Annual Financial Report - 28 of 56

RNS Number : 6300S

HSBC Holdings PLC

18 March 2016

 

		Europe		Asia		MENA		North           America		Latin           America		Total
		$m		$m		$m		$m		$m		$m
Individually assessed impairment allowances		617		351		32		190		590		1,780
- new allowances		1,112		542		134		298		738		2,824
- release of allowances no longer required		(486)		(171)		(95)		(88)		(90)		(930)
- recoveries of amounts previously written off		(9)		(20)		(7)		(20)		(58)		(114)
Collectively assessed impairment allowances10		462		293		(33)		110		1,443		2,275
- new allowances net of allowance releases		757		426		2		205		1,726		3,116
- recoveries of amounts previously written off		(295)		(133)		(35)		(95)		(283)		(841)
Total loan impairment charge for the year ended 31 December 2014		1,079		644		(1)		300		2,033		4,055

For footnote, see page 191.

On a reported basis, loan impairment charges of $3.6bn were $0.5bn lower than in 2014, primarily due to favourable currency translation in Latin America and Europe.

The commentary that follows is on a constant currency basis, while tables are presented on a reported basis.

Loan impairment charges increased by $219m compared with 2014. Notably, in the fourth quarter of 2015, our loan impairment charges increased compared with the third quarter following a rise in individually assessed loan impairment charges in a small number of countries. This was reflective of specific circumstances associated with those countries with no common underlying theme. In addition, we increased our collectively assessed loan impairment allowances on exposures related to the oil and gas industry by $0.2bn. This was primarily in North America, Middle East and North Africa, and Asia.

The commentary that follows sets out in more detail the factors that have contributed to movements in loan impairment charges compared with 2014.

Collectively assessed loan impairment allowances rose by $221m, mainly in Middle East and North Africa, North America and Asia, partly offset in Europe. It arose from the following:

·   in Middle East and North Africa (up by $167m), this was mainly in the UAE and reflected increased impairment allowances on our residential mortgage book following a review of the quality and value of collateral. In addition, loan impairment allowances increased on our corporate and commercial exposures, notably in the oil and foodstuffs industries;

·   in North America (up by $132m) and Asia (up by $108m), the increase was in the 'other commercial' sector. This reflected an increase in allowances against our oil and gas exposures in the regions. In our US CML portfolio, loan impairment allowances on residential mortgages were higher than in 2014 following lower favourable market value adjustments of underlying properties as improvements in housing market conditions were less pronounced in 2015.

·   in Europe, collectively assessed loan impairment allowances were $192m lower as 2014 included additional impairment charges from revisions to certain estimates used in our corporate collective loan impairment calculation.

Individually assessed loan impairment allowances were broadly unchanged from 2014. This reflected decreases in Latin America, Europe and Asia which were offset by increases in Middle East and North Africa and in North America. This included the following:

·   in Latin America (down by $95m), Europe (down by $44m) and Asia (down by $44m), we saw reductions in individually assessed loan impairment allowances as 2014 included significant impairment charges related to corporate and commercial exposures in our respective regions. In Asia, the reduction was partly offset by an increase in loan impairment allowances against a small number of customers in Indonesia; and

·   in Middle East and North Africa (up by $134m) and North America (up by $47m), individually assessed loan impairment allowances increased. In the former, this primarily related to higher loan impairment allowances on food wholesalers, while in North America the rise was in the oil and gas sector.

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

		Europe		Asia		MENA		North       America		Latin       America		Total
		%		%		%		%		%		%
New allowances net of allowance releases		0.31		0.23		1.07		0.41		5.37		0.48
Recoveries		(0.11)		(0.05)		(0.11)		(0.06)		(0.50)		(0.09)
Total charge for impairment losses at 31 December 2015		0.20		0.18		0.96		0.35		4.87		0.39
Amount written off net of recoveries		0.25		0.12		0.97		0.45		3.94		0.37
New allowances net of allowance releases		0.37		0.22		0.14		0.32		5.00		0.53
Recoveries		(0.08)		(0.04)		(0.14)		(0.09)		(0.72)		(0.10)
Total charge for impairment losses at 31 December 2014		0.29		0.18		-		0.23		4.28		0.43
Amount written off net of recoveries		0.49		0.13		0.58		0.97		3.59		0.58

Movement in impairment allowances by industry sector and by geographical region

		Europe		Asia		MENA		North       America		Latin       America		Total
		$m		$m		$m		$m		$m		$m
Impairment allowances at 1 January 2015		4,455		1,356		1,406		2,640		2,529		12,386
Amounts written off
Personal		(627)		(416)		(114)		(554)		(996)		(2,707)
- first lien residential mortgages		(12)		(6)		(1)		(344)		(24)		(387)
- other personal3		(615)		(410)		(113)		(210)		(972)		(2,320)
Corporate and commercial		(657)		(179)		(222)		(106)		(309)		(1,473)
- manufacturing and international trade and services		(234)		(149)		(214)		(28)		(213)		(838)
- commercial real estate and other property-related		(244)		(5)		(8)		(57)		(30)		(344)
- other commercial4		(179)		(25)		-		(21)		(66)		(291)
Financial		(12)		-		-		(2)		-		(14)
Total amounts written off		(1,296)		(595)		(336)		(662)		(1,305)		(4,194)
Recoveries of amounts written off in previous years
Personal		340		135		30		57		119		681
- first lien residential mortgages		6		4		-		26		(17)		19
- other personal3		334		131		30		31		136		662
Corporate and commercial		46		30		3		18		27		124
- manufacturing and international trade and services		16		20		2		8		15		61
- commercial real estate and other property-related		24		5		-		5		2		36
- other commercial4		6		5		1		5		10		27
Financial		2		-		-		1		-		3
Total recoveries of amounts written off in previous years		388		165		33		76		146		808
Charge to income statement		709		681		299		469		1,434		3,592
Exchange and other movements11		(387)		(82)		16		(482)		(2,084)		(3,019)
Impairment allowances at 31 December 2015		3,869		1,525		1,418		2,041		720		9,573
Impairment allowances against banks:
- individually assessed		-		-		18		-		-		18
Impairment allowances against customers:
- individually assessed		2,661		908		1,068		327		438		5,402
- collectively assessed10		1,208		617		332		1,714		282		4,153
Impairment allowances at 31 December 2015		3,869		1,525		1,418		2,041		720		9,573
Impairment allowances at 1 January 2014		5,598		1,214		1,583		4,242		2,564		15,201
Amounts written off
Personal		(724)		(463)		(157)		(1,030)		(1,359)		(3,733)
- first lien residential mortgages		(21)		(17)		(4)		(731)		(40)		(813)
- other personal3		(703)		(446)		(153)		(299)		(1,319)		(2,920)
Corporate and commercial		(1,202)		(146)		(47)		(346)		(684)		(2,425)
- manufacturing and international trade and services		(732)		(86)		(41)		(81)		(428)		(1,368)
- commercial real estate and other property-related		(342)		(53)		(6)		(153)		(39)		(593)
- other commercial4		(128)		(7)		-		(112)		(217)		(464)
Financial		(203)		-		(8)		(6)		(4)		(221)
Total amounts written off		(2,129)		(609)		(212)		(1,382)		(2,047)		(6,379)
Recoveries of amounts written off in previous years
Personal		271		143		35		86		283		818
- first lien residential mortgages		3		3		-		40		33		79
- other personal3		268		140		35		46		250		739
Corporate and commercial		29		9		7		25		58		128
- manufacturing and international trade and services		19		7		7		6		46		85
- commercial real estate and other property-related		11		-		-		3		1		15
- other commercial4		(1)		2		-		16		11		28
Financial		4		1		-		4		-		9
Total recoveries of amounts written off in previous years		304		153		42		115		341		955
Charge to income statement		1,079		644		(1)		300		2,033		4,055
Exchange and other movements11		(397)		(46)		(6)		(635)		(362)		(1,446)
Impairment allowances at 31 December 2014		4,455		1,356		1,406		2,640		2,529		12,386
Impairment allowances against banks:
- individually assessed		31		-		18		-		-		49
Impairment allowances against customers:
- individually assessed		2,981		812		1,110		276		1,016		6,195
- collectively assessed10		1,443		544		278		2,364		1,513		6,142
Impairment allowances at 31 December 2014		4,455		1,356		1,406		2,640		2,529		12,386

For footnotes, see page 191.

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

(Audited)

		Banks		Customers
		individually                  assessed		Individually                  assessed		Collectively                 assessed10		Total
		$m		$m		$m		$m
At 1 January 2015		49		6,195		6,142		12,386
Amounts written off		-		(1,368)		(2,826)		(4,194)
Recoveries of loans and advances previously written off		-		86		722		808
Charge to income statement		(11)		1,516		2,087		3,592
Exchange and other movements11		(20)		(1,027)		(1,972)		(3,019)
At 31 December 2015		18		5,402		4,153		9,573
Impairment allowances:
on loans and advances to customers				5,402		4,153		9,555
- personal				426		2,453		2,879
- corporate and commercial				4,800		1,635		6,435
- non-bank financial institutions				176		65		241
		%		%		%		%
as a percentage of loans and advances		-		0.6		0.4		0.9
		$m		$m		$m		$m
At 1 January 2014		58		7,072		8,071		15,201
Amounts written off		(6)		(2,313)		(4,060)		(6,379)
Recoveries of loans and advances previously written off		-		114		841		955
Charge to income statement		4		1,776		2,275		4,055
Exchange and other movements11		(7)		(454)		(985)		(1,446)
At 31 December 2014		49		6,195		6,142		12,386
Impairment allowances:
on loans and advances to customers				6,195		6,142		12,337
- personal				468		4,132		4,600
- corporate and commercial				5,532		1,909		7,441
- non-bank financial institutions				195		101		296
		%		%		%		%
as a percentage of loans and advances		-		0.6		0.6		1.1

For footnotes, see page 191.

Wholesale lending

On a reported basis and excluding the effects of the Brazilian reclassification of loans and advances to 'Assets held for sale', gross loans decreased by $32bn, mainly due to adverse foreign exchange effects.

The commentary that follows is on a constant currency basis, while tables are presented on a reported basis.

Wholesale lending increased by $0.5bn in the year. However, in Asia it fell by $9.6bn, mainly in Hong Kong and, to a lesser extent, mainland China and Taiwan. In Asia, the fourth quarter of 2015 saw lower than expected credit growth with a continuation of the slowdown in trade, the repayment of some existing corporate loans and slower demand for new lending.

In Europe, lending increased by $3.2bn, mainly in the UK and Germany. In the UK it rose by $1.9bn with increases in 'financial' partly offset by decreases in 'corporate and commercial', mainly relating to corporate overdraft balances where a small number of clients benefit from the use of net interest arrangements between overdrafts and deposits.

In Middle East and North Africa, overall lending reduced by $1.2bn with decreases of $3.2bn in 'financial' offset by increases of $2.0bn in 'corporate and commercial'.

In North America, lending increased by $7.5bn, mainly comprising $3.7bn in the US and $4.9bn in Canada. The increase in Canada included: $3.8bn following a change in balance sheet presentation where certain bankers' acceptances previously disclosed under 'Trading assets' were included in 'Loans and advances'; and $1.0bn relating to corporate overdraft balances and the use of net interest arrangements between overdraft and deposits. Comparatives have not been restated.

Excluding the effects of the Brazilian reclassification, lending in Latin America increased by $0.6bn, mainly in Argentina.

Total wholesale lending

		Europe		Asia		MENA		North            America		Latin           America		Total
		$m		$m		$m		$m		$m		$m
Corporate and commercial (A)		191,765		211,224		22,268		62,882		11,374		499,513
- manufacturing		39,003		34,272		2,504		17,507		2,572		95,858
- international trade and services		62,667		72,199		9,552		11,505		3,096		159,019
- commercial real estate		26,256		32,371		690		7,032		1,577		67,926
- other property-related		7,323		35,206		1,908		8,982		45		53,464
- government		3,653		1,132		1,695		203		772		7,455
- other commercial4		52,863		36,044		5,919		17,653		3,312		115,791
Financial		51,969		68,321		10,239		16,308		3,996		150,833
- non-bank financial institutions (B)		33,621		13,969		2,321		9,822		681		60,414
- banks (C)		18,348		54,352		7,918		6,486		3,315		90,419
Gross loans at 31 December 2015 (D)		243,734		279,545		32,507		79,190		15,370		650,346
Impairment allowances on wholesale lending
Corporate and commercial (a)		2,735		1,256		1,157		777		510		6,435
- manufacturing		528		254		135		140		49		1,106
- international trade and services		813		599		439		123		48		2,022
- commercial real estate		613		35		145		76		343		1,212
- other property-related		237		72		267		55		1		632
- government		6		-		-		-		2		8
- other commercial		538		296		171		383		67		1,455
Financial		194		13		22		30		-		259
- non-bank financial institutions (b)		194		13		4		30		-		241
- banks (c)		-		-		18		-		-		18
Impairment allowances at 31 December 2015 (d)		2,929		1,269		1,179		807		510		6,694
		%		%		%		%		%		%
(a) as a percentage of (A)		1.4		0.6		5.2		1.2		4.5		1.3
(b) as a percentage of (B)		0.6		0.1		0.2		0.3		-		0.4
(c) as a percentage of (C)		-		-		0.2		-		-		-
(d) as a percentage of (D)		1.2		0.5		3.6		1.0		3.3		1.0
		$m		$m		$m		$m		$m		$m
Corporate and commercial (E)		212,523		220,799		20,588		57,993		30,722		542,625
- manufacturing		39,456		37,767		2,413		15,299		12,051		106,986
- international trade and services		76,629		72,814		9,675		13,484		8,189		180,791
- commercial real estate		28,187		35,678		579		6,558		2,291		73,293
- other property-related		7,126		34,379		1,667		8,934		281		52,387
- government		2,264		1,195		1,552		164		968		6,143
- other commercial4		58,861		38,966		4,702		13,554		6,942		123,025
Financial		45,081		76,957		13,786		16,439		10,753		163,016
- non-bank financial institutions (F)		23,103		13,997		3,291		9,034		1,393		50,818
- banks (G)		21,978		62,960		10,495		7,405		9,360		112,198
Gross loans at 31 December 2014 (H)		257,604		297,756		34,374		74,432		41,475		705,641
Impairment allowances on wholesale lending
Corporate and commercial (e)		3,112		1,089		1,171		608		1,461		7,441
- manufacturing		529		242		141		152		348		1,412
- international trade and services		877		533		536		157		237		2,340
- commercial real estate		909		44		147		101		476		1,677
- other property-related		203		55		219		57		12		546
- government		4		-		1		-		-		5
- other commercial		590		215		127		141		388		1,461
Financial		252		13		39		39		2		345
- non-bank financial institutions (f)		221		13		21		39		2		296
- banks (g)		31		-		18		-		-		49
Impairment allowances at 31 December 2014 (h)		3,364		1,102		1,210		647		1,463		7,786
		%		%		%		%		%		%
(e) as a percentage of (E)		1.5		0.5		5.7		1.0		4.8		1.4
(f) as a percentage of (F)		0.9		0.1		0.6		0.4		0.1		0.6
(g) as a percentage of (G)		0.1		-		0.2		-		-		-
(h) as a percentage of (H)		1.3		0.4		3.5		0.9		3.5		1.1

For footnote, see page 191.

Commercial real estate

Commercial real estate lending

		Europe		Asia		MENA		North         America		Latin         America		Total
		$m		$m		$m		$m		$m		$m
Neither past due nor impaired		24,533		32,182		466		6,659		1,086		64,926
Past due but not impaired		89		119		25		212		9		454
Impaired loans		1,634		70		199		161		482		2,546
Total gross loans and advances at 31 December 2015		26,256		32,371		690		7,032		1,577		67,926
Of which:
- renegotiated loans12		1,586		6		182		150		210		2,134
Impairment allowances		613		35		145		76		343		1,212
Neither past due nor impaired		25,860		35,430		333		6,136		1,535		69,294
Past due but not impaired		18		170		47		100		28		363
Impaired loans		2,309		78		199		322		728		3,636
Total gross loans and advances at 31 December 2014		28,187		35,678		579		6,558		2,291		73,293
Of which:
- renegotiated loans12		1,954		19		183		191		377		2,724
Impairment allowances		909		44		147		101		476		1,677

For footnote, see page 191.

Commercial real estate lending includes the financing of corporate, institutional and high net worth individuals who are investing primarily in income-producing assets and, to a lesser extent, in their construction and development. The business focuses mainly on traditional core asset classes such as retail, offices, light industrial and residential building projects. The portfolio is globally diversified with larger concentrations in Hong Kong, the UK, the US and Canada.

In more developed markets, our exposure mainly comprises the financing of investment assets, the redevelopment of existing stock and the augmentation of both commercial and residential markets to support economic and population growth. In lesser developed commercial real estate markets our exposures comprise lending for development assets on relatively short tenors with a particular focus on supporting the larger, better capitalised developers involved in residential construction or in assets supporting economic expansion.

Our global exposure is centred largely on cities representing key locations of economic, political or cultural significance. In many lesser developed markets, industry is evolving to move away from the development and rapid construction of recent years to increasingly focus on investment stock consistent with more developed markets.

Excluding the effects of the Brazilian reclassification, commercial real estate lending was lower by $4.5bn including decreases of $3.2bn relating to adverse foreign exchange movements.

The commentary that follows is on a constant currency basis, while tables are presented on a reported basis.

The commercial real estate lending was lower by $1.3bn, largely due to a decrease of $2.6bn in Asia, mainly in Hong Kong and, to a lesser extent, mainland China and Singapore. The decrease in Asia was mainly due to the repayment and maturity of loans and was partly offset by increases of $1.0bn in North America and $0.4bn in Mexico. Europe and Middle East and Africa remained largely unchanged.

Refinance risk in commercial real estate

Commercial real estate lending tends to require the repayment of a significant proportion of the principal at maturity. Typically, a customer will arrange repayment through the acquisition of a new loan to settle the existing debt. Refinance risk is the risk that a customer, being unable to repay the debt on maturity, fails to refinance it at commercial rates. We monitor our commercial real estate portfolio closely, assessing those drivers that may indicate potential issues with refinancing. The principal driver is the vintage of the loan, when origination reflected previous market norms which do not apply in the current market. Examples might be higher loan-to-value ('LTV') ratios and/or lower interest cover ratios. The range of refinancing sources in the local market is also an important consideration, with risk increasing when lenders are restricted to banks and when bank liquidity is limited. In addition, underlying fundamentals such as the reliability of tenants, the ability to let and the condition of the property are important as they influence property values.

Commercial real estate loans and advances maturity analysis

		Europe		Asia		MENA		North America		Latin America		Total
		$m		$m		$m		$m		$m		$m
On demand, overdrafts or revolving
< 1 year13		6,830		8,811		252		2,992		694		19,579
1-2 years		4,367		5,934		66		939		102		11,408
2-5 years		11,459		11,399		235		2,037		138		25,268
> 5 years		3,600		6,227		137		1,064		643		11,671
At 31 December 2015		26,256		32,371		690		7,032		1,577		67,926
On demand, overdrafts or revolving
< 1 year13		7,382		9,810		264		1,855		1,325		20,636
1-2 years		4,643		6,689		24		1,158		205		12,719
2-5 years		11,686		12,156		156		2,131		320		26,449
> 5 years		4,476		7,023		135		1,414		441		13,489
At 31 December 2014		28,187		35,678		579		6,558		2,291		73,293

For footnote, see page 191.

Collateral on loans and advances

Collateral held is analysed separately below for commercial real estate and for other corporate, commercial and financial (non-bank) lending. This reflects the greater correlation between collateral performance and principal repayment in the commercial real estate sector than applies to other lending. In each case, the analysis includes off‑balance sheet loan commitments, primarily undrawn credit lines.

The collateral measured in the tables below consists of fixed first charges on real estate and charges over cash and marketable financial instruments. The values in the tables represent the expected market value on an open market basis; no adjustment has been made to the collateral for any expected costs of recovery. Cash is valued at its nominal value and marketable securities at their fair value. The LTV ratios presented are calculated by directly associating loans and advances with the collateral that individually and uniquely supports each facility. When collateral assets are shared by multiple loans and advances, whether specifically or, more generally, by way of an all monies charge, the collateral value is pro-rated across the loans and advances protected by the collateral.

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 are not measured in the tables below. While such mitigants have value, often providing rights in insolvency, their assignable value is not sufficiently certain and they are therefore assigned no value for disclosure purposes.

For impaired loans the collateral values cannot be directly compared with impairment allowances recognised. The LTV tables below use open market values with no adjustments. Impairment allowances are calculated on a different basis, by considering other cash flows and adjusting collateral values for costs of realising collateral as explained further on page 202.

Commercial real estate loans and advances

The value of commercial real estate collateral is determined by using a combination of professional and internal valuations and physical inspections. Due to the complexity of valuing collateral for commercial real estate, local valuation policies determine the frequency of review on the basis of local market conditions. Revaluations are sought with greater frequency as concerns over the performance of the collateral or the direct obligor increase. Revaluations may also be sought where customers amend their banking requirements, resulting in the Group extending further funds or other significant rearrangements of exposure or collateral, which may change the customer risk profile. As a result, the real estate collateral values used for CRR1-7 might date back to the last point at which such considerations applied. For CRR 8 and 9-10 almost all collateral would have been revalued within the last three years.

In Hong Kong, market practice is typically for lending to major property companies to be either 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.

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

(Audited)

		Europe		Asia		MENA		North            America		Latin            America		Total
		$m		$m		$m		$m		$m		$m
Rated CRR/EL 1 to 7
Not collateralised		4,498		12,329		499		8		500		17,834
Fully collateralised		25,773		26,270		36		9,997		542		62,618
Partially collateralised (A)		3,025		1,924		-		1,264		52		6,265
- collateral value on A		2,106		1,175		-		981		8		4,270
		33,296		40,523		535		11,269		1,094		86,717
Rated CRR/EL 8
Not collateralised		28		-		-		-		-		28
Fully collateralised		668		4		-		9		1		682
LTV ratio:
- less than 50%		86		-		-		5		1		92
- 51% to 75%		377		4		-		4		-		385
- 76% to 90%		174		-		-		-		-		174
- 91% to 100%		31		-		-		-		-		31
Partially collateralised (B)		120		1		-		1		-		122
- collateral value on B		87		-		-		-		-		87
		816		5		-		10		1		832
Rated CRR/EL 9 to 10
Not collateralised		65		51		5		2		299		422
Fully collateralised		900		18		7		76		123		1,124
LTV ratio:
- less than 50%		174		10		7		15		15		221
- 51% to 75%		425		2		-		27		59		513
- 76% to 90%		140		2		-		10		4		156
- 91% to 100%		161		4		-		24		45		234
Partially collateralised (C)		716		5		181		66		64		1,032
- collateral value on C		397		3		89		35		31		555
		1,681		74		193		144		486		2,578
At 31 December 2015		35,793		40,602		728		11,423		1,581		90,127
Rated CRR/EL 1 to 7
Not collateralised		5,351		16,132		361		87		1,719		23,650
Fully collateralised		25,873		26,323		23		9,093		556		61,868
Partially collateralised (D)		1,384		1,599		-		1,819		152		4,954
- collateral value on D		1,032		901		-		1,199		47		3,179
		32,608		44,054		384		10,999		2,427		90,472
Rated CRR/EL 8
Not collateralised		34		7		-		9		2		52
Fully collateralised		568		23		-		30		1		622
LTV ratio:
- less than 50%		64		-		-		16		1		81
- 51% to 75%		222		11		-		10		-		243
- 76% to 90%		132		9		-		4		-		145
- 91% to 100%		150		3		-		-		-		153
Partially collateralised (E)		365		-		-		7		-		372
- collateral value on E		296		-		-		2		-		298
		967		30		-		46		3		1,046
Rated CRR/EL 9 to 10
Not collateralised		369		48		6		1		499		923
Fully collateralised		992		15		7		166		178		1,358
LTV ratio:
- less than 50%		78		6		7		28		10		129
- 51% to 75%		593		2		-		91		43		729
- 76% to 90%		167		2		-		17		53		239
- 91% to 100%		154		5		-		30		72		261
Partially collateralised (F)		1,085		15		181		37		50		1,368
- collateral value on F		664		5		89		30		13		801
		2,446		78		194		204		727		3,649
At 31 December 2014		36,021		44,162		578		11,249		3,157		95,167

Other corporate, commercial and financial (non-bank) loans are analysed separately below. For financing activities in other corporate and commercial lending, collateral value is not strongly correlated to principal repayment performance. Collateral values are generally refreshed when an obligor's general credit performance deteriorates and we have to
assess the likely performance of secondary sources of repayment should it prove necessary to rely on them.

Accordingly, the table below reports values only for customers with CRR 8 to 10, recognising that these loans and advances generally have valuations which are comparatively recent.

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

(Audited)

		Europe		Asia		MENA		North            America		Latin            America		Total
		$m		$m		$m		$m		$m		$m
Rated CRR/EL 8
Not collateralised		1,618		164		36		609		102		2,529
Fully collateralised		434		41		-		454		1		930
LTV ratio:
- less than 50%		65		13		-		95		1		174
- 51% to 75%		337		8		-		85		-		430
- 76% to 90%		28		18		-		168		-		214
- 91% to 100%		4		2		-		106		-		112
Partially collateralised (A)		109		47		1		179		-		336
- collateral value on A		73		17		-		58		-		148
		2,161		252		37		1,242		103		3,795
Rated CRR/EL 9 to 10
Not collateralised		2,850		889		814		80		244		4,877
Fully collateralised		824		440		188		323		78		1,853
LTV ratio:
- less than 50%		283		94		46		47		44		514
- 51% to 75%		346		149		3		47		8		553
- 76% to 90%		96		74		25		27		9		231
- 91% to 100%		99		123		114		202		17		555
Partially collateralised (B)		1,702		506		441		423		7		3,079
- collateral value on B		795		236		55		283		5		1,374
		5,376		1,835		1,443		826		329		9,809
At 31 December 2015		7,537		2,087		1,480		2,068		432		13,604
Rated CRR/EL 8
Not collateralised		2,051		237		15		320		227		2,850
Fully collateralised		629		56		72		331		11		1,099
LTV ratio:
- less than 50%		120		13		-		186		5		324
- 51% to 75%		293		-		-		72		6		371
- 76% to 90%		51		9		69		46		-		175
- 91% to 100%		165		34		3		27		-		229
Partially collateralised (C)		105		44		1		148		6		304
- collateral value on C		46		17		1		68		4		136
								68
		2,785		337		88		799		244		4,253
Rated CRR/EL 9 to 10
Not collateralised		4,185		939		813		62		1,420		7,419
Fully collateralised		615		143		147		231		124		1,260
LTV ratio:
- less than 50%		169		68		25		48		48		358
- 51% to 75%		136		27		19		39		35		256
- 76% to 90%		168		16		6		35		26		251
- 91% to 100%		142		32		97		109		15		395
Partially collateralised (D)		624		364		547		251		140		1,926
- collateral value on D		341		169		92		141		46		789
		5,424		1,446		1,507		544		1,684		10,605
At 31 December 2014		8,209		1,783		1,595		1,343		1,928		14,858

Other credit risk exposures

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

·   some securities issued by governments, banks and other financial institutions benefit from additional credit enhancement provided by government guarantees that cover the assets.

·   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 credit default swap ('CDS') protection.

Disclosure of the Group's holdings of ABSs and associated CDS protection is provided on page 153.

·   trading assets include loans and advances held with trading intent. These mainly consist of cash collateral posted to satisfy margin requirements on derivatives, settlement accounts, reverse repos and stock borrowing. There is limited credit risk on cash collateral posted since in the event of default of the counterparty these would be set-off against the related liability. Reverse repos and stock borrowing are by their nature collateralised.

Collateral accepted as security that the Group is permitted to sell or repledge under these arrangements is described on page 162 on the Financial Statements.

·  
the Group's maximum exposure to credit risk includes financial guarantees and similar contracts granted, as well as loan and other credit-related commitments. 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.

For further information on these arrangements, see Note 37 on the Financial Statements.

Derivatives

HSBC participates in transactions exposing us to counterparty credit risk. Counterparty credit risk is the risk of financial loss if the counterparty to a transaction defaults before satisfactorily settling it. It arises principally from OTC derivatives and securities financing transactions and is calculated in both the trading and non-trading books. Transactions vary in value by reference to a market factor such as interest rate, exchange rate or asset price.

The counterparty risk from derivative transactions is taken into account when reporting the fair value of derivative positions. The adjustment to the fair value is known as the credit value adjustment ('CVA').

For an analysis of CVA, see Note 13 on the Financial Statements.

The table below reflects by risk type the fair values and gross notional contract amounts of derivatives cleared through an exchange, central counterparty and non-central counterparty.

 

END

 

 

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