Interim Report - 16 of 26

RNS Number : 1209M

HSBC Holdings PLC

12 August 2011

 



Overall exposure of HSBC

	At 30 June 2011				At 30 June 2010				At 31 December 2010
	Carrying      amount		Including sub-prime   and Alt-A		Carrying        amount		Including    sub-prime    and Alt-A		Carrying        amount		Including    sub-prime    and Alt-A
	US$bn		US$bn		US$bn		US$bn		US$bn		US$bn
ABSs ........................................................	72.9		8.1		72.6		9.4		73.9		8.5
- fair value through profit or loss ..............	10.1		0.3		10.8		0.5		10.8		0.3
- available for sale33 ..................................	54.7		6.8		53.2		7.5		54.7		7.1
- held to maturity33 ..................................	2.1		0.2		2.4		0.2		2.2		0.2
- loans and receivables ..............................	6.0		0.8		6.2		1.2		6.2		0.9
Loans at fair value through profit or loss ..	1.1		0.9		1.9		1.5		1.6		1.2
Total ABS and direct lending at fair value through profit or loss ............................	74.0		9.0		74.5		10.9		75.5		9.7
Less securities mitigated by credit derivatives with monolines and other financial institutions .............................	(8.4)		(0.3)		(8.6)		(0.6)		(8.3)		(0.4)
	65.6		8.7		65.9		10.3		67.2		9.3
Leveraged finance loans ...........................	3.7		-		5.2		-		4.9		-
- fair value through profit or loss ..............	0.1		-		0.2		-		0.3		-
- loans and receivables ..............................	3.6		-		5.0		-		4.6		-
	69.3		8.7		71.1		10.3		72.1		9.3
Exposure including securities mitigated by credit derivatives with monolines and other financial institutions ....................	77.7		9.0		79.7		10.9		80.4		9.7

For footnote, see page 146.

ABSs classified as available for sale

Our principal holdings of available-for-sale ABSs are in GB&M through special purpose entities ('SPE's) which were established from the outset with the benefit of external investor first loss protection support, together with positions held directly and by Solitaire Funding Limited ('Solitaire'), where we have first loss risk.

The following table summarises our exposure to ABSs classified as available for sale.

Available-for-sale asset-backed securities exposure

	At 30 June 2011						At 30 June 2010						At 31 December 2010
	Directly      held/ Solitaire34		SPEs		Total		Directly        held/ Solitaire34		SPEs		Total		Directly        held/ Solitaire34		SPEs		Total
	US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m
Total carrying amount of net principal exposure .................	41,685		12,992		54,677		39,391		13,774		53,165		41,106		13,586		54,692
Notional principal value of securities impaired .................	3,426		2,371		5,797		2,710		2,372		5,082		3,015		2,399		5,414
Carrying value of capital notes liability .................................	-		(333)		(333)		-		(320)		(320)		-		(254)		(254)

For footnote, see page 146.

Movement in the available-for-sale ('AFS') reserve

	Half-year to 30 June 2011						Half-year to 30 June 2010						Half-year to 31 December 2010
	Directly       held/ Solitaire34		SPEs		Total		Directly        held/   Solitaire34		SPEs		Total		Directly        held/   Solitaire34		SPEs		Total
	US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m
AFS reserve at beginning of period .......................	(4,102)		(2,306)		(6,408)		(7,349)		(4,864)		(12,213)		(4,914)		(3,168)		(8,082)
Increase in fair value of securities .......................	618		355		973		1,678		1,051		2,729		497		492		989
Impairment charge:
-  borne by HSBC ..........	238		-		238		277		-		277		167		-		167
-  allocated to capital note holders35 ........	-		137		137		-		488		488		-		43		43
Repayment of capital ........	142		94		236		301		88		389		239		99		338
Other movements .............	5		(24)		(19)		179		69		248		(91)		228		137
AFS reserve at end of period	(3,099)		(1,744)		(4,843)		(4,914)		(3,168)		(8,082)		(4,102)		(2,306)		(6,408)

For footnotes, see page 146.

Securities investment conduits

The total carrying amount of ABSs held through SPEs in the above table represents holdings in which significant first loss protection is provided through capital notes issued by SICs, excluding Solitaire.

At each reporting date, we assess whether there is any objective evidence of impairment in the value of the ABSs held by SPEs. Impairment charges incurred on these assets are offset by a credit to the impairment line for the amount of the loss allocated to capital note holders.

The economic first loss protection remaining at 30 June 2011 amounted to US$2.2bn (30 June 2010: US$2.2bn; 31 December 2010: US$2.2bn). On an IFRSs accounting basis, the carrying value of the liability for the capital notes at 30 June 2011 amounted to US$0.3bn (30 June 2010: US$0.3bn; 31 December 2010: US$0.3bn). The impairment charge recognised during the first half of 2011 amounted to US$137m (first half of 2010: US$488m; second half of 2010: US$43m).

At 30 June 2011, the available-for-sale reserve in respect of securities held by the SICs was a deficit of US$2.0bn (30 June 2010: US$3.4bn; 31 December 2010: US$2.7bn). Of this, US$1.7bn related to ABSs (30 June 2010: US$3.2bn; 31 December 2010: US$2.3bn).

Impairments recognised during the first half of 2011 from assets held directly or within Solitaire, in recognition of the first loss protection of US$1.2bn we provide through credit enhancement and from drawings against the liquidity facility we
provide, were US$238m (30 June 2010: US$277m; 31 December 2010: US$167m). The reduction in impairment charges compared with the first half of 2010 was due to the falling default rates in the underlying collateral pools. The level of impairment recognised in comparison with the deficit in the available-for-sale reserve was a reflection of the credit quality and seniority of the assets held.

Sub-prime and Alt-A residential mortgage-backed securities

The assets which are most sensitive to possible future impairment are sub-prime and Alt-A residential MBSs. Available-for-sale holdings in these higher risk categories where HSBC does not benefit from significant first loss protection amounted to US$3.5bn at 30 June 2011 (30 June 2010: US$4.2bn; 31 December 2010: US$3.8bn). For these securities the cumulative fair value losses not recognised in the income statement at 30 June 2011 was US$1.2bn (30 June 2010: losses of US$3.3bn; 31 December 2010: losses of US$1.6bn). Other holdings in these higher risk categories classified as available-for-sale are held in vehicles where third party first loss protection exists, as described in the section on SICs, above.

Impairment methodologies

The accounting policy for impairment and indicators of impairment is set out on page 259 and for available-for-sale ABSs on page 131 of the Annual Report and Accounts 2010.

Impairment and cash loss projections

At 31 December 2010, management undertook a stress analysis to estimate further potential impairments and expected cash losses on the available-for-sale ABS portfolio. This exercise comprised a shift of projections of future loss severities, default rates and prepayment rates. The results of the analysis indicated that further impairment charges of some US$950m and expected cash losses of some US$250m could arise over the next two to three years.

At 30 June 2011, management re‑performed the stress test. Management now estimates that accounting impairments of US$900m and cash losses of US$400m may arise over the remaining duration. The result reflects the deterioration in the outlook for the US economy at large and the US housing market in particular compared with previous stress projections. For example, housing prices are now projected to continue to fall further and for a longer period of time, and recover more slowly.

For the purposes of identifying impairment at the reporting date, the future projected cash flows reflect the effect of loss events that have occurred at or prior to the reporting date. For the purposes of performing stress tests to estimate potential future impairment charges, the projected future cash flows reflect additional assumptions about future loss events after the balance sheet date.

This analysis makes assumptions in respect of the future behaviour of loss severities, default rates and prepayment rates. Movements in the parameters are not independent of each other. For example, increased default rates and increased loss severities, which would imply greater impairments, generally arise under economic conditions that give rise to reduced levels of prepayment, reducing the potential for impairment charges. Conversely, economic conditions which increase the rates of prepayment are generally associated with reduced default rates and decreased loss severities.

At 30 June 2011, the incurred and projected impairment charges, measured in accordance with accounting requirements, significantly exceeded the expected cash losses on the securities. Over the lives of the available-for-sale ABSs the cumulative impairment charges will converge towards the level of cash losses. In respect of the SICs, in particular, the capital notes held by third parties are expected to absorb the cash losses arising in the vehicles.

Carrying amount of HSBC's consolidated holdings of ABSs, and direct lending held at fair value through profit or loss

	Trading		Available     for sale		Held to   maturity		Designated          at fair value     through           profit		Loans and receivables		Total		Of which held through consolidated            SPEs
	US$m		US$m		US$m		US$m		US$m		US$m		US$m
At 30 June 2011
Mortgage-related assets
Sub-prime residential	1,022		2,556		-		-		598		4,176		2,696
- direct lending ....	830		-		-		-		-		830		560
- MBSs and MBS CDOs36 ................	192		2,556		-		-		598		3,346		2,136
US Alt-A residential .	163		4,231		177		-		255		4,826		3,417
- direct lending ....	80		-		-		-		-		80		-
- MBSs36 .............	83		4,231		177		-		255		4,746		3,417
US Government agency and sponsored enterprises
- MBSs36 .............	217		22,570		1,933		-		-		24,720		17
Other residential ......	800		3,801		-		-		990		5,591		2,332
- direct lending ....	188		-		-		-		-		188		-
- MBSs36 .............	612		3,801		-		-		990		5,403		2,332
Commercial property
- MBSs and MBS CDOs36	552		8,119		-		111		1,935		10,717		6,439
	2,754		41,277		2,110		111		3,778		50,030		14,901
Leveraged finance-related assets
- ABSs and ABS CDOs36 ....................	379		5,695		-		-		399		6,473		4,450
Student loan-related assets
- ABSs and ABS CDOs36 ....................	137		5,110		-		-		151		5,398		4,411
Other assets
- ABSs and ABS CDOs36 ....................	1,791		2,595		-		6,053		1,637		12,076		1,783
	5,061		54,677		2,110		6,164		5,965		73,977		25,545

	Trading		Available       for sale		Held to     maturity		Designated at fair value       through           profit		Loans and   receivables		Total		Of which held through consolidated             SPEs
	US$m		US$m		US$m		US$m		US$m		US$m		US$m
At 30 June 2010
Mortgage-related assets
Sub-prime residential ...	1,891		2,626		-		-		658		5,175		3,077
- direct lending ....	1,438		-		-		-		-		1,438		883
- MBSs and MBS CDOs36 ................	453		2,626		-		-		658		3,737		2,194
US Alt-A residential .	115		4,907		193		-		536		5,751		3,720
- direct lending ....	102		-		-		-		-		102		-
- MBSs36 .............	13		4,907		193		-		536		5,649		3,720
US Government agency and sponsored enterprises
- MBSs36 .............	472		19,341		2,254		-		-		22,067		347
Other residential ......	1,243		4,063		-		59		1,303		6,668		2,771
- direct lending ....	348		-		-		-		-		348		36
- MBSs36 .............	895		4,063		-		59		1,303		6,320		2,735
Commercial property
- MBSs and MBS CDOs36 ................	751		8,111		-		75		1,905		10,842		6,470
	4,472		39,048		2,447		134		4,402		50,503		16,385
Leveraged finance-related assets
- ABSs and ABS CDOs36 ....................	413		6,310		-		-		516		7,239		4,173
Student loan-related assets
- ABSs and ABS CDOs36 ....................	141		5,241		-		-		144		5,526		4,192
Other assets
- ABSs and ABS CDOs36 ....................	1,715		2,566		-		5,852		1,116		11,249		2,439
	6,741		53,165		2,447		5,986		6,178		74,517		27,189
At 31 December 2010
Mortgage-related assets
Sub-prime residential	1,297		2,565		-		-		652		4,514		2,763
- direct lending ....	1,078		-		-		-		-		1,078		632
- MBSs and MBS CDOs36 ................	219		2,565		-		-		652		3,436		2,131
US Alt-A residential .	180		4,545		191		-		270		5,186		3,651
- direct lending ....	96		-		-		-		-		96		-
- MBSs36 .............	84		4,545		191		-		270		5,090		3,651
US Government agency and sponsored enterprises
- MBSs36 .............	657		21,699		2,032		-		-		24,388		6
Other residential ......	1,075		4,024		-		-		1,111		6,210		2,669
- direct lending ....	417		-		-		-		-		417		-
- MBSs36 .............	658		4,024		-		-		1,111		5,793		2,669
Commercial property
- MBSs and MBS CDOs36 ................	546		8,160		-		111		1,942		10,759		6,441
	3,755		40,993		2,223		111		3,975		51,057		15,530
Leveraged finance-related assets
- ABSs and ABS CDOs36 ....................	392		5,418		-		-		414		6,224		3,886
Student loan-related assets
- ABSs and ABS CDOs36 ....................	163		5,178		-		-		150		5,491		4,251
Other assets
- ABSs and ABS CDOs36 ....................	1,936		3,103		-		6,017		1,710		12,766		2,526
	6,246		54,692		2,223		6,128		6,249		75,538		26,193

For footnote, see page 146.

The above table excludes leveraged finance transactions, which are shown separately on page 132.

HSBC's consolidated holdings of ABSs, and direct lending held at fair value through profit or loss

	Half-year to 30 June 2011								At 30 June 2011
	Gross fair value movements			Realised						Credit
	Income statement38		Other compre- hensive income39	gains/ (losses) in the income   statement40		Impair-      ment	Reclassi-        fied41		Gross principal42	default swap        gross protection43			Net principal exposure44		Carrying amount45
	US$m		US$m		US$m		US$m		US$m	US$m	US$m	US$m	US$m	US$m	US$m
Mortgage-related assets
Sub-prime residential
Direct lending ..........	(12)		-		1		-		1,854		-		1,854		830
MBSs36 .....................	(1)		33		-		93		4,851		305		4,546		3,087
- high grade37 ..........	-		37		-		7		1,480		180		1,300		1,125
- rated C to A ..........	(1)		(7)		-		86		3,236		125		3,111		1,915
- not publicly rated ..	-		3		-		-		135		-		135		47
MBS CDOs36 ............	-		3		-		(1)		78		-		78		21
- high grade37 ..........	-		-		-		-		2		-		2		1
- rated C to A ..........	-		3		-		(1)		76		-		76		20
- not publicly rated ..	-		-		-		-		-		-		-		-
	(13)		36		1		92		6,783		305		6,478		3,938
US Alt-A residential
Direct lending ..........	1		-		-		-		90		-		90		80
MBSs36 .....................	-		51		2		479		9,142		100		9,042		4,670
- high grade37 ..........	-		(4)		-		5		531		100		431		376
- rated C to A ..........	-		55		2		472		8,549		-		8,549		4,246
- not publicly rated ..	-		-		-		2		62		-		62		48
	1		51		2		479		9,232		100		9,132		4,750
US Government agency and sponsored enterprises
MBSs36
- high grade37 ...........	1		75		2		68		23,815		-		23,815		24,720
Other residential
Direct lending ..........	30		-		21		-		187		-		187		188
MBSs36 .....................	2		44		1		(7)		6,135		-		6,135		5,403
- high grade37 ..........	-		43		1		(7)		5,356		-		5,356		4,786
- rated C to A ..........	2		1		-		-		613		-		613		492
- not publicly rated ..	-		-		-		-		166		-		166		125
	32		44		22		(7)		6,322		-		6,322		5,591
Commercial property
MBS and MBS CDOs36 .....................	(1)		311		2		(51)		12,217		395		11,822		10,442
- high grade37 ..........	(1)		84		-		(12)		4,185		-		4,185		3,911
- rated C to A ..........	-		228		2		(41)		7,903		395		7,508		6,432
- not publicly rated ..	-		(1)		-		2		129		-		129		99
Leveraged finance-related assets
ABSs and ABS CDOs36 .	-		114		-		(14)		7,289		806		6,483		5,950
- high grade37 .............	-		122		-		(12)		6,382		384		5,998		5,507
- rated C to A ............	-		(8)		-		(2)		816		422		394		342
- not publicly rated ....	-		-		-		-		91		-		91		101
Student loan-related assets
ABSs and ABS CDOs36 .	3		248		1		2		6,819		100		6,719		5,353
- high grade37 .............	3		59		1		4		3,754		-		3,754		3,339
- rated C to A ............	-		190		-		(2)		2,606		100		2,506		1,841
- not publicly rated ....	-		(1)		-		-		459		-		459		173
Other assets
ABS and ABS CDOs36 ...	19		94		10		23		14,799		7,924		6,875		4,806
- high grade37 .............	6		11		1		(5)		10,056		7,255		2,801		2,146
- rated C to A ............	14		80		8		28		4,226		669		3,557		2,310
- not publicly rated ....	(1)		3		1		-		517		-		517		350
Total ...............................	42		973		40		592		87,276		9,630		77,646		65,550

	Half-year to 30 June 2010								At 30 June 2010
	Gross fair value movements			Realised							Credit
Income                                                 statement38			Other compre-   hensive    income39	gains/ (losses) in the income   statement40		Impair-       ment	Reclassi-         fied41		Gross principal42	default swap         gross protection43			Net principal exposure44		Carrying   amount45
	US$m		US$m		US$m		US$m		US$m	US$m	US$m	US$m	US$m	US$m	US$m
Mortgage-related assets
Sub-prime residential
Direct lending ...............	(15)		-		(14)		-		2,064		-		2,064		1,438
MBSs36 ..........................	329		186		52		315		5,268		456		4,812		3,142
- high grade37 ................	2		102		2		38		1,968		331		1,638		1,423
- rated C to A ...............	327		84		50		277		3,194		125		3,068		1,717
- not publicly rated .......	-		-		-		-		106		-		106		2
MBS CDOs36 .................	9		3		52		-		676		14		662		31
- high grade37 ................	-		2		52		-		14		-		14		16
- rated C to A ...............	9		1		-		-		524		14		510		13
- not publicly rated .......	-		-		-		-		138		-		138		2
	323		189		90		315		8,008		470		7,538		4,611
US Alt-A residential
Direct lending ...............	-		-		-		-		113		-		113		102
MBSs36 ..........................	-		359		9		884		11,384		100		11,284		5,580
- high grade37 ................	-		29		-		30		818		100		718		610
- rated C to A ...............	-		323		9		855		10,381		-		10,381		4,811
- not publicly rated .......	-		7		-		(1)		185		-		185		159
	-		359		9		884		11,497		100		11,397		5,682
US Government agency and sponsored enterprises
MBSs36
- high grade37 ................	(2)		415		(3)		(63)		21,271		-		21,271		22,067
Other residential
Direct lending ...............	40		-		16		-		341		-		341		348
MBSs36 ..........................	116		108		22		4		7,141		-		7,141		6,320
- high grade37 ................	46		106		22		7		6,242		-		6,242		5,580
- rated C to A ...............	70		-		-		(3)		705		-		705		633
- not publicly rated .......	-		2		-		-		194		-		194		107
	156		108		38		4		7,482		-		7,482		6,668
Commercial property
MBS and MBS CDOs36 ...	(163)		946		(31)		170		12,635		412		12,223		10,580
- high grade37 ................	(174)		601		(47)		119		8,682		100		8,582		7,644
- rated C to A ...............	12		345		15		48		3,821		312		3,509		2,838
- not publicly rated .......	(1)		-		1		3		132		-		132		98
Leveraged finance-related assets
ABSs and ABS CDOs36 ......	57		462		4		40		8,372		514		7,858		6,725
- high grade37 ..................	57		328		1		23		6,943		346		6,598		5,815
- rated C to A ..................	-		134		3		17		1,383		168		1,214		864
- not publicly rated ..........	-		-		-		-		46		-		46		46
Student loan-related assets
ABSs and ABS CDOs36 ......	3		132		2		(3)		7,317		-		7,317		5,438
- high grade37 ..................	5		93		2		(2)		4,898		-		4,898		4,311
- rated C to A ..................	(2)		46		-		(1)		1,649		-		1,649		835
- not publicly rated ..........	-		(7)		-		-		770		-		770		292
Other assets
ABS and ABS CDOs36 ........	(204)		118		64		55		12,775		7,076		5,699		4,160
- high grade37 ..................	(312)		(8)		4		3		9,176		6,613		2,563		1,794
- rated C to A ..................	107		131		50		52		2,784		463		2,321		1,758
- not publicly rated ..........	1		(5)		10		-		815		-		815		608
Total ....................................	170		2,729		173		1,402		89,357		8,572		80,785		65,931

HSBC's consolidated holdings of ABSs, and direct lending held at fair value through profit or loss (continued)

	Half-year to 31 December 2010								At 31 December 2010
	Gross fair value movements				Realised						Credit
	Income statement38	Impair-       ment	Other compre-    hensive    income39	Impair-       ment	gains/ (losses) in the income statement40	Impair-       ment	Reclassi-         fied41		Gross principal42		default         swap         gross   protection43		Net principal exposure44		Carrying   amount45
	US$m		US$m		US$m		US$m		US$m	US$m	US$m	US$m	US$m	US$m	US$m
Mortgage-related assets
Sub-prime residential
Direct lending .........	(20)		-		(6)		-		2,233		-		2,233		1,078
MBSs36 ...................	(271)		127		(38)		70		5,104		336		4,768		3,135
- high grade37 .........	4		49		3		14		1,996		292		1,704		1,458
- rated C to A ........	(275)		78		(43)		56		3,006		44		2,962		1,645
- not publicly rated	-		-		2		-		102		-		102		32
MBS CDOs36 ...........	(9)		4		(52)		(3)		90		12		78		17
- high grade37 .........	-		(2)		(52)		-		2		-		2		1
- rated C to A ........	(9)		5		-		(3)		86		12		74		14
- not publicly rated	-		1		-		-		2		-		2		2
	(300)		131		(96)		67		7,427		348		7,079		4,230
US Alt-A residential
Direct lending .........	(1)		-		-		-		108		-		108		96
MBSs36 ...................	4		216		(6)		680		9,957		100		9,857		5,013
- high grade37 .........	-		6		3		15		660		100		560		473
- rated C to A ........	4		216		(9)		665		9,254		-		9,254		4,503
- not publicly rated	-		(6)		-		-		43		-		43		37
	3		216		(6)		680		10,065		100		9,965		5,109
US Government agency and sponsored enterprises
MBSs36
- high grade37 .........	5		(189)		(8)		20		23,739		-		23,739		24,388
Other residential
Direct lending .........	23		-		19		-		424		-		424		417
MBSs36 ...................	(110)		55		(18)		(11)		6,571		-		6,571		5,793
- high grade37 .........	(41)		43		(18)		(14)		5,841		-		5,841		5,256
- rated C to A ........	(69)		14		-		3		648		-		648		450
- not publicly rated	-		(2)		-		-		82		-		82		87
	(87)		55		1		(11)		6,995		-		6,995		6,210
Commercial property
MBS and MBS CDOs36 ...................	208		420		37		(58)		12,625		421		12,204		10,493
- high grade37 .........	179		(61)		51		(48)		6,341		15		6,326		5,791
- rated C to A ........	28		481		(13)		(12)		6,201		406		5,795		4,637
- not publicly rated	1		-		(1)		2		83		-		83		65
Leveraged finance-related assets ..........................
ABSs and ABS CDOs36	(52)		(9)		(4)		(22)		7,148		788		6,360		5,721
- high grade37 ............	(54)		(20)		(1)		(31)		6,078		351		5,727		5,148
- rated C to A ...........	2		11		(3)		9		971		437		534		472
- not publicly rated ...	-		-		-		-		99		-		99		101
Student loan-related assets
ABSs and ABS CDOs36	4		98		1		(3)		7,161		100		7,061		5,459
- high grade37 ............	4		(49)		1		(2)		4,080		-		4,080		3,626
- rated C to A ...........	-		111		-		(1)		2,620		100		2,520		1,663
- not publicly rated ...	-		36		-		-		461		-		461		170
Other assets
ABS and ABS CDOs36 .	206		267		(63)		12		15,497		7,765		7,732		5,622
- high grade37 ............	312		196		(4)		(2)		10,947		7,447		3,500		2,884
- rated C to A ...........	(105)		57		(49)		(6)		4,059		318		3,741		2,379
- not publicly rated ...	(1)		14		(10)		20		491		-		491		359
Total ..............................	(13)		989		(138)		685		90,657		9,522		81,135		67,232

For footnotes, see page 146.

Analysis of exposures and significant movements

Sub-prime residential mortgage-related assets

Sub-prime residential mortage-related assets included US$2.8bn (30 June 2010: US$3.5bn; 31 December 2010: US$3.1bn) related to US‑originated assets and US$1.1bn (30 June 2010: US$1.1bn; 31 December 2010: US$1.1bn) relating to UK non-conforming residential mortgage-related assets. US-originated assets represented US$1.5bn (30 June 2010: US$1.5bn; 31 December 2010: US$1.5bn) of the non-high grade assets held of US$2.0bn (30 June 2010: US$1.7bn; 31 December 2010: US$1.7bn), reflecting the higher quality of the UK‑originated assets.

Gains on releases of impairment of US$2m on assets classified as available for sale were recognised in the first half of 2011 (30 June 2010: losses of US$100m; 31 December 2010: gains of US$52m). Of the above gains, first half gains of US$41m

(30 June 2010: losses of US$98m; 31 December 2010: gains of US$44m) occurred in the SICs and were allocated to the capital note holders.

US Alt-A residential mortgage-related assets

During the first half of 2011, further impairments of US$364m (30 June 2010: US$598m; 31 December 2010: US$286m) were recorded in respect of Alt-A mortgage-related assets. Of the impairment above, US$168m (30 June 2010: US$369m; 31 December 2010: US$81m) occurred in the SICs and was allocated to the capital note holders.

The following table shows the vintages of the collateral assets supporting our holdings of US sub‑prime and Alt-A MBSs. Market prices for these instruments generally incorporate higher discounts for later vintages. The majority of our holdings of US sub-prime MBSs originated pre-2007; holdings of US Alt-A MBSs are more evenly distributed between pre-2007 vintages and those from 2007.

Vintages of US sub-prime and Alt-A mortgage-backed securities

	Gross principal42 of US sub-prime mortgage-backed securities at						Gross principal42 of US Alt-A mortgage-backed securities at
	30 June		30 June		31 December		30 June		30 June		31 December
	2011		2010		2010		2011		2010		2010
	US$m		US$m		US$m		US$m		US$m		US$m
Mortgage vintage
Pre-2006 .......................................	888		1,358		1,061		1,024		1,389		1,159
2006 .............................................	1,687		2,074		1,822		4,361		5,499		5,147
2007 .............................................	933		1,060		979		3,757		4,496		3,651
	3,508		4,492		3,862		9,142		11,384		9,957

For footnote, see page 146.

US Government agency and sponsored enterprises mortgage-related assets

During the first half of 2011, we increased our holdings of US Government agency and sponsored enterprises mortgage-related assets by US$0.3bn.

Other residential mortgage-related assets

The majority of our other residential mortgage-related assets were originated in the UK (30 June 2011: US$3.6bn; 30 June 2010: US$4.2bn; 31 December 2010: US$3.9bn). No impairments were recognised in respect of these UK-originated assets in the first half of 2011, nor throughout 2010, reflecting credit support within the asset portfolio.

Commercial property mortgage-related assets

Of our total of US$10.4bn (30 June 2010: US$10.6bn; 31 December 2010: US$10.5bn) of commercial property mortgage-related assets, US$4.9bn related to US originated assets (30 June 2010: US$5.4bn; 31 December 2010: US$5.2bn). Spreads continued to tighten on both US and non-US commercial property mortgage-related assets during the first half of 2011. Impairments of nil were recognised (30 June 2010: US$11m; 31 December 2010: write-backs of US$6m).

Leveraged finance-related assets

The majority of these assets related to US-originated exposures; 93% (30 June 2010: 86%; 31 December 2010: 90%) were high grade with no impairments recorded in the period.

Student loan-related assets

Our holdings in student loan-related assets were US$5.4bn (30 June 2010: US$5.4bn; 31 December 2010: US$5.5bn). No impairments were recorded on student loan-related assets in the first half of 2011, nor throughout 2010.

Transactions with monoline insurers

HSBC's exposure to derivative transactions entered into directly with monolines

Our principal exposure to monolines is through a number of OTC derivative transactions, mainly credit default swaps ('CDS's). We entered into these CDSs primarily to purchase credit protection against securities held at the time within the trading portfolio.

During the first half of 2011, the notional value of contracts with monolines was largely unchanged, but our overall credit exposure to monolines decreased as credit spreads narrowed. The table below sets out the fair value, essentially the replacement cost, of the derivative transactions at 30 June 2011, and hence the amount at risk if the CDS protection purchased were to be wholly ineffective because, for example, the monoline insurer was unable to meet its obligations. To further analyse that risk, the value of protection purchased is shown subdivided between those monolines that were rated by S&P at 'BBB- or above' at 30 June 2011, and those that were 'below BBB-' ('BBB-' is the S&P cut-off for an investment grade classification). The 'Credit risk adjustment' column indicates the valuation adjustment taken against the net exposures, and reflects our best estimate of the likely loss of value on purchased protection arising from the deterioration in creditworthiness of the monolines. These valuation adjustments, which reflect a measure of the irrecoverability of the protection purchased, have been charged to the income statement. During the first half of 2011, the credit risk adjustment on derivative contracts with monolines decreased as the exposures decreased.

HSBC's exposure to derivative transactions entered into directly with monoline insurers

	Notional            amount		Net exposure   before credit                    risk adjustment46		Credit risk     adjustment47		Net exposure      after credit                   risk adjustment
	US$m		US$m		US$m		US$m
At 30 June 2011
Derivative transactions with monoline counterparties
Monolines - investment grade (BBB- or above) .....	5,269		846		(85)		761
Monolines - sub-investment grade (below BBB-) ....	2,224		539		(372)		167
	7,493		1,385		(457)		928
At 30 June 2010
Derivative transactions with monoline counterparties
Monolines - investment grade (BBB- or above) .....	5,103		920		(92)		828
Monolines - sub-investment grade (below BBB-) ....	2,464		751		(475)		276
	7,567		1,671		(567)		1,104
At 31 December 2010
Derivative transactions with monoline counterparties
Monolines - investment grade (BBB- or above) .....	5,179		876		(88)		788
Monolines - sub-investment grade (below BBB-) ....	2,290		648		(431)		217
	7,469		1,524		(519)		1,005

For footnotes, see page 146.

The above table can be analysed as follows. At 30 June 2011, HSBC had derivative transactions referenced to underlying securities with a notional value of US$7.5bn (30 June 2010: US$7.6bn; 31 December 2010: US$7.5bn), whose value at that date indicated a potential claim against the protection purchased from the monolines of some US$1.4bn (30 June 2010: US$1.7bn; 31 December 2010: US$1.5bn). On the basis of a credit assessment of the monolines, a provision of US$457m has been taken (30 June 2010: US$567m; 31 December 2010: US$519m), leaving US$928m exposed (30 June 2010: US$1.1bn; 31 December 2010: US$1.0bn), of which US$761m is recoverable from monolines rated investment grade at 30 June 2011 (30 June 2010: US$828m; 31 December 2010: US$788m). The provisions taken imply in aggregate that 90 cents in the dollar will be recoverable from investment grade monolines and 31 cents in the dollar from non-investment grade monolines (30 June 2010: 90 cents and 37 cents, respectively; 31 December 2010: 90 cents and 33 cents, respectively).

For the CDSs, market prices are generally not readily available. Therefore the CDSs are valued on the basis of market prices of the referenced securities.

The credit risk adjustment against monolines is determined by one of a number of methodologies, dependent upon the internal credit rating of the monoline. Our assignment of internal credit ratings is based upon detailed credit analysis, and may differ from external ratings.

Credit risk adjustments for monolines

·   For highly-rated monolines, the standard credit risk adjustment methodology (as described on page 190) applies, with the exception that the future exposure profile is deemed to be constant (equal to the current market value) over the weighted average life of the referenced security, and the credit risk adjustment cannot fall below 10% of the mark-to-market exposure. 

·   In respect of monolines where default has either occurred or there is a strong possibility of default in the near term, the adjustment is determined based on the estimated probabilities of various potential scenarios, and the estimated recovery in each case.

·  For other monoline exposures, the credit risk adjustment follows the methodology for highly-rated monolines, adjusted to include the probability of a claim arising in respect of the referenced security, and applies implied probabilities of default where the likelihood of a claim is believed to be high.

HSBC's monoline credit risk adjustment calculation utilises a range of approaches depending on the credit quality of the monoline. The net effect of utilising the methodology adopted for 'highly-rated' monolines across all monolines would be to reduce the credit risk adjustment by US$117m (30 June 2010: US$14m; 31 December 2010: US$94m). The net effect of utilising a methodology based on credit default swap spreads would be an increase in credit risk adjustment of US$49m (30 June 2010: increase of US$52m; 31 December 2010: increase of US$8m).

At 30 June 2011, US$1.2bn (30 June 2010: US$1.6bn; 31 December 2010: US$1.4bn) notional value of securities referenced by monoline CDS transactions with a market value of US$0.9bn (30 June 2010: US$1.2bn; 31 December 2010: US$1.0bn) were held in the loans and receivables category, having been included in the reclassification of financial assets described in Note 10 on the Financial Statements. At the date of reclassification, the market value of the assets was US$1.0bn. The reclassification resulted in an accounting asymmetry between the CDSs, which continue to be held at fair value through profit and loss, and the reclassified securities, which are accounted for on an amortised cost basis. If the reclassifications had not occurred, the effect on the income statement for the half year to 30 June 2011 would have been an increase in profit of US$4m (first half of 2010: increase in profit of US$30m; second half of 2010: decrease in profit of US$33m). This amount represents the difference between the increase in market value of the securities during the first half of 2011 and the accretion recognised under the amortised cost method in the period.

HSBC's exposure to direct lending and irrevocable commitments to lend to monolines

HSBC had no liquidity facilities to monolines at 30 June 2011 (30 June 2010: nil; 31 December 2010: nil).

HSBC's exposure to debt securities which benefit from guarantees provided by monolines

Within both the trading and available-for-sale portfolios, we hold bonds that are 'wrapped' with a credit enhancement from a monoline. As the bonds are traded explicitly with the benefit of this enhancement, any deterioration in the credit profile of the monoline is reflected in market prices and, therefore, in the carrying amount of these securities at 30 June 2011. For wrapped bonds held in our trading portfolio, the mark-to-market movement has been reflected through the income statement. For wrapped bonds held in the available-for-sale portfolio, the mark-to-market movement is reflected in equity unless there is objective evidence of impairment, in which case the impairment loss is reflected in the income statement. No wrapped bonds were included in the reclassification of financial assets described in Note 10 on the Financial Statements.

HSBC's exposure to Credit Derivative Product Companies

CDPCs are independent companies that specialise in selling credit default protection on corporate exposures. At 30 June 2011, HSBC had purchased from CDPCs credit protection with a notional value of US$4.8bn (30 June 2010: US$5.0bn; 31 December 2010: US$4.9bn) which had a fair value of US$226m (30 June 2010: US$374m; 31 December 2010: US$235m), against which a credit risk adjustment (a provision) of US$49m (30 June 2010: US$98m; 31 December 2010: US$63m) was held. At 30 June 2011, none of the exposure was to CDPCs with investment grade ratings (30 June 2010: 23%; 31 December 2010: nil).

Leveraged finance transactions

Leveraged finance transactions include sub-investment grade acquisition or event-driven financing. The following table shows our exposure to leveraged finance transactions arising from primary transactions. Our additional exposure to leveraged finance loans through holdings of ABSs from our trading and investment activities is shown in the table on page 124.

HSBC's exposure to leveraged finance transactions

	Exposures at 30 June 2011						Exposures at 30 June 2010						Exposures at 31 December 2010
	Funded48		Un- funded49		Total		Funded48		Un-   funded49		Total		Funded48		Un-   funded49		Total
	US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m
Europe .......................................	2,761		289		3,050		3,369		393		3,762		3,337		298		3,635
Rest of Asia-Pacific ...................	-		-		-		63		24		87		17		22		39
North America ..........................	489		127		616		1,204		184		1,388		1,066		185		1,251
	3,250		416		3,666		4,636		601		5,237		4,420		505		4,925
Held within:
- loans and receivables ..........	3,249		356		3,605		4,633		450		5,083		4,199		393		4,592
- fair value through profit or loss ......................	1		60		61		3		151		154		221		112		333

For footnotes, see page 146.

We held leveraged finance commitments of US$3.8bn at 30 June 2011 (30 June 2010: US$5.5bn; 31 December 2010: US$5.1bn), of which US$3.3bn (30 June 2010: US$4.9bn; 31 December 2010: US$4.6bn) was funded.

As described in Note 10 on the Financial Statements, certain leveraged finance loans were reclassified from held for trading to loans and receivables. As a result, these loans are held at amortised cost subject to impairment and are not marked to market, and no net gains (30 June 2010: net losses of US$0.3bn; 31 December 2010: net gains of US$0.1bn) were taken to the income statement in the first half of 2011.

At 30 June 2011, our principal exposures were to companies in two sectors: US$1.5bn to data processing (30 June 2010: US$3.1bn; 31 December 2010: US$2.8bn) and US$1.8bn to communications and infrastructure (30 June 2010: US$1.7bn; 31 December 2010: US$1.8bn). During the first half of 2011, 99% of the total fair value movement not recognised was against exposures in these two sectors (30 June 2010: 99%; 31 December 2010: 99%).

Representations and warranties related to mortgage sales and securitisation activities

We have been involved in various activities related to the sale and securitisation of residential mortgages, which are not recognised on our balance sheet. These activities include:

·     the purchase of US$24bn by HSBC Bank USA, substantially all of which were originated by non-HSBC entities, with a current outstanding balance of approximately US$9bn and securitisation of these by HSBC Securities (USA) Inc. ('HSI') between 2005 and 2007;

·     HSI acting as underwriter for third-party issuance of private label MBSs with an original issuance value of US$37bn and a current outstanding balance of approximately US$16bn, most of which were sub-prime, as well as underwriting US$6bn of MBSs issued by HSBC Finance; and

·     the origination and sale by HSBC Bank USA of mortgage loans, primarily to government sponsored entities.

In sales and securitisations of mortgage loans, various representations and warranties regarding the loans may be made to purchasers of the mortgage loans and MBSs. In respect of the purchase and securitisation of third party originated mortgages and the underwriting of third-party MBSs, the obligation to repurchase loans in the event of a breach of loan level representations and warranties resides predominantly with the organisation that originated the loan. While certain of these originators are or may become financially impaired and, therefore, unable to fulfil their repurchase obligations, we do not believe we have significant exposure for repurchases on these loans.

At 30 June 2011, a liability of US$237m was recognised in respect of various representations and warranties relating to the origination and sale by HSBC Bank USA of mortgage loans, primarily to government sponsored entities (30 June 2010:

 

END

 

 

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