institutions funding commercial real estate lending. The commercial real estate mid-market sector continued to experience higher levels of renegotiation activity than is evident with larger corporates, where borrowers are generally better capitalised and have access to wider funding market opportunities. In all cases, in assessing the acceptability of renegotiated loans, we consider the ability to service interest as a minimum and reduce capital repayments as available. Despite Europe, and the UK in particular, holding the single largest retail lending portfolio in the Group, renegotiations of retail loans in this region were limited due to the quality of the residential mortgage book.

Forbearance activity within the Middle East and Latin America (primarily in Mexico and Brazil) was predominately undertaken in the commercial real estate and corporate and commercial sectors. Forbearance activity within Hong Kong and Rest of Asia-Pacific was insignificant.

HSBC Finance loan modifications and re‑ageing

(Unaudited)

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

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

From late 2009 and continuing into 2011, the volume of loans that qualify for a new modification has reduced significantly. We expect this to continue to decline as HSBC Finance believes a decreasing percentage of its customers with unmodified loans would benefit from loan modification in a way that would avoid non-payment of future cash flows. In addition, volumes of new loan modifications are expected to decrease due to improvements in economic conditions over the long-term, the cessation of new real estate secured and personal non-credit card receivables originations, the continued run-off of the portfolio and, beginning in the second quarter of 2010, more stringent qualifying payment requirements for loan modifications.

Overview by type of loan renegotiation programme in HSBC Finance

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

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

Loans that have been temporarily modified within HSBC Finance remain classified as impaired until they have demonstrated a history of payment performance against the original terms for typically 18 months after the modification date.

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

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

· The term 're-age' is a renegotiation whereby the contractual delinquency status of a loan is reset to current after demonstrating payment performance. The overdue principal and/or interest is deferred and paid at a later date. Loan re-ages enable customers who have been unable to make a small number of payments to have their loan delinquency status reset to current, thus remediating overdue balances that affect their credit score.

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

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

Qualifying criteria

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

Renegotiated real estate secured and personal non-credit card receivables are not eligible for a subsequent renegotiation until 12 or 6 months, respectively, with a maximum of five renegotiation actions within a five-year period. Borrowers must be approved for a modification and generally make two minimum qualifying monthly payments within 60 days to activate a modification.

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

Review of loan classification methodology

In the third quarter of 2011, HSBC Finance undertook a review of its loan classification methodology to provide greater differentiation of loans based on their credit risk characteristics. This review was performed partly as a result of updated

US guidance on 'troubled debt restructurings' and because an increasing percentage of the portfolio has been subject to forbearance in recent years, with the closure of the portfolio to new business. The review involved extensive statistical analysis of actual default experience in the portfolio. Amongst other improvements, this review resulted in changes to further differentiate the credit characteristics of forbearance cases, including those which return to performing status following forbearance. The review included consideration of the application of the Group's accounting policy for the recognition of impairment allowances for the CML portfolio, and changes to improve assumptions about default and severity rates for the purposes of measuring impairment allowances. The consequent changes did not result in a material change to impairment allowances recorded by HSBC Finance under IFRSs. However, the Group's revised impaired loan disclosure convention was adopted.

At 31 December 2011, renegotiated real estate secured accounts represented 86% (2010: 85%) of North America's total renegotiated loans, and US$16bn (2010: US$18.2bn) of renegotiated real estate secured loans in HSBC Finance were classified as impaired. Further details of HSBC Finance's real estate secured accounts and renegotiation programmes are provided below.

Gross loan portfolio of HSBC Finance real estate secured accounts

(Unaudited)

	Re-aged²²	Modified and re-aged	Modified	Total re- negotiated loans	Total non- renegotiated loans		Total gross loans	Total impair- ment allowances	Impair- ment allowances/ gross loans
	US$m	US$m	US$m	US$m		US$m	US$m	US$m	%

31 December 2011 ....	10,265	12,829	1,494	24,588		19,540	44,128	5,088	12
31 December 2010 .....	10,693	14,053	2,286	27,032		23,902	50,934	4,311	8

For footnote, see page 185.

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

(Unaudited)

	Number of renegotiated loans
	Re-aged	Modified and re-aged	Modified	Total
	(000s)	(000s)	(000s)	(000s)

31 December 2011 ...........................................................	121	112	14	246
31 December 2010 .............................................................	123	115	20	258

During 2011, the aggregate number of renegotiated loans reduced, despite renegotiation activity continuing, due to the run-off of the portfolio. Within the constraints of our Group credit policy, HSBC Finance's policies allow for multiple renegotiations under certain circumstances, and a number of accounts received a second (or further) renegotiation during the year which did not appear in the statistics presented above. These statistics present a loan as an addition to the volume of renegotiated loans on its first renegotiation only. At 31 December 2011, renegotiated loans were 56% (2010: 53%) of HSBC Finance's real estate secured accounts.

Corporate and Commercial forbearance

(Unaudited)

For the current policies and procedures regarding forbearance in the corporate and commercial sector, see the Appendix to Risk on page 188.

The majority of the increase in renegotiated loans activity for the commercial real estate sector in 2011 arose in Europe, which increased by US$617m. This increase predominately related to the renegotiation of a large exposure together with high levels of forbearance in the UK towards the end of 2011 reflecting current economic conditions, including a weakening in property values and a reduction in institutions funding commercial real estate lending.

In the corporate and commercial sector the increase in renegotiated loans in 2011 was again a result of increased forbearance activity in Europe. The increase related to renegotiations of a small number of larger lending arrangements provided to European corporate entities and economic pressures in Europe more generally. This was partially offset by repayments and write-offs of renegotiated loans in Europe, Rest of Asia-Pacific and Latin America.

In the financial sector the increase in renegotiated loans in 2011 primarily related to financial difficulties in one financial sector entity. In the government sector renegotiation activity was wholly due to increases in Latin America caused by term extension restructurings of municipal and local authority facilities.

Impaired loans disclosure

(Audited)

During 2011 we adopted a revised disclosure convention for the presentation of impaired loans and advances which affects the disclosure of loans and advances in the geographical regions with significant levels of forbearance activity. The previous impaired loan disclosure convention was that impaired loans and advances were those classified as CRR9, CRR10, EL9 or EL10 and all retail loans 90 days or more past due, unless individually they had been assessed as not impaired. Renegotiated loans that did not meet the above criteria were classified as 'neither past due nor impaired' or 'past due but not impaired' as appropriate, however these loans were assessed for impairment in accordance with the Group's accounting policy on the recognition of impairment allowances, as described on page 193.

The revised disclosure convention continues to be based on internal credit rating grades and, for retail exposures, 90 days or more past due status. However, it introduces a more stringent approach to the assessment of whether renegotiated loans are presented as impaired. Management believes that this revised approach better reflects the nature of risks and inherent credit quality in our loan portfolio as it is more closely calibrated to the types of forbearance concession granted and applies stricter requirements for the performance of renegotiated loans before they may be presented as no longer impaired. It also reflects developments in industry best practice disclosure, as well as a refinement of loan segmentation in our North America consumer lending business. The revised disclosure convention affects the disclosure presentation of impaired loans but does not affect the accounting policy for the recognition of impairment allowances.

Under this revised disclosure convention, impaired loans and advances are those that meet any of the following criteria:

· loans and advances classified as CRR 9, CRR 10, EL 9 or EL 10 (a description of our internal credit rating grades is provided on page 191);

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

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

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

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

Further disclosure about loans subject to forbearance is provided on page 129. Renegotiated loans and forbearance disclosures are subject to evolving industry practice and regulatory guidance.

Impaired loan comparative data for 31 December 2010 have been restated to reflect the revised impaired loans disclosure convention. Restatement of comparative data prior to 31 December 2010 is not practicable as sufficient information is not available to determine what assumptions management would have made in applying the revised disclosure convention for those comparative periods. This includes information about assumptions that would have been made in establishing the revised, more stringent period of payment performance for renegotiated loans before they are regarded as unimpaired. The difficulty associated with determining these estimates relates principally to retail portfolios that are assessed for impairment on a collective basis; these estimates become more difficult when a longer period of time has passed since the credit condition occurred.

The following table shows the effect of the revised disclosure convention on total reported impaired loans and advances to customers for geographical regions with significant levels of forbearance.

Impaired loans and advances to customers

(Audited)

	At 31 December
	2011	2010
	US$m	US$m

At 31 December - previous disclosure convention ..................................................................	27,211	28,091

Reclassified from neither past due nor impaired .......................................................................	7,895	11,200
Europe ................................................................................................................................	509	838
Middle East and North Africa .............................................................................................	61	63
North America ...................................................................................................................	6,688	9,638
Latin America ....................................................................................................................	637	661

Reclassified from past due but not impaired .............................................................................	6,478	7,580
Europe ................................................................................................................................	-	-
Middle East and North Africa .............................................................................................	30	33
North America ...................................................................................................................	6,310	7,475
Latin America ....................................................................................................................	138	72


At 31 December - revised disclosure convention .....................................................................	41,584	46,871

Impairment of loans and advances

Impaired loans and advances to customers and banks by industry sector⁸

(Audited)

	Impaired loans and advances at 31 December 2011			Impaired loans and advances at 31 December 2010
	Individually assessed	Collectively assessed	Total	Individually assessed	Collectively assessed	Total
	US$m	US$m	US$m	US$m	US$m	US$m

Banks ..................................................	155	-	155	193	-	193

Customers ............................................	16,554	25,030	41,584	16,058	30,813	46,871
- personal .......................................	2,473	24,070	26,543	2,443	29,997	32,440
- corporate and commercial ............	12,898	960	13,858	12,499	816	13,315
- financial .......................................	1,183	-	1,183	1,116	-	1,116


	16,709	25,030	41,739	16,251	30,813	47,064

For footnote, see page 185.

Impairment allowances

(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	MENA	North America	Latin America	Total
	US$m	US$m	US$m	US$m	US$m	US$m	US$m
At 31 December 2011
Gross loans and advances to customers⁸
Individually assessed impaired loans²³ ...........	10,490	519	963	2,187	1,832	563	16,554

Collectively assessed²⁴ ..................................	429,088	157,727	123,687	25,402	148,096	57,386	941,386
Impaired loans²³ .......................................	1,261	85	106	238	20,864	2,476	25,030
Non-impaired loans²⁵ ...............................	427,827	157,642	123,581	25,164	127,232	54,910	916,356


TGLAC ........................................................	439,578	158,246	124,650	27,589	149,928	57,949	957,940

Impairment allowances ................................	5,242	581	782	1,714	7,181	2,011	17,511
Individually assessed .................................	3,754	288	505	1,250	416	324	6,537
Collectively assessed .................................	1,488	293	277	464	6,765	1,687	10,974


Net loans and advances ................................	434,336	157,665	123,868	25,875	142,747	55,938	940,429

	%	%	%	%	%	%	%
Individually assessed allowances as a percentage of individually assessed loans and advances	35.8	55.5	52.4	57.2	22.7	57.4	39.5
Collectively assessed allowances as a percentage of collectively assessed loans and advances .................................................................	0.3	0.2	0.2	1.8	4.6	2.9	1.2
Total allowances as a percentage of TGLAC	1.2	0.4	0.6	6.2	4.8	3.5	1.8

	US$m	US$m	US$m	US$m	US$m	US$m	US$m
At 31 December 2010
Gross loans and advances to customers⁸
Individually assessed impaired loans²³ ...........	9,400	637	1,185	2,167	1,886	783	16,058

Collectively assessed²⁴ ..................................	432,062	140,683	108,505	24,111	197,816	59,214	962,391
Impaired loans²³ .......................................	1,994	23	139	362	25,954	2,341	30,813
Non-impaired loans²⁵ ...............................	430,068	140,660	108,366	23,749	171,862	56,873	931,578


TGLAC ........................................................	441,462	141,320	109,690	26,278	199,702	59,997	978,449

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


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	37.9	54.2	53.1	53.7	20.7	46.9	40.2
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 TGLAC	1.3	0.4	0.9	6.3	4.6	3.4	2.1

For footnotes, see page 185.

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

(Audited)

	Banks	Customers
	individually assessed	Individually assessed	Collectively assessed	Total
	US$m	US$m	US$m	US$m
2011
At 1 January ......................................................................	158	6,457	13,626	20,241
Amounts written off ..........................................................	(16)	(1,633)	(10,831)	(12,480)
Recoveries of loans and advances previously written off ....	-	191	1,235	1,426
Charge to income statement ..............................................	(16)	1,931	9,590	11,505
Exchange and other movements²⁶ ......................................	(1)	(409)	(2,646)	(3,056)

At 31 December .................................................................	125	6,537	10,974	17,636

Impairment allowances on loans and advances to customers		6,537	10,974	17,511
- personal .....................................................................		694	9,066	9,760
- corporate and commercial ..........................................		5,231	1,820	7,051
- financial .....................................................................		612	88	700

	%	%	%	%

As a percentage of loans and advances^27,28 ......................	0.09	0.71	1.20	1.67

	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 previously written off ....	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

Impairment allowances on loans and advances to customers		6,457	13,626	20,083
- personal .....................................................................		615	11,678	12,293
- corporate and commercial ..........................................		5,274	1,863	7,137
- financial .....................................................................		568	85	653

	%	%	%	%

As a percentage of loans and advances^27,28 ......................	0.11	0.70	1.49	1.91

For footnotes, see page 185.

Movement in impairment allowances by industry sector

(Audited)

	2011	2010	2009	2008	2007
	US$m	US$m	US$m	US$m	US$m

Impairment allowances at 1 January .................................	20,241	25,649	23,972	19,212	13,585

Amounts written off .........................................................	(12,480)	(19,300)	(24,840)	(17,955)	(12,844)
Personal ........................................................................	(10,431)	(16,458)	(22,703)	(16,625)	(11,670)
- residential mortgages ..............................................	(2,662)	(4,163)	(4,704)	(2,110)	(930)
- other personal ........................................................	(7,769)	(12,295)	(17,999)	(14,515)	(10,740)

Corporate and commercial ............................................	(2,009)	(2,789)	(1,984)	(1,294)	(1,163)
- manufacturing and international trade and services⁵	(1,137)	(1,050)	(1,093)	(789)	(897)
- commercial real estate and other property-related .	(392)	(1,280)	(327)	(115)	(98)
- other commercial ...................................................	(480)	(459)	(564)	(390)	(168)

Financial²⁹ ....................................................................	(40)	(53)	(153)	(36)	(11)

Recoveries of amounts written off in previous years .........	1,426	1,020	890	834	1,005
Personal ........................................................................	1,175	846	712	686	837
- residential mortgages ..............................................	86	93	61	19	19
- other personal ........................................................	1,089	753	651	667	818

Corporate and commercial ............................................	242	156	170	142	157
- manufacturing and international trade and services⁵	135	92	123	76	74
- commercial real estate and other property-related .	20	21	9	6	29
- other commercial ...................................................	87	43	38	60	54

Financial²⁹ ....................................................................	9	18	8	6	11

Charge to income statement³⁰ ..........................................	11,505	13,548	24,942	24,131	17,177
Personal ........................................................................	9,318	11,187	19,781	20,950	15,968
- residential mortgages ..............................................	4,103	3,461	4,185	5,000	1,840
- other personal ........................................................	5,215	7,726	15,596	15,950	14,128

Corporate and commercial ............................................	2,114	2,198	4,711	2,879	1,176
- manufacturing and international trade and services⁵	901	909	2,392	1,573	897
- commercial real estate and other property-related .	764	660	1,492	755	152
- other commercial ...................................................	449	629	827	551	127

Financial²⁹ ....................................................................	73	163	450	302	36
Governments ................................................................	-	-	-	-	(3)

Exchange and other movements .......................................	(3,056)	(676)	685	(2,250)	289

At 31 December ...............................................................	17,636	20,241	25,649	23,972	19,212

Impairment allowances against banks:
- individually assessed ...................................................	125	158	107	63	7
Impairment allowances against customers:
- individually assessed ...................................................	6,537	6,457	6,494	3,284	2,699
- collectively assessed ...................................................	10,974	13,626	19,048	20,625	16,506

At 31 December ...............................................................	17,636	20,241	25,649	23,972	19,212

	%	%	%	%	%
Impairment allowances against customers as a percentage of loans and advances to customers:
- individually assessed ...................................................	0.68	0.66	0.70	0.34	0.27
- collectively assessed ...................................................	1.15	1.39	2.07	2.16	1.65
²
At 31 December ...............................................................	1.83	2.05	2.77	2.50	1.92

For footnotes, see page 185.

Movement in impairment allowances by industry sector and by geographical region

(Audited)

	2011
	Europe	Hong Kong	Rest of Asia- Pacific	MENA	North America	Latin America	Total
	US$m	US$m	US$m	US$m	US$m	US$m	US$m

Impairment allowances at 1 January .................	5,740	629	959	1,669	9,234	2,010	20,241

Amounts written off .........................................	(2,781)	(210)	(554)	(187)	(6,830)	(1,918)	(12,480)
Personal ........................................................	(1,685)	(116)	(391)	(172)	(6,591)	(1,476)	(10,431)
- residential mortgages ................................	(25)	-	(6)	(2)	(2,545)	(84)	(2,662)
- other personal⁵ .........................................	(1,660)	(116)	(385)	(170)	(4,046)	(1,392)	(7,769)

Corporate and commercial .............................	(1,066)	(94)	(161)	(15)	(233)	(440)	(2,009)
- manufacturing and international trade and services ..............................................	(554)	(64)	(120)	(4)	(100)	(295)	(1,137)
- commercial real estate and other property-related ......................................................	(265)	(6)	(13)	(10)	(83)	(15)	(392)
- other commercial⁷ ....................................	(247)	(24)	(28)	(1)	(50)	(130)	(480)

Financial²⁹ .....................................................	(30)	-	(2)	-	(6)	(2)	(40)

Recoveries of amounts written off in previous years ..............................................................	572	47	185	102	132	388	1,426
Personal ........................................................	525	31	168	53	101	297	1,175
- residential mortgages ................................	21	4	3	-	39	19	86
- other personal⁵ .........................................	504	27	165	53	62	278	1,089

Corporate and commercial .............................	44	16	12	49	30	91	242
- manufacturing and international trade and services ..............................................	19	16	8	2	8	82	135
- commercial real estate and other property-related ......................................................	7	-	1	-	8	4	20
- other commercial⁷ ....................................	18	-	3	47	14	5	87

Financial²⁹ .....................................................	3	-	5	-	1	-	9

Charge to income statement³⁰ ..........................	1,902	117	274	292	7,050	1,870	11,505
Personal ........................................................	610	77	215	124	6,887	1,405	9,318
- residential mortgages ................................	98	(10)	5	42	3,899	69	4,103
- other personal⁵ .........................................	512	87	210	82	2,988	1,336	5,215

Corporate and commercial .............................	1,277	37	55	146	122	477	2,114
- manufacturing and international trade and services ..............................................	416	57	35	25	42	326	901
- commercial real estate and other property-related ......................................................	498	-	9	150	48	59	764
- other commercial⁷ ....................................	363	(20)	11	(29)	32	92	449

Financial²⁹ .....................................................	15	3	4	22	41	(12)	73

Exchange and other movements .......................	(141)	(2)	(82)	(145)	(2,347)	(339)	(3,056)

At 31 December .............................................	5,292	581	782	1,731	7,239	2,011	17,636

Impairment allowances against banks:
- individually assessed ...................................	50	-	-	17	58	-	125
Impairment allowances against customers:
- individually assessed ...................................	3,754	288	505	1,250	416	324	6,537
- collectively assessed³¹ ................................	1,488	293	277	464	6,765	1,687	10,974

At 31 December ...............................................	5,292	581	782	1,731	7,239	2,011	17,636

	%	%	%	%	%	%	%
Impairment allowances against customers as a percentage of loans and advances to customers:
- individually assessed ...................................	0.85	0.18	0.41	4.53	0.28	0.56	0.68
- collectively assessed³¹ ................................	0.34	0.19	0.22	1.68	4.51	2.91	1.15
²
At 31 December ...............................................	1.19	0.37	0.63	6.21	4.79	3.47	1.83

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

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 personal⁵ .........................................	(1,398)	(149)	(551)	(375)	(8,043)	(1,779)	(12,295)

Corporate and commercial .............................	(1,539)	(109)	(110)	(11)	(507)	(513)	(2,789)
- manufacturing and international trade and services ..............................................	(385)	(90)	(46)	(10)	(174)	(345)	(1,050)
- commercial real estate and other property-related ......................................................	(1,022)	(18)	(18)	-	(194)	(28)	(1,280)
- other commercial⁷ ....................................	(132)	(1)	(46)	(1)	(139)	(140)	(459)

Financial²⁹ .....................................................	(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 personal⁵ .........................................	222	28	165	53	104	181	753

Corporate and commercial .............................	33	7	7	4	46	59	156
- manufacturing and international trade and services ..............................................	16	7	5	2	19	43	92
- commercial real estate and other property-related ......................................................	6	-	-	-	11	4	21
- other commercial⁷ ....................................	11	-	2	2	16	12	43

Financial²⁹ .....................................................	3	-	13	-	2	-	18

Charge to income statement³⁰ ..........................	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 personal⁵ .........................................	1,110	95	286	180	4,949	1,106	7,726

Corporate and commercial .............................	1,080	72	146	304	269	327	2,198
- manufacturing and international trade and services ..............................................	395	21	100	165	25	203	909
- commercial real estate and other property-related ......................................................	360	(7)	12	117	178	-	660
- other commercial⁷ ....................................	325	58	34	22	66	124	629

Financial²⁹ .....................................................	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 assessed³¹ ................................	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 assessed³¹ ................................	0.48	0.20	0.30	1.86	4.40	2.74	1.39
²³
At 31 December ...............................................	1.29	0.44	0.87	6.29	4.60	3.35	2.05

For footnotes, see page 185.

Impairment charge

Individually and collectively assessed impairment charge to the income statement by industry sector

(Unaudited)

	2011			2010
	Individually assessed US$m	Collectively assessed US$m	Total US$m	Individually assessed US$m	Collectively assessed US$m	Total US$m

Banks ..........................................................	(16)	-	(16)	12	-	12
Personal ......................................................	141	9,177	9,318	180	11,007	11,187
Residential mortgages ..............................	104	3,999	4,103	137	3,324	3,461
Other personal⁵ .......................................	37	5,178	5,215	43	7,683	7,726

Corporate and commercial ..........................	1,703	411	2,114	2,190	8	2,198
Manufacturing and international trade and services .........................................	572	329	901	997	(88)	909
Commercial real estate and other property-related ..................................	768	(4)	764	680	(20)	660
Other commercial⁷ ..................................	363	86	449	513	116	629

Financial .....................................................	87	2	89	243	(92)	151

Total charge to income statement ...............	1,915	9,590	11,505	2,625	10,923	13,548

For footnote, see page 185.

Net loan impairment charge to the income statement

(Unaudited)

	2011	2010	2009	2008	2007
	US$m	US$m	US$m	US$m	US$m

Individually assessed impairment allowances .....................	1,915	2,625	4,458	2,064	796
New allowances .............................................................	2,904	3,617	5,173	2,742	1,533
Release of allowances no longer required .......................	(798)	(847)	(581)	(565)	(608)
Recoveries of amounts previously written off ...............	(191)	(145)	(134)	(113)	(129)

Collectively assessed impairment allowances .....................	9,590	10,923	20,484	22,067	16,381
New allowances net of allowance releases ......................	10,825	11,798	21,240	22,788	17,257
Recoveries of amounts previously written off ...............	(1,235)	(875)	(756)	(721)	(876)


Total charge for impairment losses ...................................	11,505	13,548	24,942	24,131	17,177
Banks ...........................................................................	(16)	12	70	54	-
Customers ....................................................................	11,521	13,536	24,872	24,077	17,177

At 31 December
Impaired loans⁸ .................................................................	41,739	47,064	30,845	25,422	19,594
Impairment allowances .....................................................	17,636	20,241	25,649	23,972	19,212

For footnote, see page 185.

Net loan impairment charge to the income statement by geographical region

(Unaudited)

	Europe	Hong Kong	Rest of Asia- Pacific	MENA	North America	Latin America	Total
	US$m	US$m	US$m	US$m	US$m	US$m	US$m
2011
Individually assessed impairment allowances .....	1,262	18	67	199	243	126	1,915
New allowances .............................................	1,670	79	207	328	398	222	2,904
Release of allowances no longer required .......	(378)	(41)	(114)	(80)	(111)	(74)	(798)
Recoveries of amounts previously written off	(30)	(20)	(26)	(49)	(44)	(22)	(191)

Collectively assessed impairment allowances ....	640	99	207	93	6,807	1,744	9,590
New allowances net of allowance releases ......	1,181	126	366	147	6,894	2,111	10,825
Recoveries of amounts previously written off	(541)	(27)	(159)	(54)	(87)	(367)	(1,235)


Total charge for impairment losses ..................	1,902	117	274	292	7,050	1,870	11,505
Banks ...........................................................	(11)	-	-	-	(5)	-	(16)
Customers ....................................................	1,913	117	274	292	7,055	1,870	11,521


At 31 December 2011
Impaired loans⁸ ................................................	11,819	608	1,070	2,445	22,758	3,039	41,739
Impairment allowances .....................................	5,292	581	782	1,731	7,239	2,011	17,636

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


At 31 December 2010
Impaired loans⁸ ................................................	11,500	665	1,324	2,549	27,902	3,124	47,064
Impairment allowances .....................................	5,740	629	959	1,669	9,234	2,010	20,241

For footnote, see page 185.

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

(Unaudited)

	2011	2010	2009	2008	2007
	%	%	%	%	%

New allowances net of allowance releases ..........................	1.34	1.65	2.92	2.54	2.09
Recoveries ........................................................................	(0.15)	(0.12)	(0.10)	(0.09)	(0.12)

Total charge for impairment losses ...................................	1.19	1.53	2.82	2.45	1.97

Amount written off net of recoveries ...............................	1.14	2.08	2.71	1.75	1.36

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	MENA	North America	Latin America	Total
	%	%	%	%	%	%	%
2011
New allowances net of allowance releases .........	0.59	0.11	0.38	1.46	4.01	3.54	1.34
Recoveries ........................................................	(0.14)	(0.03)	(0.15)	(0.38)	(0.07)	(0.61)	(0.15)

Total charge for impairment losses ..................	0.45	0.08	0.23	1.08	3.94	2.93	1.19

Amount written off net of recoveries ...............	0.52	0.11	0.31	0.32	3.74	2.39	1.14

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

Loans and advances to customers are excluded from average balances when reclassified to held for sale. Including these loans and advances to customers the North America new allowances net of allowance releases would be 3.77%, recoveries 0.07%, and amounts written off net of recoveries 3.51%.

Reconciliation of reported and constant currency changes in impaired loans by geographical region⁸

(Unaudited)

	31 Dec 10 as reported	Constant currency effect	31 Dec 10 at 31 Dec 11 exchange rates	Movement on a constant currency basis	31 Dec 11 as reported	Reported change	Movement on a constant currency basis
	US$m	US$m	US$m	US$m	US$m	%	%

Europe ........................................	11,500	(211)	11,289	530	11,819	3%	5%
Hong Kong ..................................	665	3	668	(60)	608	(9%)	(9%)
Rest of Asia-Pacific .....................	1,324	(55)	1,269	(199)	1,070	(19%)	(16%)
Middle East and North Africa ......	2,549	(6)	2,543	(98)	2,445	(4%)	(4%)
North America ............................	27,902	(19)	27,883	(5,125)	22,758	(18%)	(18%)
Latin America .............................	3,124	(299)	2,825	214	3,039	(3%)	8%

	47,064	(587)	46,477	(4,738)	41,739	(11%)	(10%)

For footnote, see page 185.

2011 compared with 2010

(Unaudited)

On a reported basis, loan impairment charges to the income statement of US$11.5bn in 2011 declined by 15% compared with 2010 and by 16% on a constant currency basis. During 2011, we revised our disclosure convention for impaired loans for regions with material levels of forbearance which resulted in an increase in the population of impaired loans. Impaired loan comparative data for 2010 has been restated to reflect the change in disclosure convention. On a reported basis our restated impaired loans were US$41.7bn, 11% lower than at 31 December 2010.

The following commentary is on a constant currency basis.

New loan impairment allowances were US$13.7bn, a decline of 12% compared with 2010, reflecting lower lending balances in our US consumer finance portfolios. Releases and recoveries of US$2.2bn were 17% higher, mainly in Europe and Latin America reflecting improvements in our collections operations.

Impaired loans were 4% of total gross loans and advances at the end of 2011, in line with 31 December 2010.

In Europe, new loan impairment allowances were US$2.9bn, 14% lower than 2010. Individually assessed new loan impairment allowances decreased, mainly in the UK, as the credit quality of our lending portfolio improved, partly offset by an increase in allowances in respect of a small number of CMB customers in Greece. New collectively assessed loan impairment allowances also declined, mainly in the UK personal lending book, as a result of improved delinquency rates, reflecting improved quality in both the secured and unsecured portfolios, and a range of successful actions taken to mitigate credit risk within RBWM including a focus on monitoring and identifying customers facing financial difficulty at an earlier stage. In addition, lower new loan impairment allowances reflected a reduction in unsecured lending balances. Impaired loans of US$11.8bn were 5% higher than at 31 December 2010.

Releases and recoveries in Europe were US$949m, an increase of 36% compared with the end of 2010 due to successful actions taken to mitigate credit risk as described above.

In Hong Kong, new loan impairment allowances fell by 10% compared with 2010 driven by a reduction in new loan impairment allowances against specific exposures. This was partly offset by a rise in new collectively assessed loan impairment allowances following a more significant release of allowances in 2010, as well as strong growth in lending balances. Impaired loans declined by 9% from 31 December 2010, reflecting loans whose performance improved following the renegotiation of terms and are therefore regarded as no longer impaired.

Releases and recoveries in Hong Kong were US$88m, 4% lower than at the end of 2010.

New loan impairment allowances in Rest of Asia-Pacific decreased by 22% to US$573m. The decline reflected lower new collectively assessed loan impairment allowances, mainly in India, where lending balances fell as certain higher risk unsecured portfolios were managed down. New individually assessed loan impairment allowances also decreased, mainly in Singapore, due to lower new loan impairment allowances raised against a single GB&M customer compared with 2010. Impaired loans in the region decreased by 16% from the end of 2010 to US$1.1bn at the end of 2011, mainly in India due to the repayment or write-off of previously impaired loans.

Releases and recoveries in the region increased by 5%, mainly due to the increased release of individually assessed allowances, principally in Australia and India.

In the Middle East and North Africa, new loan impairment allowances declined by 35% to US$475m in 2011. New individually assessed loan impairment allowances fell, as charges in 2011 were restricted to a small number of corporate exposures and significant charges recorded in 2010 following the restructuring of corporate exposures in the UAE did not recur. New collectively assessed loan impairment allowances also declined, primarily in the UAE, due to lower delinquencies reflecting a repositioning of the loan book to reduce our exposure to unsecured lending and focus on higher quality customers. Impaired loans declined by 4% from 31 December 2010 due to improved delinquency in line with stricter credit criteria, as referred to above.

Releases and recoveries in the region increased by 63% to US$183m in 2011 due to improved economic conditions.

In North America, new loan impairment allowances declined markedly, reducing by 16% to US$7.3bn. New collectively assessed loan impairment allowances declined, mainly in the CML portfolio, reflecting continued run-off and, in our Card and Retail Services business, lower balances, as well as improved delinquency rates as overall credit quality improved. This was partly offset by additional new loan impairment allowances related to the effects of the delays in foreclosure activity. Releases and recoveries in North America declined by 36% to US$242m. This reflected both the improvement in economic conditions in 2010, which enabled a high volume of customers who were in financial difficulty to make repayments, and the continued reductions in outstanding balances in 2011 as the CML portfolio continued to run off.

Impaired loans decreased by 18% from the end of 2010 to US$22.8bn, due to the continued run-off of the CML portfolio and the reclassification of balances relating to the pending sale of our Card and Retail Services business. This was partly offset by the effects of the delays in foreclosure processing which slowed the rate at which lending balances were transferred to foreclosed.

In Latin America, new loan impairment allowances increased by 21% to US$2.3bn. The increase in new loan impairment allowances was primarily in Brazil reflecting strong lending growth in RBWM and CMB, as well as a rise in delinquency rates, notably in the second half of 2011. This was partly offset by lower new collectively assessed loan impairment allowances in Mexico, driven by the managed decline of the riskier elements of the credit cards portfolio. Impaired loans were 8% higher than at the end of 2010 driven by increased delinquency observed during the year.

Releases and recoveries in Latin America increased by 36% from the end of 2010 to US$463m, largely reflecting an increase in the volume of accounts that are delinquent.

For an analysis of loan impairment charges and other credit risk provisions by global business, see page 57.

Collateral

Collateral and other credit enhancements held

(Audited)

Loans and advances held at amortised cost

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

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

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

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

Personal lending

Residential mortgage loans including loan commitments by level of collateral

(Audited)

	Europe	Hong Kong	Rest of Asia-Pacific	MENA	North America	Latin America	Total
	US$m	US$m	US$m	US$m	US$m	US$m	US$m
At 31 December 2011

Fully collateralised .................	125,702	46,532	38,381	1,761	60,794	4,891	278,061
Loan to Value ('LTV') ratio: - less than 25% ..................	9,898	5,364	2,383	58	3,576	282	21,561
- 25% to 50% ....................	31,601	19,643	9,978	336	10,593	1,350	73,501
- 51% to 75% ....................	52,656	17,748	18,006	895	25,138	2,221	116,664
- 76% to 90% ....................	23,919	2,884	7,624	304	13,590	876	49,197
- 91% to 100% ..................	7,628	893	390	168	7,897	162	17,138

Partially collateralised
- greater than 100% LTV ...	3,275	484	295	174	12,503	102	16,833
- collateral value ................	2,821	466	37	135	10,566	24	14,049


Total residential mortgages ....	128,977	47,016	38,676	1,935	73,297	4,993	294,894

At 31 December 2010

Fully collateralised .................	115,700	43,948	34,674	1,490	66,542	5,086	267,440
LTV ratio: - less than 25% .................	9,531	4,815	2,082	58	3,779	282	20,547
- 25% to 50% ....................	27,740	15,984	8,733	235	10,973	1,272	64,937
- 51% to 75% ....................	46,395	19,574	15,912	634	25,750	2,310	110,575
- 76% to 90% ....................	23,044	2,569	7,661	409	16,091	1,003	50,777
- 91% to 100% ..................	8,990	1,006	286	154	9,949	219	20,604

Partially collateralised
- greater than 100% LTV ...	4,156	18	176	404	12,327	173	17,254
- collateral value ................	3,705	15	45	152	10,539	88	14,544


Total residential mortgages ....	119,856	43,966	34,850	1,894	78,869	5,259	284,694

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

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

Other personal lending

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

Corporate, commercial and financial (non-bank) lending

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

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

(Audited)

	Europe	Hong Kong	Rest of Asia-Pacific	MENA	North America	Latin America	Total
	US$m	US$m	US$m	US$m	US$m	US$m	US$m
At 31 December 2011
Rated CRR/EL 1 to 7 .............	33,376	25,202	10,934	746	10,238	4,841	85,337
Not collateralised ...............	5,730	12,552	2,973	631	97	2,136	24,119
Fully collateralised ..............	24,547	11,734	6,929	65	8,506	1,706	53,487
Partially collateralised (A)...	3,099	916	1,032	50	1,635	999	7,731
- collateral value on A ....	1,775	591	280	39	311	559	3,555

Rated CRR/EL 8 to 10 ...........	3,768	4	75	310	1,057	326	5,540
Not collateralised ...............	434	2	10	55	135	127	763
Fully collateralised ..............	1,413	2	23	74	521	196	2,229
Partially collateralised (B)...	1,921	-	42	181	401	3	2,548
- collateral value on B ....	1,083	-	26	89	246	1	1,445

Total commercial real estate loans and advances..............	37,144	25,206	11,009	1,056	11,295	5,167	90,877

At 31 December 2010
Rated CRR/EL 1 to 7 .............	32,192	24,463	9,829	1,015	8,009	4,341	79,849
Not collateralised ...............	6,153	10,693	2,600	722	388	2,004	22,560
Fully collateralised ..............	22,904	12,227	6,972	65	6,837	1,574	50,579
Partially collateralised (C)...	3,135	1,543	257	228	784	763	6,710
- collateral value on C ....	1,800	955	124	149	288	310	3,626

Rated CRR/EL 8 to 10 ...........	2,810	3	113	271	1,241	403	4,841
Not collateralised ...............	249	1	8	40	60	99	457
Fully collateralised ..............	1,164	2	41	14	533	255	2,009
Partially collateralised (D) ..	1,397	-	64	217	648	49	2,375
- collateral value on D ...	867	-	44	206	430	29	1,576

Total commercial real estate loans and advances..............	35,002	24,466	9,942	1,286	9,250	4,744	84,690

The collateral included in the table above consists of fixed first charges on real estate and charges over cash for the commercial real estate sector.

Facilities are disclosed as not collateralised for this sector if they are unsecured or benefit from credit risk mitigation from guarantees, which are not quantified for the purposes of this disclosure. Lending to major property companies in Hong Kong is, by market practice, typically secured by guarantees or is unsecured. In Europe, facilities of a working capital nature are generally not secured by a first fixed charge and are therefore disclosed as not collateralised.

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

Other corporate, commercial and financial (non-bank) loans and advances including loan commitments by level of collateral

(Audited)

	Europe	Hong Kong	Rest of Asia-Pacific	MENA	North America	Latin America	Total
	US$m	US$m	US$m	US$m	US$m	US$m	US$m
At 31 December 2011
Rated CRR/EL 8 to 10 ...........	8,715	512	1,098	2,253	2,448	2,538	17,564
Not collateralised ...............	5,583	349	795	1,695	801	1,546	10,769
Fully collateralised ..............	1,765	63	147	60	441	602	3,078
Partially collateralised (A)...	1,367	100	156	498	1,206	390	3,717
- collateral value on A ....	558	55	76	103	541	214	1,547

At 31 December 2010
Rated CRR/EL 8 to 10 ...........	11,962	675	1,256	2,336	2,947	1,902	21,078
Not collateralised ...............	8,363	489	933	1,779	1,059	843	13,466
Fully collateralised ..............	1,903	51	142	60	670	854	3,680
Partially collateralised (B)...	1,696	135	181	497	1,218	205	3,932
- collateral value on B ....	627	81	80	103	422	114	1,427

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

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

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

The difference between the collateral value and the value of partially collateralised lending disclosed in the tables above cannot be directly compared to any impairment allowances recognised in respect of impaired loans, as the loans may be performing in accordance with their contractual terms. Where loans are not performing in accordance with their contractual terms, the recovery of cash flows may be affected by other cash resources of the customer, or other credit risk enhancements not quantified for the purposes of the tables above. The Group's policy for determining impairment allowances, including the effect of collateral on these impairment allowances, is provided on page 190.

Loans and advances to banks

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

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

(Audited)

	Europe	Hong Kong	Rest of Asia-Pacific	MENA	North America	Latin America	Total
	US$m	US$m	US$m	US$m	US$m	US$m	US$m
At 31 December 2011
Not collateralised ...................	25,896	34,892	42,586	9,337	14,132	19,516	146,359
Fully collateralised .................	31,515	1,365	6,927	32	978	1,238	42,055
Partially collateralised (A)......	146	50	445	-	784	114	1,539
- collateral value on A ........	104	50	207	-	702	88	1,151


Total ......................................	57,557	36,307	49,958	9,369	15,894	20,868	189,953

At 31 December 2010
Not collateralised ...................	31,225	34,336	32,631	10,416	16,829	22,436	147,873
Fully collateralised .................	50,316	154	9,558	188	3,101	4,937	68,254
Partially collateralised (B).......	91	-	28	-	959	3	1,081
- collateral value on B ........	64	-	24	-	956	-	1,044


Total ......................................	81,632	34,490	42,217	10,604	20,889	27,376	217,208

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

Derivatives

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

A description of the derivative offset amount in the 'Maximum exposure to credit risk' table is provided on page 107.

Other credit risk exposures

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

Government, bank and other financial institution issued securities may benefit from additional credit enhancement, notably through government guarantees that reference these assets. Details of government guarantees are included in Notes 15, 19 and 21 on the Financial Statements. Corporate issued debt securities are primarily unsecured. Debt securities issued by banks and financial institutions include ABSs and similar instruments, which are supported by underlying pools of financial assets. Credit risk associated with ABSs is reduced through the purchase of CDS protection. Disclosure of the Group's holdings of ABSs and associated CDS protection is provided on page 152.

Trading assets include loans and advances held with trading intent, the majority of which consist of

reverse repos and stock borrowing which, by their nature, are collateralised. Collateral accepted as security that the Group is permitted to sell or repledge under these arrangements is described in Note 37 on the Financial Statements. Trading assets also include money market term placements which are unsecured.

The Group's maximum exposure to credit risk includes financial guarantees and similar arrangements that it issues or enters into, and loan commitments that it is irrevocably committed to. Depending on the terms of the arrangement, the bank may have recourse to additional credit mitigation in the event that a guarantee is called upon or a loan commitment is drawn and subsequently defaults. Further information about these arrangements is provided in Note 41 on the Financial Statements.

Collateral and other credit enhancements obtained

(Audited)

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

	Carrying amount at 31 December³²
	2011	2010
	US$m	US$m
Nature of assets
Residential property ................	420	1,155
Commercial and industrial property ..............................	64	104
Other ......................................	17	2

	501	1,261

For footnote, see page 185.

The significant reduction in residential properties was due to the suspension of foreclosure activities at the end of 2010 and during the first half of 2011. See page 122.

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

HSBC Holdings

(Audited)

Risk on an enterprise-wide basis in HSBC Holdings is overseen by the HSBC Holdings Asset and Liability Committee ('ALCO'). The major risks faced by HSBC Holdings are credit risk and market risk (in the form of interest rate risk and foreign exchange risk), of which the most significant is credit risk.

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 2011 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.

All of the derivative transactions are with HSBC undertakings which are banking counterparties (2010: 100%).

HSBC Holdings - maximum exposure to credit risk

(Audited)

	2011	2010
	US$m	US$m

Cash at bank and in hand:
- balances with HSBC undertakings ......................................................................................	316	459
Derivatives .............................................................................................................................	3,568	2,327
Loans and advances to HSBC undertakings ..............................................................................	28,048	21,238
Financial investments .............................................................................................................	1,078	2,025
Financial guarantees and similar contracts ...............................................................................	49,402	46,988
Loan and other credit-related commitments ............................................................................	1,810	2,720

	84,222	75,757

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