Interim Report - 15x of 25

RNS Number : 6291J

HSBC Holdings PLC

10 August 2012

Credit quality of financial instruments

The five classifications describing the credit quality of our lending, debt securities portfolios and derivatives are set out in the Appendix to Risk on page 183 and defined on page 191 of the Annual Report and Accounts 2011. Additional credit quality information in respect of our consolidated holdings of ABSs is provided on page 154.

During 2011, we amended our presentation of impaired loans for portfolios with significant levels of forbearance to provide more relevant information on the effect of forbearance on the credit risk of loans and advances. This change in presentation does not affect the accounting policy for the recognition of loan impairment allowances. Further details are provided on page 146.

For the purpose of the following disclosure, retail loans which are past due up to 89 days and are not otherwise classified as impaired in accordance with our disclosure convention (see page 146), are not disclosed within the expected loss ('EL') grade to which they relate, but are separately classified as past due but not impaired.

Distribution of financial instruments by credit quality

	Neither past due nor impaired				Past due			Impair-
			Satisfac-	Sub-	but not			ment
	Strong	Good	tory	standard	impaired	Impaired	allowances¹⁸		Total
	US$m	US$m	US$m	US$m	US$m	US$m		US$m	US$m

At 30 June 2012
Cash and balances at central banks ................................	146,337	1,364	210	-	-	-			147,911
Items in the course of collection from other banks ..........................................	10,628	173	274	-	-	-			11,075
Hong Kong Government certificates of indebtedness	21,283	-	-	-	-	-			21,283

Trading assets¹⁹ ....................	242,618	68,646	49,377	711					361,352
- treasury and other eligible bills ..............................	26,256	2,726	1,116	-					30,098
- debt securities .................	97,559	14,196	19,458	350					131,563
- loans and advances:
to banks .......................	60,832	26,423	7,474	101					94,830
to customers ................	57,971	25,301	21,329	260					104,861

Financial assets designated at fair value¹⁹ ........................	8,356	5,438	608	133					14,535
- treasury and other eligible bills ..............................	77	-	14	-					91
- debt securities .................	8,228	5,359	520	131					14,238
- loans and advances:
to banks .......................	51	-	74	2					127
to customers ................	-	79	-	-					79

Derivatives¹⁹ ........................	271,850	53,347	27,875	2,862					355,934

Loans and advances held at amortised cost ...................	611,942	259,989	217,188	26,981	17,517	40,832		(17,273)	1,157,176
- to banks .........................	142,693	28,284	10,531	639	12	88		(56)	182,191
- to customers²⁰ ................	469,249	231,705	206,657	26,342	17,505	40,744		(17,217)	974,985

Financial investments ...........	330,781	27,343	23,265	3,456	-	2,205			387,050
- treasury and other similar bills ..............................	62,669	4,691	4,093	99	-	-			71,552
- debt securities .................	268,112	22,652	19,172	3,357	-	2,205			315,498

Assets held for sale ...............	4,677	1,365	3,125	665	449	366		(106)	10,541
- disposal groups ...............	4,632	1,365	3,125	665	447	255		(106)	10,383
- non-current assets held for sale .............................	45	-	-	-	2	111		-	158

Other assets ..........................	11,908	7,672	12,403	1,604	290	520			34,397
- endorsements and acceptances ..................	2,172	4,807	4,849	945	5	4			12,782
- accrued income and other	9,736	2,865	7,554	659	285	516			21,615


	1,660,380	425,337	334,325	36,412	18,256	43,923		(17,379)	2,501,254

Distribution of financial instruments by credit quality (continued)

	Neither past due nor impaired				Past due			Impair-
			Satisfac-	Sub-	but not			ment
	Strong	Good	tory	standard	impaired	Impaired⁷	allowances¹⁸		Total
	US$m	US$m	US$m	US$m	US$m	US$m		US$m	US$m

At 30 June 2011
Cash and balances at central banks ................................	66,860	999	229	130	-	-			68,218
Items in the course of collection from other banks ..........................................	14,107	658	291	2	-	-			15,058
Hong Kong Government certificates of indebtedness	19,745	-	-	-	-	-			19,745

Trading assets¹⁹ ....................	318,456	51,432	62,735	5,609					438,232
- treasury and other eligible bills ..............................	21,488	1,197	1,214	-					23,899
- debt securities .................	173,233	10,726	22,215	2,631					208,805
- loans and advances:
to banks .......................	73,490	20,773	4,347	1,524					100,134
to customers ................	50,245	18,736	34,959	1,454					105,394

Financial assets designated at fair value¹⁹ ........................	7,856	5,356	6,700	65					19,977
- treasury and other eligible bills ..............................	207	-	-	-					207
- debt securities .................	6,660	5,085	6,686	65					18,496
- loans and advances:
to banks .......................	70	271	14	-					355
to customers ................	919	-	-	-					919

Derivatives¹⁹ ........................	211,625	34,718	11,096	3,233					260,672

Loans and advances held at amortised cost ...................	695,086	302,837	186,904	31,426	22,166	44,406		(18,894)	1,263,931
- to banks .........................	182,273	35,168	7,666	785	116	197		(162)	226,043
- to customers²⁰ ................	512,813	267,669	179,238	30,641	22,050	44,209		(18,732)	1,037,888

Financial investments ...........	351,940	24,373	25,631	4,103	-	2,603			408,650
- treasury and other similar bills ..............................	54,771	3,370	3,479	44	-	-			61,664
- debt securities .................	297,169	21,003	22,152	4,059	-	2,603			346,986

Other assets ..........................	11,982	7,285	15,106	1,525	637	254			36,789
- endorsements and acceptances ..................	1,801	4,228	4,776	499	16	18			11,338
- accrued income and other	10,181	3,057	10,330	1,026	621	236			25,451


	1,697,657	427,658	308,692	46,093	22,803	47,263		(18,894)	2,531,272

	Neither past due nor impaired				Past due			Impair-
			Satisfac-	Sub-	but not			ment
	Strong	Good	tory	standard	impaired	Impaired	allowances¹⁸		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 assets¹⁹ ...................	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 value¹⁹ .......................	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

Derivatives¹⁹ .......................	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 customers²⁰ ..............	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


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

For footnotes, see page 180.

We assess credit quality on all financial instruments which are subject to credit risk. The balance of these financial instruments at 30 June 2012 was US$2,501bn, of which US$1,661bn or 66% were classified as 'strong'. This percentage was broadly in line with 31 December 2011. The proportion of financial instruments classified as 'good' and 'satisfactory' remained broadly stable at 17% and 13%, respectively. The proportion of 'sub-standard' financial instruments remained low at 1% at 30 June 2012.

Loans and advances held at amortised cost on which credit quality has been assessed increased by 3% to US$1,157bn. At 30 June 2012, 75% of the Group's lending balances were classified as either 'strong' or 'good', broadly in line with the end of 2011.

Financial investments on which credit quality is assessed were US$387bn at 30 June 2012, compared with US$393bn at 31 December 2011. The majority of the Group's exposure was in the form of available-for-sale debt securities issued by government and government agencies classified as 'strong' and this proportion was broadly in line with the end of 2011.

Derivative assets on which credit quality has been assessed increased by 3% to US$356bn compared with 31 December 2011. This rise was mainly in Europe, driven by a significant rise in the fair value of interest rate contracts due to downward movements of yield curves in major currencies, reflecting the ongoing monetary response to the economic weakness and turmoil in the eurozone. The proportion of balances classified as 'strong' declined marginally from 81% at the end of 2011 to 76% at 30 June 2012 and the proportion of 'satisfactory' balances increased from 5% to 8%.

Trading assets on which credit quality has been assessed grew by 17% to US$361bn from 31 December 2011, as client activity increased from the subdued levels seen in the second half of 2011. This resulted in higher reverse repo and equity securities balances as well as a rise in settlement account balances, which vary significantly in proportion to the level of trading activity. The proportion of balances classified as 'strong' declined despite an overall increase in total balances classified as 'strong'. This reflected a rise in the reverse repo transactions with counterparties classified as 'good' and 'satisfactory', as well as the downgrade of certain eurozone countries which resulted in the movement of related debt securities balances from 'strong' to 'good'.

Cash and balances at central banks, on which credit quality has been assessed, increased by 14% to US$148bn, reflecting the deposit of surplus liquidity in Europe with the local central bank. Substantially all of the Group's cash and balances at central banks were classified as 'strong', with the most significant concentrations in Europe and North America.

Assets held for sale on which credit quality has been assessed declined, with reductions across all classifications, following the completion of the sale of our Card and Retail Services business in the US.

Past due but not impaired gross financial instruments

Past due but not impaired loans are those for which the customer is in the early stages of delinquency and has failed to make a payment, or a partial payment, in accordance with the contractual terms of the loan agreement. This is typically where a loan is past due up to 89 days 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 90 days or more where there are no other indicators of impairment, but where the value of collateral is sufficient to repay both the principal debt and all potential interest for at least one year; and short‑term trade facilities past due more than 90 days for technical reasons such as delays in documentation, but where there is no concern over the creditworthiness of the counterparty. Where groups of loans are collectively assessed for impairment, collective impairment allowances are recognised for loans classified as past due but not impaired.

At 30 June 2012, US$17.5bn of loans and advances held at amortised cost were classified as past due but not impaired (31 December 2011: US$20.0bn; 30 June 2011: US$22.2bn). The largest concentration of these balances was in HSBC Finance. The decrease in 2012 was primarily due to lower lending balances resulting in a reduction in early stage delinquency in the CML portfolio.

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

	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 30 June 2012 ...........................	2,259	1,084	2,548	980	7,874	2,772	17,517
At 30 June 2011⁷ ............................	2,528	1,071	2,377	1,292	11,447	3,451	22,166
At 31 December 2011 .....................	1,990	1,107	2,319	1,165	10,216	3,212	20,009

For footnote, see page 180.

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

	At 30 June 2012	At 30 June 2011⁷	At 31 December 2011
	US$m	US$m	US$m

Banks ................................................................................................................	12	116	39

Customers .........................................................................................................	17,505	22,050	19,970
Personal ........................................................................................................	12,153	16,689	13,951
Corporate and commercial .............................................................................	5,011	5,047	5,855
Financial ........................................................................................................	341	314	164


	17,517	22,166	20,009

For footnote, see page 180.

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

	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 30 June 2012
Loans and advances held at amortised cost ..	13,137	2,903	1,307	79	91	17,517
- to banks ................................................	12	−	−	−	−	12
- to customers .........................................	13,125	2,903	1,307	79	91	17,505

Assets held for sale¹ .....................................	270	116	50	6	7	449
- disposal groups ......................................	270	114	50	6	7	447
- non-current assets held for sale .............	−	2	−	−	−	2

Other assets .................................................	168	39	30	10	43	290
- endorsements and acceptances ..............	3	1	−	−	1	5
- other ....................................................	165	38	30	10	42	285


	13,575	3,058	1,387	95	141	18,256

At 30 June 2011
Loans and advances held at amortised cost⁷ .	16,125	3,808	1,911	185	137	22,166
- to banks ................................................	116	-	-	-	-	116
- to customers .........................................	16,009	3,808	1,911	185	137	22,050

Other assets .................................................	317	166	72	30	52	637
- endorsements and acceptances ..............	13	1	-	-	2	16
- other ....................................................	304	165	72	30	50	621


	16,442	3,974	1,983	215	189	22,803

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 sale¹ .....................................	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

For footnotes, see page 180.

Renegotiated loans and forbearance

Current policies and procedures regarding renegotiated loans and forbearance are described in the Appendix to Risk on page 183.

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

Renegotiated loans and advances to customers

	At 30 June 2012
	Neither past due nor impaired	Past due but not impaired	Impaired	Total
	US$m	US$m	US$m	US$m

Retail .................................................................................	8,007	3,532	19,229	30,768
First lien residential mortgages........................................	5,841	2,842	16,096	24,779
Other personal ...............................................................	2,166	690	3,133	5,989

Commercial real estate........................................................	2,392	30	3,216	5,638
Corporate and commercial..................................................	4,387	401	3,993	8,781
Financial ............................................................................	261	-	560	821
Governments .....................................................................	44	-	117	161

	15,091	3,963	27,115	46,169

Total renegotiated loans and advances to customers as a percentage of total gross loans and advances to customers ...............................................................................................					4.7%

	At 30 June 2011				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

Retail .........................	8,504	4,074	20,454	33,032		8,133	4,401	19,125	31,659
First lien residential mortgages ...........	5,595	3,123	16,872	25,590		5,916	3,560	15,932	25,408
Other personal ........	2,909	951	3,582	7,442		2,217	841	3,193	6,251

Commercial real estate	2,697	10	2,659	5,366		2,793	9	3,248	6,050
Corporate and commercial..............	4,092	342	3,141	7,575		3,432	461	3,376	7,269
Financial ....................	341	-	552	893		249	-	491	740
Governments ..............	116	-	21	137		113	2	132	247

	15,750	4,426	26,827	47,003		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 .........................				4.4%					4.8%

Renegotiated loans and advances to customers by geography

	At	At	At
	30 June	30 June	31 December
	2012	2011	2011
	US$m	US$m	US$m

Europe .............................................................................................	12,423	11,250	11,464
Hong Kong ......................................................................................	419	478	447
Rest of Asia-Pacific ..........................................................................	445	608	448
Middle East and North Africa ...........................................................	2,649	2,095	2,655
North America .................................................................................	27,528	29,761	28,475
Latin America ..................................................................................	2,705	2,811	2,476

	46,169	47,003	45,965

Total impairment allowances on renegotiated loans .........................	7,350	8,899	7,670
Individually assessed .....................................................................	2,422	1,989	2,311
Collectively assessed .....................................................................	4,928	6,910	5,359

Renegotiated loans totalled US$46.2bn at 30 June 2012 (30 June 2011: US$47.0bn; 31 December 2011: US$46.0bn). The most significant portfolio of renegotiated loans remains in North America and, at 30 June 2012, amounted to US$27.5bn or 60% of total renegotiated loans

(30 June 2011: US$29.8bn or 63%; 31 December 2011: US$28.5bn or 62%), substantially all of which were retail loans held by HSBC Finance. Of the total renegotiated loans in North America, US$17.9bn were presented as impaired at 30 June 2012 (30 June 2011: US$19.2bn; 31 December 2011: US$17.8bn),

and the ratio of total impairment allowances to impaired loans at 30 June 2012 was 27% (30 June 2011: 34%; 31 December 2011: 28%).

Europe is the next largest portfolio of renegotiated loans which, at 30 June 2012, amounted to US$12.4bn (30 June 2011: US$11.3bn; 31 December 2011: US$11.5bn), constituting 27% of total renegotiated loans (30 June 2011: 24%; 31 December 2011: 25%). Of the total renegotiated loans in Europe, US$6.2bn were presented as impaired at 30 June 2012 (30 June 2011: US$5.4bn; 31 December 2011: US$6.0bn), and the ratio of total impairment allowances to impaired loans at 30 June 2012 was 27% (30 June 2011: 30%; 31 December 2011: 30%). Renegotiated balances in Europe were largely concentrated in the commercial real estate sector 38% (30 June 2011: 40%; 31 December 2011: 41%) and the corporate and commercial sector 38% (30 June 2011: 34%; 31 December 2011: 32%). The commercial real estate sector, particularly in the UK, continued to face weakening in property values and a reduction in institutions funding commercial real estate lending. The commercial real estate mid-market sector continued to experience higher levels of renegotiation activity than is evident with larger corporates, where borrowers are generally better capitalised and have access to wider funding market opportunities. In all cases, in assessing the acceptability of renegotiated loans, we consider the

ability to service interest as a minimum and reduce capital repayments if possible. Despite Europe and the UK, in particular, holding the single largest retail lending portfolio in the Group, renegotiations of retail loans in this region were limited due to the quality of the residential mortgage book.

The balance of renegotiated loans in the Middle East and North Africa and Latin America (primarily in Mexico and Brazil) remained predominately concentrated in the corporate and commercial sectors. Forbearance in Hong Kong and Rest of Asia-Pacific remained insignificant.

HSBC Finance loan modifications and re‑ageing

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. For further details on HSBC Finance's loan renegotiation programmes, see page 131 of the Annual Report and Accounts 2011.

At 30 June 2012, renegotiated real estate secured accounts represented 85% (30 June 2011: 86%; 31 December 2011: 86%) of North America's total renegotiated loans, and US$15.6bn (30 June 2011: US$17.4bn; 31 December 2011: US$16.0bn) of renegotiated real estate secured loans in HSBC Finance were classified as impaired.

Gross loan portfolio of HSBC Finance real estate secured accounts

	Re-aged²¹	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	%

30 June 2012 ............	9,906	12,171	1,293	23,370		17,860	41,230	4,884	12
30 June 2011 ..............	10,507	13,460	1,757	25,724		21,548	47,272	4,504	10
31 December 2011 .....	10,265	12,829	1,494	24,588		19,540	44,128	5,088	12

For footnote, see page 180.

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

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

30 June 2012 ...................................................................	118	109	13	240
30 June 2011 .....................................................................	122	113	17	252
31 December 2011 .............................................................	121	112	14	246

During the half-year to 30 June 2012, the aggregate number of renegotiated loans reduced, despite renegotiation activity continuing, due to the run-off of the portfolio. Within the constraints of our Group credit policy, HSBC Finance's policies allow for multiple renegotiations under certain circumstances, and a number of accounts received a second (or further) renegotiation during the year which are not duplicated in the statistics presented above. These statistics present a loan as an addition to the volume of renegotiated loans on its first renegotiation only. At 30 June 2012, renegotiated loans were 57% (30 June 2011: 55%; 31 December 2011: 56%) of HSBC Finance's real estate secured accounts.

Corporate and commercial forbearance

For the current policies and procedures regarding forbearance in the corporate and commercial sector, see page 188 in the Annual Report and Accounts 2011.

In the corporate and commercial sector, the increase of US$1,512m in renegotiated loans for the half-year ended 30 June 2012 compared with the end of 2011 was a result of increased forbearance activity in Europe, Middle East and North Africa and Latin America. In Europe the increases primarily related to CMB customers in the UK. In Middle East and North Africa, the increase was due largely to two significant individual loan renegotiations for UAE based borrowers, the larger of the two being cash secured. In Latin America the increase was largely related to Brazil due to a small number of larger corporate restructurings and increased restructuring activity in Business Banking.

In the commercial real estate sector the balance of renegotiated loans decreased by US$412m, compared with the end of 2011, mainly in the Middle East and North Africa. This predominately related to a decrease in balances for a single CMB customer in Bahrain.

Impaired loans

During 2011 we adopted a revised disclosure convention for the presentation of impaired loans and advances for geographical regions with significant levels of forbearance. The previous impaired loans disclosure convention was that impaired loans and advances were those classified as customer risk rating ('CRR') 9, CRR 10, EL 9 or EL 10 and all retail loans 90 days or more past due, unless individually they had been assessed as not impaired. Our current impaired loan disclosure convention is described below.

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 184);

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

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

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

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

Further disclosure about loans subject to forbearance is provided on page 143. Renegotiated loans and forbearance disclosures are subject to evolving industry practice and regulatory guidance.

Impaired loan comparative data at 30 June 2011 have been restated to reflect the revised impaired loans disclosure convention. The following table shows the effect of the restatement on 30 June 2011 total reported impaired loans and advances to customers.

The impaired loan comparative data at 31 December 2011 were previously published in accordance with the revised disclosure convention. For further details see page 133 of the Annual Report and Accounts 2011.

Impaired loans and advances to customers

	At
	30 June
	2011
	US$m

Previous disclosure convention ..........................................................................................................................	25,982

Reclassified from neither past due nor impaired .................................................................................................	11,341
Europe ..........................................................................................................................................................	675
Middle East and North Africa ........................................................................................................................	71
North America ..............................................................................................................................................	9,602
Latin America ...............................................................................................................................................	993

Reclassified from past due but not impaired .......................................................................................................	6,886
Europe ..........................................................................................................................................................	-
Middle East and North Africa ........................................................................................................................	28
North America ..............................................................................................................................................	6,708
Latin America ...............................................................................................................................................	150


Revised disclosure convention ...........................................................................................................................	44,209

Impairment of loans and advances

Impaired loans and advances to customers and banks by industry sector

	Impaired loans and advances at 30 June 2012			Impaired loans and advances at 30 June 2011⁷			Impaired loans and advances at 31 December 2011
	Individ- ually assessed	Collect- ively assessed	Total	Individ- ually assessed	Collect- ively assessed	Total	Individ- ually assessed	Collect- ively assessed	Total
	US$m	US$m	US$m	US$m	US$m	US$m	US$m	US$m	US$m

Banks ............................	88	-	88	197	-	197	155	-	155

Customers ......................	16,973	23,771	40,744	15,794	28,415	44,209	16,554	25,030	41,584
- personal ..................	2,280	23,211	25,491	2,198	27,144	29,342	2,473	24,070	26,543
- corporate and commercial ................	13,692	560	14,252	12,396	1,268	13,664	12,898	960	13,858
- financial ..................	1,001	-	1,001	1,200	3	1,203	1,183	-	1,183


	17,061	23,771	40,832	15,991	28,415	44,406	16,709	25,030	41,739

For footnote, see page 180.

Impairment allowances

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

	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 30 June 2012
Gross loans and advances to customers
Individually assessed impaired loans²² ....................................	9,680	475	1,035	2,309	1,946	1,528	16,973

Collectively assessed²³ ................	440,958	165,265	129,300	27,360	158,843	53,503	975,229
- impaired loans²² ...................	1,201	80	113	205	20,240	1,932	23,771
- non-impaired loans²⁴ ...........	439,757	165,185	129,187	27,155	138,603	51,571	951,458


TGLAC ......................................	450,638	165,740	130,335	29,669	160,789	55,031	992,202

Total impairment allowances .........	5,193	536	846	1,773	6,798	2,071	17,217
- individually assessed .................	3,709	250	564	1,324	439	368	6,654
- collectively assessed .................	1,484	286	282	449	6,359	1,703	10,563


Net loans and advances ...................	445,445	165,204	129,489	27,896	153,991	52,960	974,985

Impairment allowances on loans and advances to customers by geographical region (continued)

	Europe	Hong Kong	Rest of Asia- Pacific	MENA	North America	Latin America	Total
	%	%	%	%	%	%	%
Allowances as a percentage of loans and advances:
- individually assessed (in each case) ..........................................	38.3	52.6	54.5	57.3	22.6	24.1	39.2
- collectively assessed (in each case) ..........................................	0.3	0.2	0.2	1.6	4.0	3.2	1.1
- total (in each case) ..................	1.2	0.3	0.6	6.0	4.2	3.8	1.7

	US$m	US$m	US$m	US$m	US$m	US$m	US$m
At 30 June 2011
Gross loans and advances to customers⁷
Individually assessed impaired loans²² ...................................	9,584	489	1,081	1,949	1,826	865	15,794

Collectively assessed²³ ................	482,079	159,454	121,176	25,314	185,718	67,085	1,040,826
- impaired loans²² ..................	1,294	21	127	344	23,831	2,798	28,415
- non-impaired loans²⁴ ...........	480,785	159,433	121,049	24,970	161,887	64,287	1,012,411


TGLAC ......................................	491,663	159,943	122,257	27,263	187,544	67,950	1,056,620

Total impairment allowances .........	5,332	573	828	1,569	8,282	2,148	18,732
- individually assessed ................	3,607	297	518	1,098	384	339	6,243
- collectively assessed ................	1,725	276	310	471	7,898	1,809	12,489


Net loans and advances ..................	486,331	159,370	121,429	25,694	179,262	65,802	1,037,888

	%	%	%	%	%	%	%
Allowances as a percentage of loans and advances:
- individually assessed (in each case) ..........................................	37.6	60.7	47.9	56.3	21.0	39.2	39.5
- collectively assessed (in each case) ..........................................	0.4	0.2	0.3	1.9	4.3	2.7	1.2
- total (in each case) ..................	1.1	0.4	0.7	5.8	4.4	3.2	1.8

	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 loans²² ...................................	10,490	519	963	2,187	1,832	563	16,554

Collectively assessed²³ ................	429,088	157,727	123,687	25,402	148,096	57,386	941,386
- impaired loans²² ..................	1,261	85	106	238	20,864	2,476	25,030
- non-impaired loans²⁴ ...........	427,827	157,642	123,581	25,164	127,232	54,910	916,356


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

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


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

	%	%	%	%	%	%	%
Allowances as a percentage of loans and advances:
- individually assessed (in each case) ..........................................	35.8	55.5	52.4	57.2	22.7	57.4	39.5
- collectively assessed (in each case) ..........................................	0.3	0.2	0.2	1.8	4.6	2.9	1.2
- total (in each case) ..................	1.2	0.4	0.6	6.2	4.8	3.5	1.8

For footnotes, see page 180.

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

	Banks	Customers
	individually assessed⁷	Individually assessed	Collectively assessed	Total
	US$m	US$m	US$m	US$m

At 1 January 2012 .............................................................	125	6,537	10,974	17,636
Amounts written off ..........................................................	(70)	(963)	(4,110)	(5,143)
Recoveries of loans and advances previously written off ....	-	84	484	568
Charge to income statement ..............................................	1	1,102	3,422	4,525
Exchange and other movements ........................................	-	(106)	(207)	(313)

At 30 June 2012 ................................................................	56	6,654	10,563	17,273

Impairment allowances:
on loans and advances to customers ................................		6,654	10,563	17,217
- personal ..................................................................		700	8,686	9,386
- corporate and commercial .......................................		5,341	1,809	7,150
- financial ..................................................................		613	68	681

as a percentage of loans and advances^26,27 .......................	0.04%	0.71%	1.12%	1.60%

	US$m	US$m	US$m	US$m

At 1 January 2011 .............................................................	158	6,457	13,626	20,241
Amounts written off ..........................................................	-	(986)	(5,975)	(6,961)
Recoveries of loans and advances previously written off ....	-	107	623	730
Charge to income statement ..............................................	1	637	4,335	4,973
Exchange and other movements ........................................	3	28	(120)	(89)

At 30 June 2011 ................................................................	162	6,243	12,489	18,894

Impairment allowances:
on loans and advances to customers ................................		6,243	12,489	18,732
- personal ..................................................................		679	10,550	11,229
- corporate and commercial .......................................		4,966	1,853	6,819
- financial ..................................................................		598	86	684

as a percentage of loans and advances^26,27 .......................	0.10%	0.64%	1.27%	1.66%

	US$m	US$m	US$m	US$m

At 1 July 2011 ...................................................................	162	6,243	12,489	18,894
Amounts written off ..........................................................	(16)	(647)	(4,856)	(5,519)
Recoveries of loans and advances previously written off ....	-	84	612	696
Charge to income statement ..............................................	(17)	1,294	5,255	6,532
Exchange and other movements²⁵ ......................................	(4)	(437)	(2,526)	(2,967)

At 31 December 2011 ........................................................	125	6,537	10,974	17,636

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

as a percentage of loans and advances^26,27 .......................	0.09%	0.71%	1.20%	1.67%

For footnotes, see page 180.

Impairment charge

Net loan impairment charge to the income statement by geographical region

	Europe US$m	Hong Kong US$m	Rest of Asia- Pacific US$m	MENA US$m	North America US$m	Latin America US$m	Total US$m
Half-year to 30 June 2012
Individually assessed impairment allowances
New allowances ..................................	988	15	129	176	193	191	1,692
Release of allowances no longer required ............................................	(312)	(16)	(39)	(54)	(59)	(25)	(505)
Recoveries of amounts previously written off .......................................	(22)	(3)	(8)	(17)	(26)	(8)	(84)

	654	(4)	82	105	108	158	1,103

Collectively assessed impairment allowances
New allowances net of allowance releases ............................................	371	54	179	54	2,103	1,145	3,906
Recoveries of amounts previously written off .......................................	(171)	(13)	(67)	(24)	(55)	(154)	(484)

	200	41	112	30	2,048	991	3,422

Total charge for impairment losses .......	854	37	194	135	2,156	1,149	4,525
Banks ................................................	1	−	−	−	−	−	1
Customers ..........................................	853	37	194	135	2,156	1,149	4,524


At 30 June 2012
Impaired loans ......................................	10,935	555	1,148	2,534	22,200	3,460	40,832
Impairment allowances .........................	5,232	536	846	1,790	6,798	2,071	17,273

Half-year to 30 June 2011
Individually assessed impairment allowances
New allowances ..................................	744	20	78	96	182	89	1,209
Release of allowances no longer required ............................................	(269)	(23)	(61)	(37)	(41)	(35)	(466)
Recoveries of amounts previously written off .......................................	(21)	(13)	(11)	(11)	(15)	(34)	(105)

	454	(16)	6	48	126	20	638

Collectively assessed impairment allowances
New allowances net of allowance releases ............................................	684	52	188	81	3,004	951	4,960
Recoveries of amounts previously written off .......................................	(288)	(13)	(90)	(30)	(55)	(149)	(625)

	396	39	98	51	2,949	802	4,335

Total charge for impairment losses .......	850	23	104	99	3,075	822	4,973
Banks ................................................	-	-	-	-	-	1	1
Customers ..........................................	850	23	104	99	3,075	821	4,972


At 30 June 2011
Impaired loans⁷ .....................................	10,985	514	1,210	2,313	25,719	3,665	44,406
Impairment allowances .........................	5,412	573	828	1,586	8,346	2,149	18,894

	Europe US$m	Hong Kong US$m	Rest of Asia- Pacific US$m	MENA US$m	North America US$m	Latin America US$m	Total US$m
Half-year to 31 December 2011
Individually assessed impairment allowances
New allowances ..................................	926	59	129	232	216	133	1,695
Release of allowances no longer required ............................................	(109)	(18)	(53)	(43)	(70)	(39)	(332)
Recoveries of amounts previously written off .......................................	(9)	(7)	(15)	(38)	(29)	12	(86)

	808	34	61	151	117	106	1,277

Collectively assessed impairment allowances
New allowances net of allowance releases ............................................	497	74	178	66	3,890	1,160	5,865
Recoveries of amounts previously written off .......................................	(253)	(14)	(69)	(24)	(32)	(218)	(610)

	244	60	109	42	3,858	942	5,255

Total charge for impairment losses .......	1,052	94	170	193	3,975	1,048	6,532
Banks ...............................................	(11)	-	-	-	(5)	(1)	(17)
Customers ........................................	1,063	94	170	193	3,980	1,049	6,549


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

For footnote, see page 180.

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

	Europe	Hong Kong	Rest of Asia- Pacific	MENA	North America	Latin America	Total
	%	%	%	%	%	%	%
Half-year to 30 June 2012
New allowances net of allowance releases .................................	0.55	0.07	0.42	1.26	2.89	4.59	1.12
Recoveries .................................	(0.10)	(0.02)	(0.12)	(0.29)	(0.10)	(0.57)	(0.13)

Total charge for impairment losses ....................................	0.45	0.05	0.30	0.97	2.79	4.02	0.99

Amount written off net of recoveries .............................	0.47	0.10	0.18	0.53	3.20	3.01	0.99

Half-year to 30 June 2011
New allowances net of allowance releases .................................	0.57	0.07	0.36	1.04	3.27	3.20	1.20
Recoveries .................................	(0.15)	(0.03)	(0.18)	(0.31)	(0.07)	(0.58)	(0.15)

Total charge for impairment losses ....................................	0.42	0.04	0.18	0.73	3.20	2.62	1.05

Amount written off net of recoveries .............................	0.68	0.10	0.38	0.45	3.89	2.39	1.31

Half-year to 31 December 2011
New allowances net of allowance releases .................................	0.62	0.15	0.41	1.87	4.94	3.93	1.51
Recoveries .................................	(0.12)	(0.03)	(0.14)	(0.46)	(0.07)	(0.65)	(0.14)

Total charge for impairment losses ....................................	0.50	0.12	0.27	1.41	4.87	3.28	1.37

Amount written off net of recoveries .............................	0.38	0.11	0.24	0.18	3.61	2.42	1.00

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

	31 Dec 11 as reported	Constant currency effect	31 Dec 11 at 30 Jun 12 exchange rates	Movement on a constant currency basis	30 Jun 12 as reported	Reported change	Change on a constant currency basis
	US$m	US$m	US$m	US$m	US$m	%	%

Europe .......................................	11,819	59	11,878	(943)	10,935	(7)	(8)
Hong Kong .................................	608	1	609	(54)	555	(9)	(9)
Rest of Asia-Pacific ....................	1,070	-	1,070	78	1,148	7	7
Middle East and North Africa .....	2,445	(2)	2,443	91	2,534	4	4
North America ...........................	22,758	-	22,758	(558)	22,200	(2)	(2)
Latin America ............................	3,039	(109)	2,930	530	3,460	14	18

Total ..........................................	41,739	(51)	41,688	(856)	40,832	(2)	(2)

Impaired loans and net loan impairment allowances

On a reported basis, loan impairment charges to the income statement of US$4.5bn in the first half of 2012 declined by 9% compared with the first half of 2011 and by 31% compared with the second half of 2011. Impaired loans were US$40.8bn, 2% lower than at 31 December 2011.

The following commentary is on a constant currency basis.

New loan impairment allowances were US$5.6bn, a decline of 6% compared with the first half of 2011, reflecting lower lending balances in our US run-off portfolios. Releases and recoveries of US$1.1bn were 6% lower, mainly in Europe.

Impaired loans were 3% of total gross loans and advances at 30 June 2012, in line with 31 December 2011.

In Europe, new loan impairment allowances were US$1.4bn, 1% lower than in the first half of 2011, primarily in the UK as we continued to focus our lending on higher quality assets. New collectively assessed loan impairment allowances declined, mainly in the UK due to lower delinquency rates in both the secured and unsecured lending portfolios in RBWM and the shortening of the write-off period for balances greater than 180 days in Marks and Spencer Retail Financial Services Holdings Limited ('M&S Money') which resulted in an increase in allowances in 2011. New individually assessed loan impairment allowances increased, mainly in the UK, reflecting the challenging economic conditions. Impaired loans of US$10.9bn were 8% lower than at 31 December 2011 due to lower delinquency rates.

Releases and recoveries in Europe were US$507m, a decrease of 9% compared with the first half of 2011, mainly in the UK due to the shortening of the write-off period for balances greater than 180 days overdue in M&S Money which resulted in an increase in releases and recoveries last year.

In Hong Kong, new loan impairment allowances fell by 5% compared with the first half of 2011, reflecting lower loan impairment charges against specific exposures and a reduction in general provisions as a result of lower delinquency rates. Impaired loans declined by 9% from 31 December 2011, reflecting improved delinquency in the mortgage portfolio.

Releases and recoveries in Hong Kong were US$32m, 35% lower than in the first half of 2011 due to the non-recurrence of significant releases and recoveries from two GB&M customers.

New loan impairment allowances in Rest of Asia-Pacific increased by 20% to US$308m as a result of a specific impairment on a corporate exposure in Australia and a number of individual loan impairment charges in India and New Zealand. Impaired loans in the region increased by 7% from the end of 2011 to US$1.1bn at 30 June 2012, mainly in Malaysia.

Releases and recoveries in the region decreased by 26%, mainly due to lower releases for cards as we run-off the portfolio in India, and the non-recurrence of recoveries in Thailand following the sale of the RBWM business.

In the Middle East and North Africa, new loan impairment allowances increased by 30% to US$230m in the first half of 2012 due to an increase in individually assessed impairment charges in GB&M. New collectively assessed loan impairment allowances declined, primarily in RBWM due to lower delinquencies driven by stricter acquisition criteria which resulted in an improvement in credit quality. Impaired loans of US$2.5bn increased marginally at 30 June 2012 from US$2.4bn at 31 December 2011.

Releases and recoveries in the region increased by 23% to US$95m, compared with the first half of 2011.

In North America, new loan impairment allowances declined markedly, reducing by 28% to US$2.3bn. In our CML portfolio, the fall in new collectively assessed loan impairment allowances reflected a reduction in lending balances as the portfolio continued to run off, and an improvement in two-months-and-over contractual delinquency on balances less than 180 days past due. Loan impairment charges were adversely affected by delays in expected cash flows from mortgage loans due, in part, to the delays in foreclosure processing, though the effects were less pronounced than in the first half of 2011. Additionally, in the first half of 2012, we increased our loan impairment allowances having updated our assumptions regarding the timing of expected cash flows received from customers with loan modifications. Impaired loans decreased by 2% from the end of 2011 to US$22.2bn, driven by the continued run‑off of the CML portfolio.

Releases and recoveries in North America increased by US$29m, due to higher customer repayments within the corporate and commercial sector, as well as a significant recovery in the first half of 2012.

In Latin America, new loan impairment allowances increased by 46% to US$1.3bn, driven by higher new collectively assessed loan impairment allowances in Brazil, primarily reflecting strong balance sheet growth in previous periods as a result of increased marketing, a focus on acquiring customers and strong customer demand in buoyant economic conditions which subsequently weakened, notably in the personal and corporate portfolios. We implemented a number of actions to address the increase in delinquencies including improving our collections capabilities reducing third-party originations and lowering credit limits where appropriate. New individually assessed loan impairment charges also rose, mainly in Brazil following a rise in individually assessed loan impairment charges and significantly increased loan impairment charges in Business Banking. Impaired loans increased by 18% compared with 31 December 2011, driven by worsening delinquency in Brazil.

Releases and recoveries in Latin America decreased by 3% from the first half of 2011 to US$187m, primarily in Brazil due to weaker economic conditions.

Securitisation exposures and other structured products

This section contains information about our exposure to the following:

· asset-backed securities ('ABS's), including mortgage-backed securities ('MBS's) and related collateralised debt obligations ('CDO's);

· direct lending at fair value through profit or loss;

· monoline insurance companies ('monolines');

· credit derivative product companies;

· leveraged finance transactions; and

· representations and warranties related to mortgage sales and securitisation activities.

Within the above is included information on the GB&M legacy credit activities in respect of Solitaire Funding Limited ('Solitaire'), the securities investment conduits ('SIC's), the ABSs trading portfolios and derivative transactions with monolines. Further information in respect of Solitaire and the SICs is provided in Note 22 to the Financial Statements.

Business model

Balance Sheet Management holds ABSs primarily issued by government agency and sponsored enterprises as part of our investment portfolios.

Our investment portfolios include SICs and money market funds. We also originate leveraged finance loans for the purpose of syndicating or selling them down to generate trading profit or holding them to earn interest margin over their lives.

Exposure in the first half of 2012

The first half of 2012 saw continued uncertainty and concerns over sovereign credit risk and continued challenges for the US housing market. Despite this, there was modest price appreciation across a range of ABSs asset classes. Unrealised losses in our available-for-sale portfolios reduced in the first half of 2012 from US$5.1bn to US$3.9bn, mainly as a result of this price appreciation.

Within the following tables are assets held in the GB&M legacy credit portfolio with a carrying value of US$33.3bn (30 June 2011: US$44.5bn; 31 December 2011: US$35.4bn).

A summary of the nature of HSBC's exposures is provided in the Appendix to Risk on page 183.

This information is provided by RNS

The company news service from the London Stock Exchange

END

IR SSWFMAFESEFA