Annual Financial Report - 26 of 48

RNS Number : 3816B

HSBC Holdings PLC

03 April 2013

 



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

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

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

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

Distribution of financial instruments by credit quality

(Audited)

	Neither past due nor impaired								Past due				Impair-
	Strong		Good	Satisfactory			Sub- standard		but not impaired		Impaired		ment allowances10		Total
	US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m
At 31 December 2012
Cash and balances at central banks ...............................	138,124		3,235		147		26								141,532
Items in the course of collection from other banks	6,661		203		439		-								7,303
Hong Kong Government certificates of indebtedness	22,743		-		-		-								22,743
Trading assets11 ...................	237,078		60,100		66,537		3,462								367,177
- treasury and other eligible bills ................	20,793		4,108		1,340		41								26,282
- debt securities ...............	106,453		16,685		20,931		608								144,677
- loans and advances: to banks ....................	49,133		21,018		7,418		702								78,271
to customers ..............	60,699		18,289		36,848		2,111								117,947
Financial assets designated at fair value11 .......................	6,186		5,884		401		243								12,714
- treasury and other eligible bills ...........................	54		-		-		-								54
- debt securities ...............	6,089		5,830		391		241								12,551
- loans and advances: to banks ....................	43		-		10		2								55
to customers ..............	-		54		-		-								54
Derivatives11 .......................	284,115		46,214		24,877		2,244								357,450
Loans and advances held at amortised cost .................	625,091		246,323		213,241		23,996		18,911		38,776		(16,169)		1,150,169
- to banks ........................	117,220		23,921		10,575		772		10		105		(57)		152,546
- to customers12 ..............	507,871		222,402		202,666		23,224		18,901		38,671		(16,112)		997,623
Financial investments ..........	357,452		27,428		21,143		6,759		-		2,530				415,312
- treasury and other similar bills ...........................	80,320		3,818		1,957		1,455		-		-				87,550
- debt securities ...............	277,132		23,610		19,186		5,304		-		2,530				327,762
Assets held for sale ..............	2,425		3,287		2,311		314		387		1,286		(718)		9,292
- disposal groups ..............	2,033		1,118		1,789		268		118		82		(49)		5,359
- non-current assets held for sale ......................	392		2,169		522		46		269		1,204		(669)		3,933
Other assets .........................	9,679		6,007		13,845		1,759		231		462				31,983
- endorsements and acceptances ...............	1,995		4,344		5,195		483		7		8				12,032
- accrued income and other	7,684		1,663		8,650		1,276		224		454				19,951
Total financial instruments ..	1,689,554		398,681		342,941		38,803		19,529		43,054		(16,887)		2,515,675

Distribution of financial instruments by credit quality (continued)

	Neither past due nor impaired								Past due				Impair-
	Strong		Good	Satisfactory			Sub-    standard		but not   impaired		Impaired		ment                    allowances10		Total
	US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m
At 31 December 2011
Cash and balances at central banks ...............................	126,926		2,678		263		35								129,902
Items in the course of collection from other banks	7,707		150		350		1								8,208
Hong Kong Government certificates of indebtedness	20,922		-		-		-								20,922
Trading assets11 ...................	231,594		37,182		39,171		1,502								309,449
- treasury and 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
to customers ..............	46,211		7,448		15,233		236								69,128
Financial assets designated at fair value11 .......................	7,176		4,728		830		192								12,926
- treasury and other eligible bills ...........................	123		-		-		-								123
- debt securities ...............	6,148		4,728		767		191								11,834
- loans and advances: to banks ....................	55		-		63		1								119
to customers ..............	850		-		-		-								850
Derivatives11 .......................	279,557		45,858		18,627		2,337								346,379
Loans and advances held at amortised cost .................	609,081		245,352		194,661		28,210		20,009		41,739		(17,636)		1,121,416
- to banks ........................	144,815		28,813		6,722		568		39		155		(125)		180,987
- to customers12 ..............	464,266		216,539		187,939		27,642		19,970		41,584		(17,511)		940,429
Financial investments ..........	340,173		24,757		22,139		3,532		-		2,233				392,834
- treasury and other similar bills ...........................	58,627		3,348		3,144		104		-		-				65,223
- debt securities ...............	281,546		21,409		18,995		3,428		-		2,233				327,611
Assets held for sale ..............	14,365		12,587		7,931		536		2,524		1,479		(1,614)		37,808
- disposal groups ..............	14,317		12,587		7,931		536		2,522		1,467		(1,614)		37,746
- non-current assets 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

For footnotes, see page 249.

Past due but not impaired gross financial instruments

(Audited)

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

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

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

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

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

(Audited)

	Europe		Hong        Kong		Rest of        Asia-     Pacific		MENA		North America		Latin America		Total
	US$m		US$m		US$m		US$m		US$m		US$m		US$m
31 December 2012
Banks ......................................................	-		-		10		-		-		-		10
Customers ................................................	2,339		1,311		2,964		975		7,721		3,591		18,901
Personal ..................................................	1,416		638		1,961		248		5,806		2,198		12,267
Corporate and commercial .......................	909		579		953		726		1,910		1,360		6,437
Financial (non-bank financial institutions)	14		94		50		1		5		33		197
	2,339		1,311		2,974		975		7,721		3,591		18,911
31 December 2011
Banks ......................................................	-		38		1		-		-		-		39
Customers ................................................	1,990		1,069		2,318		1,165		10,216		3,212		19,970
Personal ..................................................	1,362		715		1,626		166		7,941		2,141		13951
Corporate and commercial .......................	614		346		680		997		2,159		1,059		5855
Financial (non-bank financial institutions)	14		8		12		2		116		12		164
	1,990		1,107		2,319		1,165		10,216		3,212		20,009

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

(Audited)

	Up to 29        days		30-59         days		60-89         days		90-179         days		180 days and over		Total
	US$m		US$m		US$m		US$m		US$m		US$m
At 31 December 2012
Loans and advances held at amortised cost .................	14,236		3,189		1,262		200		24		18,911
- to banks ...............................................................	10		-		-		-		-		10
- to customers ........................................................	14,226		3,189		1,262		200		24		18,901
Assets held for sale .....................................................	251		84		48		2		2		387
- disposal groups .....................................................	87		17		11		1		2		118
- non-current assets held for sale ............................	164		67		37		1		-		269
Other assets ................................................................	122		37		24		12		36		231
- endorsements and acceptances .............................	6		1		-		-		-		7
- other ...................................................................	116		36		24		12		36		224
	14,609		3,310		1,334		214		62		19,529
At 31 December 2011
Loans and advances held at amortised cost .................	14,239		3,680		1,727		223		140		20,009
- to banks ...............................................................	39		-		-		-		-		39
- to customers ........................................................	14,200		3,680		1,727		223		140		19,970
Assets held for sale .....................................................	1,563		644		307		8		2		2,524
- disposal groups .....................................................	1,563		644		307		7		1		2,522
- non-current assets held for sale ............................	-		-		-		1		1		2
Other assets ................................................................	225		80		37		22		57		421
- endorsements and acceptances .............................	7		2		-		1		-		10
- other ...................................................................	218		78		37		21		57		411
	16,027		4,404		2,071		253		199		22,954

Renegotiated loans and forbearance

(Audited)

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

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

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

Renegotiated loans and advances to customers

(Audited)

	At 31 December 2012									At 31 December 2011
	Neither          past   due nor impaired		Past due    but not impaired		Impaired		Total				Neither          past     due nor   impaired		Past due      but not   impaired		Impaired		Total
	US$m		US$m		US$m		US$m				US$m		US$m		US$m		US$m
Personal ............................	7,952		3,524		18,279		29,755				8,133		4,401		19,125		31,659
First lien residential mortgages ..................	5,861		2,828		15,459		24,148				5,916		3,560		15,932		25,408
Other personal1 ..............	2,091		696		2,820		5,607				2,217		841		3,193		6,251
Corporate and commercial..	4,608		295		6,892		11,795				6,338		472		6,756		13,566
Manufacturing and international trade services ......................	2,381		154		3,012		5,547				2,396		255		2,755		5,406
Commercial real estate and other property-related ........................	1,796		10		3,484		5,290				2,949		122		3,550		6,621
Governments .................	177		-		-		177				113		2		132		247
Other commercial9 .........	254		131		396		781				880		93		319		1,292
Financial ............................	255		-		422		677				249		-		491		740
	12,815		3,819		25,593		42,227				14,720		4,873		26,372		45,965
Total renegotiated loans and advances to customers as a percentage of total gross loans and advances to customers .....................							4.2%										4.8%

For footnotes, see page 249.

Renegotiated loans and advances to customers by geographical region

(Audited)

	Europe		Hong        Kong		Rest of        Asia-     Pacific		MENA		North America		Latin America		Total
	US$m		US$m		US$m		US$m		US$m		US$m		US$m
31 December 2012
Personal ..................................................	2,817		245		248		190		25,474		781		29,755
First lien residential mortgages .............	1,896		68		78		112		21,896		98		24,148
Other personal1 ....................................	921		177		170		78		3,578		683		5,607
Corporate and commercial .......................	6,829		147		300		1,859		685		1,975		11,795
Manufacturing and international trade services ............................................	3,002		22		193		659		191		1,480		5,547
Commercial real estate and other property-related ...............................	3,641		25		37		899		486		202		5,290
Governments .......................................	-		-		-		2		-		175		177
Other commercial9 ...............................	186		100		70		299		8		118		781
Financial ..................................................	328		-		4		340		3		2		677
	9,974		392		552		2,389		26,162		2,758		42,227
Total impairment allowances on renegotiated loans ................................	1,547		16		96		546		3,864		485		6,554
Individually assessed .............................	1,545		15		63		543		39		213		2,418
Collectively assessed ............................	2		1		33		3		3,825		272		4,136

	Europe		Hong        Kong		Rest of         Asia-      Pacific		MENA		North    America		Latin   America		Total
	US$m		US$m		US$m		US$m		US$m		US$m		US$m
31 December 2011
Personal ..................................................	2,524		285		267		220		27,773		590		31,659
First lien residential mortgages..............	1,630		86		85		93		23,442		72		25,408
Other personal1 ....................................	894		199		182		127		4,331		518		6,251
Corporate and commercial .......................	8,453		157		181		2,198		700		1,877		13,566
Manufacturing and international trade services ...................................	3,013		32		104		887		174		1,196		5,406
Commercial real estate and other property-related ...............................	4,897		29		45		913		522		215		6,621
Governments .......................................	-		-		-		5		-		242		247
Other commercial9 ...............................	543		96		32		393		4		224		1,292
Financial ..................................................	487		5		-		237		2		9		740
	11,464		447		448		2,655		28,475		2,476		45,965
Total impairment allowances on renegotiated loans ................................	1,821		20		64		300		5,017		448		7,670
Individually assessed .............................	1,760		19		41		300		44		147		2,311
Collectively assessed ............................	61		1		23		-		4,973		301		5,359

For footnotes, see page 249.

2012 compared with 2011

(Unaudited)

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

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

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

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

HSBC Finance loan modifications and re‑ageing

(Unaudited)

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

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

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

Types of loan renegotiation programme in HSBC Finance ·  A temporary modification is a change to the contractual terms of a loan that results in the giving up of a right to contractual cash flows over a pre-defined period. With a temporary modification the loan is expected to revert back to the original contractual terms, including the interest rate charged, after the modification period. An example is reduced interest payments. A substantial number of HSBC Finance modifications involve interest rate reductions. These modifications lower the amount of interest income HSBC Finance is contractually entitled to receive in future periods. Historically, modifications have generally been for six months, although extended modification periods are now more common. Loans that have been re-aged are classified as impaired with the exception of first-time loan re-ages that were less than 60 days past due at the time of re-age. These remain classified as impaired until they have demonstrated a history of payment performance against their original contracted terms for at least 12 months. ·  A permanent modification is a change to the contractual terms of a loan that results in giving up a right to contractual cash flows over the life of the loan. An example is a permanent reduction in the interest rate charged. Permanent or long-term modifications which are due to an underlying hardship event remain classified as impaired for their full life. ·  The term 're-age' describes a renegotiation by which the contractual delinquency status of a loan is reset to current after demonstrating payment performance. The overdue principal and/or interest is deferred and paid at a later date. Loan re-ageing enables customers who have been unable to make a small number of payments to have their loan delinquency status reset to current so that their credit score is not affected by the overdue balances. Loans that have been re-aged remain classified as impaired until they have demonstrated a history of payment performance against the original contractual terms for at least 12 months. A temporary or permanent modification may also lead to a re‑ageing of a loan although a loan may be re-aged without any modification to its original terms and conditions. Where loans have been granted multiple concessions, subject to the qualifying criteria discussed below, the concession is deemed to have been made due to concern regarding the borrower's ability to pay, and the loan is disclosed as impaired. The loan remains disclosed as impaired from that date forward until the borrower has demonstrated a history of repayment performance for the period of time required for either modifications or re-ages, as described above.

Qualifying criteria

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

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

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

2012 compared with 2011

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

Gross loan portfolio of HSBC Finance real estate secured balances

(Unaudited)

	Re-aged13		Modified and re-aged		Modified		Total re- negotiated loans	Total non- renegotiated loans			Total gross loans		Total impair- ment allowances		Impair- ment allowances/ gross loans
	US$m		US$m		US$m		US$m		US$m		US$m		US$m		%
31 December 2012 ...	9,640		11,660		1,121		22,421		16,261		38,743		4,481		12
31 December 2011 .....	10,265		12,829		1,494		24,588		19,540		44,128		5,088		12

For footnote, see page 249.

Movement in HSBC Finance renegotiated real estate balances

(Unaudited)

	2012
	US$m
At 1 January ................................................................................................................................................	24,588
Additions ............................................................................................................................................................	1,221
Payments ...........................................................................................................................................................	(1,133)
Write-offs ..........................................................................................................................................................	(1,796)
Transfer to 'Assets held for sale' and 'Other assets' ...........................................................................................	(459)
At 31 December ...........................................................................................................................................	22,421

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

(Unaudited)

	Number of renegotiated loans (000s)								Total    number of loans (000s)
	Re-aged		Modified and re-aged		Modified		Total
31 December 2012 ...............................................	117		107		11		235		427
31 December 2011 .................................................	121		112		14		246		469

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

Corporate and commercial forbearance

(Unaudited)

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

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

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

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

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

Impaired loans

(Audited)

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

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

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

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

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

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

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

Movement in impaired loans by geographical region

(Unaudited)

	Europe		Hong      Kong		Rest of      Asia-    Pacific		MENA		North America		Latin America		Total
	US$m		US$m		US$m		US$m		US$m		US$m		US$m
Impaired loans at 1 January 2012 .....................	11,819		608		1,070		2,445		22,758		3,039		41,739
Personal .......................................................	2,797		190		388		428		21,094		1,646		26,543
Corporate and commercial ............................	8,113		372		667		1,798		1,517		1,391		13,858
Financial2 .....................................................	909		46		15		219		147		2		1,338
Classified as impaired during the year ................	3,482		292		924		648		8,130		4,507		17,983
Personal .......................................................	933		169		549		73		7,363		2,807		11,894
Corporate and commercial ............................	2,481		123		375		531		739		1,696		5,945
Financial2 .....................................................	68		-		-		44		28		4		144
Transferred from impaired to unimpaired during the year ..............................................	(1,164)		(47)		(85)		(321)		(4,223)		(1,765)		(7,605)
Personal .......................................................	(279)		(38)		(69)		(32)		(4,124)		(1,124)		(5,666)
Corporate and commercial ............................	(858)		(5)		(15)		(289)		(99)		(640)		(1,906)
Financial2 .....................................................	(27)		(4)		(1)		-		-		(1)		(33)
Amounts written off  ........................................	(1,891)		(217)		(564)		(264)		(3,514)		(2,112)		(8,562)
Personal .......................................................	(632)		(127)		(373)		(96)		(3,227)		(1,521)		(5,976)
Corporate and commercial ............................	(1,212)		(90)		(191)		(143)		(202)		(590)		(2,428)
Financial2 .....................................................	(47)		-		-		(25)		(85)		(1)		(158)
Net repayments and other.................................	(1,101)		(159)		(198)		(34)		(2,806)		(481)		(4,779)
Personal .......................................................	(353)		(22)		(56)		(5)		(2,380)		(228)		(3,044)
Corporate and commercial ............................	(466)		(133)		(136)		(26)		(363)		(253)		(1,377)
Financial2 .....................................................	(282)		(4)		(6)		(3)		(63)		-		(358)
At 31 December 2012 ....................................	11,145		477		1,147		2,474		20,345		3,188		38,776
Personal .......................................................	2,466		172		439		368		18,726		1,580		23,751
Corporate and commercial ............................	8,058		267		700		1,872		1,592		1,604		14,093
Financial2 .....................................................	621		38		8		234		27		4		932

For footnote, see page 249.

Collateral

Collateral and other credit enhancements held

(Audited)

Loans and advances held at amortised cost

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

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

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

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

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

Personal lending

Residential mortgage loans including loan commitments by level of collateral

(Audited)

	Europe		Hong          Kong		Rest of Asia-Pacific		MENA		North     America		Latin     America		Total
	US$m		US$m		US$m		US$m		US$m		US$m		US$m
At 31 December 2012
Fully collateralised .................	141,673		53,478		43,662		2,106		59,799		5,193		305,911
Loan to value ('LTV') ratio: - less than 25% ..................	11,733		8,090		4,438		125		3,703		319		28,408
- 25% to 50% ....................	36,038		30,155		12,752		623		10,934		1,522		92,022
- 51% to 75% ....................	60,395		12,770		19,625		1,001		26,582		2,295		122,668
- 76% to 90% ....................	27,118		1,931		6,195		189		12,307		871		48,611
- 91% to 100% ..................	6,389		532		652		168		6,273		186		14,200
Partially collateralised:
- greater than 100% LTV ...	2,967		2		376		85		10,210		16		13,656
- collateral value ................	2,565		1		323		76		8,684		12		11,661
Total residential mortgages ....	144,640		53,480		44,038		2,191		70,009		5,209		319,567
At 31 December 2011
Fully collateralised .................	125,702		46,532		38,381		1,761		60,794		4,891		278,061
LTV ratio: - less than 25%  .................	9,898		5,364		2,383		58		3,576		282		21,561
- 25% to 50% ....................	31,601		19,643		9,978		336		10,593		1,350		73,501
- 51% to 75% ....................	52,656		17,748		18,006		895		25,138		2,221		116,664
- 76% to 90% ....................	23,919		2,884		7,624		304		13,590		876		49,197
- 91% to 100% ..................	7,628		893		390		168		7,897		162		17,138
Partially collateralised:
- greater than 100% LTV ...	3,275		484		295		174		12,503		102		16,833
- collateral value ................	2,821		466		37		135		10,566		24		14,049
Total residential mortgages ....	128,977		47,016		38,676		1,935		73,297		4,993		294,894

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

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

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

Other personal lending

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

Corporate, commercial and financial (non-bank) lending

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

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

(Audited)

	Europe		Hong          Kong		Rest of Asia-Pacific		MENA		North     America		Latin     America		Total
	US$m		US$m		US$m		US$m		US$m		US$m		US$m
At 31 December 2012
Rated CRR/EL 1 to 7
Not collateralised	7,068		10,790		3,647		569		181		2,083		24,338
Fully collateralised ........................	23,450		17,355		6,106		92		9,054		1,846		57,903
Partially collateralised (A)..................	3,088		1,476		1,150		33		1,063		903		7,713
- collateral value on A ...............	2,780		1,179		464		29		401		423		5,276
	33,606		29,621		10,903		694		10,298		4,832		89,954
Rated CRR/EL 8 to 10
Not collateralised	418		-		-		14		34		105		571
Fully collateralised ........................	1,261		2		60		8		408		141		1,880
LTV ratio: - less than 25% ...................	34		-		1		-		25		10		70
- 25% to 50%	119		1		55		7		86		8		276
- 51% to 75%	437		-		2		-		69		28		536
- 76% to 90%	501		-		1		-		58		63		623
- 91% to 100% ...................	170		1		1		1		170		32		375
Partially collateralised (B) ..................	1,585		-		51		204		377		24		2,241
- collateral value on B ...............	938		-		15		111		265		13		1,342
	3,264		2		111		226		819		270		4,692
Total commercial real estate loans and advances .........	36,870		29,623		11,014		920		11,117		5,102		94,646
At 31 December 2011
Rated CRR/EL 1 to 7
Not collateralised	5,730		12,552		2,973		631		97		2,136		24,119
Fully collateralised ........................	24,547		11,734		6,929		65		8,506		1,706		53,487
Partially collateralised (C) ..................	3,099		916		1,032		50		1,635		999		7,731
- collateral value on C ...............	1,775		591		280		39		311		559		3,555
	33,376		25,202		10,934		746		10,238		4,841		85,337
Rated CRR/EL 8 to 10
Not collateralised	434		2		10		55		135		127		763
Fully collateralised ........................	1,413		2		23		74		521		196		2,229
LTV ratio: - less than 25% ...................	24		-		-		-		65		9		98
- 25% to 50%	140		2		-		-		5		21		168
- 51% to 75%	935		-		1		-		217		28		1,181
- 76% to 90%	159		-		2		74		61		117		413
- 91% to 100% ...................	155		-		20		-		173		21		369
Partially collateralised (D) .................	1,921		-		42		181		401		3		2,548
- collateral value on D ...............	1,083		-		26		89		246		1		1,445
	3,768		4		75		310		1,057		326		5,540
Total commercial real estate loans and advances .........	37,144		25,206		11,009		1,056		11,295		5,167		90,877

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

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

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

(Audited)

	Europe		Hong          Kong		Rest of Asia-Pacific		MENA		North     America		Latin     America		Total
	US$m		US$m		US$m		US$m		US$m		US$m		US$m
At 31 December 2012
Not collateralised	5,110		260		572		1,186		533		1,023		8,684
Fully collateralised ........................	1,463		82		146		132		478		284		2,585
LTV ratio: - less than 25% ...................	77		3		11		-		11		68		170
- 25% to 50%	192		4		62		6		49		84		397
- 51% to 75%	290		39		31		33		131		61		585
- 76% to 90%	196		24		11		18		96		17		362
- 91% to 100% ...................	708		12		31		75		191		54		1,071
Partially collateralised (A)..................	1,106		84		251		828		753		273		3,295
- collateral value on A ...............	628		41		89		124		359		108		1,349
	7,679		426		969		2,146		1,764		1,580		14,564
At 31 December 2011
Not collateralised	5,583		349		795		1,695		801		1,546		10,769
Fully collateralised ........................	1,765		63		147		60		441		602		3,078
LTV ratio: - less than 25% ...................	173		4		10		3		16		106		312
- 25% to 50%	274		47		29		3		38		74		465
- 51% to 75%	587		11		32		31		51		96		808
- 76% to 90%	153		-		32		20		128		21		354
- 91% to 100% ...................	578		1		44		3		208		305		1,139
Partially collateralised (B)...................	1,367		100		156		498		1,206		390		3,717
- collateral value on B ...............	558		55		76		103		541		214		1,547
	8,715		512		1,098		2,253		2,448		2,538		17,564

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

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

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

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

Loans and advances to banks

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

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

(Audited)

	Europe		Hong          Kong		Rest of Asia-Pacific		MENA		North     America		Latin     America		Total
	US$m		US$m		US$m		US$m		US$m		US$m		US$m
At 31 December 2012
Not collateralised ...................	36,043		24,622		40,694		7,290		9,050		12,838		130,537
Fully collateralised .................	25,496		2,294		5,667		-		811		3,691		37,959
Partially collateralised (A)......	62		1,459		1,207		-		-		-		2,728
- collateral value on A ........	61		1,452		1,135		-		-		-		2,648
	61,601		28,375		47,568		7,290		9,861		16,529		171,224
At 31 December 2011
Not collateralised ...................	25,896		34,892		42,586		9,337		14,132		19,516		146,359
Fully collateralised .................	31,515		1,365		6,927		32		978		1,238		42,055
Partially collateralised (B).......	146		50		445		-		784		114		1,539
- collateral value on B ........	104		50		207		-		702		88		1,151
	57,557		36,307		49,958		9,369		15,894		20,868		189,953

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

Derivatives

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

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

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

Other credit risk exposures

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

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

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

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

Collateral and other credit enhancements obtained 

(Audited)

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

	Carrying amount at 31 December
	2012		2011
	US$m		US$m
Nature of assets
Residential property ................	353		420
Commercial and industrial property ..............................	88		64
Other ......................................	3		17
	444		501

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

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

Impairment of loans and advances

(Audited)

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

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

Impairment allowances on loans and advances to customers by geographical region

(Audited)

	Europe		Hong      Kong		Rest of      Asia-    Pacific		MENA		North America		Latin America		Total
	US$m		US$m		US$m		US$m		US$m		US$m		US$m
At 31 December 2012
Gross loans and advances to customers
Individually assessed impaired loans14 (A) ....	9,959		398		1,019		2,251		1,849		1,295		16,771
Collectively assessed15 (B) ...........................	458,802		173,688		137,846		27,629		144,523		54,476		996,964
Impaired loans14 .......................................	1,121		79		128		197		18,482		1,893		21,900
Non-impaired loans16 ...............................	457,681		173,609		137,718		27,432		126,041		52,583		975,064
Total (C) .....................................................	468,761		174,086		138,865		29,880		146,372		55,771		1,013,735
Impairment allowances (C) ..........................	5,321		473		746		1,794		5,616		2,162		16,112
Individually assessed (A) ...........................	3,781		192		442		1,323		428		406		6,572
Collectively assessed (B) ..........................	1,540		281		304		471		5,188		1,756		9,540
Net loans and advances ................................	463,440		173,613		138,119		28,086		140,756		53,609		997,623
	%		%		%		%		%		%		%
Allowances as a percentage of loans and advances:
- individually assessed (A) ........................	38.0		48.2		43.4		58.8		23.1		31.4		39.2
- collectively assessed (B) ........................	0.3		0.2		0.2		1.7		3.6		3.2		1.0
- total (C) ................................................	1.1		0.3		0.5		6.0		3.8		3.9		1.6
	US$m		US$m		US$m		US$m		US$m		US$m		US$m
At 31 December 2011
Gross loans and advances to customers
Individually assessed impaired loans14 (E) .....	10,490		519		963		2,187		1,832		563		16,554
Collectively assessed15 (F) ............................	429,088		157,727		123,687		25,402		148,096		57,386		941,386
Impaired loans14 .......................................	1,261		85		106		238		20,864		2,476		25,030
Non-impaired loans16 ...............................	427,827		157,642		123,581		25,164		127,232		54,910		916,356
Total (G) .....................................................	439,578		158,246		124,650		27,589		149,928		57,949		957,940
Impairment allowances (G) ..........................	5,242		581		782		1,714		7,181		2,011		17,511
Individually assessed (E) ...........................	3,754		288		505		1,250		416		324		6,537
Collectively assessed (F) ...........................	1,488		293		277		464		6,765		1,687		10,974
Net loans and advances ................................	434,336		157,665		123,868		25,875		142,747		55,938		940,429
	%		%		%		%		%		%		%
Allowances as a percentage of loans and advances:
- individually assessed (E) ........................	35.8		55.5		52.4		57.2		22.7		57.4		39.5
- collectively assessed (F) ........................	0.3		0.2		0.2		1.8		4.6		2.9		1.2
- total (G) ................................................	1.2		0.4		0.6		6.2		4.8		3.5		1.8

For footnotes, see page 249.

Net loan impairment charge to the income statement by geographical region

(Unaudited)

	Europe		Hong      Kong		Rest of      Asia-    Pacific		MENA		North America		Latin America		Total
	US$m		US$m		US$m		US$m		US$m		US$m		US$m
2012
Individually assessed impairment allowances .....	1,387		(8)		97		205		258		200		2,139
New allowances .............................................	1,960		32		239		369		380		292		3,272
Release of allowances no longer required .......	(516)		(34)		(117)		(133)		(85)		(49)		(934)
Recoveries of amounts previously written off	(57)		(6)		(25)		(31)		(37)		(43)		(199)
Collectively assessed impairment allowances ....	487		92		243		50		3,204		1,945		6,021
New allowances net of allowance releases ......	839		117		368		94		3,296		2,254		6,968
Recoveries of amounts previously written off	(352)		(25)		(125)		(44)		(92)		(309)		(947)
Total charge for impairment losses ..................	1,874		84		340		255		3,462		2,145		8,160
Customers ....................................................	1,874		84		340		255		3,462		2,145		8,160
2011
Individually assessed impairment allowances .....	1,262		18		67		199		243		126		1,915
New allowances .............................................	1,670		79		207		328		398		222		2,904
Release of allowances no longer required .......	(378)		(41)		(114)		(80)		(111)		(74)		(798)
Recoveries of amounts previously written off	(30)		(20)		(26)		(49)		(44)		(22)		(191)
Collectively assessed impairment allowances ....	640		99		207		93		6,807		1,744		9,590
New allowances net of allowance releases ......	1,181		126		366		147		6,894		2,111		10,825
Recoveries of amounts previously written off	(541)		(27)		(159)		(54)		(87)		(367)		(1,235)
Total charge for impairment losses ..................	1,902		117		274		292		7,050		1870		11,505
Banks ...........................................................	(11)		-		-		-		(5)		-		(16)
Customers ....................................................	1,913		117		274		292		7,055		1,870		11,521

2012 compared with 2011

(Unaudited)

The following commentary is on a constant currency basis.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

END

 

 

ACSUUSSRONASRAR