Annual Financial Report - 17

RNS Number : 4083J

HSBC Holdings PLC

30 March 2010

	Page
Regulation and supervision¹ .....................	196
Risk management¹ .......................................	199
Credit risk .....................................................	201
Credit risk management² .......................	201
Credit exposure³ .....................................	206
Areas of special interest¹ .......................	214
Credit quality of financial instruments³ .........................................	225
Impaired loans and advances².............	230
Impairment allowances and charges³..	230
HSBC Holdings² ......................................	241
Risk elements in the loan portfolio¹ ....	241
Liquidity and funding²................................	244
Policies and procedures² ......................	244
Primary sources of funding² ..................	244
The management of risk²........................	245
Contingent liquidity risk² .....................	247
The impact of market turmoil² ..............	248
HSBC Holdings² ......................................	249
Market risk ...................................................	250
Sensitivity analysis² ...............................	251
Impact of market turmoil³ ......................	252
Trading portfolios² .................................	253
Non-trading portfolios² .........................	255
Sensitivity of net interest income¹ ........	256
Structural foreign exchange exposures¹ ............................................	257
Defined benefit pension schemes².........	258
HSBC Holdings³ ......................................	258
Residual value risk¹ .....................................	261
Operational risk¹ ..........................................	262
Legal risk¹ ................................................	262
Group security and fraud risk¹ .............	263
Pension risk¹ ................................................	263
Reputational risk¹ ........................................	263
Sustainability risk¹ ......................................	264
Risk management of insurance operations² ...............................................	265
Life insurance business² ........................	265
Non-life insurance business² ................	266
Insurance risk² ........................................	266
Financial risks² .......................................	272
Present value of in-force long-term insurance business² ............................	283
Capital management and allocation ..........	285
Capital management² ............................	285
Capital measurement and allocation³	286
Risk-weighted assets by principal subsidiary¹ ...........................................	291

1 Unaudited.

2 Audited.

3 Audited where indicated.

Regulation and supervision

(Unaudited)

With listings of its ordinary shares in London, Hong Kong, New York, Paris and Bermuda, HSBC Holdings complies with the relevant requirements for listing and trading on each of these exchanges. In the UK, these are the Listing Rules of the Financial Services Authority ('FSA'); in Hong Kong, The Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited ('HKSE'); in the US, where the shares are traded in the form of ADSs, HSBC Holdings' shares are registered with the US Securities and Exchange Commission. As a consequence of its US listing, HSBC Holdings is also subject to the reporting and other requirements of the US Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, and the New York Stock Exchange's ('NYSE') Listed Company Manual, in each case as applied to foreign private issuers. In France and Bermuda, HSBC Holdings is subject to the listing rules of Euronext, Paris and the Bermuda Stock Exchange respectively, applicable to companies with secondary listings.

A statement of HSBC's compliance with the provisions of the Combined Code on Corporate Governance issued by the Financial Reporting Council and with the Code on Corporate Governance Practices in Appendix 14 to the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited is set out in the 'Report of the Directors: Governance' on page 294.

HSBC's operations throughout the world are regulated and supervised by approximately 540 different central banks and regulatory authorities in those jurisdictions in which HSBC has offices, branches or subsidiaries. These authorities impose a variety of requirements and controls designed to improve financial stability and the transparency of financial markets and their contribution to economic growth. These regulations and controls cover, inter alia, capital adequacy, depositor protection, market liquidity, governance standards, customer protection (for example, fair lending practices, product design, and marketing and documentation standards), and social responsibility obligations (for example, anti‑money laundering and anti-terrorist financing measures). In addition, a number of countries in which HSBC operates impose rules that affect, or place limitations on, foreign or foreign-owned or controlled banks and financial institutions. The rules include restrictions on the opening of local offices, branches or subsidiaries and the types of banking and non-banking activities that may be conducted by those local offices, branches or subsidiaries; restrictions on the acquisition of local banks or regulations requiring a specified percentage of local ownership; and restrictions on investment and other financial flows entering or leaving the country. The supervisory and regulatory regimes of the countries where HSBC operates will determine to some degree HSBC's ability to expand into new markets, the services and products that HSBC will be able to offer in those markets and how HSBC structures specific operations. As aresult of government interventions in response to recent global economic conditions, it is widely anticipated that there will be a substantial increase in government regulation and supervision of the financial services industry, including the imposition of higher capital requirements, heightened disclosure standards and restrictions on certain types of transaction structures.

The FSA supervises HSBC on a consolidated basis. In addition, each operating bank, finance company or insurance operation within HSBC is regulated by local supervisors. The primary regulatory authorities are those in the UK, Hong Kong and the US, the Group's principal areas of operation.

UK regulation and supervision

UK banking and financial services institutions are subject to multiple regulations. The primary UK statute is the Financial Services and Markets Act 2000 ('FSMA'). Additionally, data privacy is regulated by the Data Protection Act 1998. Other UK financial services legislation is derived from EU directives relating to banking, securities, insurance, investments and sales of personal financial services.

In addition to its role as HSBC's lead regulator, the FSA is responsible for authorising and supervising all HSBC's businesses in the UK which require authorisation under FSMA. These include deposit-taking, retail banking, life and general insurance, pensions, investments, mortgages, custody and share dealing businesses, and treasury and capital markets activity. HSBC Bank is HSBC's principal authorised institution in the UK.

FSA rules establish the minimum criteria for authorisation for banks and financial services businesses in the UK. They also set out reporting (and, as applicable, consent) requirements with regard to large individual exposures and large exposures to related borrowers. In its capacity as supervisor of HSBC on a consolidated basis, the FSA receives information on the capital adequacy of, and sets requirements for, HSBC as a whole. Further details on capital measurement are included in 'Capital management and allocation' on pages 285 to 291. The FSA's approach to capital requirements for UK insurers is to require minimum capital to be calculated on two bases. First, firms must calculate their liabilities on a prudent basis and add a statutory solvency margin ('pillar 1'). Secondly, firms must calculate their liabilities on a realistic basis then add to this their own calculation of risk-based capital. The sum of realistic reserves and risk-based capital ('pillar 2') is agreed with the FSA. Insurers are required to maintain capital equal to the higher of pillars 1 and 2. The FSA has the right to object, on prudential grounds, to persons who hold, or intend to hold, 10 per cent or more of the voting power of a financial institution.

The regulatory framework of the UK financial services system has traditionally been based on co‑operation between the FSA and authorised institutions. The FSA monitors authorised institutions through ongoing supervision and the review of routine and ad hoc reports relating to financial and prudential matters. The FSA may periodically obtain independent reports, usually from the auditors of the authorised institution, as to the adequacy of internal control procedures and systems as well as procedures and systems governing records and accounting. The FSA meets regularly with HSBC's senior executives to discuss HSBC's adherence to the FSA's prudential guidelines. They also regularly discuss fundamental matters relating to HSBC's business in the UK and internationally, including areas such as strategic and operating plans, risk control, loan portfolio composition and organisational changes, including succession planning. In light of current conditions, HSBC has experienced an increased level of ongoing interaction with the FSA.

Hong Kong regulation and supervision

Banking in Hong Kong is subject to the provisions of the Banking Ordinance and to the powers, functions and duties ascribed by the Banking Ordinance to the Hong Kong Monetary Authority (the 'HKMA'). The principal function of the HKMA is to promote the general stability and effective working of the banking system in Hong Kong. The HKMA is responsible for supervising compliance with the provisions of the Banking Ordinance. The Banking Ordinance gives power to the Chief Executive of Hong Kong to give directions to the HKMA and the Financial Secretary with respect to the exercise of their respective functions under the Banking Ordinance.

The HKMA has responsibility for authorising banks, and has discretion to attach conditions to its authorisation. The HKMA requires that banks or their holding companies file regular prudential returns, and holds regular discussions with the management of the banks to review their operations. The HKMA may also conduct 'on-site' examinations of banks and, in the case of banks incorporated in Hong Kong, of any local and overseas branches and subsidiaries. The HKMA requires all authorised institutions to have adequate systems of internal control and requires the institutions' external auditors, upon request, to report on those systems and other matters such as the accuracy of information provided to the HKMA. In addition, the HKMA may from time to time conduct tripartite discussions with banks and their external auditors.

The HKMA has the power to serve a notice of objection on persons if they are no longer deemed to be fit and proper to be controllers of the bank, if they may otherwise threaten the interests of depositors or potential depositors, or if they have contravened any conditions specified by the HKMA. The HKMA may revoke authorisation in the event of an institution's non‑compliance with the provisions of the Banking Ordinance. These provisions require, among other things, the furnishing of accurate reports.

The HKMA implemented Basel II with effect from 1 January 2007 for all Authorised Institutions incorporated in Hong Kong.

The marketing of, dealing in and provision of advice and asset management services in relation to securities in Hong Kong are subject to the provisions of the Securities and Futures Ordinance of Hong Kong ('Securities and Futures Ordinance'). Entities engaging in activities regulated by the Securities and Futures Ordinance are required to be licensed. The HKMA is the primary regulator for banks involved in the securities business, while the Securities and Futures Commission is the regulator for non-banking entities.

US regulation and supervision

HSBC is subject to extensive federal and state supervision and regulation in the US. Banking laws and regulations of the Board of Governors of the Federal Reserve System (the 'Federal Reserve Board'), the Office of the Comptroller of the Currency (the 'OCC') and the Federal Deposit Insurance Corporation (the 'FDIC') govern many aspects of HSBC's US business.

HSBC and its US operations are subject to supervision, regulation and examination by the Federal Reserve Board because HSBC is a 'bank holding company' under the US Bank Holding Company Act of 1956 ('BHCA'), as a result of its control of HSBC Bank USA, N.A., McLean, Virginia ('HBUS'); HSBC Trust Company (Delaware), N.A., Wilmington, Delaware ('HTCD'); and Wells Fargo HSBC Trade Bank, N.A., San Francisco, California ('WFTB'). HSBC North America Holdings Inc. ('HNAH'), formed to hold HSBC's US and Canadian operations is also a 'bank holding company'. Both HSBC and HNAH are registered as financial holding companies ('FHC's) under the BHCA, and, accordingly, may affiliate with securities firms and insurance companies and engage in other activities that are financial in nature or incidental or complementary to activities that are financial in nature. The ability of HSBC and HNAH to engage in expanded financial activities as FHCs depends upon HSBC and HNAH continuing to meet certain criteria set forth in the BHCA, including requirements that their US depository institution subsidiaries be 'well capitalised' and 'well managed', and that such institutions have achieved at least a satisfactory record in meeting community credit needs during their most recent examinations pursuant to the Community Reinvestment Act.

In general, under the BHCA, an FHC would be required, upon notice by the Federal Reserve Board, to enter into an agreement with the Federal Reserve Board to correct any failure to comply with the requirements to maintain FHC status. Until such deficiencies are corrected, the Federal Reserve Board may impose limitations on the US activities of an FHC and depository institutions under its control. If such deficiencies are not corrected, the Federal Reserve Board may require an FHC to divest its control of any subsidiary depository institution or to desist from certain financial activities in the US.

The three US banks, HBUS, HTCD, and WFTB are subject to regulation and examination primarily by the OCC, secondarily by the FDIC, and by the Federal Reserve Board. Banking laws and regulations restrict many aspects of their operations and administration, including the establishment and maintenance of branch offices, capital and reserve requirements, deposits and borrowings, investment and lending activities, payment of dividends and numerous other matters.

In December 2007, US regulators published a final rule regarding Risk-Based Capital Standards: Advanced Capital Adequacy Framework - Basel II. This final rule represents the US adoption of Basel II. The final rule became effective on 1 April 2008, and requires large bank holding companies, including HNAH, to adopt its provisions no later than 1 April 2011. HNAH has established comprehensive Basel II implementation project teams comprised of risk management specialists representing all risk disciplines. In addition, US banking authorities have adopted 'leverage' capital requirements that generally require US banks and bank holding companies to maintain a minimum amount of capital in relation to their balance sheet assets (measured on a non-risk weighted basis).

HSBC Bank USA and HTCD are subject to risk-based assessments from the Federal Deposit Insurance Corporation ('FDIC'), which insures deposits generally to a maximum of US$100,000 per depositor for domestic deposits. In October 2008, the FDIC raised the maximum amount of insured deposits to US$250,000 per depositor and, on 20 May 2009, extended the increased limit until 31 December 2013. On 1 January 2014, the limit will return to US$100,000 for all deposit accounts, except for certain retirement accounts which remain insured up to US$250,000 per depositor. The FDIC bases assessments on supervisory ratings, financial ratios and long-term debt issuer ratings, with those banks in the highest rated categories paying lower assessments. Due to projected shortfalls in the FDIC fund as a result of continuing bank failures, the FDIC has required all insured banks, including HBUS and HTCD, to prepay their insurance premium for the next three years.

In October 2008, the FDIC announced its Temporary Liquidity Guarantee Programme ('TLGP'), under which the FDIC will guarantee (i) newly-issued senior unsecured debt issued by eligible, participating institutions, and (ii) certain non-interest bearing transaction accounts. HNAH and its subsidiary banks and bank holding companies elected to participate in both components of the TLGP, as applicable. The FDIC is phasing out this programme, and will cease guaranteeing newly-issued debt on 30 April 2010.

HSBC's US consumer finance operations are subject to extensive state-by-state regulation in the US, and to laws relating to consumer protection (both in general, and in respect of sub-prime lending operations, which have been subject to enhanced regulatory scrutiny); discrimination in extending credit; use of credit reports; privacy matters; disclosure of credit terms; and correction of billing errors. They also are subject to regulations and legislation that limit operations in certain jurisdictions.

Risk management

(Unaudited)

Introduction

All HSBC's activities involve, to varying degrees, the measurement, evaluation, acceptance and management of risks or combinations of risks. The most important categories of risk that the Group is exposed to are credit risk (including cross-border country risk), market risk, operational risks in various forms, liquidity risk, insurance risk, pension risk, residual value risk, reputational risk and sustainability (environmental and social) risks. Market risk includes foreign exchange, interest rate and equity price risks.

The management of these various risk categories is discussed below. Insurance risk is managed by the Group's insurance businesses together with their own credit, liquidity and market risk functions, distinct from those covering the rest of HSBC due to the different nature of their activities but under risk oversight at Group level.

The risk profiles of HSBC Group and of individual operating entities change constantly under the influence of a wide range of factors. The risk management framework established by the Group fosters the continuous monitoring of the risk environment and an integrated evaluation of risks and their interactions.

Risk governance and ownership

A well-established risk governance and ownership structure ensures oversight of, and accountability for, the effective management of risk at Group, regional, customer group and operating entity levels.

The Board approves the Group's risk appetite framework, plans and performance targets for the Group and its principal operating subsidiaries, the appointment of senior officers, the delegation of authorities for credit and other risks and the establishment of effective control procedures. Under authority delegated by the Board, the Group Management Board ('GMB') through its separately convened Risk Management Meeting ('RMM') formulates high-level Group risk management policy, exercises delegated risk authorities and oversees the implementation of risk appetite and controls. It monitors all categories of risk, receives reports on performance and emerging issues, determines action to be taken and reviews the efficacy of HSBC's risk management framework.

Primary responsibility for managing risk at operating entity level lies with the respective boards and Chief Executive Officers, as custodians of their

balance sheets. In their oversight and stewardship of risk management at Group level, however, GMB and RMM are supported by a dedicated Global Risk function headed by the Group Chief Risk Officer ('GCRO'), who is a member of both bodies and reports to the Chief Financial Officer, Executive Director, Risk and Regulation within the integrated Finance and Risk function, which the latter represents on the Board.

Global Risk has functional responsibility for the principal financial risk types, namely retail and wholesale credit, market, operational, security and fraud risks. For these it establishes Group policy, exercises Group-wide oversight and provides reporting and analysis of portfolio composition trends on a global and regional basis to senior management. Accountability and consistent control across the Global Risk function is provided through the Global Risk Management Board, chaired by the GCRO, the members of which include the Chief Risk Officers of HSBC's regions and the heads of risk disciplines within Group Management Office ('GMO'). The regional governance bodies for key risk matters reflect those in place at the centre. Functional units at the entity and regional levels report to Group Risk. GMO helps build the Group's risk management capacity through staff selection, training, development, performance assessment and remuneration - the GCRO is jointly responsible with business heads for setting the performance goals of senior Global Risk officers. Global Risk also co‑ordinates the continued development of the Group's risk appetite, economic capital and stress testing frameworks, and engages in discussions with regulators and in industry forums on risk and regulatory policy developments, assesses their implications and makes recommendations accordingly. In addition, the GCRO is a member of the Group Portfolio Oversight Committee, chaired by the Group Treasurer, which governs the portfolio management activities of Global Banking.

Risk appetite

HSBC's risk appetite framework describes the quantum and types of risk that HSBC is prepared to take in executing its strategy. It is central to an integrated approach to risk, capital and business management and supports the Group in achieving its return on equity objectives, as well as being a key element in meeting the Group's obligations under pillar 2 of Basel II.

The formulation of risk appetite considers HSBC's risk capacity, its financial position, the strength of its core earnings and the resilience of its reputation and brand. It is expressed both qualitatively, describing which risks are taken and why, and quantitatively. HSBC senior management attaches quantitative metrics to individual risk types to ensure that:

· underlying business activity may be guided and controlled, so that it continues to be aligned to the risk appetite framework;

· key assumptions underpinning risk appetite can be monitored and, as necessary, adjusted through subsequent business planning cycles; and

· business decisions anticipated to be necessary to mitigate risk are flagged and acted upon promptly.

The risk appetite framework, governed by the Board and overseen in its implementation on an ongoing basis by GMB and RMM, is also maintained at regional and customer group levels. It operates through two key mechanisms:

· the framework itself defines the governance bodies, processes, metrics and other features of how HSBC addresses risk appetite as part of its ongoing business; and

· periodic risk appetite statements define, at various levels in the business, the desired level of risk commensurate with return and growth targets and in line with the corporate strategy and stakeholder objectives.

The risk appetite framework covers both the beneficial and adverse aspects of risk. Within it, economic capital is the common currency through which risk is measured and used as the basis for risk evaluation, capital allocation and performance measurement across regions and customer groups. Risk appetite is executed through the operational limits that control the levels of risk run by the Group, regions and customer groups and is measured using risk-adjusted performance metrics.

Scenario stress testing

Scenario analysis and stress testing are important mechanisms in understanding the sensitivities of the Group capital and business plans to the adverse effects of extreme, but plausible, events. As well as considering the potential financial effect on plans, a key output of this tool is the consideration and establishment of management action plans for mitigating such events should they, or similar events, arise.

Group Risk regularly assesses regulatory capital supply against demand under a range of stress

scenarios, including projected global economic downturns more severe than that which is currently being experienced. Qualitative and quantitative techniques are used to estimate the potential impact on HSBC's capital position of such scenarios. HSBC also participates, where appropriate, in standard scenario analyses requested by regulatory bodies.

In particular, this framework has aided management in mitigating some of the effects of the global financial crisis. While the prediction of future events cannot cover all eventualities, nor precisely identify future events, a number of the scenarios analysed in the past provided additional management insight into the actions necessary to mitigate the risks when similar events occurred.

In addition to the suite of risk scenarios considered for the HSBC Group, each major subsidiary conducts regular macro-economic and event-driven scenario analyses specific to that region under the Group governance framework. Executive managers from across HSBC meet regularly to consider and debate the outcome of these scenarios and formulate recommended management actions. Macro-economic analyses are considered regularly by GMB.

Risk control culture

HSBC's risk management policies are encapsulated in the Group Standards Manual and cascaded in a hierarchy of policy manuals throughout the Group to communicate standards, instructions and guidance to employees. They support the formulation of risk appetite and establish procedures for monitoring and controlling risks, with timely and reliable reporting to management. HSBC regularly reviews and updates its risk management policies, systems and methodologies to reflect changes in law, regulation, markets, products and emerging best practice.

It is the responsibility of all Group officers to identify, assess and manage risk within the scope of their assigned responsibilities. Personal accountability, reinforced by the Group's governance structure and instilled by training and experience, helps to foster throughout the Group a disciplined and constructive culture of risk management and control.

Credit risk

Credit risk management

(Audited)

Credit risk is the risk of financial loss if a customer or counterparty fails to meet a payment obligation under a contract. It arises principally from direct lending, trade finance and leasing business, but also from off-balance sheet products such as counterparty risk guarantees and credit derivatives, and from the Group's holdings of debt securities. Among the risks in which the Group engages, credit risk generates the largest regulatory capital requirement.

The objectives of credit risk management, underpinning sustainably profitable business, are principally to maintain a strong culture of responsible lending and a robust risk policy and control framework; to both partner and challenge the business line in defining and implementing risk appetite, with its continuous re-evaluation under actual and scenario conditions; and to ensure independent, expert scrutiny of credit risks, their costs and their mitigation.

The credit risk governance structures and control frameworks implemented by the Group are designed for all stages of economic and financial cycles. During 2009, a number of processes, for example, crisis management and new product review, were enhanced in response to recent 'best practice' recommendations of industry and regulatory bodies. Central credit risk oversight and independent review activities have been reinforced within a common operating model for the responsibilities and interaction of GMO Risk, regionally integrated risk functions and country-based management.

Credit Risk is part of the Global Risk function, and the heads of its retail, wholesale and market risk disciplines within GMO, as well as regional Chief Risk Officers and certain country Chief Credit Officers and the Head of Risk Strategy, report to the GCRO.

Across the Group, Credit Risk fulfils the role of an independent credit control unit, while engaging in dialogue with business teams to set priorities, refine risk appetite, and monitor and report higher-risk exposures. Credit risk and risk capital management policies and methodologies, including analytical model developments and management information, are enhanced in the light of experience gained, for instance through the roll-out of the Group's advanced internal ratings-based ('IRB') approach to Basel II. See also 'Capital Management' on page 285.

The Credit Risk function within GMO provides high-level oversight and management of credit risk for HSBC worldwide. Its responsibilities include:

· formulating Group credit policy. Compliance, subject to approved dispensations, is mandatory for all HSBC's operating companies, which must develop and record in local instruction manuals their detailed credit policies and procedures, consistent with Group policy;

· guiding HSBC's operating companies on the Group's appetite for credit risk exposure to specified market sectors, activities and banking products. GMO Risk controls exposures to certain higher-risk sectors and closely monitors exposure to others, including real estate, the automotive sector, certain non-bank financial institutions, structured products and leveraged finance transactions. When necessary, restrictions are imposed on new business or exposures, which may be capped at Group and/or entity level;

· undertaking independent review and objective assessment of risk. GMO Risk assesses all commercial non-bank credit facilities and exposures - including those embedded in derivatives - that are originated or renewed by HSBC's operating companies over designated limits, prior to the facilities being committed to customers or transactions being undertaken. Operating companies may not confirm credit approval without this concurrence;

· monitoring the performance and management of portfolios across the Group. GMO Risk tracks emerging trends and conducts in-depth portfolio reviews, overseeing the effective management of any adverse characteristics;

· controlling centrally exposures to sovereign entities, banks and other financial institutions. HSBC's credit and settlement risk limits to counterparties in these sectors are approved and managed by GMO Risk to optimise the use of credit availability and avoid excessive risk concentration;

· controlling exposure for all debt securities held; where a security is not held solely for the purpose of trading, a formal issuer risk limit is established;

· establishing and maintaining HSBC's policy on large credit exposures, ensuring that concentrations of exposure by counterparty, sector or geography do not become excessive in relation to the Group's capital base and remain within internal and regulatory limits. GMO Risk also monitors HSBC's intra-Group exposures to ensure they are maintained within regulatory limits and ensures that policy and practice are fully aligned to evolving regulatory requirements;

· controlling cross-border exposures, through the imposition of country limits with sub-limits by maturity and type of business. Country limits are determined by taking into account economic and political factors, and applying local business knowledge. Transactions with countries deemed to be higher risk are considered on a case by case basis;

· maintaining and developing HSBC's risk rating framework and systems, to classify exposures meaningfully and enable focused management of the risks involved. The GCRO chairs the Credit Risk Analytics Oversight Committee, which reports to the RMM and oversees risk rating model governance for both wholesale and retail business. Rating methodologies, based upon a wide range of analytics and market data-based tools, are core inputs to the assessment of customer risk. For larger facilities, while full use is made of automated risk-rating processes, the ultimate responsibility for setting risk ratings rests with the final approving executive;

· assisting the Risk Strategy unit in the development of stress-testing scenarios, economic capital measurement and the refinement of key risk indicators and their reporting, embedded within the Group's business planning processes;

· reporting on aspects of the HSBC credit risk portfolio to the RMM, the Group Audit Committee and the Board of Directors of HSBC Holdings by way of a variety of regular and ad hoc reports covering:

- risk concentrations;

- retail portfolio performance at Group entity, regional and overall Group levels;

- specific higher-risk portfolio segments;

- a risk map of the status of key risk topics, with associated preventive and mitigating actions;

- individual large impaired accounts, and impairment allowances/charges for all customer segments;

- country limits, cross-border exposures and related impairment allowances;

- portfolio and analytical model performance data; and

- stress-testing results and recommendations;

· managing and directing credit risk management systems initiatives. A centralised database covers substantially all the Group's direct lending exposures, to deliver an increasingly granular level of management reporting. A uniform credit application process for banks is operational throughout the Group and a similar corporate credit application system covers almost all Group corporate business by value;

· providing advice and guidance to HSBC's operating companies, to promote best practice throughout the Group on credit-related matters such as sustainability risk, new products and training; and

· acting on behalf of HSBC Holdings as the primary interface, for credit-related issues, with external parties including the Bank of England, the FSA, local regulators, rating agencies, corporate analysts, trade associations and counterparts in the world's major banks and non-bank financial institutions.

Each HSBC operating company is required to implement credit policies, procedures and lending guidelines that meet local requirements while conforming to Group standards. Credit approval authorities are delegated by the Board of Directors of HSBC Holdings to the most senior Chief Executive Officers, who receive commensurate delegations from their own boards. In each major subsidiary, a Chief Risk Officer or Chief Credit Officer reports to the local Chief Executive Officer or Chief Operating Officer on credit-related issues, while maintaining a direct functional reporting line to the GCRO.

Credit quality

(Audited)

Each operating company is responsible for the quality and performance of its credit portfolios and for monitoring and controlling all credit risks in them, including those subject to central approval by Group Risk. This includes managing its own risk concentrations by market sector, geography and product. Local systems are in place throughout the Group to enable operating companies to control and monitor exposures by customer and retail product segments. A Credit Review and Risk Identification team reports directly to each regional Chief Risk Officer, and reviews the robustness and effectiveness of key risk measurement, monitoring and control activities.

HSBC's credit risk rating systems and processes differentiate exposures in order to highlight those with greater risk factors and higher potential severity of loss. In the case of individually significant accounts, risk ratings are reviewed regularly and any amendments are implemented promptly. Within the Group's retail businesses, risk is assessed and managed using a wide range of risk and pricing models to generate portfolio data.

HSBC's historical risk rating system based on a judgemental assessment of the likelihood and impact of delinquency was superseded in 2008 for financial reporting purposes and, for all significant risk management decisions employing credit risk ratings, by a more risk-sensitive and granular methodology. This facilitates the IRB approach under Basel II adopted by the Group to support calculation of its minimum credit regulatory capital requirement. For further details, see 'Credit quality of financial instruments' on page 225.

Special attention is paid to problem exposures, which are subject to more frequent and intensive review and reporting, in order to accelerate remedial action. Where appropriate, HSBC's local operating companies maintain or establish specialist units to provide customers with support in order to help them avoid default wherever possible.

Periodic risk-based audits of operating companies' credit processes and portfolios are undertaken by HSBC's Internal Audit function. Audits include consideration of the adequacy and clarity of credit policy/procedure manuals; an overview of homogeneous portfolios of similar assets to assess the quality of the loan book and other exposures; consideration of any oversight or review work performed by credit risk management functions and the adequacy of impairment calculations; a review of analytical model governance and implementation; a review of management objectives and a check that Group and local standards and policies are adhered to in the approval and management of credit facilities.

Individually significant accounts are reviewed on a sample basis to ensure that risk ratings are appropriate, that credit and collection procedures have been properly followed and that where deterioration is evident, impairment allowances are raised in accordance with the Group's established procedures. Internal Audit discusses with management any risk ratings it considers to be inappropriate; after discussion, its final recommendations for revised ratings must then be adopted.

Impairment assessment

(Audited)

When impairment losses occur, HSBC reduces the carrying amount of loans and advances through the use of an allowance account. When impairment of available-for-sale financial assets and held-to-maturity financial investments occurs, the carrying

amount of the asset is reduced directly. For further details, see 'Accounting policies' on page 369.

Impairment allowances may be assessed and created either for individually significant accounts or, on a collective basis, for groups of individually significant accounts for which no evidence of impairment has been individually identified or for high-volume groups of homogeneous loans that are not considered individually significant.

It is HSBC's policy that each operating company creates allowances for impaired loans promptly and consistently.

Management regularly evaluates the adequacy of the established allowances for impaired loans by conducting a detailed review of the loan portfolio, comparing performance and delinquency statistics with historical trends and assessing the impact of current economic conditions.

Individually assessed impairment allowances

These are determined by evaluating exposure to loss, case by case, on all individually significant accounts and all other accounts that do not qualify for the collective assessment approach outlined below. Loans are treated as impaired as soon as there is objective evidence that an impairment loss has been incurred. The criteria used by HSBC to determine that there is such objective evidence include:

· known cash flow difficulties experienced by the borrower;

· past due contractual payments of either principal or interest;

· breach of loan covenants or conditions;

· the probability that the borrower will enter bankruptcy or other financial realisation; and

· a significant downgrading in credit rating by an external credit rating agency.

In determining the level of allowances on such accounts, the following factors are typically considered:

· HSBC's aggregate exposure to the customer;

· the viability of the customer's business model and their capacity to trade successfully out of financial difficulties, generating sufficient cash flow to service debt obligations;

· the ability of the borrower to obtain, and make payments in, the currency of the loan if not denominated in local currency;

· the amount and timing of expected receipts and recoveries;

· the extent of other creditors' commitments ranking ahead of, or pari passu with, HSBC and the likelihood of other creditors continuing to support the company;

· the complexity of determining the aggregate amount and ranking of all creditor claims and the extent to which legal and insurance uncertainties are evident;

· the value of security and likelihood of successfully realising it;

· the existence of other credit mitigants and the ability of the providers of such credit mitigants to deliver as contractually committed; and

· when available, the secondary market price of the debt.

The level of impairment allowances on individually significant accounts that are above defined materiality thresholds is reviewed at least semi-annually, and more regularly when circumstances require. This normally encompasses re-assessment of the enforceability of any collateral held and of actual and anticipated receipts. For significant commercial and corporate debts, specialised loan 'work-out' teams with experience in insolvency and specific market sectors are used to manage the lending and assess likely losses.

Individually assessed impairment allowances are only released when there is reasonable and objective evidence of a reduction in the established loss estimate.

Collectively assessed impairment allowances

Impairment is assessed on a collective basis in two circumstances:

· to cover losses that have been incurred but have not yet been identified on loans subject to individual assessment; and

· for homogeneous groups of loans that are not considered individually significant.

Incurred but not yet identified impairment

Individually assessed loans for which no evidence of impairment has been specifically identified on an individual basis are grouped together according to their credit risk characteristics. A collective impairment allowance is calculated to reflect impairment losses incurred at the balance sheet date which will only be individually identified in the future.

The collective impairment allowance is determined having taken into account:

· historical loss experience in portfolios of similar credit risk characteristics (for example, by industry sector, risk rating or product segment);

· the estimated period between impairment occurring and the loss being identified and evidenced by the establishment of an appropriate allowance against the individual loan; and

· management's experienced judgement as to whether current economic and credit conditions are such that the actual level of inherent losses is likely to be greater or less than that suggested by historical experience.

The period between a loss occurring and its identification is estimated by local management for each relevant portfolio. In general, the periods used vary between four and twelve months although, in exceptional cases, longer periods are warranted.

The basis on which impairment allowances for incurred but not yet identified losses is established in each reporting entity is documented and reviewed by senior Finance and Credit Risk management to ensure conformity with Group policy.

Homogeneous groups of loans

Two methodologies are used to calculate impairment allowances where large numbers of relatively low-value assets are managed using a portfolio approach, typically:

· low-value, homogeneous small business accounts in certain countries or territories;

· residential mortgages that have not been individually assessed;

· credit cards and other unsecured consumer lending products; and

· motor vehicle financing.

When appropriate empirical information is available, the Group uses roll rate methodology. This employs a statistical analysis of historical trends of default and the amount of consequential loss, based on the delinquency of accounts within a portfolio of homogeneous accounts. Other historical data and current economic conditions are also evaluated when calculating the appropriate level of impairment allowance required to cover inherent loss. In certain highly developed markets, models also take into account behavioural and account management trends revealed in, for example, bankruptcy and rescheduling statistics.

When the portfolio size is small, or when information is insufficient or not reliable enough to adopt a roll rate methodology, the Group uses a basic formulaic approach based on historical loss rate experience.

Generally, historical experience is the most objective and relevant information from which to begin to assess inherent loss within each portfolio. In circumstances where historical loss experience provides less relevant information about the inherent loss in a given portfolio at the balance sheet date - for example, where there have been changes in economic conditions or regulations - management considers the more recent trends in the portfolio risk factors which may not be adequately reflected in its statistical models and, subject to guidance from Group Finance and GMO Risk, adjusts impairment allowances accordingly.

Roll rates, loss rates and the expected timing of future recoveries are regularly benchmarked against actual outcomes to ensure they remain appropriate.

Write-off of loans and advances

Loans are normally written off, either partially or in full, when there is no realistic prospect of further recovery. Where loans are secured, this is generally after receipt of any proceeds from the realisation of security. In circumstances where the net realisable value of any collateral has been determined and there is no reasonable expectation of further recovery, write off may be earlier.

In the case of residential mortgages and second lien loans in HSBC Finance, loan carrying amounts in excess of net realisable value are written off at or before the time foreclosure is completed or when settlement is reached with the borrower. If there is no reasonable expectation of recovery, and foreclosure is pursued, unconstrained by delays required by law or regulation, the loan is normally written off no later than the end of the month in which the loan becomes 180 days contractually past due.

Unsecured personal facilities, including credit cards, are generally written off at between 150 and 210 days past due, the standard period being the end of the month in which the account becomes 180 days contractually delinquent. Write-off periods may be extended, generally to no more than 360 days past due but in very exceptional circumstances exceeding that figure, in a few countries where local regulation or legislation constrain earlier write-off, or where the realisation of collateral for secured real estate lending extends to this time.

In the event of bankruptcy or analogous proceedings, write-off may occur earlier than at the periods stated above. Collections procedures may continue after write-off.

Following the earlier decision to cease underwriting through the Group's US consumer mortgage lending business and, given the reduced ability of customers to refinance their facilities which changed their historical behaviour patterns, HSBC Finance shortened the write-off period from 240 days or later to 180 days contractually past due. The effect of this change was an acceleration of write-offs which reduced gross loans and advances by US$3.3 billion, with a corresponding reduction in impairment allowances and impaired loans. There has been no significant impact on net loans and advances or loan impairment charges. The effect on the current period has been quantified where relevant to the appropriate disclosure.

Cross-border exposures

Management assesses the vulnerability of countries to foreign currency payment restrictions when considering impairment allowances on cross-border exposures. This assessment includes an analysis of the economic and political factors existing at the time. Economic factors include the level of external indebtedness, the debt service burden and access to external sources of funds to meet the debtor country's financing requirements. Political factors taken into account include the stability of the country and its government, threats to security, and the quality and independence of the legal system.

Impairment allowances are assessed in respect of all qualifying exposures within these countries unless these exposures and the inherent risks are:

· performing, trade-related and of less than one year's maturity;

· mitigated by acceptable security cover which is, other than in exceptional cases, held outside the country concerned;

· in the form of securities held for trading purposes for which a liquid and active market exists, and which are measured at fair value daily;

· performing facilities with a principal (excluding security) of US$1 million or below; or

· performing facilities with maturity dates shorter than three months.

Credit exposure

Maximum exposure to credit risk

(Audited)

HSBC's exposure to credit risk covers a broad range of asset classes, including derivatives, trading assets, loans and advances to customers, loans and advances to banks and financial investments. Credit exposure in 2009 remained diversified across these asset classes, though the balance of the Group's credit exposure changed in 2009 due to the run-off of consumer finance assets in the US and greater deployment of deposit inflows into debt securities. In addition, a significant decline in volatility in financial markets led to lower derivative assets and a reduced exposure to loss in the event of default on derivative contracts. The lower volatility, steepening yield curves and narrowing credit spreads resulted in a fall in the fair value of outstanding derivative contracts. The level of offsetting derivative balances moved in line with the decline in balances of maximum exposure.

There was a deterioration in 2009 in the credit quality of loans and advances to the commercial real estate sector, notably in parts of Europe, the Middle East and North America.

Exposure to personal lending secured on residential property remained significant. HSBC suffered from continuing weakness in credit conditions in the US mortgage market. However, in the UK, despite lower activity in the housing market as a whole, the credit quality of HSBC's mortgage business remained good throughout 2009 and was well secured. Exposure to the Hong Kong residential mortgage market also remained well-secured. For further commentary on personal lending, see 'Areas of Special Interest - Personal Lending' on page 215.

Loss experience continued to be concentrated in the personal lending portfolios, primarily in the US with 75 per cent of loan impairment charges and other credit risk provisions arising in Personal Financial Services in 2009 compared with 85 per cent in 2008. In 2009, 12 per cent of the Group's loan impairment charges and other credit risk provisions arose in Commercial Banking, compared with 9 per cent in 2008. Loan impairment charges in Global Banking and Markets were 6 per cent of total, loan impairment charges and other credit risk provisions compared with 3 per cent in 2008.

The following table presents the maximum exposure to credit risk from balance sheet and off-balance sheet financial instruments, before taking account of any collateral held or other credit enhancements (unless such credit enhancements meet offsetting requirements). For financial assets recognised on the balance sheet, the maximum exposure to credit risk equals their carrying amount; for financial guarantees and similar contracts granted, it is the maximum amount that HSBC would have to pay if the guarantees were called upon. For loan commitments and other credit-related commitments that are irrevocable over the life of the respective facilities, it is generally the full amount of the committed facilities.

Maximum exposure to credit risk

(Audited)

	At 31 December 2009			At 31 December 2008
	Maximum exposure	Offset	Exposure to credit risk (net)	Maximum exposure	Offset	Exposure to credit risk (net)
	US$m	US$m	US$m	US$m	US$m	US$m

Cash and balances at central banks ...............	60,655	-	60,655	52,396	-	52,396
Items in the course of collection from other banks .......................................................	6,395	-	6,395	6,003	-	6,003
Hong Kong Government certificates of indebtedness .............................................	17,463	-	17,463	15,358	-	15,358

Trading assets ..............................................	386,070	(8,496)	377,574	405,451	(13,227)	392,224
Treasury and other eligible bills ................	22,346	-	22,346	32,458	-	32,458
Debt securities .........................................	201,598	-	201,598	199,619	-	199,619
Loans and advances to banks ...................	78,126	-	78,126	73,055	-	73,055
Loans and advances to customers .............	84,000	(8,496)	75,504	100,319	(13,227)	87,092

Financial assets designated at fair value ........	22,198	-	22,198	17,540	-	17,540
Treasury and other eligible bills ................	223	-	223	235	-	235
Debt securities .........................................	20,718	-	20,718	16,349	-	16,349
Loans and advances to banks ...................	354	-	354	230	-	230
Loans and advances to customers .............	903	-	903	726	-	726

Derivatives ..................................................	250,886	(189,606)	61,280	494,876	(383,308)	111,568

Loans and advances held at amortised cost: .	1,076,012	(91,127)	984,885	1,086,634	(83,398)	1,003,236
- to banks ................................................	179,781	(116)	179,665	153,766	(126)	153,640
- to customers .........................................	896,231	(91,011)	805,220	932,868	(83,272)	849,596

Financial investments ..................................	360,034	-	360,034	292,984	-	292,984
Treasury and other similar bills ................	58,434	-	58,434	41,027	-	41,027
Debt securities .........................................	301,600	-	301,600	251,957	-	251,957

Other assets .................................................	36,373	(4)	36,369	40,859	(5)	40,854
Endorsements and acceptances ................	9,311	(4)	9,307	10,482	(5)	10,477
Other .......................................................	27,062	-	27,062	30,377	-	30,377

Financial guarantees and similar contracts ...	53,251	-	53,251	52,318	-	52,318
Loan and other credit-related commitments¹	558,050	-	558,050	604,022	-	604,022

	2,827,387	(289,233)	2,538,154	3,068,441	(479,938)	2,588,503

For footnote, see page 291.

Collateral and other credit enhancements

(Audited)

Collateral held against financial instruments presented in the above table is described in more detail below.

Items in the course of collection from other banks

Settlement risk arises in any situation where a payment in cash, securities or equities is made in the expectation of a corresponding receipt of cash, securities or equities. Daily settlement limits are established for counterparties to cover the aggregate of HSBC's transactions with each one on any single day. Settlement risk on many transactions, particularly those involving securities and equities, is substantially mitigated by settling through assured payment systems or on a delivery-versus-payment basis.

Treasury, other eligible bills and debt securities

Collateral held as security for financial assets other than loans and advances is determined by the nature of the instrument. Debt securities, treasury and other eligible bills are generally unsecured, except for ABSs and similar instruments, which are secured by pools of financial assets.

Derivatives

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

Loans and advances

It is HSBC's policy, when lending, to do so on the basis of the customer's capacity to repay, rather than rely primarily on the value of security offered. Depending on the customer's standing and the type of product, facilities may be provided unsecured. Whenever available, collateral can be an important mitigant of credit risk.

The guidelines applied by operating companies in respect of the acceptability of specific classes of collateral or credit risk mitigation and the determination of valuation parameters are subject to regular review to ensure that they are supported by empirical evidence and continue to fulfil their intended purpose. The principal collateral types employed by HSBC are as follows:

· in the personal sector, mortgages over residential properties;

· in the commercial and industrial sector, charges over business assets such as premises, stock and debtors;

· in the commercial real estate sector, charges over the properties being financed; and

· in the financial sector, charges over financial instruments such as cash, debt securities and equities in support of trading facilities.

In addition, credit derivatives, including credit default swaps and structured credit notes, and securitisation structures are used to hedge or transfer credit risk within the Group's loan portfolio.

HSBC does not disclose the fair value of collateral held as security or other credit enhancements on loans and advances past due but not impaired, or on individually assessed impaired loans and advances, as it is not practicable to do so.

Concentration of exposure

(Audited)

Concentrations of credit risk arise when a number of counterparties or exposures have comparable economic characteristics, or such counterparties are engaged in similar activities or operate in the same geographical areas or industry sectors, so that their collective ability to meet contractual obligations is uniformly affected by changes in economic, political or other conditions. Wrong-way risk is an aggravated form of concentration risk and arises when there is a strong correlation between the counterparty's probability of default and the mark-to-market value of the underlying transaction. Wrong-way risk can be seen in the following examples:

· when the counterparty is resident and/or incorporated in an emerging market and seeks to sell a non-domestic currency in exchange for its home currency;

· when the trade involves the purchase of an equity put option from a counterparty whose shares are the subject of the option;

· the purchase of credit protection from a counterparty who is closely associated with the reference entity of the credit default swap or total return swap; and

· the purchase of credit protection on an asset type which is highly concentrated in the exposure of the counterparty selling the credit protection.

HSBC uses a range of tools to monitor and control wrong-way risk, including requiring entities to obtain prior approval before undertaking wrong-way risk transactions outside pre-agreed guidelines. The Credit Risk Management functions undertake control and monitoring processes and a regular meeting of a committee comprising senior management from Global Markets, Credit, Market Risk Management and Finance is responsible for reviewing and actively managing wrong-way risk, including allocating capital.

Securities held for trading

(Unaudited)

Total securities held for trading within trading assets were US$259 billion at 31 December 2009 (2008: US$254 billion). The largest concentration of these assets was government and government agency securities, which amounted to US$135 billion, or 52 per cent of overall trading securities (2008: US$143 billion, 56 per cent). This included US$22 billion (2008: US$32 billion) of treasury and other eligible bills. Corporate debt and other securities were US$84 billion or 32 per cent of overall trading securities, in line with 2008's level of US$83 billion. Included within total securities held for trading were US$41 billion (2008: US$50 billion) of debt securities issued by banks and other financial institutions.

A more detailed analysis of securities held for trading is set out in Note 16 on the Financial Statements and an analysis of credit quality is provided on page 225.

Debt securities, treasury and other eligible bills

(Unaudited)

At US$360 billion, total financial investments excluding equity securities were 23 per cent higher at 31 December 2009 than at the end of 2008. Debt securities, at US$302 billion, represented the largest concentration of financial investments at 84 per cent of the total, compared with US$252 billion (86 per cent) at 31 December 2008. HSBC's holdings of corporate debt, ABSs and other securities were spread across a wide range of issuers and geographical regions, with 37 per cent invested in securities issued by banks and other financial institutions. In total, holdings in ABSs decreased by US$8 billion due to a combination of movements in fair values, principal amortisations and write-downs.

Total financial investments excluding equity securities increased by 23 per cent to US$360 billion in 2009.

Investments in securities of governments and government agencies of US$171 billion were 46 per cent of overall financial investments, 8 percentage points higher than in 2008. US$58 billion of these investments comprised treasury and other eligible bills.

A more detailed analysis of financial investments is set out in Note 19 on the Financial Statements and an analysis by credit quality is provided on page 225.

The insurance businesses held diversified portfolios of debt and equity securities designated at fair value (2009: US$25 billion; 2008: US$20 billion) and debt securities classified as financial investments (2009: US$35 billion; 2008: US$28 billion). A more detailed analysis of securities held by the insurance businesses is set out on page 273.

Derivatives

(Unaudited)

Derivative assets at 31 December 2009 were US$251 billion, a decline of 49 per cent from 31 December 2008, primarily in foreign exchange, interest rate and credit derivatives. The main drivers of the reduction were fair value movements across the entire portfolio arising from lower levels of volatility within the financial markets, steepening yield curves and narrowing credit spreads.

Exposure to derivative assets fell by 49 per cent in 2009 to US$251 billion.

Loans and advances

(Unaudited)

At constant exchange rates, gross loans and advances to customers (excluding the financial sector) at 31 December 2009 declined by US$83 billion or 9 per cent from 31 December 2008.

Personal lending represented 47 per cent of total gross loans and advances to customers. Residential mortgages of US$261 billion represented 28 per cent of total gross advances to customers and constituted the Group's largest concentration in a single exposure type. As a result of continued run‑off in the US consumer finance exit portfolios, personal lending within North America fell to be broadly in line with European exposure.

Corporate, commercial and financial lending, including settlement accounts, amounted to 52 per cent of total gross loans and advances to customers at 31 December 2009. The largest industry concentrations were to non-bank financial institutions and commercial real estate lending at 10 per cent and 8 per cent, respectively, of total gross lending to customers.

Exposure to non-bank financial institutions principally comprised secured lending on trading accounts, primarily through repo facilities.

Commercial, industrial and international trade lending declined moderately in 2009, falling as a proportion of total lending by a single percentage point to 21 per cent of total gross loans and advances to customers. Within this category, the largest concentration of lending was to the service sector, which amounted to 6 per cent of total gross lending to customers.

Loans and advances to banks were widely distributed across major institutions in 2009.

Further discussion of significant movements in credit quality of the personal lending and wholesale

lending portfolios is set out in Areas of Special Interest on pages 214 to 218.

The following tables analyse loans by industry sector and by the location of the principal operations of the lending subsidiary or, in the case of the operations of The Hongkong and Shanghai Banking Corporation, HSBC Bank, HSBC Bank Middle East and HSBC Bank USA, by the location of the lending branch.

Gross loans and advances by industry sector

(Unaudited)

	At 31 December 2008	Constant currency effect	Movement on a constant currency basis	At 31 December 2009
	US$m	US$m	US$m	US$m
Gross loans and advances to customers
Personal²..............................................................	440,227	22,169	(28,190)	434,206
Residential mortgages^2,3,....................................	243,337	13,567	3,765	260,669
Other personal^2,4 ..............................................	196,890	8,602	(31,955)	173,537

Corporate and commercial ...................................	407,474	30,384	(54,768)	383,090
Commercial, industrial and international trade...	209,840	16,125	(29,837)	196,128
Commercial real estate .....................................	70,969	4,668	(6,248)	69,389
Other property-related .....................................	30,739	1,783	(2,002)	30,520
Government .....................................................	6,544	185	(40)	6,689
Other commercial⁵ ...........................................	89,382	7,623	(16,641)	80,364

Financial ..............................................................	101,085	5,419	(9,854)	96,650
Non-bank financial institutions ........................	99,536	5,248	(9,547)	95,237
Settlement accounts .........................................	1,549	171	(307)	1,413

Asset-backed securities reclassified .......................	7,991	-	(164)	7,827

Total gross loans and advances to customers⁶ .......	956,777	57,972	(92,976)	921,773

Gross loans and advances to banks ................	153,829	7,413	18,646	179,888

Total gross loans and advances .............................	1,110,606	65,385	(74,330)	1,101,661

For footnotes, see page 291.

Gross loans and advances to customers by industry sector

(Audited)

	2009	2008	2007	2006	2005
	US$m	US$m	US$m	US$m	US$m

Personal² ........................................................	434,206	440,227	500,834	476,146	420,476
Residential mortgages^2,3 ...............................	260,669	243,337	269,068	265,337	238,546
Other personal²^,4 .........................................	173,537	196,890	231,766	210,809	181,930

Corporate and commercial ..............................	383,090	407,474	400,771	343,107	278,709
Commercial, industrial and international trade ................................................................	196,128	209,840	202,038	162,109	130,802
Commercial real estate ................................	69,389	70,969	72,345	60,366	51,815
Other property-related ................................	30,520	30,739	33,907	27,165	22,196
Government ................................................	6,689	6,544	5,708	8,990	8,218
Other commercial⁵ ......................................	80,364	89,382	86,773	84,477	65,678

Financial .........................................................	96,650	101,085	99,148	62,458	52,174
Non-bank financial institutions ...................	95,237	99,536	96,781	59,204	50,032
Settlement accounts ....................................	1,413	1,549	2,367	3,254	2,142

Asset-backed securities reclassified ..................	7,827	7,991	-	-	-

Total gross loans and advances to customers⁶ ..	921,773	956,777	1,000,753	881,711	751,359

Impaired loans ................................................	30,606	25,352	19,582	15,071	12,338
- as a percentage of gross loans and advances to customers ............................................	3.3%	2.6%	2.0%	1.7%	1.6%

Total impairment allowances ..........................	25,542	23,909	19,205	13,578	11,357
- as a percentage of total gross loans and advances ...........................................	2.8%	2.5%	1.9%	1.5%	1.5%

For footnotes, see page 291.

Loans and advances to customers by industry sector and by geographical region

(Audited)

	Europe	Hong Kong	Rest of Asia- Pacific⁷	Middle East⁷	North America	Latin America	Gross loans and advances to customers		Gross loans by industry sector as a % of total gross loans
	US$m	US$m	US$m	US$m	US$m	US$m		US$m		%
At 31 December 2009
Personal² ........................................	162,562	47,946	32,514	6,405	163,934	20,845		434,206		47.2
Residential mortgages^2,3 ..............	109,872	35,292	21,983	1,898	86,591	5,033		260,669		28.3
Other personal^2,4 .........................	52,690	12,654	10,531	4,507	77,343	15,812		173,537		18.9

Corporate and commercial ..............	202,919	49,340	46,175	16,604	40,902	27,150		383,090		41.5
Commercial, industrial and international trade ..................	112,374	17,728	28,228	9,336	11,528	16,934		196,128		21.3
Commercial real estate ................	33,853	13,782	6,475	1,309	11,527	2,443		69,389		7.5
Other property-related ................	6,231	10,062	3,863	1,357	8,452	555		30,520		3.3
Government ................................	2,216	441	595	1,356	208	1,873		6,689		0.7
Other commercial⁵ ......................	48,245	7,327	7,014	3,246	9,187	5,345		80,364		8.7

Financial .........................................	73,851	2,899	2,350	1,213	14,150	2,187		96,650		10.5
Non-bank financial institutions ...	73,225	2,462	2,246	1,206	13,963	2,135		95,237		10.3
Settlement accounts ....................	626	437	104	7	187	52		1,413		0.2

Asset-backed securities reclassified ..	6,284	-	-	-	1,543	-		7,827		0.8

Total gross loans and advances to customers ('TGLAC')^6,8 .........	445,616	100,185	81,039	24,222	220,529	50,182		921,773		100.0

Percentage of TGLAC by geographical region .....................	48.3%	10.9%	8.8%	2.6%	23.9%	5.5%		100.0%

Impaired loans⁸ ...............................	10,722	841	1,200	1,646	13,246	2,951		30,606
- as a percentage of TGLAC ......	2.4%	0.8%	1.5%	6.8%	6.0%	5.9%		3.3%

Total impairment allowances⁸ ........	6,135	804	996	1,378	13,676	2,553		25,542
- as a percentage of TGLAC ......	1.4%	0.8%	1.2%	5.7%	6.2%	5.1%		2.8%

	US$m	US$m	US$m	US$m	US$m	US$m		US$m
At 31 December 2008
Personal .........................................	141,532	46,087	29,887	7,524	195,534	19,663		440,227		46.0
Residential mortgages³ .................	87,267	33,014	18,244	1,941	98,383	4,488		243,337		25.4
Other personal⁴ ...........................	54,265	13,073	11,643	5,583	97,151	15,175		196,890		20.6

Corporate and commercial ..............	219,640	52,186	47,394	18,732	47,291	22,231		407,474		42.5
Commercial, industrial and international trade ..................	121,047	20,186	29,294	10,853	15,178	13,282		209,840		21.9
Commercial real estate ................	32,704	14,233	6,713	1,431	13,504	2,384		70,969		7.4
Other property-related ................	7,666	10,296	3,541	1,587	7,234	415		30,739		3.2
Government ................................	1,864	951	579	1,181	352	1,617		6,544		0.7
Other commercial⁵ ......................	56,359	6,520	7,267	3,680	11,023	4,533		89,382		9.3

Financial .........................................	62,620	2,680	4,193	1,453	27,746	2,393		101,085		10.6
Non-bank financial institutions ...	61,823	2,402	3,940	1,447	27,560	2,364		99,536		10.4
Settlement accounts ....................	797	278	253	6	186	29		1,549		0.2

Asset-backed securities reclassified ..	6,258	-	-	-	1,733	-		7,991		0.9

TGLAC⁶ .........................................	430,050	100,953	81,474	27,709	272,304	44,287		956,777		100.0

Percentage of TGLAC by geographical region .....................	44.9%	10.6%	8.5%	2.9%	28.5%	4.6%		100.0%

Impaired loans ................................	6,774	852	835	279	14,285	2,327		25,352
- as a percentage of TGLAC ......	1.6%	0.8%	1.0%	1.0%	5.2%	5.3%		2.6%

Total impairment allowances ..........	3,859	733	813	414	16,090	2,000		23,909
- as a percentage of TGLAC ......	0.9%	0.7%	1.0%	1.5%	5.9%	4.5%		2.5%

For footnotes, see page 291.

Gross loans and advances to customers by country within Rest of Asia-Pacific, Middle East and Latin America

(Audited)

	Residential mortgages US$m	Other personal US$m	Property- related US$m	Commercial, international trade and other US$m	Total US$m
At 31 December 2009
Rest of Asia-Pacific⁷
Australia ..........................................	5,919	993	1,785	3,496	12,193
India ................................................	883	864	458	3,002	5,207
Indonesia .........................................	59	571	71	2,114	2,815
Japan ...............................................	109	149	796	1,444	2,498
Mainland China ................................	1,503	319	2,633	8,915	13,370
Malaysia ..........................................	2,925	1,717	1,085	3,548	9,275
Singapore .........................................	5,149	3,041	2,407	4,251	14,848
South Korea .....................................	2,093	407	30	1,932	4,462
Taiwan .............................................	2,205	503	53	1,578	4,339
Other ...............................................	1,138	1,967	1,020	7,907	12,032

	21,983	10,531	10,338	38,187	81,039

Middle East⁷ (excluding Saudi Arabia)
Egypt ...............................................	4	326	126	2,132	2,588
United Arab Emirates .......................	1,650	2,881	1,395	8,848	14,774
Other ...............................................	244	1,300	1,145	4,171	6,860

	1,898	4,507	2,666	15,151	24,222

Latin America
Argentina .........................................	31	628	49	1,689	2,397
Brazil ...............................................	717	10,494	1,076	12,111	24,398
Mexico ............................................	2,259	2,702	995	6,762	12,718
Panama ............................................	1,151	973	475	3,464	6,063
Other ...............................................	875	1,015	403	2,313	4,606

	5,033	15,812	2,998	26,339	50,182

At 31 December 2008
Rest of Asia-Pacific⁷
Australia ..........................................	3,598	783	1,621	3,350	9,352
India ................................................	1,112	1,482	493	3,332	6,419
Indonesia .........................................	27	527	26	1,410	1,990
Japan ...............................................	57	160	808	4,818	5,843
Mainland China ................................	1,303	12	2,784	7,423	11,522
Malaysia ..........................................	2,699	1,624	941	4,263	9,527
Singapore .........................................	4,209	3,301	2,448	3,521	13,479
South Korea .....................................	2,153	682	34	2,497	5,366
Taiwan .............................................	2,217	705	14	1,497	4,433
Other ...............................................	869	2,367	1,085	9,222	13,543

	18,244	11,643	10,254	41,333	81,474

Middle East⁷ (excluding Saudi Arabia)
Egypt ...............................................	-	275	125	2,106	2,506
United Arab Emirates .......................	1,693	3,748	2,118	10,214	17,773
Other ...............................................	248	1,560	775	4,847	7,430

	1,941	5,583	3,018	17,167	27,709

Latin America
Argentina .........................................	41	707	60	1,648	2,456
Brazil ...............................................	376	8,585	694	9,578	19,233
Mexico ............................................	2,150	3,665	1,024	6,094	12,933
Panama ............................................	1,105	1,076	569	1,877	4,627
Other ...............................................	816	1,142	452	2,628	5,038

	4,488	15,175	2,799	21,825	44,287

For footnote, see page 291.

Loans and advances to banks by geographical region

(Audited)

	Europe	Hong Kong	Rest of Asia- Pacific⁷	Middle East⁷	North America	Latin America	Gross loans and advances to banks		Impair- ment allowances
	US$m	US$m	US$m	US$m	US$m	US$m		US$m		US$m

At 31 December 2009 ..................	65,614	36,197	35,648	8,435	15,386	18,608		179,888		(107)
At 31 December 2008 ....................	62,012	29,646	28,665	7,476	11,458	14,572		153,829		(63)
At 31 December 2007 ....................	104,534	63,737	32,373	7,488	16,566	12,675		237,373		(7)
At 31 December 2006 ....................	76,837	50,359	19,716	7,801	17,865	12,634		185,212		(7)
At 31 December 2005 ....................	44,369	42,751	14,514	5,045	10,331	8,964		125,974		(9)

For footnote, see page 291.

Country distribution of outstandings and cross-border exposures

(Unaudited)

HSBC controls the risk associated with cross-border lending, essentially that foreign currency will not be made available to local residents to make payments, through a centralised structure of internal country limits which are determined by taking into account relevant economic and political factors. Exposures to individual countries and cross-border exposure in aggregate are kept under continual review.

The following table summarises the aggregate of in-country foreign currency and cross-border outstandings by type of borrower to countries which individually represent in excess of 1 per cent of HSBC's total assets. The classification is based on the country of residence of the borrower but also recognises the transfer of country risk in respect of third-party guarantees, eligible collateral held and residence of the head office when the borrower is a branch. In accordance with the Bank of England Country Exposure Report (Form CE) guidelines, outstandings comprise loans and advances (excluding settlement accounts), amounts receivable under finance leases, acceptances, commercial bills, CDs and debt and equity securities (net of short positions), and exclude accrued interest and intra‑HSBC exposures.

In-country foreign currency and cross-border amounts outstanding

(Unaudited)

	Banks	Government and official institutions	Other	Total
	US$bn	US$bn	US$bn	US$bn
At 31 December 2009
UK ........................................................................	37.5	7.0	38.0	82.5
US .........................................................................	10.7	29.3	25.7	65.7
France ...................................................................	27.0	10.7	7.7	45.4
Germany ...............................................................	21.9	15.0	4.5	41.4

At 31 December 2008
UK ........................................................................	38.4	7.1	33.8	79.3
US .........................................................................	13.6	26.4	34.1	74.1
France ...................................................................	19.9	12.1	7.9	39.9
Germany ...............................................................	18.9	8.0	6.7	33.6
The Netherlands ....................................................	14.1	1.9	10.3	26.3

At 31 December 2007
UK ........................................................................	32.3	2.2	47.5	82.0
US .........................................................................	14.0	11.4	29.5	54.9
France ...................................................................	38.8	1.7	1.9	42.4
Germany ...............................................................	30.3	5.9	5.6	41.8
The Netherlands ....................................................	21.4	0.2	4.2	25.8

At 31 December 2009, HSBC had in-country foreign currency and cross-border amounts outstanding to counterparties in The Netherlands of between 0.75 per cent and 1 per cent of total assets; in aggregate, US$19.6 billion.

At 31 December 2008, HSBC had in-country foreign currency and cross-border amounts outstanding to counterparties in Japan of between 0.75 per cent and 1.0 per cent of total assets; in aggregate, US$24.4 billion.

At 31 December 2007, HSBC had in-country foreign currency and cross-border amounts outstanding to counterparties in Hong Kong, Belgium and Ireland of between 0.75 per cent and 1.0 per cent of total assets. The aggregate in-country foreign currency and cross-border amounts outstanding were Hong Kong, US$19.7 billion, Belgium, US$19.3 billion and Ireland, US$19.3 billion.

Areas of special interest

Wholesale lending

(Unaudited)

Wholesale lending covers the range of credit facilities granted to sovereign borrowers, banks, non‑bank financial institutions and major corporate entities. The Group's wholesale portfolios are well diversified across geographical and industry sectors, with exposure subject to portfolio controls governing concentration risk. Overall credit quality showed some signs of deterioration during 2009, as companies were affected by the global economic downturn, although in the second half credit conditions eased on the back of successful refinancing activity earlier in the year.

The widespread intervention by many governments to stabilise and, in some cases to recapitalise, banks and other financial intermediaries had a positive effect in reducing fears of a systemic threat to financial markets. Notwithstanding this, many wholesale customers and counterparties faced the twin challenges of a reduction in available credit and liquidity, and reduced demand for their products and services; this encouraged them to reduce indebtedness through portfolio disposals, extend the duration of short-term finance and focus increasingly on cost efficiency.

HSBC has worked closely with its customers to identify problem areas early and minimise the likelihood and impact of potentially adverse situations. During 2009, the Group improved the structure of its credit exposures by, for example, adjusting tenor and adding collateral in response to the heightened risks. HSBC also played a positive role in maintaining credit supply, where possible.

Commercial real estate

Commercial real estate and other property-related lending at 31 December 2009 of US$100 billion declined by 8 per cent from 31 December 2008 on a constant currency basis and represented 11 per cent of total loans and advances to customers. In 2009, the sector experienced a deterioration in credit quality, particularly in parts of Europe, including the UK, and in the Middle East and North America, due to a decline in asset values, a rise in rent shortfalls from vacant properties or non-payment, a contraction in demand for new housing, a prospective fall in rental cash flows and significantly restricted refinancing options. As a result of these factors, portfolio impairment occurred in a limited number of cases. The Group's long-standing policies on asset origination which focus on relationships with long‑term customers and appropriate initial leverage and interest coverage ratios played a key role in minimising impairment. While individual regions differ in their approach, the Group's origination loan-to-value ratios are typically less than 65 per cent.

Automotive sector

The global automotive industry has seen a significant deterioration in market conditions and prospects over a prolonged period, as new entrants and legacy cost issues, primarily in the US and Europe, have taken effect. Declining sales volumes, exacerbated by the current economic downturn, have increased the incidence of financial stress on equipment manufacturers, suppliers and dealers. In the second half of 2009, the industry saw some consolidation and, although there were tentative signs of an increase in sales, these should be viewed in the light of the various government scrappage schemes for older vehicles in the US and Europe.

HSBC has adopted a cautious approach towards this industry for a number of years, prioritising commitments to stronger global manufacturers and limiting exposure to those firms considered most likely to be affected by an industry downturn. As a result, HSBC did not have any significant direct exposure to the major US vehicle manufacturers which entered Chapter 11 bankruptcy restructuring during 2009. HSBC had some exposure to North American vehicle dealers and suppliers, but this was minimal in the context of the Group. Exposure to the industry is controlled by a global appetite cap that is reviewed regularly at the Group Risk Management Meeting.

This information is provided by RNS

The company news service from the London Stock Exchange

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