Annual Financial Report - 28 of 60

RNS Number : 1566D

HSBC Holdings PLC

25 March 2014

 



Credit risk

	Page		App1		Tables	Page
Credit risk management .................................			266
Summary of credit risk in 2013 ................	152				Maximum exposure to credit risk .................................	152
					Loans and advances excluding held for sale: total exposure, impairment allowances and charges ........	152
					Personal lending .........................................................	153
					Wholesale lending ........................................................	154
					Credit quality of gross loans and advances ..................	155
Impairment of loans and advances .................	155				Loan impairment charges by geographical region ......	155
					Loan impairment charges by industry ..........................	155
Assets held for sale ........................................	156				Loans and advances to customers and banks measured at amortised cost ......................................................	156
					Loan impairment charges and other credit risk provisions ................................................................	157
Credit exposure ..........................................	157
Maximum exposure to credit risk ...................	157				Counterparty analysis of notional contract amounts of derivatives by product type .......................................	158
					Maximum exposure to credit risk .................................	159
					Loan and other credit-related commitments ................	160
Personal lending ........................................	160				Total personal lending .................................................	160
Mortgage lending ...........................................	161				Mortgage lending products ..........................................	162
Mortgage lending in the US ............................	162				HSBC Finance US CML - residential mortgages .........	163
					Trends in two months and over contractual delinquency in the US ..................................................................	163
					HSBC Finance: foreclosed properties in the US ...........	164
Credit quality of personal lending in the US ...	164
Non-US mortgage lending ..............................	164
Other personal lending ...................................	165
Wholesale lending .....................................	165				Total wholesale lending ...............................................	166
Financial (non-bank) .....................................	167
Loans and advances to banks .........................	167
Corporate and commercial .............................	168
Credit quality of financial instruments ..	169		267		Credit quality classification ..........................................	267
2013 compared with 2012 .............................	169				Distribution of financial instruments by credit quality ..	170
Past due but not impaired gross financial instruments ................................................	172				Past due but not impaired loans and advances to customers and banks by geographical region ..........	172
					Ageing analysis of days for past due but not impaired gross financial instruments .......................................	173
Renegotiated loans and forbearance ...............	173		268		Renegotiated loans and advances to customers ...........	174
					Renegotiated loans and advances to customers by geographical region ................................................	174
					Movement in renegotiated loans by geographical region .................................................................................	175
HSBC Finance loan modifications and re-age programmes ...............................................	176				Gross loan portfolio of HSBC Finance real estate secured balances ......................................................	178
					Movement in HSBC Finance renegotiated real estate balances ..................................................................	178
...					Number of renegotiated real estate secured accounts remaining in HSBC Finance's portfolio ...................	178
Corporate and commercial renegotiated loans	178
Collateral ....................................................	178
Collateral and other credit enhancements held	178				Residential mortgage loans including loan commitments by level of collateral .................................................	179
					Commercial real estate loans and advances including loan commitments by level of collateral ...................	181
					Other corporate, commercial and financial (non-bank) loans and advances including loan commitments by collateral rated CRR/EL8 to 10 only ........................	182
					Loans and advances to banks including loan commitments by level of collateral .................................................	184
Collateral and other credit enhancements obtained .....................................................	185				Carrying amount of assets obtained .............................	185

	Page		App1		Tables	Page
Impaired loans ............................................	185				Movement in impaired loans by geographical region ..	186
Impairment of loans and advances .................	187				Impairment allowances on loans and advances to customers by geographical region ...........................	188
					Net loan impairment charge to the income statement by geographical region ................................................	189
2013 compared with 2012 .............................	189
Further analysis of impairment ......................	191				Movement in impairment allowances by industry sector and geographical region .........................................	192
					Movement in impairment allowances over 5 years .......	193
					Movement in impairment allowances on loans and advances to customers and banks ............................	194
					Individually and collectively assessed impairment charge to the income statement by industry sector ...............	194
					Net loan impairment charge to the income statement ..	195
					Charge for impairment losses as a percentage of average gross loans and advances to customers by geographical region ................................................	195
					Charge for impairment losses as a percentage of average gross loans and advances to customers ....................	195
					Reconciliation of reported and constant currency changes by geographical region ............................................	196
					Reconciliation of reported and constant currency impairment charge to the income statement .............	196
Refinance risk.................................................			272
Impairment assessment ..................................			272
Concentration of exposure .......................	197		273
Financial investments ....................................	197
Trading assets.................................................	197				Trading assets ..............................................................	197
Derivatives ....................................................	197
Loans and advances .......................................	197				Gross loans and advances by industry sector................	198
					Gross loans and advances to customers by industry sector and by geographical region ...........................	199
					Loans and advances to banks by geographical region .	200
					Gross loans and advances to customers by country ......	201
HSBC Holdings ..........................................	203				HSBC Holdings - maximum exposure to credit risk .....	203
Securitisation exposures and other structured products ................................	203		274
Exposure in 2013 ..........................................	204				Overall exposure of HSBC ...........................................	204
					Movement in the available-for-sale reserve ..................	205
Securities investment conduits .......................	205				Available-for-sale reserve and economic first loss protection in SICs, excluding Solitaire .....................	205
Impairment methodologies ............................	205				Impairment charges/(write-backs) ...............................	205
					Carrying amount of HSBC's consolidated holdings of ABSs, and direct lending held at fair value through profit or loss .............................................................	206
Transactions with monoline insurers ..............	208				HSBC's exposure to derivative transactions entered into directly with monoline insurers .................................	208
Leveraged finance transactions ................	209				HSBC's exposure to leveraged finance transactions .....	209
Representations and warranties related to mortgage sales and securitisation activities ..................................................	209
Eurozone exposures ...................................	210
Exposures to countries in the eurozone ..........	210				Summary of exposures to peripheral eurozone countries	210
Redenomination risk ......................................	211				In country funding exposure.........................................	212
1. Appendix to Risk - risk policies and practices.

Credit risk is the risk of financial loss if a customer or counterparty fails to meet an obligation under a contract. It arises principally from direct lending, trade finance and leasing business, but also from other products such as guarantees and credit derivatives and from holding assets in the form of debt securities.

There were no material changes to our policies and practices for the management of credit risk in 2013.

A summary of our current policies and practices regarding credit risk is provided in the Appendix to Risk on page 266.

Summary of credit risk in 2013

(Unaudited)

Maximum exposure to credit risk

	At 31 December
	2013		2012
	US$m		US$m
Trading assets ...........................	239,301		367,177
- other trading assets ............	229,181		248,496
- reverse repos .....................	10,120		118,681
Financial assets designated at fair value ..............................	12,719		12,714
Derivatives ...............................	282,265		357,450
Loans and advances to banks ....	211,521		152,546
- loans and other receivables	120,046		117,085
- reverse repos .....................	91,475		35,461
Loans and advances to customers	1,080,304		997,623
- loans and other receivables	992,089		962,972
- reverse repos .....................	88,215		34,651
Financial investments ...............	416,785		415,312
Assets held for sale ...................	3,306		9,292
Other assets ..............................	231,858		203,561
Off-balance sheet exposures .....	633,903		624,462
- financial guarantees and similar contracts ...............	46,300		44,993
- loan and other credit-related commitments ...................	587,603		579,469
	3,111,962		3,140,137

Total exposure to credit risk remained broadly unchanged in 2013 with loans and advances remaining the largest element. While the total exposure to credit risk remained broadly stable, there was an increase in the amount of reverse repos classified as 'Loans and advances to banks' and 'Loans and advances to customers', with a corresponding reduction in the amount classified as 'Trading assets'. This followed a change in the way GB&M manages reverse repo activities during the year, as set out on page 220.

For a detailed analysis of our maximum exposure to credit risk, see page 157.

In 2013, we successfully weathered the imposition of capital controls in Cyprus and we continued to monitor events in the eurozone. We also continued to monitor our portfolio in Egypt as the constitutional crisis unfolded.

More details of the specific political and macroeconomic risks associated with these countries, and our management response, are provided on page 148.

Loans and advances excluding held for sale: total exposure, impairment allowances and charges

(Unaudited)

	2013		2012
	US$bn		US$bn
At 31 December
Total gross loans and advances (A) .........................................	1,307.0		1,166.3
Impairment allowances (a) .........	15.2		16.2
(a) as a percentage of A .............	1.16%		1.39%
Loans and advances net of impairment allowances.............	1,291.8		1,150.2
Year ended 31 December
Impairment charges ...................	6.0		8.2

After excluding reverse repo balances, (a) as a percentage of A was 1.35% at 31 December 2013 (2012: 1.47%).

Impairment allowances as a percentage of gross loans and advances decreased to 1.16% in 2013 from 1.39% in 2012. This reduction was mainly in North America due to the run-off and loan sales in our CML portfolio.

For further details on our loan impairment allowances, see page 188.

Personal lending

(Unaudited)

	Europe		Hong      Kong		Rest of      Asia-    Pacific		MENA		North America		Latin America		Total
	US$m		US$m		US$m		US$m		US$m		US$m		US$m
2013
First lien residential mortgages
Gross amount (A) .................	140,474		53,762		38,285		2,451		60,955		3,948		299,875
Impairment allowances .........	439		-		57		124		2,886		32		3,538
- as a percentage of A ..........	0.3%		-		0.1%		5.1%		4.7%		0.8%		1.2%
Other personal lending1
Gross amount (B) .................	51,633		19,794		12,688		4,033		11,735		10,970		110,853
Impairment allowances .........	959		78		144		169		532		1,182		3,064
- as a percentage of B ..........	1.9%		0.4%		1.1%		4.2%		4.5%		10.8%		2.8%
Total personal lending
Gross amount (C) .................	192,107		73,556		50,973		6,484		72,690		14,918		410,728
Impairment allowances .........	1,398		78		201		293		3,418		1,214		6,602
- as a percentage of C ..........	0.7%		0.1%		0.4%		4.5%		4.7%		8.1%		1.6%
2012
First lien residential mortgages
Gross amount (D) .................	135,172		52,296		36,906		2,144		70,133		5,211		301,862
Impairment allowances .........	489		4		66		136		4,163		47		4,905
- as a percentage of D ..........	0.4%		0.0%		0.2%		6.3%		5.9%		0.9%		1.6%
Other personal lending1
Gross amount (E) .................	51,102		18,045		12,399		4,088		14,221		13,376		113,231
Impairment allowances .........	977		57		143		189		684		1,257		3,307
- as a percentage of E ..........	1.9%		0.3%		1.2%		4.6%		4.8%		9.4%		2.9%
Total personal lending
Gross amount (F) ..................	186,274		70,341		49,305		6,232		84,354		18,587		415,093
Impairment allowances .........	1,466		61		209		325		4,847		1,304		8,212
- as a percentage of F ...........	0.8%		0.1%		0.4%		5.2%		5.7%		7.0%		2.0%

For footnote, see page 263.

The following commentary is on a constant currency basis.

Total personal lending of US$411bn at 31 December 2013 was broadly in line with 2012. Balances decreased in North America from the continued run-off and loan sales in our CML portfolio, including the disposal of our non-real estate loan portfolio and several tranches of real estate loan balances. In addition, in Latin America, we disposed of our operations in Panama. These reductions were broadly offset by increases in residential mortgage balances in Rest of Asia-Pacific, the UK and Hong Kong.

Impairment allowances declined by 18% to US$7bn at 31 December 2013 from US$8bn at the end of 2012, primarily in North America
reflecting the continued run-off and loan sales in our CML portfolio and an improvement in the housing market. In Hong Kong and Rest of Asia-Pacific, impairment allowances remained at low levels throughout 2013. Impairment allowances as a percentage of total personal lending reduced to 1.6% from 2.0% in 2012. This was driven by North America for the reasons noted above. In Europe, they declined as a percentage of gross personal lending balances to 0.7% compared with 0.8% in 2012.

During the year we reviewed the impairment allowance methodology used for retail banking across the Group (see page 72).

For a more detailed analysis of our personal lending, see page 160.

Wholesale lending

(Unaudited)

	Europe		Hong      Kong		Rest of      Asia-    Pacific		MENA		North America		Latin America		Total
	US$m		US$m		US$m		US$m		US$m		US$m		US$m
2013
Corporate and commercial
Gross amount (A) .................	242,107		114,832		89,066		19,760		50,585		30,188		546,538
Impairment allowances ........	3,821		361		557		1,212		769		1,339		8,059
- as a percentage of A ..........	1.58%		0.31%		0.63%		6.13%		1.52%		4.44%		1.47%
Financial2
Gross amount (B) .................	149,454		42,760		59,159		8,975		72,755		16,657		349,760
Impairment allowances ........	379		10		7		78		55		11		540
- as a percentage of B ..........	0.25%		0.02%		0.01%		0.87%		0.08%		0.07%		0.15%
2012
Corporate and commercial
Gross amount (C) .................	226,755		99,199		85,305		22,452		48,083		35,590		517,384
Impairment allowances ........	3,537		383		526		1,312		732		856		7,346
- as a percentage of C ..........	1.56%		0.39%		0.62%		5.84%		1.52%		2.41%		1.42%
Financial2
Gross amount (D) .................	101,052		28,046		48,847		10,394		27,400		18,122		233,861
Impairment allowances ........	358		29		11		174		37		2		611
- as a percentage of D ..........	0.35%		0.10%		0.02%		1.67%		0.14%		0.01%		0.26%

For footnote, see page 263.

Total wholesale lending increased to US$896bn at 31 December 2013 from US$747bn at the end of 2012 due to increased reverse repo loans to banks and customers resulting from the change in the way GB&M manages these activities (see page 220). Total reverse repos to customers increased by US$53bn and to banks by US$56bn.

Excluding reverse repos, total balances rose due to higher international trade and services lending, mainly in Hong Kong and, to a lesser extent, in Rest of Asia-Pacific as we capitalised on trade and capital flows. Commercial real estate and other property related balances increased, mainly in Hong Kong as a result of demand for financing in the property investment and development sectors. Other commercial balances increased, notably in GB&M in the UK, on corporate overdraft balances which did not meet the netting criteria. In addition, loans and advances to banks rose as a result of increased trade re-finance and central bank lending in Hong Kong.
This was partly offset by a decline in Latin America following the disposal of our operations in Panama.

Impairment allowances increased to US$9bn at 31 December 2013 from US$8bn at the end of 2012. In Latin America, they rose as a proportion of gross corporate and commercial lending to 4.44% (2012: 2.33%). This was principally in Mexico from higher individually assessed impairments in CMB relating to homebuilders resulting from a change in public housing policy. In Brazil, there were increases in CMB due to model changes and assumption revisions on restructured loan account portfolios, which were partly offset by an improvement in the quality of the portfolio. In addition there were higher specific impairments across a number of corporate exposures. In the Middle East and North Africa, impairment allowances as a proportion of gross financial lending fell from 1.70% to 0.87%, mainly due to a release on an individually assessed impairment in 2013.

For a more detailed analysis of our wholesale lending, see page 165.

Credit quality of gross loans and advances

(Unaudited)

	Europe		Hong      Kong		Rest of      Asia-    Pacific		MENA		North America		Latin America		Total
	US$m		US$m		US$m		US$m		US$m		US$m		US$m
2013
Neither past due nor impaired ...........................	568,040		229,202		195,299		32,194		174,455		55,862		1,255,052
- of which renegotiated ................................	2,534		248		172		1,021		4,882		543		9,400
Past due but not impaired .................................	2,399		1,499		2,723		757		6,453		1,640		15,471
- of which renegotiated ................................	748		9		31		146		3,002		11		3,947
Impaired ...........................................................	13,228		445		1,178		2,285		15,123		4,244		36,503
- of which renegotiated ................................	6,474		86		221		927		10,905		2,215		20,828
2012
Neither past due nor impaired ...........................	500,599		200,110		179,337		35,628		127,457		65,520		1,108,651
- of which renegotiated ................................	3,871		275		199		1,300		6,061		1,109		12,815
Past due but not impaired .................................	2,339		1,311		2,974		975		7,721		3,591		18,911
- of which renegotiated ................................	371		8		35		168		3,104		133		3,819
Impaired ...........................................................	11,145		477		1,147		2,474		20,345		3,188		38,776
- of which renegotiated ................................	5,732		109		318		921		16,997		1,516		25,593

On a reported basis at 31 December 2013, US$1,255bn of gross loans and advances were classified as neither past due nor impaired, an increase of 13% on the end of 2012, mainly in Europe and North America, resulting from higher reverse repo balances due to the change in the way GB&M manages these activities (see page 220).

At 31 December 2013, US$15bn of gross loans and advances were classified as past due but not impaired compared with US$19bn at the end of 2012, a reduction of 18%. The largest concentration of these balances was in HSBC Finance. The decrease was mainly in Latin America where we repositioned our portfolio in Brazil and disposed of our operations in Panama, and in North America, due to the continued run-off and loan sales in the CML portfolio.

Gross loans and advances classified as impaired decreased by 6% to US$37bn, mainly in North America due to the continued run-off and loan sales in the CML portfolio.

Renegotiated loans totalled US$34bn at 31 December 2013 compared with US$42bn at the end of 2012. The reduction was primarily due to the continued run-off and loan sales in the CML portfolio. North America accounted for the largest
volume of renegotiated loans, at US$19bn or 55% of the total at 31 December 2013 (2012: US$26bn or 62%), most of which were first lien residential mortgages held by HSBC Finance. US$11bn of the renegotiated loans in North America were impaired at 31 December 2013 (2012: US$17bn).

For a more detailed analysis of the credit quality of financial instruments, see page 169.

Impairment of loans and advances

(Unaudited)

Loan impairment charges by geographical region

Loan impairment charges by industry

Loan impairment charges in 2013 decreased to US$6.0bn from US$8.2bn in 2012 on a reported basis. On a constant currency basis they were 24% lower. The reduction was primarily in RBWM in North America, due to improvements in housing market conditions and lower delinquency levels, along with the continued run-off and loan disposals in the CML portfolio and the sale of the CRS business in 2012. This decline was partly offset by increases in Latin America, principally in Mexico, where there were higher specific impairments in CMB which primarily related to homebuilders due to a change in public housing policy, and collective impairment provisions in RBWM. In Brazil, loan impairment charges increased, reflecting impairment model changes and assumption revisions for restructured loan account portfolios in RBWM and CMB and higher specific impairments across a number of corporate exposures. This rise was partly offset by improvements in the quality of the portfolio in Brazil as the modification of credit strategies in previous years helped to mitigate rising delinquency rates.

For a more detailed analysis of the impairment of loans and advances, see page 187.

Assets held for sale

During 2013, the growth in gross loans and advances was affected by a reclassification of certain lending balances to 'Assets held for sale'. Disclosures relating to assets held for sale are provided in the following credit risk management tables, primarily where the disclosure is relevant to the measurement of these financial assets:

·     'Maximum exposure to credit risk' (page 159);

·     'Distribution of financial instruments by credit quality' (page 170); and

·     'Ageing analysis of days past due but not impaired gross financial instruments' (page 173).

Although gross loans and advances held for sale and related impairment allowances are reclassified from 'Loans and advances to customers' and 'Loans and advances to banks' in the balance sheet, there is no equivalent income statement reclassification. As a result, charges for loan impairment losses shown in the credit risk disclosures include loan impairment charges relating to financial assets classified as 'Assets held for sale'.

Loans and advances to customers and banks measured at amortised cost

(Audited)

	At 31 December 2013				At 31 December 2012
	Gross        loans and         advances		Impairment     allowances on loans and         advances		Gross          loans and           advances		Impairment        allowances     on loans and           advances
	US$m		US$m		US$m		US$m
Reported in 'Loans and advances to customers and banks' .	1,307,026		15,201		1,166,338		16,169
Reported in 'Assets held for sale' .......................................	1,970		111		7,350		718
	1,308,996		15,312		1,173,688		16,887

The lending balances in 'Assets held for sale' at the end of 2013 included balances associated with the disposal of our operations in Colombia, Uruguay and Jordan, net of impairment allowances.

We continue to measure lending balances held for sale at amortised cost less allowances for impairment; such carrying amounts may differ from
fair value. Any difference between the carrying amount and the sales price, which is the fair value at the time of sale, would be recognised as a gain or a loss.

The table below analyses the amount of loan impairment charges and other credit risk provisions ('LIC's) arising from assets held for sale.

Loan impairment charges and other credit risk provisions

(Unaudited)

	2013
	US$m
LICs arising from:
- disposals and assets held for sale .....	197
- assets not held for sale ....................	5,652
	5,849

See Note 16 on the Financial Statements for the carrying amount and the fair value at 31 December 2013 of loans and advances to banks and customers classified as held for sale.

Credit exposure

Maximum exposure to credit risk

(Audited)

The table on page 159 provides information on balance sheet items, offsets and loan and other credit-related commitments. Commentary on balance sheet movements is provided on page 66.

'Maximum exposure to credit risk' table (page 159)

The table presents our 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 enhancements meet accounting 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 we 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.

Loans and advances

For details of our maximum exposure to loans and advances, see Personal lending on page 160 (unaudited); Wholesale lending on page 165 (unaudited); Credit quality of financial instruments on page 169; and Concentration of exposure on page 197 (unaudited).

The loans and advances offset in the table on page 159 relates to customer loans and deposits and balances where there is a legally enforceable right of offset in the event of counterparty default and where, as a result, there is a net exposure for credit risk purposes. However, as there is no intention to settle these balances on a net basis under normal circumstances, they do not qualify for net presentation for accounting purposes.

Derivatives

Our maximum exposure to derivatives decreased, primarily reflecting a reduction in the fair value of interest rate derivative contracts in Europe due to upward movements in yield curves in major currencies. Over half of all trades were exchange traded or otherwise settled centrally, the majority of these being interest rate derivatives.

The derivatives offset amount in the table on page 159 relates to exposures where the counterparty has an offsetting derivative exposure with HSBC, a master netting arrangement is in place and the credit risk exposure is managed on a net basis, or the position is specifically collateralised, normally in the form of cash.

At 31 December 2013, the total amount of such offsets was US$252bn (2012: US$311bn), of which US$209bn (2012: US$270bn) were offsets under a master netting arrangement, US$36bn (2012: US$39bn) was collateral received in cash and US$7bn (2012: US$1.8bn) was other collateral. The decline in the total offset reflects the reduction in the fair value of derivative contracts in the year resulting from an upward shift in major yield curves. These amounts do not qualify for offset for accounting purposes as either there is no legally enforceable right to offset or it is not intended for settlement to be on a net basis.

Loan and other credit-related commitments

Loan and other credit-related commitments largely consist of corporate and commercial off-balance sheet commitments including term and trade-related lending balances and overdrafts, and retail off-balance sheet commitments including overdrafts, residential mortgages, personal loans and credit card balances. They remained well diversified across geographical regions.

At 31 December 2013, loan and other credit-related commitments rose to US$588bn (2012: US$579bn), driven by increased undrawn corporate facilities in Europe, mainly in France, the UK and Germany, and in North America reflecting our focus on growing in target commercial segments in the US. These increases were partly offset by a decline in Latin America following the disposal of our operations in Panama.

For details of our loans and other credit-related commitments, see page 160 (unaudited).

Other credit risk mitigants

While not disclosed as an offset in the 'Maximum exposure to credit risk' table, other arrangements are in place which reduce our maximum exposure to credit risk. These include short positions in securities and financial assets held as part of linked insurance/ investment contracts where the risk is predominantly borne by the policyholder. In addition, we hold collateral in the form of financial instruments that are not recognised on the balance sheet.

See page 178 and Note 34 on the Financial Statements for further details on collateral in respect of certain loans and advances.

Counterparty analysis of notional contract amounts of derivatives by product type

(Unaudited)

			Traded over the counter
	Traded on recognised exchanges		Settled by central counterparties		Not settled by central counterparties		Total
	US$m		US$m		US$m		US$m
At 31 December 2013
HSBC
Foreign exchange ...............................................................	41,384		16,869		5,232,750		5,291,003
Interest rate .......................................................................	857,562		18,753,836		7,736,520		27,347,918
Equity ................................................................................	274,880		−		315,023		589,903
Credit ................................................................................	−		104,532		573,724		678,256
Commodity and other ........................................................	6,531		−		71,311		77,842
	1,180,357		18,875,237		13,929,328		33,984,922
At 31 December 2012
HSBC
Foreign exchange ...............................................................	27,869		11,156		4,413,532		4,452,557
Interest rate .......................................................................	837,604		12,316,673		8,459,665		21,613,942
Equity ................................................................................	225,452		−		270,216		495,668
Credit ................................................................................	−		73,281		828,226		901,507
Commodity and other ........................................................	19,006		−		61,213		80,219
	1,109,931		12,401,110		14,032,852		27,543,893

The purposes for which HSBC uses derivatives are described in Note 18 on the Financial Statements.

Maximum exposure to credit risk

(Audited)

	At 31 December 2013						At 31 December 2012
	Maximum    exposure		Offset		Net		Maximum      exposure		Offset		Net
	US$m		US$m		US$m		US$m		US$m		US$m
Cash and balances at central banks ...............	166,599		-		166,599		141,532		-		141,532
Items in the course of collection from other banks .......................................................	6,021		-		6,021		7,303		-		7,303
Hong Kong Government certificates of indebtedness .............................................	25,220		-		25,220		22,743		-		22,743
Trading assets ..............................................	239,301		(1,777)		237,524		367,177		(19,700)		347,477
Treasury and other eligible bills ................	21,584		-		21,584		26,282		-		26,282
Debt securities .........................................	141,644		-		141,644		144,677		-		144,677
Loans and advances to banks ...................	27,885		-		27,885		78,271		-		78,271
Loans and advances to customers .............	48,188		(1,777)		46,411		117,947		(19,700)		98,247
Financial assets designated at fair value ........	12,719		-		12,719		12,714		-		12,714
Treasury and other eligible bills ................	50		-		50		54		-		54
Debt securities .........................................	12,589		-		12,589		12,551		-		12,551
Loans and advances to banks ...................	76		-		76		55		-		55
Loans and advances to customers .............	4		-		4		54		-		54
Derivatives ..................................................	282,265		(252,344)		29,921		357,450		(310,859)		46,591
Loans and advances to customers held at amortised cost3 ........................................	1,080,304		(116,677)		963,627		997,623		(91,846)		905,777
- personal ................................................	404,126		(1,348)		402,778		406,881		(1,604)		405,277
- corporate and commercial ....................	538,479		(90,215)		448,264		510,038		(78,650)		431,388
- financial (non-bank financial institutions) .................................................................	137,699		(25,114)		112,585		80,704		(11,592)		69,112
Loans and advances to banks held at amortised cost3 ........................................................	211,521		(2,903)		208,618		152,546		(3,732)		148,814
Financial investments ..................................	416,785		-		416,785		415,312		-		415,312
Treasury and other similar bills ................	78,111		-		78,111		87,550		-		87,550
Debt securities .........................................	338,674		-		338,674		327,762		-		327,762
Assets held for sale ......................................	3,306		(22)		3,284		9,292		(164)		9,128
- disposal groups ......................................	2,647		(22)		2,625		5,359		(164)		5,195
- non-current assets held for sale .............	659		-		659		3,933		-		3,933
Other assets .................................................	34,018		-		34,018		31,983		-		31,983
Endorsements and acceptances ................	11,624		-		11,624		12,032		-		12,032
Other .......................................................	22,394		-		22,394		19,951		-		19,951
Financial guarantees and similar contracts ...	46,300		-		46,300		44,993		-		44,993
Loan and other credit-related commitments4	587,603		-		587,603		579,469		-		579,469
	3,111,962		(373,723)		2,738,239		3,140,137		(426,301)		2,713,836

For footnotes, see page 263.

Loan and other credit-related commitments

(Unaudited)

	Europe		Hong         Kong		Rest of         Asia-      Pacific		MENA		North   America		Latin  America		Total
	US$m		US$m		US$m		US$m		US$m		US$m		US$m
At 31 December 2013
Personal .........................................	92,148		50,306		24,139		2,940		15,647		9,774		194,954
Corporate and commercial ..............	91,895		50,128		69,956		19,045		92,837		21,956		345,817
Financial .........................................	18,930		4,517		3,960		705		17,478		1,242		46,832
	202,973		104,951		98,055		22,690		125,962		32,972		587,603
At 31 December 2012
Personal .........................................	80,596		47,617		26,133		5,271		17,424		14,142		191,183
Corporate and commercial ..............	91,957		58,082		64,618		17,197		87,631		22,770		342,255
Financial .........................................	15,080		2,958		6,919		453		18,099		2,522		46,031
	187,633		108,657		97,670		22,921		123,154		39,434		579,469

Personal lending

(Unaudited)

We provide a broad range of secured and unsecured personal lending products to meet customer needs. Given the diversity of the markets in which we operate, the range is not standard across all countries but is tailored to meet the demands of individual markets.

Personal lending includes advances to customers for asset purchases such as residential property, where the loans are typically secured by the assets being acquired. We also offer loans secured on existing assets, such as first and second liens on residential property and unsecured lending products such as overdrafts, credit cards and payroll loans.

Total personal lending

(Unaudited)

	UK		Rest of      Europe		Hong         Kong		US5		Rest of        North   America		Other     regions6		Total
	US$m		US$m		US$m		US$m		US$m		US$m		US$m
At 31 December 2013
First lien residential mortgages (A) .	132,174		8,300		53,762		42,317		18,638		44,684		299,875
Other personal lending (B) ..............	22,913		28,720		19,794		6,257		5,478		27,691		110,853
- motor vehicle finance ..............	-		11		-		-		20		2,662		2,693
- credit cards ...............................	11,480		3,016		6,428		734		411		8,287		30,356
- second lien residential mortgages	-		-		-		5,010		251		93		5,354
- other ........................................	11,433		25,693		13,366		513		4,796		16,649		72,450
Total personal lending (C) ..............	155,087		37,020		73,556		48,574		24,116		72,375		410,728
Impairment allowances on personal lending
First lien residential mortgages (a)	368		71		-		2,834		52		213		3,538
Other personal lending (b) ...........	450		509		78		470		62		1,495		3,064
- motor vehicle finance ..............	-		3		-		-		-		90		93
- credit cards ...............................	132		271		40		39		8		365		855
- second lien residential mortgages	-		-		-		421		5		-		426
- other ........................................	318		235		38		10		49		1,040		1,690
Total (c)......................................	818		580		78		3,304		114		1,708		6,602
(a) as a percentage of A ...................	0.3%		0.9%		-		6.7%		0.3%		0.5%		1.2%
(b) as a percentage of B ..................	2.0%		1.8%		0.4%		7.5%		1.1%		5.4%		2.8%
(c) as a percentage of C ..................	0.5%		1.6%		0.1%		6.8%		0.5%		2.4%		1.6%

	UK		Rest of       Europe		Hong          Kong		US5		Rest of         North     America		Other       regions6		Total
	US$m		US$m		US$m		US$m		US$m		US$m		US$m
At 31 December 2012
First lien residential mortgages (E) ..	127,024		8,148		52,296		49,417		20,716		44,261		301,862
Other personal lending (F) ..............	23,446		27,656		18,045		7,382		6,839		29,863		113,231
- motor vehicle finance ..............	-		24		-		-		20		3,871		3,915
- credit cards ...............................	11,369		3,060		5,930		821		735		8,881		30,796
- second lien residential mortgages	508		-		-		5,959		363		131		6,961
- other ........................................	11,569		24,572		12,115		602		5,721		16,980		71,559
Total personal lending (G) ..............	150,470		35,804		70,341		56,799		27,555		74,124		415,093
Impairment allowances on personal lending
First lien residential mortgages (e)	425		64		4		4,133		30		249		4,905
Other personal lending (f) ...........	576		401		57		590		94		1,589		3,307
- motor vehicle finance ..............	-		4		-		-		1		144		149
- credit cards ...............................	150		184		28		40		14		385		801
- second lien residential mortgages	44		-		-		542		6		-		592
- other ........................................	382		213		29		8		73		1,060		1,765
Total (g) .....................................	1,001		465		61		4,723		124		1,838		8,212
(e) as a percentage of E ..................	0.3%		0.8%		-		8.4%		0.1%		0.6%		1.6%
(f) as a percentage of F ...................	2.5%		1.4%		0.3%		8.0%		1.4%		5.3%		2.9%
(g) as a percentage of G ..................	0.7%		1.3%		0.1%		8.3%		0.5%		2.5%		2.0%

For footnotes, see page 263.

Total personal lending was US$411bn at 31 December 2013, down from US$415bn at the end of 2012 (US$412bn on a constant currency basis). The decrease on a constant currency basis reflected the continued run-off and loan sales in the CML portfolio in the US and the disposal of our operations in Panama. This was mostly offset by an increase in mortgage lending in Rest of Asia-Pacific, the UK and Hong Kong.

For further analysis of the impairment of loans and allowances, see page 187.

Mortgage lending

(Unaudited)

We offer a wide range of mortgage products designed to meet customer needs, including capital repayment, interest-only, affordability and offset mortgages.

Group credit policy prescribes the range of acceptable residential property loan-to-value ('LTV') thresholds with the maximum upper limit for new loans set between 75% and 95%. Specific
LTV thresholds and debt-to-income ratios are managed at regional and country levels and, although the parameters must comply with Group policy, strategy and risk appetite, they differ in the various locations in which we operate to reflect the local economic and housing market conditions, regulations, portfolio performance, pricing and other product features.

The commentary that follows is on a constant currency basis.

At 31 December 2013, total mortgage lending was US$305bn, a reduction of US$3bn on 2012. Balances declined in North America due to the continued run-off and loan sales in the CML portfolio, and in Latin America following the disposal of our operations in Panama. This was largely offset by increases in Rest of Asia-Pacific and Hong Kong which reflected our focus on secured lending, although the rate of growth in the latter began to slow as transaction volumes in the property market declined in 2013. Balances also grew in the UK due to our competitive offering.

Mortgage lending products

(Unaudited)

	UK		Rest of      Europe		Hong         Kong		US5		Rest    of North   America		Other     regions6		Total
	US$m		US$m		US$m		US$m		US$m		US$m		US$m
At 31 December 2013
First lien residential mortgages ........	132,174		8,300		53,762		42,317		18,638		44,684		299,875
Second lien residential mortgages ....	-		-		-		5,010		251		93		5,354
Total mortgage lending (A) ............	132,174		8,300		53,762		47,327		18,889		44,777		305,229
Second lien as a percentage of A .....	-		-		-		10.6%		1.3%		0.2%		1.8%
Impairment allowances on mortgage lending ........................................	368		71		-		3,255		57		213		3,964
First lien residential mortgages ....	368		71		-		2,834		52		213		3,538
Second lien residential mortgages	-		-		-		421		5		-		426
Interest-only (including offset) mortgages ...................................	48,907		553		6		-		352		1,109		50,927
Affordability mortgages, including adjustable-rate mortgages ............	2		506		12		16,274		-		5,581		22,375
Other ..............................................	95		-		-		-		-		159		254
Total interest-only, affordability mortgages and other (a) ..............	49,004		1,059		18		16,274		352		6,849		73,556
- (a) as a percentage of A ...........	37.1%		12.8%		-		34.4%		1.9%		15.3%		24.1%
At 31 December 2012
First lien residential mortgages ........	127,024		8,148		52,296		49,417		20,716		44,261		301,862
Second lien residential mortgages ....	508		-		-		5,959		363		131		6,961
Total mortgage lending (B) .............	127,532		8,148		52,296		55,376		21,079		44,392		308,823
Second lien as a percentage of B .....	0.4%		-		-		10.8%		1.7%		0.3%		2.3%
Impairment allowances on mortgage lending ........................................	469		64		4		4,675		36		249		5,497
First lien residential mortgages ....	425		64		4		4,133		30		249		4,905
Second lien residential mortgages	44		-		-		542		6		-		592
Interest-only (including offset) mortgages ...................................	49,650		372		30		-		531		1,146		51,729
Affordability mortgages, including adjustable-rate mortgages ............	6		532		19		18,456		-		5,135		24,148
Other ..............................................	99		-		-		-		-		204		303
Total interest-only, affordability mortgages and other (b) ..............	49,755		904		49		18,456		531		6,485		76,180
- (b) as a percentage of B ............	39.0%		11.1%		0.1%		33.3%		2.5%		14.6%		24.7%

For footnotes, see page 263.

Mortgage lending in the US

(Unaudited)

In the US, total mortgage lending balances were US$47bn at 31 December 2013, a decrease of 15% compared with the end of 2012. Overall, US mortgage lending comprised 12% of our total personal lending and 16% of our total mortgage lending.

Mortgage lending balances at 31 December 2013 in HSBC Finance were US$30bn, a decrease of 22% compared with the end of 2012 due to the continued run-off and loan sales in the CML portfolio. In HSBC Bank USA, mortgage lending balances were US$18bn at 31 December 2013, broadly in line with 2012.

HSBC Finance

The CML portfolio continued to be affected by economic conditions in the US, where the housing market improved but unemployment remained high despite levels declining during 2013. In addition, liquidation rates continued to be affected by declines in loan prepayment rates as fewer refinancing opportunities for our customers existed.

HSBC Finance US Consumer and Mortgage Lending⁷ - residential mortgages

(Unaudited)

	At 31 December
	2013		2012
	US$m		US$m
Residential mortgages
First lien .................................	27,305		35,092
Second lien ..............................	3,014		3,651
Total (A) ................................	30,319		38,743
Impairment allowances ...........	3,028		4,480
- as a percentage of A .........	10.0%		11.6%

For footnote, see page 263.

For first lien residential mortgages in our CML portfolio, two months and over delinquent balances were US$4.6bn at 31 December 2013 compared with US$7.6bn at 31 December 2012. The decline in delinquent balances mainly reflected the continued portfolio run-off and loan sales as well as the improved conditions in the housing market.

Second lien residential mortgage balances in our CML portfolio two months and over delinquent declined by 21% to US$276m at 31 December 2013, as a result of the continued run-off and loan sales in the CML portfolio.

HSBC Bank USA

  In HSBC Bank USA we continued to sell a portion of new originations to the secondary market as a means of managing our interest rate risk and improving structural liquidity and focused on our strategy to grow the HSBC Premier customer base. First lien residential mortgage balances two months and over delinquent, rose in 2013 to US$1.3bn as they continued to be affected by a lengthy foreclosure process which has resulted in higher balances remaining delinquent. The delinquency ratio fell over the same period.

Second lien mortgages in the US

The majority of second lien residential mortgages are taken up by customers who hold a first lien mortgage issued by a third party. Second lien residential mortgage loans have a risk profile characterised by higher LTV ratios, because in the majority of cases the loans were taken out to complete the refinancing of properties. Loss severity on default of second liens has typically approached 100% of the amount outstanding, as any equity in the property is consumed through the repayment of the first lien loan.

Impairment allowances for these loans are determined by applying a roll-rate migration analysis which captures the propensity of these loans to default based on past experience. Once we believe that a second lien residential mortgage loan is likely to progress to write-off, the loss severity assumed in establishing our impairment allowance is close to 100% in the CML portfolios, and more than 80% in HSBC Bank USA.

Trends in two months and over contractual delinquency in the US

(Unaudited)

	At 31 December
	2013		2012		2011
	US$m		US$m		US$m
In personal lending in the US
First lien residential mortgages .....................................................................	5,931		8,926		9,065
-  Consumer and Mortgage Lending ..........................................................	4,595		7,629		7,922
-  other mortgage lending .........................................................................	1,336		1,297		1,143
Second lien residential mortgages ..................................................................	406		477		674
-  Consumer and Mortgage Lending ..........................................................	276		350		501
-  other mortgage lending .........................................................................	130		127		173
Credit card ....................................................................................................	25		27		714
Private label .................................................................................................	-		-		316
Personal non-credit card ...............................................................................	25		335		513
Total ............................................................................................................	6,387		9,765		11,282
	%		%		%
As a percentage of the relevant loans and receivables balances
First lien residential mortgages .....................................................................	14.0		18.1		17.1
Second lien residential mortgages ..................................................................	8.1		8.0		8.5
Credit card ....................................................................................................	3.4		3.3		3.8
Private label .................................................................................................	-		-		2.5
Personal non-credit card ...............................................................................	4.9		7.4		8.3
Total ............................................................................................................	13.1		16.1		11.4

HSBC Finance: foreclosed properties in the US

(Unaudited)

	Year ended 31 December
	2013		2012
Number of foreclosed properties at end of period .........................................................................	4,254		2,973
Number of properties added to foreclosed inventory in the period ................................................	9,752		6,827
Average loss on sale of foreclosed properties8 ..............................................................................	1%		6%
Average total loss on foreclosed properties9 .................................................................................	51%		54%
Average time to sell foreclosed properties (days) .........................................................................	154		172

For footnotes, see page 263.

Credit quality of personal lending in the US

(Unaudited)

The increase in foreclosed residential properties was due to the suspension of foreclosure activities at the end of 2011 and during the first half of 2012. We have resumed processing suspended foreclosure actions in all states and have referred the majority of the backlog of loans for foreclosure. We also began initiating new foreclosure activities in all states. As a consequence, although the number of foreclosed properties sold increased and the time to sell these properties accelerated, the number of new properties added to the foreclosed inventory at HSBC Finance in 2013 increased to 9,752. This number will continue to be affected by refinements to our foreclosure processes. The number of real estate owned properties adding to inventory during 2014 will be affected by our receivable sale programme. We expect many of the properties currently in foreclosure to be sold prior to taking title.

Valuation of foreclosed properties in the US

We obtain real estate by foreclosing on the collateral pledged as security for residential mortgages. Prior to foreclosure, carrying amounts of the loans in excess of fair value less costs to sell are written down to the discounted cash flows expected to be recovered, including from the sale of the property.

Broker price opinions are obtained and updated every 180 days and real estate price trends are reviewed quarterly to reflect any improvement or additional deterioration. Our methodology is regularly validated by comparing the discounted cash flows expected to be recovered based on current market conditions (including estimated cash flows from the sale of the property) to the updated broker price opinion, adjusted for the estimated historical difference between interior and exterior appraisals. The fair values of foreclosed properties are initially determined on the basis of broker price opinions. Within 90 days of foreclosure, a more detailed property valuation is performed reflecting information obtained from a physical interior inspection of the property and additional allowances or write-downs are recorded as appropriate. Updates to the valuation are performed no less than once every 45 days until the property is sold, with declines or increases recognised through changes to allowances.

The significant backlog of foreclosures and additional delays in the processing of foreclosures could have an adverse effect on housing prices, which in turn may result in higher loss severities while foreclosures are delayed. The number of foreclosed properties at 31 December 2013 increased to 4,254 from 2,973 at the end of December 2012, reflecting the higher volume of properties added to the foreclosed inventory. The average total loss and the average loss on sale of foreclosed properties improved during 2013, reflecting improvements in home prices during the year.

For further information on renegotiated loans in North America, see page 174.

Non-US mortgage lending

(Unaudited)

The commentary that follows is on a constant currency basis.

Total non-US mortgage lending was US$258bn at 31 December 2013, an increase of US$5bn on 2012. Our most significant concentrations of mortgage lending were in the UK and Hong Kong.

The Group's largest concentration of mortgage exposure was in the UK. At 31 December 2013 it was US$132bn, up by 1% on the end of 2012. The credit performance of our UK mortgage portfolio was stable, reflecting actions taken in previous years which included restrictions on lending to purchase residential property for the purpose of rental. Impairment allowances on first lien mortgages as a proportion of total first lien mortgage loan balances remained low. Almost all lending was originated through our own sales force, and the self-certification of income was not permitted. The majority of our mortgage lending in the UK was to existing customers who held current or savings accounts with HSBC. The average LTV ratio for new business was 60% during 2013 (2012: 59%). Loan impairment charges and delinquency levels in our UK mortgage book declined, aided by the low interest rate environment.

Interest-only mortgage products in the UK totalled US$49bn or 37% of the UK mortgage portfolio, down marginally on 2012. All interest-only lending is assessed for affordability on a capital repayment basis and, since March 2013, is only available to Premier customers. Offset mortgage products in the UK totalled US$22bn or 17% of the UK mortgage portfolio. The offset mortgage product, originated only by First Direct, is assessed for affordability on a capital repayment basis. Offset mortgage customers may make regular or one-off capital repayments but are able to redraw additional funds up to an agreed limit.

The underwriting criteria for interest-only products are consistent with those for equivalent capital repayment mortgages, and such products are typically originated at more conservative LTV ratios. We monitor specific risk characteristics within the interest-only portfolio, such as LTV ratio, age at expiry, current income levels and credit bureau scores. There are currently no concentrations of higher risk characteristics that cause the interest-only portfolio to be considered as carrying unduly high credit risk, and delinquency and impairment charges remain low, demonstrating similar performance characteristics to our capital repayment products. We run contact programmes to ensure we build an informed relationship with customers so that they receive appropriate support in meeting the final repayment of principal and understand the alternative repayment options available.

Mortgage lending in Hong Kong was US$54bn, an increase of 3% on the end of 2012, although the rate of growth began to slow as transaction volumes in the property market declined in 2013. The quality of our mortgage book remained high with no new impairment allowances in 2013. The average LTV ratio on new mortgage lending was 44% compared with an estimated 32% for the overall portfolio.

Mortgage lending in Rest of North America fell by 5% to US$19bn. This included a reduction of US$857m in Canada due to tightened regulatory lending guidelines.

Mortgage lending in other regions rose by 7% to US$45bn at 31 December 2013. Balances grew in Rest of Asia-Pacific, resulting from our focus on secured lending and supported by marketing campaigns, mainly in mainland China and Australia. This was partly offset by a reduction in Latin America due to the disposal of our operations in Panama.

Other personal lending

(Unaudited)

Credit cards

Total credit card lending of US$30bn at 31 December 2013 was 2% higher than at the end of 2012, mainly in Hong Kong from marketing campaigns and in Turkey from business expansion. This was partly offset by the sale of the private label credit card portfolio in Canada in 2013.

Other personal non-credit card lending

Other personal non-credit card lending balances remained broadly in line with 2012 at US$80bn at 31 December 2013. There were reductions in North America in the US on second lien mortgages as noted above and in Canada, mainly due to client deleveraging, high credit standards and tightened regulatory lending guidelines. In Latin America, there was a decline due to the disposal of our operations in Panama, our focus on growing secured lending and our more restrictive lending criteria in Brazil. This was largely offset by increases in term lending in France, second lien mortgages in Singapore and personal loans in Mexico.

Wholesale lending

(Unaudited)

Wholesale lending covers the range of credit facilities granted to sovereign borrowers, banks, non‑bank financial institutions, corporate entities and commercial borrowers. Our wholesale portfolios are well diversified across geographical and industry sectors, with certain exposures subject to specific portfolio controls.

During the year GB&M made a change to the way it manages reverse repo activities (see page 220), materially affecting loans and advances to banks and financial (non-bank) balances.

Total wholesale lending

(Unaudited)

	Europe		Hong         Kong		Rest of         Asia-      Pacific		MENA		North   America		Latin  America		Total
	US$m		US$m		US$m		US$m		US$m		US$m		US$m
At 31 December 2013
Corporate and commercial (A) .......	239,529		114,832		89,066		19,760		50,447		30,188		543,822
- manufacturing ..........................	55,920		11,582		19,176		3,180		11,853		12,214		113,925
- international trade and services	77,113		43,041		36,327		8,629		11,676		8,295		185,081
- commercial real estate .............	31,326		25,358		9,202		639		5,900		2,421		74,846
- other property-related .............	7,308		19,546		7,601		1,333		8,716		328		44,832
- government .............................	3,340		739		282		1,443		564		974		7,342
- other commercial10 ..................	64,522		14,566		16,478		4,536		11,738		5,956		117,796
Financial (non-bank financial institutions) (B) ..........................	75,550		7,610		8,522		2,532		42,591		1,376		138,181
Asset-backed securities reclassified ..	2,578		-		-		-		138		-		2,716
Loans and advances to banks (C) ....	73,904		35,150		50,637		6,443		30,164		15,281		211,579
Total wholesale lending (D) ............	391,561		157,592		148,225		28,735		123,340		46,845		896,298
Of which:
- reverse repos to customers .......	48,091		1,991		4,457		-		33,676		-		88,215
- reverse repos to banks ..............	49,631		2,473		10,500		24		23,744		5,103		91,475
Impairment allowances on wholesale lending
Corporate and commercial (a) ........	3,821		361		557		1,212		769		1,339		8,059
- manufacturing ..........................	618		85		161		182		89		384		1,519
- international trade and services	1,216		236		192		502		188		349		2,683
- commercial real estate .............	1,116		5		17		153		202		396		1,889
- other property-related .............	269		16		86		236		93		8		708
- government .............................	3		-		-		10		1		-		14
- other commercial .....................	599		19		101		129		196		202		1,246
Financial (non-bank financial institutions) (b) ...........................	344		10		7		60		50		11		482
Loans and advances to banks (c) .....	35		-		-		18		5		-		58
Total (d) .........................................	4,200		371		564		1,290		824		1,350		8,599
(a) as a percentage of A ...................	1.60%		0.31%		0.63%		6.13%		1.52%		4.44%		1.48%
(b) as a percentage of B ..................	0.46%		0.13%		0.08%		2.37%		0.12%		0.80%		0.35%
(c) as a percentage of C ..................	0.05%		-		-		0.28%		0.02%		-		0.03%
(d) as a percentage of D ..................	1.07%		0.24%		0.38%		4.49%		0.67%		2.88%		0.96%

	Europe		Hong          Kong		Rest of          Asia-       Pacific		MENA		North     America		Latin    America		Total
	US$m		US$m		US$m		US$m		US$m		US$m		US$m
At 31 December 2012
Corporate and commercial (E) ........	223,061		99,199		85,305		22,452		47,886		35,590		513,493
- manufacturing ..........................	56,690		10,354		19,213		3,373		9,731		12,788		112,149
- international trade and services	70,954		33,832		32,317		9,115		13,419		9,752		169,389
- commercial real estate .............	33,279		23,384		9,286		865		6,572		3,374		76,760
- other property-related .............	7,402		16,399		6,641		2,103		7,607		380		40,532
- government .............................	2,393		2,838		1,136		1,662		774		1,982		10,785
- other commercial10 ..................	52,343		12,392		16,712		5,334		9,783		7,314		103,878
Financial (non-bank financial institutions) (F) ...........................	55,732		4,546		4,255		1,196		13,935		1,594		81,258
Asset-backed securities reclassified ..	3,694		-		-		-		197		-		3,891
Loans and advances to banks (G) ....	45,320		23,500		44,592		9,198		13,465		16,528		152,603
Total wholesale lending (H) ............	327,807		127,245		134,152		32,846		75,483		53,712		751,245
Of which:
- reverse repos to customers .......	27,299		760		307		-		6,281		4		34,651
- reverse repos to banks ..............	22,301		1,918		6,239		500		811		3,692		35,461
Impairment allowances on wholesale lending
Corporate and commercial (e) ........	3,537		383		526		1,312		732		856		7,346
- manufacturing ..........................	611		86		129		210		84		287		1,407
- international trade and services	992		233		185		360		189		329		2,288
- commercial real estate .............	1,011		5		62		156		214		103		1,551
- other property-related .............	164		20		81		241		102		13		621
- government .............................	15		-		-		42		2		-		59
- other commercial .....................	744		39		69		303		141		124		1,420
Financial (non-bank financial institutions) (f) ...........................	318		29		11		157		37		2		554
Loans and advances to banks (g) .....	40		-		-		17		-		-		57
Total (h) .........................................	3,895		412		537		1,486		769		858		7,957
(e) as a percentage of E ..................	1.59%		0.39%		0.62%		5.84%		1.53%		2.41%		1.43%
(f) as a percentage of F ...................	0.57%		0.64%		0.26%		13.13%		0.27%		0.13%		0.68%
(g) as a percentage of G ..................	0.09%		-		-		0.18%		-		-		0.04%
(h) as a percentage of H ..................	1.19%		0.32%		0.40%		4.52%		1.02%		1.60%		1.06%

For footnote, see page 263.

After excluding reverse repo balances, (d) as a percentage of D was 1.43% for Europe, 1.24% for North America and 1.2% in total at 31 December 2013. After excluding reverse repo balances, (h) as a percentage of H was 1.4% for Europe, 1.12% for North America and 1.17% in total at 31 December 2012.

On a reported basis, total wholesale lending increased by US$145bn to US$896bn at 31 December 2013. On a constant currency basis balances grew by US$149bn, of which reverse repo balances to customers increased by US$53bn and to banks by US$56bn, driven by the change in the way GB&M manages these activities (see page 220). Excluding reverse repos, total balances rose due to higher international trade and services lending, mainly in Hong Kong and, to a lesser extent, in Rest of Asia-Pacific, as we capitalised on trade and capital flows. Other commercial balances increased, notably in GB&M in the UK, on corporate overdraft balances which did not meet the netting criteria. In addition, loans and advances to banks rose as a result of increased trade re-finance and central bank lending in Hong Kong. This was partly offset by a decline in Latin America following the disposal of our operations in Panama.

For more detail on impairment allowances see page 187.

The commentary that follows is on a constant currency basis.

Financial (non-bank)

Financial (non-bank) lending increased from US$82bn at 31 December 2012 to US$138bn at 31 December 2013. This was mainly in Europe and North America due to increased reverse repo balances, as discussed above.

Loans and advances to banks

Loans and advances to banks increased from US$150bn at 31 December 2012 to US$212bn at 31 December 2013. This was driven by higher reverse repo balances due to the change in the way GB&M manages these activities, mainly affecting Europe and North America. In addition, there was a rise in placements with financial institutions in Hong Kong and Rest of Asia-Pacific.

Corporate and commercial

Corporate and commercial lending increased by US$33bn to US$544bn at 31 December 2013. This was driven by a rise in international trade and services lending balances, mainly in Hong Kong and, to a lesser extent, Rest of Asia-Pacific as we capitalised on trade and capital flows. Other commercial balances increased, notably in GB&M in the UK, on corporate overdraft balances which did not meet the netting criteria, and in North America from growth in lending to corporate customers, reflecting our focus on target segments in the US. This was partly offset in Latin America as a result of the disposal of our operations in Panama and tightened lending criteria across most of the region coupled with a reduction of government loans in Hong Kong following repayments in the year.

Total commercial real estate and other property-related lending was US$120bn at 31 December 2013, marginally higher compared with 2012. Loan balances grew in Hong Kong as a result of demand for financing in the property investment and development sectors. This was partly offset by lower demand for lending in the UK and the disposal of our operations in Panama.

Commercial real estate

Our exposure to commercial real estate lending continued to be concentrated in Hong Kong, the UK, Rest of Asia-Pacific and North America. The markets in Hong Kong and Rest of Asia-Pacific remained relatively strong throughout 2013 despite cooling measures and the prospect of an end to tapering in the US. In the UK, the commercial property market steadily improved as demand for commercial tenancies rose amid signs that the benefits of the economic recovery were beginning to filter to regional markets beyond London and the South East, which had remained relatively strong throughout the downturn. In North America, the US market showed the benefits of a return to economic growth with trends reflecting the recovery, particularly in larger metropolitan markets, where both commercial and residential demand improved. In Canada, broader concerns regarding overheating in the real estate markets did not affect the commercial property market.

Refinance risk in commercial real estate

It is not untypical for commercial real estate lending to require the repayment of a significant proportion
of the principal at maturity. Typically, a customer will arrange repayment through the acquisition of a new loan to settle the existing debt. Refinance risk is the risk that a customer, being unable to repay their debt on maturity, is unable to refinance the debt at commercial rates. Refinance risk is described in more detail on page 272. This risk is subject to close scrutiny in key commercial real estate markets because it can arise, in particular, when a loan is serviced exclusively by the property to which it relates, i.e. when the bank does not, or is not able to, place principal reliance on other cash flows available to the borrower. We monitor our commercial real estate portfolio closely, assessing those drivers that may indicate potential issues with refinancing. The principal driver is the vintage of the loan, when origination reflected previous market norms which no longer apply in the current market. Examples might be higher LTV ratios and/or lower interest cover ratios. The range of refinancing sources in the local market is also an important consideration, with risk increasing when lenders are restricted to banks and when bank liquidity is limited. In addition, underlying fundamentals such as the reliability of tenants, the ability to let and the condition of the property are important, as they influence property values.

For the Group's commercial real estate portfolios as a whole, the behaviour of markets and the quality of assets did not cause undue concern in 2013. While the commercial real estate market in the UK has taken some time to recover, the drivers described above are not currently causing sufficient concern regarding our sensitivity to the risk of refinancing to warrant enhanced management attention. Stronger liquidity in 2013, as a wider range of international financiers returned to the market, significantly eased pressure on the options for refinance.

At 31 December 2013, we had US$22bn of commercial real estate loans in the UK of which US$7bn were due to be refinanced within the next 12 months. Of these balances, cases subject to close monitoring in our Loan Management unit amounted to US$2bn. US$2bn were disclosed as impaired with impairment allowances of US$650m. Where these loans are not considered impaired it is because there is sufficient evidence to indicate that the associated contractual cash flows will be recovered or that the loans will not need to be refinanced on terms we would consider below market norms.

Credit quality of financial instruments

(Audited)

A summary of our current policies and practices regarding the credit quality of financial instruments is provided in the Appendix to Risk on page 267.

The five classifications describing the credit quality of our lending, debt securities portfolios and derivatives are defined on page 267 (unaudited). Additional credit quality information in respect of our consolidated holdings of ABSs is provided on page 275.

For the purpose of the following disclosure, retail loans which are past due up to 89 days and are not otherwise classified as impaired in accordance with our disclosure convention (see page 267 (unaudited)), are not disclosed within the expected loss ('EL') grade to which they relate, but are separately classified as past due but not impaired.

2013 compared with 2012

(Unaudited)

We assess credit quality on all financial instruments which are subject to credit risk, as shown in the table on page 170. 

On a reported basis, the balance of financial instruments bearing credit risk at 31 December 2013 was US$2,478bn, of which US$1,650bn or 67% was classified as 'strong' (31 December 2012: 67%). The proportion of financial instruments classified as 'good' and 'satisfactory' remained broadly stable at 17% and 13%, respectively. The proportion of
'sub-standard' financial instruments remained low at 2% at 31 December 2013.

Loans and advances held at amortised cost increased to US$1,292bn from US$1,150bn at 31 December 2012. At 31 December 2013, 77%
of these balances were classified as either 'strong' or 'good', broadly in line with the end of 2012.

The majority of the Group's exposure to financial investments was in the form of available-for-sale debt securities issued by governments and government agencies classified as 'strong'. This proportion was broadly unchanged in 2013 at 87%.

Trading assets on which credit quality has been assessed decreased by 35% from 31 December 2012 to US$239bn due to lower reverse repo balances following a change to the way GB&M manages these activities. The proportion of balances classified as 'strong' rose marginally from 65% at 31 December 2012 to 68% at 31 December 2013. This was due to the reduction in reverse repo balances as noted above, with most of these balances previously being spread across the 'strong', 'good' and 'satisfactory' classifications. In addition, there was a reduction in our holdings of government bonds in Hong Kong and Rest of Asia-Pacific.

The proportion of derivative assets classified as 'strong' fell marginally from 79% at the end of 2012 to 78% at 31 December 2013 as a result of a decrease in the fair value of interest rate derivatives classified as 'strong' in Europe. The proportion of 'satisfactory' balances fell to 5% from 7% for the same reason.

Cash and balances at central banks rose by 18% to US$167bn, mainly in Europe due to the placement of surplus funds from deposit growth exceeding lending growth and, to a lesser extent in North America. Substantially all of the Group's cash and balances at central banks were classified as 'strong', with the most significant concentrations in Europe and North America.

 

END

 

 

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