Annual Financial Report - 29 of 60

RNS Number : 1574D

HSBC Holdings PLC

25 March 2014

 



Distribution of financial instruments by credit quality

(Audited)

	Neither past due nor impaired								Past due				Impair-
	Strong		Good	Satisfactory			Sub- standard		but not impaired		Impaired		ment allowances11		Total
	US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m
At 31 December 2013
Cash and balances at central banks ..............	162,017		2,877		265		1,440								166,599
Items in the course of collection from other banks..........................	5,590		66		286		79								6,021
Hong Kong Government certificates of indebtedness ...............	25,220		-		-		-								25,220
Trading assets12 .............	163,444		39,475		34,868		1,514								239,301
- treasury and other eligible bills ..........	17,235		3,585		758		6								21,584
- debt securities .........	107,831		16,498		16,167		1,148								141,644
- loans and advances: to banks ..............	15,804		5,546		6,342		193								27,885
to customers ........	22,574		13,846		11,601		167								48,188
Financial assets designated at fair value12 .............	6,608		5,183		671		257								12,719
- treasury and other eligible bills ..........	50		-		-		-								50
- debt securities .........	6,490		5,179		664		256								12,589
- loans and advances: to banks ..............	68		-		7		1								76
to customers ........	-		4		-		-								4
Derivatives12 .................	220,711		47,004		13,425		1,125								282,265
Loans and advances to customers held at amortised cost13 .........	535,947		262,698		220,970		23,944		15,460		36,428		(15,143)		1,080,304
- personal ..................	326,269		39,024		14,882		1,580		10,175		18,798		(6,602)		404,126
- corporate and commercial .........	133,355		194,970		175,046		21,281		5,009		16,877		(8,059)		538,479
- financial (non-bank financial institutions) .........	76,323		28,704		31,042		1,083		276		753		(482)		137,699
of which:
- reverse repos ..........	47,443		19,621		21,149		2		-		-		-		88,215
Loans and advances to banks held at amortised cost ............................	155,598		39,388		13,382		3,125		11		75		(58)		211,521
of which:
- reverse repos ..........	64,100		18,257		7,116		2,002		-		-		-		91,475
Financial investments ....	362,799		27,833		17,556		6,089		-		2,508				416,785
- treasury and other similar bills ..........	69,364		5,595		1,856		1,296		-		-				78,111
- debt securities .........	293,435		22,238		15,700		4,793		-		2,508				338,674
Assets held for sale ........	1,129		642		1,050		351		89		156		(111)		3,306
- disposal groups ........	1,093		642		496		351		86		90		(111)		2,647
- non-current assets held for sale ................	36		-		554		-		3		66		-		659
Other assets ...................	11,372		7,386		13,798		808		218		436				34,018
- endorsements and acceptances .........	1,976		4,824		4,562		225		19		18				11,624
- accrued income and other ...................	9,396		2,562		9,236		583		199		418				22,394
	1,650,435		432,552		316,271		38,732		15,778		39,603		(15,312)		2,478,059

	Neither past due nor impaired									Past due				Impair-
	Strong		Good	Satisfactory				Sub-    standard		but not   impaired		Impaired		ment allowances11		Total
	US$m		US$m		US$m			US$m		US$m		US$m		US$m		US$m
At 31 December 2012
Cash and balances at central banks ..............	138,124		3,235		147			26								141,532
Items in the course of collection from other banks .........................	6,661		203		439			-								7,303
Hong Kong Government certificates of indebtedness................	22,743		-		-			-								22,743
Trading assets12 .............	237,078		60,100		66,537			3,462								367,177
- treasury and other eligible bills ..........	20,793		4,108		1,340			41								26,282
- debt securities .........	106,453		16,685		20,931			608								144,677
- loans and advances: to banks ..............	49,133		21,018		7,418			702								78,271
to customers ........	60,699		18,289		36,848			2,111								117,947
Financial assets designated at fair value12 .............	6,186		5,884		401			243								12,714
- treasury and other eligible bills ..........	54		-		-			-								54
- debt securities .........	6,089		5,830		391			241								12,551
- loans and advances: to banks ..............	43		-		10			2								55
to customers ........	-		54		-			-								54
Derivatives12 .................	284,115		46,214		24,877			2,244								357,450
Loans and advances to customers held at amortised cost13 .........	507,871		222,402		202,666			23,224		18,901		38,671		(16,112)		997,623
- personal ..................	321,887		39,533		16,225			1,430		12,267		23,751		(8,212)		406,881
- corporate and commercial .........	137,139		166,338		172,457			20,920		6,437		14,093		(7,346)		510,038
- financial (non-bank financial institutions) .........	48,845		16,531		13,984			874		197		827		(554)		80,704
of which:
- reverse repos ..........	29,324		4,944		381			2		-		-		-		34,651
Loans and advances to banks held at amortised cost ............................	117,220		23,921		10,575			772		10		105		(57)		152,546
of which:
- reverse repos ..........	29,483		3,509		2,467			2		-		-		-		35,461
Financial investments ....	357,452		27,428		21,143			6,759		-		2,530				415,312
- treasury and other similar bills ..........	80,320		3,818		1,957			1,455		-		-				87,550
- debt securities .........	277,132		23,610		19,186			5,304		-		2,530				327,762
Assets held for sale ........	2,425		3,287		2,311			314		387		1,286		(718)		9,292
- disposal groups ........	2,033		1,118		1,789			268		118		82		(49)		5,359
- non-current assets held for sale ................	392		2,169		522			46		269		1,204		(669)		3,933
Other assets ...................	9,679		6,007		13,845			1,759		231		462				31,983
- endorsements and acceptances .........	1,995		4,344		5,195			483		7		8				12,032
- accrued income and other ...................	7,684		1,663		8,650			1,276		224		454				19,951
	1,689,554		398,681		342,941			38,803		19,529		43,054		(16,887)		2,515,675

For footnotes, see page 263.

Past due but not impaired gross financial instruments

(Audited)

Past due but not impaired loans are those in respect of which the customer is in the early stages of delinquency and has failed to make a payment or a partial payment in accordance with the contractual terms of the loan agreement. This is typically when a loan is less than 90 days past due and there are no other indicators of impairment.

Further examples of exposures past due but not impaired include individually assessed mortgages that are in arrears more than 90 days for which there are no other indicators of impairment and the value of collateral is sufficient to repay both the principal debt and all potential interest for at least one year, or short‑term trade facilities past due more than 90 days for technical reasons such as delays in documentation but there is no concern over the creditworthiness of the counterparty. When groups of loans are collectively assessed for impairment, collective impairment allowances are recognised for loans classified as past due but not impaired.

At 31 December 2013, US$15.5bn of loans and advances held at amortised cost were classified as past due but not impaired (2012: US$18.9bn). The largest concentration of these balances was in HSBC Finance, where they decreased by 13% compared with the end of 2012 due to the continued run-off and loan sales in the CML portfolio. In Latin America, balances decreased by 54% to US$1.6bn, primarily in Brazil as we reposition our portfolio. In addition, we disposed of our operations in Panama.

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

(Audited)

	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
31 December 2013
Banks ......................................................	-		11		-		-		-		-		11
Customers ................................................	2,399		1,488		2,723		757		6,453		1,640		15,460
-  personal ...........................................	1,287		882		1,882		174		4,817		1,133		10,175
-  corporate and commercial ................	1,092		410		787		580		1,635		505		5,009
-  financial (non-bank financial institutions) ..................................	20		196		54		3		1		2		276
	2,399		1,499		2,723		757		6,453		1,640		15,471
31 December 2012
Banks ......................................................	-		-		10		-		-		-		10
Customers ................................................	2,339		1,311		2,964		975		7,721		3,591		18,901
-  personal ...........................................	1,416		638		1,961		248		5,806		2,198		12,267
-  corporate and commercial ................	909		579		953		726		1,910		1,360		6,437
-  financial (non-bank financial institutions) ..................................	14		94		50		1		5		33		197
	2,339		1,311		2,974		975		7,721		3,591		18,911

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

(Audited)

	Up to 29        days		30-59         days		60-89         days		90-179         days		180 days and over		Total
	US$m		US$m		US$m		US$m		US$m		US$m
At 31 December 2013
Loans and advances to customers held at amortised cost ...................................................................................	11,689		2,587		1,057		76		51		15,460
-  personal ..............................................................	7,170		2,124		865		16		-		10,175
-  corporate and commercial ..................................	4,290		418		190		60		51		5,009
-  financial (non-bank financial institutions) ..........	229		45		2		-		-		276
Loans and advances to banks held at amortised cost ...	11		-		-		-		-		11
Loans and advances ....................................................	11,700		2,587		1,057		76		51		15,471
Assets held for sale .....................................................	61		12		8		6		2		89
-  disposal groups ....................................................	61		11		8		5		1		86
-  non-current assets held for sale ...........................	-		1		-		1		1		3
Other assets ................................................................	142		43		18		6		9		218
-  endorsements and acceptances ............................	13		3		-		1		2		19
-  other ..................................................................	129		40		18		5		7		199
	11,903		2,642		1,083		88		62		15,778
At 31 December 2012
Loans and advances to customers held at amortised cost ...................................................................................	14,226		3,189		1,262		200		24		18,901
-  personal ..............................................................	8,718		2,441		1,058		42		8		12,267
-  corporate and commercial ..................................	5,384		675		204		158		16		6,437
-  financial (non-bank financial institutions)...........	124		73		-		-		-		197
Loans and advances to banks held at amortised cost ...	10		-		-		-		-		10
Loans and advances ....................................................	14,236		3,189		1,262		200		24		18,911
Assets held for sale .....................................................	251		84		48		2		2		387
-  disposal groups ....................................................	87		17		11		1		2		118
-  non-current assets held for sale ...........................	164		67		37		1		-		269
Other assets ................................................................	122		37		24		12		36		231
-  endorsements and acceptances ............................	6		1		-		-		-		7
-  other ..................................................................	116		36		24		12		36		224
	14,609		3,310		1,334		214		62		19,529

Renegotiated loans and forbearance

(Audited)

Current policies and procedures regarding renegotiated loans and forbearance are described in the Appendix to Risk on page 268.

The contractual terms of a loan may be modified for a number of reasons, including changes in market conditions, customer retention and other factors not related to the current or potential credit deterioration of a customer. 'Forbearance' describes concessions made on the contractual terms of a loan in response to an obligor's financial difficulties. We classify and report loans on which concessions have been granted under conditions of credit distress as 'renegotiated loans' when their contractual payment terms have been modified, because we have significant concerns about the borrowers' ability to meet contractual payments when due. Concessions on loans made to customers which do not affect the
payment structure or basis of repayment, such as waivers of financial or security covenants, do not directly provide concessionary relief to customers in terms of their ability to service obligations as they fall due and are therefore not included in this classification.

There were no material changes to our group standard policies and procedures regarding renegotiated loans in 2013. In Brazil, we realigned local practices to meet Group standard policy and reviewed the impairment allowance methodology used for our retail banking and Business Banking mass portfolios to ensure that it better reflected the level of restructuring that is taking place and the performance of these restructured accounts.

The following tables show the gross carrying amounts of the Group's holdings of renegotiated loans and advances to customers by industry sector, geography and credit quality classification.

Renegotiated loans and advances to customers

(Audited)

	At 31 December 2013									At 31 December 2012
	Neither          past   due nor impaired		Past due    but not impaired		Impaired		Total				Neither          past     due nor   impaired		Past due      but not   impaired		Impaired		Total
	US$m		US$m		US$m		US$m				US$m		US$m		US$m		US$m
Personal ............................	5,895		3,585		12,092		21,572				7,952		3,524		18,279		29,755
-  first lien residential mortgages ...............	4,881		3,219		10,857		18,957				5,861		2,828		15,459		24,148
-  other personal1 ...........	1,014		366		1,235		2,615				2,091		696		2,820		5,607
Corporate and commercial..	3,147		362		8,493		12,002				4,608		295		6,892		11,795
-  manufacturing and international trade services ..................	1,529		163		4,178		5,870				2,381		154		3,012		5,547
-  commercial real estate and other property-related ....................	1,050		113		3,385		4,548				1,796		10		3,484		5,290
-  governments ..............	274		-		43		317				177		-		-		177
-  other commercial10 ....	294		86		887		1,267				254		131		396		781
Financial ............................	358		-		243		601				255		-		422		677
	9,400		3,947		20,828		34,175				12,815		3,819		25,593		42,227
Total renegotiated loans and advances to customers as a percentage of total gross loans and advances to customers .....................							3.1%										4.2%

For footnotes, see page 263.

Renegotiated loans and advances to customers by geographical region

(Audited)

	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
31 December 2013
Personal ..................................................	2,251		218		217		149		18,130		607		21,572
-  first lien residential mortgages ..........	1,820		52		65		91		16,853		76		18,957
-  other personal1 ................................	431		166		152		58		1,277		531		2,615
Corporate and commercial .......................	7,270		125		205		1,583		658		2,161		12,002
-  manufacturing and international trade services ................................	3,709		18		85		489		198		1,371		5,870
-  commercial real estate and other property-related ...........................	2,940		3		36		662		446		461		4,548
-  governments ....................................	-		-		-		137		-		180		317
-  other commercial10 ..........................	621		104		84		295		14		149		1,267
Financial ..................................................	235		-		2		362		1		1		601
	9,756		343		424		2,094		18,789		2,769		34,175
Total impairment allowances on renegotiated loans ................................	1,867		13		88		460		2,285		1,014		5,727
-  individually assessed .........................	1,821		12		66		460		98		464		2,921
-  collectively assessed .........................	46		1		22		-		2,187		550		2,806

	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
31 December 2012
Personal ..................................................		2,817				245				248			190				25,474			781		29,755
-  first lien residential mortgages ..........		1,896				68				78			112				21,896			98		24,148
-  other personal1 ................................		921				177				170			78				3,578			683		5,607
Corporate and commercial .......................		6,829				147				300			1,859				685			1,975		11,795
-  manufacturing and international trade services ................................		3,002				22				193			659				191			1,480		5,547
-  commercial real estate and other property-related ...........................		3,641				25				37			899				486			202		5,290
-  governments ....................................		-				-				-			2				-			175		177
-  other commercial10 ..........................		186				100				70			299				8			118		781
Financial ..................................................		328				-				4			340				3			2		677
		9,974				392				552			2,389				26,162			2,758		42,227
Total impairment allowances on renegotiated loans ................................		1,547				16				96			546				3,864			485		6,554
-  individually assessed .........................		1,545				15				63			543				39			213		2,418
-  collectively assessed .........................		2				1				33			3				3,825			272		4,136

For footnotes, see page 263.

Movement in renegotiated loans by geographical region

(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
Renegotiated loans at 1 January 2013 ...............	9,974		392		552		2,389		26,162		2,758		42,227
-  personal ....................................................	2,817		245		248		190		25,474		781		29,755
-  corporate and commercial ........................	6,829		147		300		1,859		685		1,975		11,795
-  financial ...................................................	328		-		4		340		3		2		677
Loans renegotiated in the year without  derecognition................................................	2,807		-		49		101		1,727		1,311		5,995
-  personal ....................................................	264		-		8		16		1,335		507		2,130
-  corporate and commercial ........................	2,541		-		41		85		391		803		3,861
-  financial ...................................................	2		-		-		-		1		1		4
Loans renegotiated in the year resulting in recognition of a new loan..............................	105		47		66		14		-		62		294
-  personal ....................................................	17		46		30		14		-		25		132
-  corporate and commercial ........................	88		1		36		-		-		37		162
-  financial ...................................................	-		-		-		-		-		-		-
Repayments  .....................................................	(2,139)		(99)		(134)		(541)		(1,759)		(707)		(5,379)
-  personal ....................................................	(489)		(71)		(40)		(64)		(1,387)		(353)		(2,404)
-  corporate and commercial ........................	(1,574)		(28)		(93)		(477)		(370)		(354)		(2,896)
-  financial ...................................................	(76)		-		(1)		-		(2)		-		(79)
Amounts written off  ........................................	(426)		(2)		(23)		(38)		(1,035)		(409)		(1,933)
-  personal ....................................................	(99)		(2)		(18)		(9)		(995)		(233)		(1,356)
-  corporate and commercial ........................	(303)		-		(5)		(29)		(40)		(175)		(552)
-  financial ...................................................	(24)		-		-		-		-		(1)		(25)
Other ...............................................................	(565)		5		(86)		169		(6,306)		(246)		(7,029)
-  personal ....................................................	(259)		-		(11)		2		(6,297)		(120)		(6,685)
-  corporate and commercial ........................	(311)		5		(74)		145		(8)		(125)		(368)
-  financial ...................................................	5		-		(1)		22		(1)		(1)		24
At 31 December 2013 ....................................	9,756		343		424		2,094		18,789		2,769		34,175
-  personal ....................................................	2,251		218		217		149		18,130		607		21,572
-  corporate and commercial ........................	7,270		125		205		1,583		658		2,161		12,002
-  financial ...................................................	235		-		2		362		1		1		601

For footnote, see page 263.

The above table shows the movement in renegotiated loans for the year. During the year there were US$6.3bn of new loans classified as renegotiated, of which US$294m resulted in the derecognition of the original loan and recognition of a new loan. The majority of the movement during the year was in 'Other', which included a reduction in North America of US$5.6bn due to loan sales in the CML portfolio and transfers to other assets upon foreclosure and repossession of the real estate collateral of US$668m. In addition, there were refinements in data collection to personal and corporate and commercial, which resulted in improved renegotiated loan identification and led to a decrease in Turkey of US$523m.

See page 270 for further details on the types of restructures that may result in derecognition accounting.

2013 compared with 2012

(Unaudited)

The following commentary is on a reported basis.

Renegotiated loans totalled US$34.2bn at 31 December 2013 (2012: US$42.2bn). The most significant portfolio remained in North America at US$18.8bn or 55% of the total at 31 December 2013 (2012: US$26.2bn or 62%), substantially all of which were retail loans held by HSBC Finance

Further commentary is provided below for retail and corporate and commercial renegotiated loans.

Retail renegotiated loans

(Unaudited)

The following commentary is on a reported basis.

Renegotiated loans to retail customers totalled US$21.6bn at 31 December 2013, a reduction of US$8.2bn compared with the end of 2012. This was due to the continued run-off and loan sales in the CML portfolio. The most significant portfolio of renegotiated retail loans remained in North America and amounted to US$18.1bn or 84% of the Group's total, substantially all of which were retail loans held by HSBC Finance.

The next largest portfolio of renegotiated retail loans was in Europe and amounted to US$2.3bn, a reduction of US$566m compared with the end of 2012. The decrease was mainly due to repayments and write-offs on renegotiated loans in the UK.

In Latin America, renegotiated retail loans decreased by US$174m to US$607m, mainly resulting from more restrictive conditions being required for the approval of renegotiations.

Renegotiated retail loans in Hong Kong, Rest of Asia-Pacific and the Middle East and North Africa remained low.

HSBC Finance loan modifications and re-age programmes

HSBC Finance maintains loan modification and re‑age ('loan renegotiation') programmes in order to manage customer relationships, improve collection opportunities and, if possible, avoid foreclosure.

Since 2006, HSBC Finance has implemented an extensive loan renegotiation programme, and a significant portion of its loan portfolio has been subject to renegotiation at some stage in the life of the customer relationship as a consequence of the economic conditions in the US and the nature of HSBC Finance's customer base.

The volume of loans that qualify for modification has reduced significantly in recent years. We expect this trend to continue as HSBC Finance believes the percentage of its customers with unmodified loans who would benefit from loan modification in a way that would avoid non-payment of future cash flows is decreasing. In addition, volumes of new loan modifications are expected to decrease due to gradual improvements in economic conditions, the cessation of new real estate secured and personal non-credit card receivables originations, and the continued run-off and loan sales in the CML portfolio.

Qualifying criteria

For an account to qualify for renegotiation it must meet certain criteria. However, HSBC Finance retains the right to decline a renegotiation. The extent to which HSBC Finance renegotiates accounts that are eligible under its existing policies varies according to its view of prevailing economic conditions and other factors which may change from year to year. In addition, exceptions to policies and practices may be made in specific situations in response to legal or regulatory agreements or orders.

Renegotiated real estate secured and personal lending receivables are not eligible for a subsequent renegotiation for twelve and six months, respectively, with a maximum of five renegotiations permitted within a five-year period. Borrowers must be approved for a modification and generally make two minimum qualifying monthly payments within 60 days to activate a modification. In certain circumstances where the debt has been restructured in bankruptcy proceedings, fewer or no payments may be required. Accounts whose borrowers are subject to a Chapter 13 plan filed with a bankruptcy court generally may be re-aged upon receipt of one qualifying payment, while accounts whose borrowers have filed for Chapter 7 bankruptcy protection may be re-aged upon receipt of a signed reaffirmation agreement. In addition, for some products accounts may be re-aged without receipt of a payment in certain special circumstances (e.g. in the event of a natural disaster or a hardship programme).

Types of loan renegotiation programme in HSBC Finance ·  A temporary modification is a change to the contractual terms of a loan that results in HSBC Finance giving up a right to contractual cash flows over a pre-defined period. With a temporary modification the loan is expected to revert back to the original contractual terms, including the interest rate charged, after the modification period. An example is reduced interest payments. A substantial number of HSBC Finance modifications involve interest rate reductions, which lower the amount of interest income HSBC Finance is contractually entitled to receive in future periods. Historically, modifications have generally been for six months, although extended modification periods are now more common. Loans that have been re-aged are classified as impaired with the exception of first-time loan re-ages that were less than 60 days past due at the time of re-age. These remain classified as impaired until they have demonstrated a history of payment performance against their original contracted terms for at least 12 months. ·  A permanent modification is a change to the contractual terms of a loan that results in HSBC Finance giving up a right to contractual cash flows over the life of the loan. An example is a permanent reduction in the interest rate charged. Permanent or long-term modifications which are due to an underlying hardship event remain classified as impaired for their full life. ·  The term 're-age' describes a renegotiation by which the contractual delinquency status of a loan is reset to current after demonstrating payment performance. The overdue principal and/or interest is deferred and paid at a later date. Loan re-ageing enables customers who have been unable to make a small number of payments to have their loan delinquency status reset to current so that their credit score is not affected by the overdue balances. Loans that have been re-aged remain classified as impaired until they have demonstrated a history of payment performance against the original contractual terms for at least 12 months. A temporary or permanent modification may also lead to a re‑ageing of a loan although a loan may be re-aged without any modification to its original terms and conditions. Where loans have been granted multiple concessions, subject to the qualifying criteria discussed above, the concession is deemed to have been made due to concern regarding the borrower's ability to pay, and the loan is disclosed as impaired. The loan remains disclosed as impaired from that date forward until the borrower has demonstrated a history of repayment performance for the period of time required for either modifications or re-ages, as described above.

2013 compared with 2012

At 31 December 2013, renegotiated real estate secured accounts in HSBC Finance represented 91% (2012: 86%) of North America's total renegotiated loans. US$10bn (2012: US$14bn) of renegotiated real estate secured loans were classified as impaired. A significant portion of HSBC Finance's renegotiated portfolio has received multiple renegotiations. Consequently, a significant proportion of loans included in the table below have undergone multiple re-ages or modifications. In this regard, multiple modifications have remained consistent at 75% to 80% of total modifications.

During 2013, the aggregate number of renegotiated loans reduced, due to the run-off and loan sales in the CML portfolio, despite renegotiation activity continuing. Within the constraints of our Group credit policy, HSBC Finance's policies allow for multiple renegotiations under certain circumstances, and a significant number of accounts received second or subsequent renegotiations during the year which do not appear in the statistics presented. These statistics treat a loan as an addition to the volume of renegotiated loans on its first renegotiation only. At 31 December 2013, renegotiated loans were 57% (2012: 58%) of the total portfolio of HSBC Finance's real estate secured accounts.

Gross loan portfolio of HSBC Finance real estate secured balances

(Unaudited)

	Re-aged14		Modified and re-aged		Modified		Total re- negotiated loans	Total non- renegotiated loans			Total gross loans		Total impair- ment allowances		Impair- ment allowances/ gross loans
	US$m		US$m		US$m		US$m		US$m		US$m		US$m		%
At 31 December 2013	8,167		8,213		768		17,148		13,171		30,319		3,028		10
At 31 December 2012	9,640		11,660		1,121		22,421		16,261		38,743		4,481		12

For footnote, see page 263.

Movement in HSBC Finance renegotiated real estate balances

(Unaudited)

	2013		2012
	US$m		US$m
At 1 January ......................................................................................................................	22,421		24,588
Additions ................................................................................................................................	967		1,221
Payments ................................................................................................................................	(1,540)		(1,133)
Write-offs ...............................................................................................................................	(1,122)		(1,796)
Transfer to 'Assets held for sale' and 'Other assets' ................................................................	(3,578)		(459)
At 31 December ................................................................................................................	17,148		22,421

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

(Unaudited)

	Number of renegotiated loans (000s)								Total    number of loans (000s)
	Re-aged		Modified and re-aged		Modified		Total
At 31 December 2013 ........................................	102		78		8		188		352
At 31 December 2012 ..........................................	117		107		11		235		427

Corporate and commercial renegotiated loans

(Unaudited)

For the current policies and procedures regarding renegotiated loans in the corporate and commercial sector, see the Appendix to Risk on page 271.

On a reported basis, there was a US$207m increase in renegotiated loans in the corporate and commercial sector in 2013 to US$12bn. Higher balances in Europe US$441m and Latin America US$186m, were partly offset by reductions across the other regions.

In Europe, there were higher balances in manufacturing and international trade services of US$707m, mainly in the UK due to a small number of significant individual restructurings, and in other commercial balances of US$435m, principally in Spain. This was partly offset by lower balances in the commercial real estate and other property-related sector of US$701m, mainly in the UK due to net loan repayments.

In the Middle East and North Africa, the majority of the fall of US$276m was due to loan repayments in both manufacturing and international
trade services and commercial real estate and other property-related sectors, mainly in the UAE.

In Rest of Asia-Pacific, the majority of the US$95m reduction in renegotiated loan balances was in the manufacturing and international trade services sector as well as the commercial real estate and other property-related sector.

Renegotiated balances in Latin America increased by US$186m compared with the end of 2012, primarily due to a small number of large renegotiations in the commercial real estate and other property-related sector in Mexico, related to homebuilders resulting from a change in public housing policy.

Collateral

Collateral and other credit enhancements held

(Audited)

Loans and advances held at amortised cost

It is the Group's practice to lend on the basis of customers' ability to meet their obligations out of cash flow resources rather than rely on the value of security offered. Depending on a customer's standing and the type of product, facilities may

be provided without security. For other lending, a charge over collateral is obtained and considered in determining the credit decision and pricing. In the event of default, the bank may utilise the collateral as a source of repayment. Depending on its form, collateral can have a significant financial effect in mitigating our exposure to credit risk.

The tables below provide a quantification of the value of fixed charges we hold over borrowers' specific assets where we have a history of enforcing, and are able to enforce, collateral in satisfying a debt in the event of the borrower failing to meet its contractual obligations, and where the collateral is cash or can be realised by sale in an established market. The collateral valuation in the tables below excludes any adjustments for obtaining and selling the collateral.

We may also manage our risk by employing other types of collateral and credit risk enhancements such as second charges, other liens and unsupported guarantees, but the valuation of such mitigants is less certain and their financial effect has not been quantified. In particular, loans shown in the tables below as not collateralised or partially collateralised may benefit from such credit mitigants.

Certain credit mitigants are used strategically in portfolio management activities. While single name concentrations arise in portfolios managed by GB&M and CMB, it is only in the former that their size requires the use of portfolio level credit mitigants. Across GB&M risk limits and utilisations, maturity profiles and risk quality are monitored and managed pro-actively. This process is key to determining our risk appetite for these larger, more complex, geographically distributed customer groups. While the principal form of risk management continues to be at the point of exposure origination through the lending decision-making process, GB&M also utilises loan sales and credit default swap ('CDS') hedges to manage concentrations and reduce risk. These transactions are the responsibility of a dedicated GB&M portfolio management team. Hedging activity is carried out within agreed credit parameters, and is subject to market risk limits and a robust governance structure. CDS mitigants are held at portfolio level and are not reported in the presentation below.

Personal lending

Residential mortgage loans including loan commitments by level of collateral

(Audited)

	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
Non-impaired loans and advances
Fully collateralised ........................	146,326		54,432		43,900		2,235		44,125		3,749		294,767
Loan to value ('LTV') ratio: - less than 25% ...................	11,438		8,496		4,270		149		3,339		219		27,911
- 25% to 50%	43,590		29,508		13,205		600		9,833		1,118		97,854
- 51% to 75%	66,452		13,726		20,644		1,095		20,751		1,715		124,383
- 76% to 90%	21,603		1,887		4,949		348		6,933		606		36,326
- 91% to 100% ...................	3,243		815		832		43		3,269		91		8,293
Partially collateralised:
- greater than 100% LTV (A) .............	1,410		14		348		42		4,150		59		6,023
- collateral value on A ..	852		14		293		37		3,681		49		4,926
	147,736		54,446		44,248		2,277		48,275		3,808		300,790
Impaired loans and advances
Fully collateralised ........................	1,369		33		221		90		10,128		160		12,001
LTV ratio: - less than 25% ...................	47		15		17		2		128		4		213
- 25% to 50%	197		11		57		13		1,265		93		1,636
- 51% to 75%	452		7		89		31		4,250		47		4,876
- 76% to 90%	320		-		49		34		2,809		13		3,225
- 91% to 100% ...................	353		-		9		10		1,676		3		2,051
Partially collateralised:
- greater than 100% LTV (B) ..............	104		-		17		6		2,548		8		2,683
- collateral value on B ..	91		-		4		6		2,272		4		2,377
	1,473		33		238		96		12,676		168		14,684
	149,209		54,479		44,486		2,373		60,951		3,976		315,474

Residential mortgage loans including loan commitments by level of collateral (continued)
(Audited)

	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
Non-impaired loans and advances
Fully collateralised .................	139,769		53,431		43,399		1,955		46,312		5,035		289,901
LTV ratio: - less than 25% ..................	11,569		8,076		4,419		117		3,546		308		28,035
- 25% to 50% ....................	35,557		30,132		12,665		579		9,365		1,468		89,766
- 51% to 75% ....................	59,702		12,760		19,534		929		20,755		2,222		115,902
- 76% to 90% ....................	26,768		1,931		6,144		172		8,437		855		44,307
- 91% to 100% ..................	6,173		532		637		158		4,209		182		11,891
Partially collateralised:
- greater than 100% LTV (C) .......................................	2,748		2		366		72		6,330		15		9,533
- collateral value on C ........	2,445		1		315		64		5,514		11		8,350
	142,517		53,433		43,765		2,027		52,642		5,050		299,434
Impaired loans and advances
Fully collateralised .................	1,904		47		263		151		13,487		158		16,010
LTV ratio: - less than 25% ..................	164		14		19		8		157		11		373
- 25% to 50% ....................	481		23		87		44		1,569		54		2,258
- 51% to 75% ....................	693		10		91		72		5,827		73		6,766
- 76% to 90% ....................	350		-		51		17		3,870		16		4,304
- 91% to 100% ..................	216		-		15		10		2,064		4		2,309
Partially collateralised:
- greater than 100% LTV (D) .......................................	219		-		10		13		3,880		1		4,123
- collateral value on D .......	120		-		8		12		3,170		1		3,311
	2,123		47		273		164		17,367		159		20,133
	144,640		53,480		44,038		2,191		70,009		5,209		319,567

The above table shows residential mortgage lending including off-balance sheet loan commitments by level of collateral. Off-balance sheet commitments include loans that have been approved but which the customer has not yet drawn, and the undrawn portion of loans that have a flexible drawdown facility such as the offset mortgage product. The collateral included in the table above consists of first charges on real estate.

The LTV ratio is calculated as the gross on-balance sheet carrying amount of the loan and any off-balance sheet loan commitment at the balance sheet date divided by the value of collateral. The methodologies for obtaining residential property collateral values vary throughout the Group, but are typically determined by using a combination of professional appraisals, house price indices and statistical analysis. Valuations must be updated on a regular basis and, as a minimum, at intervals of every three years. They are conducted more frequently when market conditions or portfolio performance are subject to significant change or when a loan is identified and assessed as impaired.

The LTV ratio bandings are consistent with our internal risk management reporting. While we do have mortgages in the higher LTV bands, our appetite for such lending is restricted and the larger portion of our portfolio is concentrated in the lower risk LTV bandings of 75% and below.

Other personal lending

Other personal lending consists primarily of overdrafts, credit cards and second lien mortgage portfolios. Second lien lending is supported by collateral but the claim on the collateral is subordinate to the first lien charge. The majority of our second lien portfolios were originated in North America where loss experience on defaulted second lien loans has typically approached 100%; consequently, we do not generally attach any significant financial value to this type of collateral. Credit cards and overdrafts are usually unsecured.

Corporate, commercial and financial (non-bank) lending

Collateral held is analysed separately below for commercial real estate and for other corporate, commercial and financial (non-bank) lending. This reflects the difference in collateral held on the portfolios. In each case, the analysis includes off‑balance sheet loan commitments, primarily undrawn credit lines.

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

(Audited)

	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
Rated CRR/EL 1 to 7
Not collateralised	4,865		10,186		3,978		192		137		935		20,293
Fully collateralised .......................	24,154		18,895		6,422		21		8,627		1,728		59,847
Partially collateralised (A)..................	2,664		1,552		825		139		704		484		6,368
- collateral value on A ...	1,827		1,278		410		24		303		292		4,134
	31,683		30,633		11,225		352		9,468		3,147		86,508
Rated CRR/EL 8
Not collateralised	109		-		10		-		1		3		123
Fully collateralised .......................	793		-		-		72		68		1		934
LTV ratio:
- less than 25% ....................	13		-		-		-		4		-		17
- 25% to 50%	126		-		-		-		11		-		137
- 51% to 75%	367		-		-		72		49		1		489
- 76% to 90%	173		-		-		-		4		-		177
- 91% to 100% ....................	114		-		-		-		-		-		114
Partially collateralised (B) .................	360		-		2		-		13		-		375
- collateral value on B ..	281		-		1		-		11		-		293
	1,262		-		12		72		82		4		1,432
Rated CRR/EL 9 to 10
Not collateralised	564		-		-		7		4		521		1,096
Fully collateralised .......................	1,079		6		6		31		233		286		1,641
LTV ratio:
- less than 25% ....................	46		-		-		-		1		5		52
- 25% to 50%	229		2		-		7		38		27		303
- 51% to 75%	436		3		3		7		110		57		616
- 76% to 90%	209		1		2		17		62		62		353
- 91% to 100% ....................	159		-		1		-		22		135		317
Partially collateralised (C) .................	1,815		-		5		181		240		56		2,297
- collateral value on C ..	1,284		-		5		89		115		34		1,527
	3,458		6		11		219		477		863		5,034
	36,403		30,639		11,248		643		10,027		4,014		92,974
At 31 December 2012
Rated CRR/EL 1 to 7
Not collateralised ...	7,068		10,790		3,647		569		181		2,083		24,338
Fully collateralised .	23,450		17,355		6,106		92		9,054		1,846		57,903
Partially collateralised (A).	3,088		1,476		1,150		33		1,063		903		7,713
- collateral value on A ........................	2,780		1,179		464		29		401		423		5,276
	33,606		29,621		10,903		694		10,298		4,832		89,954
Rated CRR/EL 8 to 10
Not collateralised ...	418		-		-		14		34		105		571
Fully collateralised .	1,261		2		60		8		408		141		1,880
LTV ratio: - less than 25% ..	34		-		1		-		25		10		70
- 25% to 50% ....	119		1		55		7		86		8		276
- 51% to 75% ....	437		-		2		-		69		28		536
- 76% to 90% ....	501		-		1		-		58		63		623
- 91% to 100% ..	170		1		1		1		170		32		375
Partially collateralised (B)	1,585		-		51		204		377		24		2,241
- collateral value on B ........................	938		-		15		111		265		13		1,342
	3,264		2		111		226		819		270		4,692
	36,870		29,623		11,014		920		11,117		5,102		94,646

The collateral used in the assessment of the above lending consists of fixed first charges on real estate and charges over cash for commercial real estate. These facilities are disclosed as not collateralised if they are unsecured or benefit from credit risk mitigation from guarantees, which are not quantified for the purposes of this disclosure. In Hong Kong, market practice is typically for lending to major property companies to be secured by guarantees or unsecured. In Europe, facilities of a working capital nature are generally not secured by a first fixed charge and are therefore disclosed as not collateralised.

The value of commercial real estate collateral is determined by using a combination of professional and internal valuations and physical inspections. Due to the complexity of valuing collateral for commercial real estate, local valuation policies determine the frequency of review on the basis of local market conditions. Revaluations are sought with greater frequency when, as part of the regular
credit assessment of the obligor, material concerns arise in relation to the transaction which may affect the underlying performance of the collateral, or the obligor's credit quality declines sufficiently to raise questions over whether the principal source of payment can fully meet the obligation (i.e. the obligor's credit quality classification indicates it is at the lower end, that is sub‑standard, or approaching impaired). Where such concerns exist the revaluation method selected will depend upon the LTV relationship, the direction in which the local commercial real estate market has moved since the last valuation and, most importantly, the specific characteristics of the underlying commercial real estate which is of concern. Collateral values held for customers rated CRR 9 to 10 (i.e. classified as impaired) are separately disclosed above, starting with 2013.

For further details on cross-collateralisation and LTV calculations for commercial real estate and other corporate and commercial, see page 183.

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

(Audited)

	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
Rated CRR/EL 8
Not collateralised	2,411		5		180		37		328		456		3,417
Fully collateralised .......................	259		16		35		1		227		70		608
LTV ratio:
- less than 25% ....................	15		1		15		-		7		7		45
- 25% to 50%	50		15		7		1		77		4		154
- 51% to 75%	103		-		4		-		47		10		164
- 76% to 90%	25		-		8		-		31		5		69
- 91% to 100% ....................	66		-		1		-		65		44		176
Partially collateralised (A) .................	435		14		9		528		345		73		1,404
- collateral value on A ...	17		3		2		398		89		18		527
	3,105		35		224		566		900		599		5,429
Rated CRR/EL 9 to 10
Not collateralised	1,467		229		456		1,089		26		1,615		4,882
Fully collateralised .......................	1,121		47		114		49		309		266		1,906
LTV ratio:
- less than 25% ....................	36		1		6		2		7		42		94
- 25% to 50%	88		7		43		-		17		117		272
- 51% to 75%	161		10		11		47		29		49		307
- 76% to 90%	156		24		29		-		46		43		298
- 91% to 100% ....................	680		5		25		-		210		15		935
Partially collateralised (B) .................	1,192		53		251		770		359		290		2,915
- collateral value on B ..	606		33		117		102		149		131		1,138
	3,780		329		821		1,908		694		2,171		9,703
	6,885		364		1,045		2,474		1,594		2,770		15,132

	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
Rated CRR/EL 8 to 10
Not collateralised	5,110		260		572		1,186		533		1,023		8,684
Fully collateralised .......................	1,463		82		146		132		478		284		2,585
LTV ratio: - less than 25% ....................	77		3		11		-		11		68		170
- 25% to 50%	192		4		62		6		49		84		397
- 51% to 75%	290		39		31		33		131		61		585
- 76% to 90%	196		24		11		18		96		17		362
- 91% to 100% ....................	708		12		31		75		191		54		1,071
Partially collateralised (A)..................	1,106		84		251		828		753		273		3,295
- collateral value on A ...	628		41		89		124		359		108		1,349
	7,679		426		969		2,146		1,764		1,580		14,564

The collateral used in the assessment of the above lending primarily includes first legal charges over real estate and charges over cash in the commercial and industrial sector, and charges over cash and marketable financial instruments in the financial (non-bank) sector. Government sector lending is generally unsecured.

It should be noted that the above table excludes other types of collateral which are commonly taken for corporate and commercial lending such as unsupported guarantees and floating charges over the assets of a customer's business. While such mitigants have value, often providing rights in insolvency, their assignable value is not sufficiently certain and they are assigned no value for disclosure purposes.

As with commercial real estate, the value of real estate collateral included in the table above is generally determined by using a combination of professional and internal valuations and physical inspections. The frequency of revaluation is similar to commercial real estate loans and advances; however, for financing activities in corporate and commercial lending that are not predominantly commercial real estate-oriented, collateral value is not as strongly correlated to principal repayment performance. Collateral values are generally refreshed when an obligor's general credit performance deteriorates and we have to assess the likely performance of secondary sources of repayment should it prove necessary to rely on them. For this reason, the table above reports values only for customers with CRR 8 to 10, recognising that these loans and advances generally have valuations which are comparatively recent. Starting with 2013, collateral values held for customers rated CRR 9 to 10 (i.e. classified as impaired) are separately disclosed. For the above table, cash is valued at its nominal value and marketable securities at their fair value. The LTV ratios presented are calculated by directly associating loans and advances with the collateral that individually and uniquely supports each facility. Where collateral assets are shared by multiple loans and advances, whether specifically or, more generally, by way of an all monies charge, the collateral value is pro-rated across the loans and advances protected by the collateral.

In both the commercial real estate and other corporate and commercial collateral tables the difference between the collateral value and the value of partially collateralised lending cannot be directly compared with any impairment allowances recognised in respect of impaired loans, as the loans may be performing in accordance with their contractual terms. When loans are not performing in accordance with their contractual terms, the recovery of cash flows may be affected by other cash resources of the customer, or other credit risk enhancements not quantified for the tables above. The values in the tables represent the expected market value on an open market basis; no adjustment has been made to the collateral for any expected costs of recovery. When a loan is considered for impairment, the value used in the impairment allowance calculation takes such costs into consideration and might also reflect any deviation from an open market value arising from the expected conditions for sale, such as a forced sale within a specified timetable. While the values reported are therefore expected to be closely aligned to the values used in impairment assessment, they will not be the same. The existence or otherwise of specific collateral is not taken into account in the modeling of wholesale impairment allowances for loss events which are incurred but not reported. These models operate on portfolio level observations of current loss in each portfolio to which they are applied as described on page 272. As current loss estimates are derived from adjusted historical observations, the contribution of collateral is indirectly reflected in the loss history.

Our policy for determining impairment allowances, including the effect of collateral on these impairment allowances, is described on page 272.

Loans and advances to banks

The following table shows loans and advances to banks, including off-balance sheet loan commitments by level of collateral.

Loans and advances to banks including loan commitments by level of collateral

(Audited)

	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
Rated CRR/EL 1 to 8
Not collateralised ...............	22,356		31,462		41,524		6,374		7,211		10,481		119,408
Fully collateralised ..............	52,114		2,260		8,168		24		23,744		4,724		91,034
Partially collateralised (A) ..	68		1,866		2,616		-		-		-		4,550
- collateral value on A ....	3		1,696		2,516		-		-		-		4,215
	74,538		35,588		52,308		6,398		30,955		15,205		214,992
Rated CRR/EL 9 to 10
Not collateralised ...............	153		-		-		312		14		-		479
	74,691		35,588		52,308		6,710		30,969		15,205		215,471
At 31 December 2012
Rated CRR/EL 1 to 10
Not collateralised ...............	36,043		24,622		40,694		7,290		9,050		12,838		130,537
Fully collateralised ..............	25,496		2,294		5,667		-		811		3,691		37,959
Partially collateralised (C) ..	62		1,459		1,207		-		-		-		2,728
- collateral value on C ....	61		1,452		1,135		-		-		-		2,648
	61,601		28,375		47,568		7,290		9,861		16,529		171,224

The collateral used in the assessment of the above lending relates primarily to cash and marketable securities. Loans and advances to banks are typically unsecured. Certain products such as reverse repos and stock borrowing are effectively collateralised and have been included in the above as fully or partly collateralised. The fully collateralised loans and advances to banks in Europe consist primarily of reverse repo agreements and stock borrowing. Collateral values held for customers rated CRR 9 to 10 (i.e. classified as impaired) are separately disclosed above, starting with 2013.

Derivatives

The International Swaps and Derivatives Association ('ISDA') Master Agreement is our preferred agreement for documenting derivatives activity. It provides the contractual framework within which dealing activity across a full range of over-the-counter ('OTC') 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 our 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 counterparty risk inherent in outstanding positions. The majority of our CSAs are with financial institutional clients.

We manage the counterparty exposure arising from market risk on our OTC derivative contracts by using collateral agreements with counterparties and netting agreements. Currently, we do not actively manage our general OTC derivative counterparty exposure in the credit markets, although we may manage individual exposures in certain circumstances.

For a description of how the derivative offset amount in the 'Maximum exposure to credit risk' table is derived, see page 159.

Other credit risk exposures

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

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

Details of government guarantees are included in Notes 6, 10 and 12 on the Financial Statements.

·     debt securities issued by corporates are primarily unsecured;

·     debt securities issued by banks and financial institutions include ABSs and similar instruments which are supported by underlying pools of financial assets. Credit risk associated with ABSs is reduced through the purchase of CDS protection.

Disclosure of the Group's holdings of ABSs and associated CDS protection is provided on page 204.

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

Collateral accepted as security that the Group is permitted to sell or repledge under these arrangements is described in Note 36 on the Financial Statements.

The Group's maximum exposure to credit risk includes financial guarantees and similar arrangements that we issue or enter into, and loan commitments that we are irrevocably committed to. Depending on the terms of the arrangement, we may have recourse to additional credit mitigation in the event that a guarantee is called upon or a loan commitment is drawn and subsequently defaults. For further information on these arrangements, see Note 40 on the Financial Statements.

Collateral and other credit enhancements obtained 

(Audited)

The carrying amount of assets obtained by taking possession of collateral held as security, or calling upon other credit enhancements, is as follows:

Carrying amount of assets obtained

	At 31 December
	2013		2012
	US$m		US$m
Nature of assets
Residential property ................	408		353
Commercial and industrial property ..............................	43		88
Other ......................................	2		3
	453		444

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. In the US we have resumed processing suspended foreclosure actions in all states and have referred the majority of the backlog of loans for foreclosure. We have also begun initiating new foreclosure activities in all states (see page 164 (unaudited)).

We make repossessed properties available for sale in an orderly fashion, with the proceeds used to reduce or repay the outstanding indebtedness. If excess funds arise after the debt has been repaid, they are made available to repay other secured lenders with lower priority or are returned to the customer. We do not generally occupy repossessed properties for our business use.

Impaired loans

(Audited)

Impaired loans and advances are those that meet any of the following criteria:

·     wholesale loans and advances classified as Customer Risk Rating ('CRR') 9 or CRR 10. These grades are assigned when the bank considers that either the customer is unlikely to pay its credit obligations in full, without recourse to security, or when the customer is past due 90 days or more on any material credit obligation to HSBC.

·     retail loans and advances classified as Expected Loss ('EL') 9 or EL 10. These grades are assigned to retail loans and advances greater than 90 days past due unless individually they have been assessed as not impaired.

For further details of the CRR and the EL scales see page 267 (unaudited);

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

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

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

For further disclosure on loans subject to forbearance, see page 268. 

Renegotiated loans and forbearance disclosures are subject to evolving industry practice and regulatory guidance.

Movement in impaired loans by geographical region

(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
Impaired loans at 1 January 2013 .....................	11,145		477		1,147		2,474		20,345		3,188		38,776
Personal .......................................................	2,466		172		439		368		18,726		1,580		23,751
Corporate and commercial ............................	8,058		267		700		1,872		1,592		1,604		14,093
Financial2 .....................................................	621		38		8		234		27		4		932
Classified as impaired during the year ................	4,952		371		1,053		419		6,168		4,333		17,296
Personal .......................................................	1,176		224		574		107		5,319		1,872		9,272
Corporate and commercial ............................	3,726		144		479		306		837		2,453		7,945
Financial2 .....................................................	50		3		-		6		12		8		79
Transferred from impaired to unimpaired during the year ..............................................	(1,215)		(33)		(112)		(166)		(3,198)		(642)		(5,366)
Personal .......................................................	(265)		(27)		(110)		(68)		(3,172)		(266)		(3,908)
Corporate and commercial ............................	(804)		(6)		(2)		(85)		(24)		(375)		(1,296)
Financial2 .....................................................	(146)		-		-		(13)		(2)		(1)		(162)
Amounts written off  ........................................	(1,411)		(182)		(356)		(165)		(1,706)		(1,957)		(5,777)
Personal .......................................................	(423)		(149)		(295)		(79)		(1,433)		(1,456)		(3,835)
Corporate and commercial ............................	(927)		(30)		(61)		(75)		(270)		(499)		(1,862)
Financial2 .....................................................	(61)		(3)		-		(11)		(3)		(2)		(80)
Net repayments and other.................................	(243)		(188)		(554)		(277)		(6,486)		(678)		(8,426)
Personal .......................................................	(16)		(76)		(226)		(11)		(5,771)		(382)		(6,482)
Corporate and commercial ............................	(339)		(84)		(325)		(253)		(708)		(294)		(2,003)
Financial2 .....................................................	112		(28)		(3)		(13)		(7)		(2)		59
At 31 December 2013 ....................................	13,228		445		1,178		2,285		15,123		4,244		36,503
Personal .......................................................	2,938		144		382		317		13,669		1,348		18,798
Corporate and commercial ............................	9,714		291		791		1,765		1,427		2,889		16,877
Financial2 .....................................................	576		10		5		203		27		7		828

	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
Impaired loans at 1 January 2012 .....................	11,819		608		1,070		2,445		22,758		3,039		41,739
Personal .......................................................	2,797		190		388		428		21,094		1,646		26,543
Corporate and commercial ............................	8,113		372		667		1,798		1,517		1,391		13,858
Financial2 .....................................................	909		46		15		219		147		2		1,338
Classified as impaired during the year ................	3,482		292		924		648		8,130		4,507		17,983
Personal .......................................................	933		169		549		73		7,363		2,807		11,894
Corporate and commercial ............................	2,481		123		375		531		739		1,696		5,945
Financial2 .....................................................	68		-		-		44		28		4		144
Transferred from impaired to unimpaired during the year ..............................................	(1,164)		(47)		(85)		(321)		(4,223)		(1,765)		(7,605)
Personal .......................................................	(279)		(38)		(69)		(32)		(4,124)		(1,124)		(5,666)
Corporate and commercial ............................	(858)		(5)		(15)		(289)		(99)		(640)		(1,906)
Financial2 .....................................................	(27)		(4)		(1)		-		-		(1)		(33)
Amounts written off  ........................................	(1,891)		(217)		(564)		(264)		(3,514)		(2,112)		(8,562)
Personal .......................................................	(632)		(127)		(373)		(96)		(3,227)		(1,521)		(5,976)
Corporate and commercial ............................	(1,212)		(90)		(191)		(143)		(202)		(590)		(2,428)
Financial2 .....................................................	(47)		-		-		(25)		(85)		(1)		(158)
Net repayments and other.................................	(1,101)		(159)		(198)		(34)		(2,806)		(481)		(4,779)
Personal .......................................................	(353)		(22)		(56)		(5)		(2,380)		(228)		(3,044)
Corporate and commercial ............................	(466)		(133)		(136)		(26)		(363)		(253)		(1,377)
Financial2 .....................................................	(282)		(4)		(6)		(3)		(63)		-		(358)
At 31 December 2012 ......................................	11,145		477		1,147		2,474		20,345		3,188		38,776
Personal .......................................................	2,466		172		439		368		18,726		1,580		23,751
Corporate and commercial ............................	8,058		267		700		1,872		1,592		1,604		14,093
Financial2 .....................................................	621		38		8		234		27		4		932

For footnote, see page 263.

Impairment of loans and advances

(Audited)

A summary of our current policies and practices regarding impairment assessment is provided in the Appendix to Risk on page 272.

The tables below analyse by geographical region the impairment allowances recognised for impaired loans and advances that are either individually
assessed or collectively assessed, and collective impairment allowances on loans and advances classified as not impaired.

During 2013, we reviewed the impairment allowance methodology used for retail banking and small business portfolios across the Group (see page 72).

Impairment allowances on loans and advances to customers by geographical region

(Audited)

	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$m
At 31 December 2013
Gross loans and advances to customers
Individually assessed impaired loans15 (A)	11,497		377		1,073		2,117		1,736		2,595		19,395
Collectively assessed16 (B) .......................	498,267		195,621		147,488		26,659		164,130		43,887		1,076,052
-  impaired loans15 ...............................	1,690		68		105		148		13,373		1,649		17,033
-  non-impaired loans17 ........................	496,577		195,553		147,383		26,511		150,757		42,238		1,059,019
Total (C) .................................................	509,764		195,998		148,561		28,776		165,866		46,482		1,095,447
Impairment allowances (c) .......................	5,563		449		765		1,565		4,237		2,564		15,143
-  individually assessed (a) ....................	4,019		174		460		1,131		410		878		7,072
-  collectively assessed (b) ....................	1,544		275		305		434		3,827		1,686		8,071
Net loans and advances ............................	504,201		195,549		147,796		27,211		161,629		43,918		1,080,304
Of which:
-  reverse repos to customers ...............	48,091		1,991		4,457		-		33,676		-		88,215
(a) as a percentage of A ...........................	35.0%		46.2%		42.9%		53.4%		23.6%		33.8%		36.5%
(b) as a percentage of B ...........................	0.3%		0.1%		0.2%		1.6%		2.3%		3.8%		0.8%
(c) as a percentage of C ...........................	1.1%		0.2%		0.5%		5.4%		2.6%		5.5%		1.4%
	US$m		US$m		US$m		US$m		US$m		US$m		US$m
At 31 December 2012
Gross loans and advances to customers
Individually assessed impaired loans15 (D)	9,959		398		1,019		2,251		1,849		1,295		16,771
Collectively assessed16 (E) .......................	458,802		173,688		137,846		27,629		144,523		54,476		996,964
-  impaired loans15 ...............................	1,121		79		128		197		18,482		1,893		21,900
-  non-impaired loans17 ........................	457,681		173,609		137,718		27,432		126,041		52,583		975,064
Total (F) .................................................	468,761		174,086		138,865		29,880		146,372		55,771		1,013,735
Impairment allowances (f) .......................	5,321		473		746		1,794		5,616		2,162		16,112
-  individually assessed (d) ....................	3,781		192		442		1,323		428		406		6,572
-  collectively assessed (e) ....................	1,540		281		304		471		5,188		1,756		9,540
Net loans and advances ............................	463,440		173,613		138,119		28,086		140,756		53,609		997,623
Of which:
-  reverse repos to customers ...............	27,299		760		307		-		6,281		4		34,651
(d) as a percentage of D ...........................	38.0%		48.2%		43.4%		58.8%		23.1%		31.4%		39.2%
(e) as a percentage of E ...........................	0.3%		0.2%		0.2%		1.7%		3.6%		3.2%		1.0%
(f) as a percentage of F ............................	1.1%		0.3%		0.5%		6.0%		3.8%		3.9%		1.6%

For footnotes, see page 263.

After excluding reverse repo balances, (c) as a percentage of C was 1.21% for Europe, 3.21% for North America and 1.5% in total at 31 December 2013. After excluding reverse repos, (f) as a percentage of F was 1.21% for Europe, 4.01% for North America and 1.65% in total at 31 December 2012.

Net loan impairment charge to the income statement by geographical region

(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
Individually assessed impairment allowances ...........................................	1,376		13		132		(86)		262		623		2,320
-  new allowances .................................	1,828		65		251		196		398		702		3,440
-  release of allowances no longer required ............................................	(402)		(44)		(101)		(235)		(98)		(31)		(911)
-  recoveries of amounts previously written off .......................................	(50)		(8)		(18)		(47)		(38)		(48)		(209)
Collectively assessed impairment allowances18 ........................................	356		122		216		42		973		2,019		3,728
-  new allowances net of allowance releases ............................................	943		149		330		82		1,058		2,253		4,815
-  recoveries of amounts previously written off .......................................	(587)		(27)		(114)		(40)		(85)		(234)		(1,087)
Total charge for impairment losses ..........	1,732		135		348		(44)		1,235		2,642		6,048
-  banks ...............................................	-		-		-		-		5		-		5
-  customers ........................................	1,732		135		348		(44)		1,230		2,642		6,043
2012
Individually assessed impairment allowances ...........................................	1,387		(8)		97		205		258		200		2,139
-  new allowances .................................	1,960		32		239		369		380		292		3,272
-  release of allowances no longer required ............................................	(516)		(34)		(117)		(133)		(85)		(49)		(934)
-  recoveries of amounts previously written off .......................................	(57)		(6)		(25)		(31)		(37)		(43)		(199)
Collectively assessed impairment allowances18 ........................................	487		92		243		50		3,204		1,945		6,021
-  new allowances net of allowance releases ............................................	839		117		368		94		3,296		2,254		6,968
-  recoveries of amounts previously written off .......................................	(352)		(25)		(125)		(44)		(92)		(309)		(947)
Total charge for impairment losses ..........	1,874		84		340		255		3,462		2,145		8,160
-  customers ........................................	1,874		84		340		255		3,462		2,145		8,160

For footnote, see page 263.

2013 compared with 2012

(Unaudited)

On a reported basis, loan impairment allowances were US$15bn at 31 December 2013, a 6% decrease compared with the end of 2012. Impaired loans and advances were US$37bn, a decrease of 6% from the end of 2012.

The following commentary is on a constant currency basis.

Loan impairment allowances fell by 5% to US$15bn. The reduction was mainly in North America, driven by the continued run-off and loan sales in the US CML portfolio and improvements in housing market conditions.

Impaired loans decreased by 5% compared with the end of 2012 to US$37bn, reflecting the continued run-off and loan sales in the US CML portfolio.

Releases and recoveries of US$2.2bn were higher than in 2012, mainly in Europe on collectively assessed recoveries in RBWM following debt sales in the UK in 2013 and, in the Middle East and North Africa, due to a small number of individual releases, mainly in GB&M on UAE-related exposures.

Regional analysis

In Europe, new loan impairment allowances decreased marginally to US$3bn, primarily due to lower new individual allowances in GB&M and in CMB, mainly in France and on Greek exposures, reflecting improvements to the challenging economic conditions in 2012. This was largely offset by higher new collective allowances in the UK, mainly in the retail sector.

Impaired loans increased by 16% compared with the end of 2012 to US$13bn, resulting from a small number of individually assessed corporate and commercial loans in the UK and France and portfolio growth in Turkey.

Releases and recoveries in Europe were US$1bn, a rise of 13% compared with the end of 2012, mainly due to higher recoveries from debt sales in the UK in 2013. This was partly offset by lower releases, mainly in France in GB&M and CMB.

In Hong Kong and Rest of Asia-Pacific new loan impairment allowances and impaired loans remained at low levels.

In the Middle East and North Africa, new loan impairment allowances were US$278m, a decrease of US$180m. This was due to a reduction in new individually assessed allowances as a result of the overall improvement in the loan portfolio compared with 2012, and improved property prices in the UAE.

Impaired loans of US$2bn at 31 December 2013 were 7% lower than in 2012, mainly in the UAE due to recoveries and an improvement in credit quality.

Releases and recoveries in the region rose by US$114m on 2012 to US$322m due to a small number of individual releases, mainly in GB&M on UAE-related exposures.

In North America, new loan impairment allowances decreased by 60% to US$1.5bn, driven by lower new collectively assessed allowances as a result of improvements in housing market conditions and the continued run-off and loan sales in the CML portfolio.

Impaired loans fell by 25% to US$15bn compared with the end of 2012 due to the continued run‑off and loan sales in the CML portfolio.

Releases and recoveries in North America were broadly in line with 2012.

In Latin America, new loan impairment allowances increased by 25% to US$3bn, primarily in Mexico from higher specific impairments in CMB relating to homebuilders due to a change in the public housing policy, and higher collective provisions in RBWM. In Brazil, collectively assessed new allowances increased as a result of impairment methodology changes and assumption revisions for restructured loan account portfolios in RBWM and CMB as well as higher specific impairments across a number of corporate exposures. This was partly offset by improvements in credit quality in Brazil as modifications to credit strategies in previous years to mitigate rising delinquency rates took effect.

Impaired loans increased by 47% from the end of 2012 to US$4bn, mainly relating to homebuilders in Mexico and from methodology changes and higher individually assessed impairments in CMB in Brazil across a number of corporate exposures.

Releases and recoveries in Latin America reduced to US$313m compared with 2012, mainly in RBWM in Brazil and Mexico.

For an analysis of loan impairment charges and other credit risk provisions by global business, see page 94.

 

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