Interim Report - 16 of 28

RNS Number : 9057L

HSBC Holdings PLC

16 August 2013

 



reduction in the US run-off portfolio and the reclassification of loan balances to 'Assets held for sale' in our non-strategic operations in Latin America, Europe and, to a lesser extent, North America. This was partly offset by a modest increase in residential mortgage balances in Rest of Asia‑Pacific, primarily in mainland China and Australia, Hong Kong and the UK.

Total wholesale lending increased to US$776bn at 30 June 2013 from US$729bn at the end of 2012, due to a rise in lending to banks, largely in Europe, and increased international trade and services lending to corporate and commercial customers in Hong Kong. This was partly offset by a decline in Latin America, where we reclassified lending balances relating to the planned disposal of our non‑strategic businesses to 'Assets held for sale'.

At 30 June 2013, impairment allowances as a percentage of gross loans and advances decreased to 1.33% from 1.39% at the end of 2012 as a result of a reduction in loan impairment charges (as described below) and an increase in wholesale lending.

Loan impairment charges in the first half of 2013 decreased to US$3.2bn from US$4.4bn in the first half of 2012 and US$3.5bn in the second half of 2012. The reduction was primarily in RBWM in North America due to significant favourable market value adjustments in the value of the underlying properties reflecting improvements in the housing sector, lower delinquency levels, the continued run-off of the CML portfolio and the sale of the CRS business in 2012. This decline was partly offset by increases in Latin America due to higher collective impairment provisions in RBWM and CMB as a result of impairment model changes and assumption revisions in Brazil and increases in Mexico reflecting higher lending balances, a revision to the assumptions used in our collective assessment models in the first half of 2013 and the non‑recurrence of a provision release in the first half of 2012. In addition, individually assessed impairment provisions increased in Mexico in CMB and GB&M and in the UK in CMB.

Credit exposure

Maximum exposure to credit risk

The table on page 115 provides information on balance sheet items, offsets and loan and other credit-related commitments. Commentary on the balance sheet movements is provided on page 38.

Derivatives

The derivatives offset amount in the table below 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 30 June 2013, the total amount of such offsets was US$254bn (30 June 2012: US$340bn; 31 December 2012: US$311bn), of which US$213bn (30 June 2012: US$301bn; 31 December 2012: US$270bn) were offsets under a master netting arrangement, US$36bn (30 June 2012: US$38bn; 31 December 2012: US$39bn) was collateral received in cash and US$6bn (30 June 2012: US$1.1bn; 31 December 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 period. These amounts do not qualify for offset for accounting purposes as settlement is not intended to be made 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, retail off-balance sheet commitments including overdrafts, residential mortgages and personal loans and credit card balances. Loan and other credit-related commitments rose marginally, driven by an increase in North America, reflecting our focus on growing in target commercial segments in the US, and a rise in term and trade-related commitments in Hong Kong and mainland China. This was partly offset by a decline in the Middle East and North Africa as a result of drawdowns by wholesale customers in the UAE and a reduction in our exposure to Egypt.

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 respect of individual loans and advances.

Maximum exposure to credit risk¹

	At 30 June 2013						At 30 June 2012						At 31 December 2012
	Maximum exposure		Offset		Exposure to credit risk (net)		Maximum exposure		Offset		Exposure to credit risk (net)		Maximum exposure		Offset		Exposure to credit risk (net)
	US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m
Cash and balances at central banks .............	148,285		-		148,285		147,911		-		147,911		141,532		-		141,532
Items in the course of collection from other banks ........................	8,416		-		8,416		11,075		-		11,075		7,303		-		7,303
Hong Kong Government certificates of indebtedness ..............	24,275		-		24,275		21,283		-		21,283		22,743		-		22,743
Trading assets ..............	381,124		(8,557)		372,567		361,352		(12,665)		348,687		367,177		(19,700)		347,477
Treasury and other eligible bills .............	19,188		-		19,188		30,098		-		30,098		26,282		-		26,282
Debt securities ...........	147,568		-		147,568		131,563		-		131,563		144,677		-		144,677
Loans and advances:
- to banks ...............	96,748		-		96,748		94,830		-		94,830		78,271		-		78,271
- to customers ........	117,620		(8,557)		109,063		104,861		(12,665)		92,196		117,947		(19,700)		98,247
Financial assets designated at fair value ...............	12,548		-		12,548		14,535		-		14,535		12,714		-		12,714
Treasury and other eligible bills .............	99		-		99		91		-		91		54		-		54
Debt securities ...........	12,392		-		12,392		14,238		-		14,238		12,551		-		12,551
Loans and advances:
- to banks ...............	25		-		25		127		-		127		55		-		55
- to customers ........	32		-		32		79		-		79		54		-		54
Derivatives ..................	299,213		(254,077)		45,136		355,934		(340,442)		15,492		357,450		(310,859)		46,591
Loans and advances held at amortised cost: ......	1,154,504		(94,670)		1,059,834		1,157,176		(93,044)		1,064,132		1,150,169		(95,578)		1,054,591
- to banks ...............	185,122		(6,296)		178,826		182,191		(7,092)		175,099		152,546		(3,732)		148,814
- to customers ........	969,382		(88,374)		881,008		974,985		(85,952)		889,033		997,623		(91,846)		905,777
Financial investments ..	394,846		-		394,846		387,050		-		387,050		415,312		-		415,312
Treasury and other similar bills .............	79,005		-		79,005		71,552		-		71,552		87,550		-		87,550
Debt securities ...........	315,841		-		315,841		315,498		-		315,498		327,762		-		327,762
Assets held for sale ......	18,690		(572)		18,118		10,541		(4)		10,537		9,292		(164)		9,128
- disposal groups .....	17,756		(572)		17,184		10,383		(4)		10,379		5,359		(164)		5,195
- non-current assets    held for sale .........	934		-		934		158		-		158		3,933		-		3,933
Other assets	32,470		-		32,470		34,397		-		34,397		31,983		-		31,983
Endorsements and acceptances ............	11,329		-		11,329		12,782		-		12,782		12,032		-		12,032
Other ........................	21,141		-		21,141		21,615		-		21,615		19,951		-		19,951
Financial guarantees and similar contracts .......	43,783		-		43,783		39,190		-		39,190		44,993		-		44,993
Loan and other credit- related commitments2 ..................................	587,946		-		587,946		564,113		-		564,113		579,469		-		579,469
	3,106,100		(357,876)		2,748,224		3,104,557		(446,155)		2,658,402		3,140,137		(426,301)		2,713,836

For footnotes, see page 178.

Personal lending

Total personal lending was US$395bn at 30 June 2013, down from US$415bn at the end of 2012 (US$401bn on a constant currency basis). The decrease on a constant currency basis reflected the reclassification of loan balances to 'Assets held for sale' in our non-strategic operations in Latin America, Europe and, to a lesser extent, North America, and a decrease in lending in North America due to the repayments and write-offs in the US run-off portfolio. This was partly offset by an increase in mortgage lending in Rest of Asia-Pacific, Hong Kong and the UK.

Total personal lending

	UK		Rest of     Europe		Hong        Kong		US3		Rest of       North America		Other    regions3		Total
	US$m		US$m		US$m		US$m		US$m		US$m		US$m
At 30 June 2013
First lien residential mortgages (A) ..........	120,740		6,694		53,475		47,186		19,091		42,462		289,648
Other personal lending (B) .......................	20,395		25,441		18,813		6,805		5,877		27,530		104,861
- motor vehicle finance .......................	-		16		-		-		22		3,050		3,088
- credit cards ........................................	10,421		3,042		5,738		742		567		8,095		28,605
- second lien residential mortgages .......	-		-		-		5,483		295		103		5,881
- other .................................................	9,974		22,383		13,075		580		4,993		16,282		67,287
Total personal lending (C) .......................	141,135		32,135		72,288		53,991		24,968		69,992		394,509
Impairment allowances on personal lending
First lien residential mortgages (a) ........	(337)		(65)		-		(3,504)		(39)		(218)		(4,163)
Other personal lending (b) ....................	(488)		(474)		(76)		(554)		(75)		(1,554)		(3,221)
- motor vehicle finance .......................	-		(4)		-		-		(1)		(96)		(101)
- credit cards ........................................	(136)		(232)		(43)		(35)		(10)		(354)		(810)
- second lien residential mortgages .......	-		-		-		(512)		(5)		-		(517)
- other .................................................	(352)		(238)		(33)		(7)		(59)		(1,104)		(1,793)
Total (c) ..................................................	(825)		(539)		(76)		(4,058)		(114)		(1,772)		(7,384)
(a) as a percentage of (A) ........................	0.3%		1.0%		-		7.4%		0.2%		0.5%		1.4%
(b) as a percentage of (B) .........................	2.4%		1.9%		0.4%		8.1%		1.3%		5.6%		3.1%
(c) as a percentage of (C) .........................	0.6%		1.7%		0.1%		7.5%		0.5%		2.5%		1.9%
At 30 June 2012
First lien residential mortgages (D) ..........	116,949		8,780		48,951		50,773		20,809		40,518		286,780
Other personal lending (E) .......................	21,807		26,114		16,718		12,405		7,624		29,354		114,022
- motor vehicle finance .......................	-		29		-		15		24		3,852		3,920
- credit cards ........................................	10,961		2,640		5,174		791		1,188		8,369		29,123
- second lien residential mortgages .......	644		-		-		6,352		424		144		7,564
- other .................................................	10,202		23,445		11,544		5,247		5,988		16,989		73,415
Total personal lending (F) ........................	138,756		34,894		65,669		63,178		28,433		69,872		400,802
Impairment allowances on personal lending
First lien residential mortgages (d) ........	(441)		(59)		(7)		(4,463)		(38)		(241)		(5,249)
Other personal lending (e) ....................	(609)		(400)		(55)		(1,425)		(121)		(1,526)		(4,136)
- motor vehicle finance .......................	-		(4)		-		-		(1)		(166)		(171)
- credit cards ........................................	(165)		(189)		(25)		(35)		(33)		(392)		(839)
- second lien residential mortgages .......	(33)		-		-		(634)		(9)		-		(676)
- other .................................................	(411)		(207)		(30)		(756)		(78)		(968)		(2,450)
Total (f) ..................................................	(1,050)		(459)		(63)		(5,888)		(159)		(1,766)		(9,385)
(d) as a percentage of (D) ........................	0.4%		0.7%		-		8.8%		0.2%		0.6%		1.8%
(e) as a percentage of (E) .........................	2.8%		1.5%		0.3%		11.5%		1.6%		5.2%		3.6%
(f) as a percentage of (F) .........................	0.8%		1.3%		0.1%		9.3%		0.6%		2.5%		2.3%

	UK		Rest of      Europe		Hong        Kong		US3		Rest of       North    America		Other      regions3		Total
	US$m		US$m		US$m		US$m		US$m		US$m		US$m
At 31 December 2012
First lien residential mortgages (G) ...	127,024		8,148		52,296		49,417		20,716		44,261		301,862
Other personal lending (H) ...............	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 (I) .................	150,470		35,804		70,341		56,799		27,555		74,124		415,093
Impairment allowances on personal lending
First lien residential mortgages (g)	(425)		(64)		(4)		(4,133)		(30)		(249)		(4,905)
Other personal lending (h) ............	(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 (i) ...........................................	(1,001)		(465)		(61)		(4,723)		(124)		(1,838)		(8,212)
(g) as a percentage of (G) .................	0.3%		0.8%		-		8.4%		0.1%		0.6%		1.6%
(h) as a percentage of (H) .................	2.5%		1.4%		0.3%		8.0%		1.4%		5.3%		2.9%
(i) as a percentage of (I) ...................	0.7%		1.3%		0.1%		8.3%		0.5%		2.5%		2.0%

For footnote, see page 178.

Mortgage lending

The commentary that follows is on a constant currency basis.

At 30 June 2013, total mortgage lending was US$296bn, a marginal decline from 31 December 2012 which was due to the continued run-off of the CML portfolio in North America and the reclassification of balances to 'Assets held for sale' in Latin America and Europe. It was partly offset by increases in Rest of Asia-Pacific, reflecting our focus on secured lending supported by marketing campaigns; in Hong Kong, although the rate of growth began to slow; and in the UK, reflecting our competitive pricing.

Mortgage lending products

	UK		Rest of     Europe		Hong        Kong		US3		Rest of North  America		Other    regions3		Total
	US$m		US$m		US$m		US$m		US$m		US$m		US$m
At 30 June 2013
First lien residential mortgages4 ................	120,740		6,694		53,475		47,186		19,091		42,462		289,648
Second lien residential mortgages .............	-		-		-		5,483		295		103		5,881
Total mortgage lending (A) .....................	120,740		6,694		53,475		52,669		19,386		42,565		295,529
Second lien as percentage of (A) ..............	-		-		-		10.4%		1.5%		0.2%		2.0%
Impairment allowances on mortgage lending .............................................................	(337)		(65)		-		(4,016)		(44)		(218)		(4,680)
First lien residential mortgages .............	(337)		(65)		-		(3,504)		(39)		(218)		(4,163)
Second lien residential mortgages .........	-		-		-		(512)		(5)		-		(517)
Interest-only (including offset) mortgages .............................................................	46,301		140		29		-		445		1,116		48,031
Affordability mortgages, including adjustable-rate mortgages ('ARM's) .....	2		453		17		18,007		-		5,535		24,014
Other .......................................................	89		-		-		-		-		175		264
Total interest-only, affordability mortgages and other .............................................	46,392		593		46		18,007		445		6,826		72,309
- as a percentage of (A) .......................	38.4%		8.9%		0.1%		34.2%		2.3%		16.0%		24.5%

Mortgage lending products (continued)

	UK		Rest of      Europe		Hong        Kong		US3		Rest   of North     America		Other      regions3		Total
	US$m		US$m		US$m		US$m		US$m		US$m		US$m
At 30 June 2012
First lien residential mortgages4 ...............	116,949		8,780		48,951		50,773		20,809		40,518		286,780
Second lien residential mortgages .............	644		-		-		6,352		424		144		7,564
Total mortgage lending (B) ......................	117,593		8,780		48,951		57,125		21,233		40,662		294,344
Second lien as percentage of (B) ..............	0.5%		-		-		11.1%		2.0%		0.4%		2.6%
Impairment allowances on mortgage lending.............................................................	(474)		(59)		(7)		(5,097)		(47)		(241)		(5,925)
First lien residential mortgages .............	(441)		(59)		-		(4,463)		(38)		-		(5,249)
Second lien residential mortgages .........	(33)		-		(7)		(634)		(9)		(241)		(676)
Interest-only (including offset) mortgages .............................................................	47,605		48		30		-		582		1,195		49,460
Affordability mortgages, including ARMs .	35		480		21		16,424		276		5,993		23,229
Other .......................................................	102		-		-		-		-		201		303
Total interest-only, affordability mortgages and other .............................................	47,742		528		51		16,424		858		7,389		72,992
- as a percentage of (B) .......................	40.6%		6.0%		0.1%		28.8%		4.0%		18.2%		24.8%
At 31 December 2012
First lien residential mortgages4 ................	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 (C) ......................	127,532		8,148		52,296		55,376		21,079		44,392		308,823
Second lien as percentage of (C) ..............	0.4%		-		0.0%		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		52		30		-		531		1,146		51,409
Affordability mortgages, including ARMs .	6		532		19		18,456		-		5,135		24,148
Other .......................................................	99		-		-		-		-		204		303
Total interest-only, affordability mortgages and other .............................................	49,755		584		49		18,456		531		6,485		75,860
- as a percentage of (C) .......................	39.0%		7.2%		0.1%		33.3%		2.5%		14.6%		24.6%

For footnotes, see page 178.

Mortgage lending in the US

In the US, total mortgage lending balances were US$53bn at 30 June 2013, a decrease of 5% compared with the end of 2012. Overall, US mortgage lending represented 13% of our total personal lending and 18% of our total mortgage lending, in line with 31 December 2012.

Mortgage lending balances at 30 June 2013 in HSBC Finance were US$36bn, a decrease of 8% compared with the end of 2012 due to the continued run-off of the CML portfolio. In HSBC Bank USA, mortgage lending balances were US$17bn at 30 June 2013, an increase of 3% from the end of 2012. This was driven, in part, by increased origination to our Premier customers, in line with our strategy to grow this customer base.

HSBC Finance US Consumer and Mortgage Lending⁵ - residential mortgages

	At     30 Jun         2013		At       30 Jun         2012		At      31 Dec         2012
	US$m		US$m		US$m
Residential mortgages
First lien .................	32,271		37,188		35,092
Second lien .............	3,328		4,042		3,651
Total (A) ................	35,599		41,230		38,743
Impairment allowances ...........	3,789		4,884		4,480
-  as a percentage of A ................	10.6%		11.8%		11.6%

For footnote, see page 178.

For first lien residential mortgages in our CML portfolio, two months and over delinquent balances were US$7.1bn at 30 June 2013, compared with

US$7.6bn at 31 December 2012. The decline mainly reflected the continued run-off of balances. In HSBC Bank USA, two months and over delinquent balances were broadly in line with the end of 2012, at US$1.4bn.

Second lien mortgage balances declined by 8% to US$5.5bn at 30 June 2013, representing 10% of the overall US mortgage lending portfolio, as a result of the continued run-off of the CML portfolio. Two months and over delinquent balances were US$401m at 30 June 2013 compared with US$477m at 31 December 2012.

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 loan-to-value 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.

HSBC Finance: foreclosed properties in the US

	Half-year to
	30 June		30 June		31 December
	2013		2012		2012
Number of foreclosed properties at end of period .........................................	4,068		2,836		2,973
Number of properties added to foreclosed inventory in the half-year ............	4,902		3,615		3,212
Average loss on sale of foreclosed properties6 ...............................................	2%		5%		5%
Average total loss on foreclosed properties7 .................................................	51%		55%		53%
Average time to sell foreclosed properties (days) ..........................................	155		179		166

For footnotes, see page 178.

The number of foreclosed properties at HSBC Finance at 30 June 2013 increased compared with the end of December 2012 as we work through the backlog in foreclosure activity which arose from the temporary suspension of foreclosures.

The average total loss on foreclosed properties and the average loss on sale of foreclosed properties decreased compared with the first half of 2012, reflecting improvements in home prices.

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 obtain and 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 based on 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.

Trends in two months and over contractual delinquency in the US

	At          30 June                2013		At            30 June                2012		At   31 December                2012
	US$m		US$m		US$m
In personal lending in the US
First lien residential mortgages .....................................................................	8,378		8,851		8,926
Consumer and Mortgage Lending ..............................................................	7,114		7,662		7,629
Other mortgage lending ............................................................................	1,264		1,189		1,297
Second lien residential mortgages ..................................................................	401		515		477
Consumer and Mortgage Lending ..............................................................	274		372		350
Other mortgage lending ............................................................................	127		143		127
Credit card ....................................................................................................	19		29		27
Personal non-credit card ...............................................................................	24		339		335
Total ............................................................................................................	8,822		9,734		9,765
	%		%		%
As a percentage of the relevant loans and receivables balances
First lien residential mortgages .....................................................................	17.6		17.4		18.1
Second lien residential mortgages ..................................................................	7.3		7.9		8.0
Credit card ....................................................................................................	2.5		3.7		3.3
Personal non-credit card ...............................................................................	4.1		6.3		7.4
Total ............................................................................................................	16.2		15.3		16.1

Non-US mortgage lending

The commentary that follows is on a constant currency basis.

Total non-US mortgage lending was US$243bn at 30 June 2013, broadly in line with the end of 2012. Our most significant concentrations of mortgage lending were in the UK and Hong Kong.

In the UK, mortgage lending was US$121bn at 30 June 2013, slightly higher than at 31 December 2012. This represented the Group's largest concentration of mortgage exposure. Interest only products made up US$46bn of total UK mortgage lending.

The credit quality of our UK mortgage portfolio remained high with impairment allowances at 0.3% of total gross mortgages as the effects of initiatives taken in previous years, including restricting certain types of lending, continued to be felt. During the first half of 2013, the average loan-to-value ('LTV') ratio for new business was 59% compared with 51% for the whole portfolio, a slight increase compared with the levels seen during 2012.

Mortgage lending in Hong Kong was US$53bn, an increase of 2% on the end of 2012 reflecting continued growth in the market during the first half of 2013, although the rate of growth began to slow at the end of the period. The quality of our mortgage book remained high with negligible impairment allowances. The average LTV ratio on new mortgage lending was 44% compared with an estimated 32% for the overall portfolio.

Mortgage lending in other regions remained broadly stable at US$69bn at 30 June 2013. Increases in Rest of Asia-Pacific derived from our focus on secured lending in mainland China and Australia were offset by decreases in Latin America due to the reclassification of balances to 'Assets held for sale'.

Other personal lending

Credit cards

Total credit card lending of US$29bn at 30 June 2013 was 3% below the end of 2012 due to subdued credit appetite and consumer de-leveraging, mainly in Europe, and the transfer of balances to 'Assets held for sale' in Latin America. This was partly offset by increased balances in Turkey from business expansion.

Personal non-credit card lending

Personal non-credit card lending balances fell by 4% to US$70bn at 30 June 2013, mainly in Europe and Latin America due to balances being transferred to 'Assets held for sale'.

Wholesale lending

On a reported basis, total wholesale lending increased by US$24bn from 31 December 2012 to US$776bn at 30 June 2013. On a constant currency basis, it rose by US$47bn due to higher lending to banks, largely in Europe, and an increase in international trade and services lending to corporate and commercial customers in Hong Kong. This was partly offset by a decline in Latin America where we reclassified lending balances relating to the planned disposal of our non-strategic businesses to 'Assets held for sale'.

Total wholesale lending

	Europe		Hong         Kong		Rest of         Asia-      Pacific		MENA		North   America		Latin  America		Total
	US$m		US$m		US$m		US$m		US$m		US$m		US$m
At 30 June 2013
Corporate and commercial (A) .......	211,128		111,610		86,873		21,416		48,327		30,451		509,805
- manufacturing ..........................	46,202		10,944		19,300		3,409		9,609		12,128		101,592
- international trade and services	66,317		42,707		35,091		9,458		13,082		7,771		174,426
- commercial real estate .............	30,764		24,158		9,258		898		6,064		2,328		73,470
- other property-related .............	7,403		17,182		6,533		1,526		7,725		285		40,654
- government .............................	1,834		2,813		407		1,664		348		1,431		8,497
- other commercial8 ...................	58,608		13,806		16,284		4,461		11,499		6,508		111,166
Financial (non-bank financial institutions) (B) ..........................	51,060		6,168		4,630		1,822		12,103		1,380		77,163
Asset-backed securities reclassified...	3,319		-		-		-		147		-		3,466
Loans and advances to banks (C) ....	68,281		33,293		48,965		9,454		11,818		13,361		185,172
Total wholesale lending (D) ............	333,788		151,071		140,468		32,692		72,395		45,192		775,606
Impairment allowances on wholesale lending
Corporate and commercial (a) ........	3,708		334		506		1,264		827		1,071		7,710
- manufacturing ..........................	570		81		130		199		88		325		1,393
- international trade and services	1,116		207		174		523		207		346		2,573
- commercial real estate .............	1,036		4		24		158		156		231		1,609
- other property-related .............	213		17		81		241		139		13		704
- government .............................	2		-		-		31		2		-		35
- other commercial .....................	771		25		97		112		235		156		1,396
Financial (non-bank financial institutions) (b) ...........................	270		29		6		118		43		1		467
Loans and advances to banks (c) .....	33		-		-		17		-		-		50
Total (d) .........................................	4,011		363		512		1,399		870		1,072		8,227
(a) as a percentage of (A) ...............	1.76%		0.30%		0.58%		5.90%		1.71%		3.52%		1.51%
(b) as a percentage of (B) ................	0.53%		0.47%		0.13%		6.48%		0.36%		0.07%		0.61%
(c) as a percentage of (C) ................	0.05%		-		-		0.18%		-		-		0.03%
(d) as a percentage of (D) ...............	1.20%		0.24%		0.36%		4.28%		1.20%		2.37%		1.06%

Total wholesale lending (continued)

	Europe		Hong          Kong		Rest of          Asia-       Pacific		MENA		North     America		Latin    America		Total
	US$m		US$m		US$m		US$m		US$m		US$m		US$m
At 30 June 2012
Corporate and commercial (E) ........	214,423		96,164		81,029		22,216		43,540		34,829		492,201
- manufacturing ..........................	55,245		10,235		17,550		3,888		8,594		12,538		108,050
- international trade and services	64,843		31,631		30,777		8,574		11,471		9,399		156,695
- commercial real estate .............	32,563		21,510		9,544		940		6,706		3,451		74,714
- other property-related .............	7,506		17,079		6,849		2,060		6,120		344		39,958
- government .............................	2,073		2,906		390		1,514		774		1,853		9,510
- other commercial8 ....................	52,193		12,803		15,919		5,240		9,875		7,244		103,274
Financial (non-bank financial institutions) (F) ...........................	58,322		3,907		3,897		1,438		25,237		1,754		94,555
Asset-backed securities reclassified ..	4,243		-		-		-		401		-		4,644
Loans and advances to banks (G) ....	58,652		29,673		50,228		9,512		14,528		19,654		182,247
Total wholesale lending (H) ............	335,640		129,744		135,154		33,166		83,706		56,237		773,647
Impairment allowances on wholesale lending
Corporate and commercial (e).........	3,270		445		641		1,276		718		800		7,150
- manufacturing ..........................	816		97		287		198		82		280		1,760
- international trade and services	947		276		168		418		153		320		2,282
- commercial real estate .............	864		4		47		158		233		85		1,391
- other property-related .............	170		20		66		155		127		12		550
- government .............................	4		-		-		38		1		-		43
- other commercial .....................	469		48		73		309		122		103		1,124
Financial (non-bank financial institutions) (f) ...........................	421		28		14		183		33		2		681
Loans and advances to banks (g) .....	39		-		-		17		-		-		56
Total (h) .........................................	3,730		473		655		1,476		751		802		7,887
(e) as a percentage of (E) ................	1.53%		0.46%		0.79%		5.74%		1.65%		2.30%		1.45%
(f) as a percentage of (F) ................	0.72%		0.72%		0.36%		12.73%		0.13%		0.11%		0.72%
(g) as a percentage of (G) ................	0.07%		-		-		0.18%		-		-		0.03%
(h) as a percentage of (H) ...............	1.11%		0.36%		0.48%		4.45%		0.90%		1.43%		1.02%

	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 (I) .........	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 commercial8 ....................	52,343		12,392		16,712		5,334		9,783		7,314		103,878
Financial (non-bank financial institutions) (J) ...........................	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 (K) ....	45,320		23,500		44,592		9,198		13,465		16,528		152,603
Total wholesale lending (L) .............	327,807		127,245		134,152		32,846		75,483		53,712		751,245
Impairment allowances on wholesale lending
Corporate and commercial (i) .........	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) (j) ............................	318		29		11		157		37		2		554
Loans and advances to banks (k) .....	40		-		-		17		-		-		57
Total (l) ..........................................	3,895		412		537		1,486		769		858		7,957
(i) as a percentage of (I) .................	1.59%		0.39%		0.62%		5.84%		1.53%		2.41%		1.43%
(j) as a percentage of (J) .................	0.57%		0.64%		0.26%		13.13%		0.27%		0.13%		0.68%
(k) as a percentage of (K) ...............	0.09%		-		-		0.18%		-		-		0.04%
(l) as a percentage of (L) ................	1.19%		0.32%		0.40%		4.52%		1.02%		1.60%		1.06%

For footnote, see page 178.

The commentary that follows is on a constant currency basis.

Corporate and commercial

Corporate and commercial lending, excluding commercial real estate and other property-related lending represented 40% of total gross loans and advances to customers compared with 39% at 31 December 2012. The increase of US$13bn, was driven by a rise in international trade and services lending balances in Hong Kong, mainland China and Singapore due to continued demand for financing, and other commercial balances in North America, from growth in lending to corporate customers, reflecting our focus on target segments in the US. This was partly offset by a decline in corporate and commercial lending balances, excluding commercial real estate and other property-related lending, in Latin America as a result of the re-classification of lending balances relating to the planned disposal of our non-strategic businesses to 'Assets held for sale'.

The aggregate of our commercial real estate and other property-related lending was US$114bn at 30 June 2013, in line with 31 December 2012, representing 12% of total loans and advances to customers. Commercial real estate and other property-related lending declined in Latin America due to the re-classification of lending balances to 'Assets held for sale', but was largely offset by growth in Hong Kong where demand for financing continued, although the rate of growth has begun to slow.

For information on refinancing in commercial real estate lending, see page 103.

Financial (non-bank)

Financial (non-bank) lending decreased from US$79bn at 31 December 2012 to US$77bn at 30 June 2013. This was mainly in Europe and North America due to a decline in reverse repo activity, partly offset by higher reverse repo balances in Hong Kong.

Loans and advances to banks

Loans and advances to banks increased from US$149bn at 31 December 2012 to US$185bn at 30 June 2013. This was driven by higher demand for reverse repo funding in Europe and a rise in placements with financial institutions in Hong Kong and Rest of Asia-Pacific.

Credit quality of financial instruments

We assess credit quality on all financial instruments which bear credit risk. The distribution of financial instruments by credit quality is tabulated below. The five classifications describing the credit quality of our lending, debt securities portfolios and derivatives are set out in the Appendix to Risk on page 253 of the Annual Report and Accounts 2012. Additional credit quality information in respect of our consolidated holdings of ABSs is provided on page 146.

Distribution of financial instruments by credit quality

	Neither past due nor impaired								Past due				Impair-
					Satis-		Sub-		but not				ment
	Strong		Good		factory		standard		impaired9		Impaired	allowances10			Total
	US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m
At 30 June 2013
Cash and balances at central banks ................................	145,666		2,084		156		379								148,285
Items in the course of collection from other banks ..........................................	7,992		117		215		92								8,416
Hong Kong Government certificates of indebtedness	24,275		-		-		-								24,275
Trading assets11 .....................	238,433		60,246		77,818		4,627								381,124
- treasury and other eligible bills ..............................	14,827		3,569		758		34								19,188
- debt securities .................	115,007		15,430		16,333		798								147,568
- loans and advances:
to banks .......................	59,115		22,581		13,076		1,976								96,748
to customers ................	49,484		18,666		47,651		1,819								117,620
Financial assets designated at fair value11 ........................	6,016		5,417		1,024		91								12,548
- treasury and other eligible bills ..............................	99		-		-		-								99
- debt securities .................	5,916		5,385		1,010		81								12,392
- loans and advances:
to banks .......................	1		-		14		10								25
to customers ................	-		32		-		-								32
Derivatives11 .........................	228,458		44,137		24,808		1,810								299,213
Loans and advances held at amortised cost ...................	638,031		241,575		213,494		22,737		16,073		38,205		(15,611)		1,154,504
- to banks .........................	149,254		22,465		11,292		2,050		26		85		(50)		185,122
- to customers12 ................	488,777		219,110		202,202		20,687		16,047		38,120		(15,561)		969,382
Financial investments ...........	340,631		26,981		18,751		5,110		-		3,373				394,846
- treasury and other similar bills ..............................	72,441		3,424		2,056		1,078		-		6				79,005
- debt securities .................	268,190		23,557		16,695		4,032		-		3,367				315,841
Assets held for sale ...............	4,906		5,955		6,129		492		641		744		(177)		18,690
- disposal groups ...............	4,788		5,679		6,065		478		609		239		(102)		17,756
- non-current assets held for sale .............................	118		276		64		14		32		505		(75)		934
Other assets ..........................	11,146		6,530		12,627		1,532		193		442				32,470
- endorsements and acceptances ..................	1,880		4,506		4,367		543		31		2				11,329
- accrued income and other	9,266		2,024		8,260		989		162		440				21,141
	1,645,554		393,042		355,022		36,870		16,907		42,764		(15,788)		2,474,371

	Neither past due nor impaired								Past due				Impair-
					Satis-		Sub-		but not				ment
	Strong		Good		factory		standard		impaired9		Impaired	allowances10			Total
	US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m
At 30 June 2012
Cash and balances at central banks ...........................	146,337		1,364		210		-								147,911
Items in the course of collection from other banks ...........................	10,628		173		274		-								11,075
Hong Kong Government certificates of indebtedness .................	21,283		-		-		-								21,283
Trading assets11................	242,618		68,646		49,377		711								361,352
- treasury and other eligible bills .............	26,256		2,726		1,116		-								30,098
- debt securities ...........	97,559		14,196		19,458		350								131,563
- loans and advances:
to banks .................	60,832		26,423		7,474		101								94,830
to customers ...........	57,971		25,301		21,329		260								104,861
	-	-	-	-	-	-	-	-	-	-	-	-	-	-	-
Financial assets designated at fair value11 ...................	8,356		5,438		608		133								14,535
- treasury and other eligible bills .............	77		-		14		-								91
- debt securities ...........	8,228		5,359		520		131								14,238
- loans and advances:
to banks .................	51		-		74		2								127
to customers ...........	-		79		-		-								79
	-	-	-	-	-	-	-	-	-	-	-	-	-	-	-
Derivatives11 ...................	271,850		53,347		27,875		2,862								355,934
	-	-	-	-	-	-	-	-	-	-	-	-	-	-	-
Loans and advances held at amortised cost .............	611,942		259,989		217,188		26,981		17,517		40,832		(17,273)		1,157,176
- to banks ...................	142,693		28,284		10,531		639		12		88		(56)		182,191
- to customers12 ..........	469,249		231,705		206,657		26,342		17,505		40,744		(17,217)		974,985
	-	-	-	-	-	-	-	-	-	-	-	-	-	-	-
Financial investments ......	330,781		27,343		23,265		3,456		-		2,205				387,050
- treasury and other similar bills .............	62,669		4,691		4,093		99		-		-				71,552
- debt securities ...........	268,112		22,652		19,172		3,357		-		2,205				315,498
	-	-	-	-	-	-	-	-	-	-	-	-	-	-	-
Assets held for sale ..........	4,677		1,365		3,125		665		449		366		(106)		10,541
- disposal groups .........	4,632		1,365		3,125		665		447		255		(106)		10,383
- non-current assets held for sale ............	45		-		-		-		2		111		-		158
Other assets .....................	11,908		7,672		12,403		1,604		290		520				34,397
- endorsements and acceptances ............	2,172		4,807		4,849		945		5		4				12,782
- accrued income and other ...........................	9,736		2,865		7,554		659		285		516				21,615
	-	-	-	-	-	-	-	-	-	-	-	-	-	-	-
	1,660,380		425,337		334,325		36,412		18,256		43,923		(17,379)		2,501,254

Distribution of financial instruments by credit quality (continued)

	Neither past due nor impaired								Past due				Impair-
					Satis-		Sub-		but not				ment
	Strong		Good		factory		standard		impaired9		Impaired	allowances10			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 assets11 ...................	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 value11 .......................	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
Derivatives11 .......................	284,115		46,214		24,877		2,244								357,450
Loans and advances held at amortised cost .................	625,091		246,323		213,241		23,996		18,911		38,776		(16,169)		1,150,169
- to banks ........................	117,220		23,921		10,575		772		10		105		(57)		152,546
- to customers12 ...............	507,871		222,402		202,666		23,224		18,901		38,671		(16,112)		997,623
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 178.

On a reported basis the balance of credit risk bearing financial instruments at 30 June 2013 was US$2,474bn, of which US$1,646bn or 67% were classified as 'strong' (31 December 2012: 67%). The proportion of financial instruments classified as 'good' and 'satisfactory' remained broadly stable at 16% and 14%, respectively. The proportion of 'sub-standard' financial instruments remained low at 1% at 30 June 2013.

Loans and advances held at amortised cost were US$1,155bn, similar to the US$1,150bn at 31 December 2012. At 30 June 2013, 76% 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 government and government agencies classified as 'strong' and this proportion was broadly unchanged in the first half of 2013 at 85%.

Trading assets on which credit quality has been assessed rose by 4% to US$381bn from 31 December 2012. However, the proportion of balances classified as 'strong' declined slightly from 65% at 31 December 2012 to 63% at 30 June 2013 despite an overall increase in total balances classified as 'strong'. This was due to a rise in the level of balances classified as 'satisfactory' as a result of an increase in settlement and reverse repo balances in Europe and higher balances in North America, reflecting increased lending to hedge funds.

The proportion of derivative assets classified as 'strong' fell from 79% at the end of 2012 to 76% at 30 June 2013 as a result of net downgrades in respect of individual corporate counterparties across a range of industries in Hong Kong and Mexico and a decrease in the mark‑to‑market value of interest rate derivatives classified as 'strong' in Europe. The proportion of 'satisfactory' balances remained broadly unchanged at 8%.

Cash and balances at central banks rose by 5% to US$148bn as a result of increases in North America due to sales and maturities of available-  for-sale government debt securities. This was partly offset by a decrease in Hong Kong as liquidity was redeployed to support growth in lending. 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.

Past due but not impaired gross financial instruments

The definition of past due but not impaired loans is set out on page 156 of the Annual Report and Accounts 2012.

At 30 June 2013, US$16.1bn of loans and advances held at amortised cost were classified as past due but not impaired (31 December 2012: US$18.9bn; 30 June 2012: US$17.5bn). The largest concentration of these balances was in HSBC Finance where they decreased by 22% compared with the end of 2012 due to the decline in CML lending balances as the portfolio continued to run off.

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

	Europe		Hong        Kong		Rest of        Asia-     Pacific		MENA		North America		Latin America		Total
	US$m		US$m		US$m		US$m		US$m		US$m		US$m
At 30 June 2013
Banks ............................................	16		-		10		-		-		-		26
Customers ......................................	2,043		1,321		2,814		1,001		6,930		1,938		16,047
-  personal .................................	1,210		751		1,897		227		4,585		1,298		9,968
-  corporate and commercial .....	822		492		783		723		2,340		634		5,794
-  financial (non-bank financial institutions) ...........................	11		78		134		51		5		6		285
	2,059		1,321		2,824		1,001		6,930		1,938		16,073
At 30 June 2012
Banks ............................................	-		2		10		-		-		-		12
Customers ......................................	2,259		1,082		2,538		980		7,874		2,772		17,505
-  personal .................................	1,454		646		1,785		158		6,285		1,825		12,153
-  corporate and commercial .....	785		417		708		818		1,337		946		5,011
-  financial (non-bank financial institutions) ...........................	20		19		45		4		252		1		341
	2,259		1,084		2,548		980		7,874		2,772		17,517
At 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 past due but not impaired gross financial instruments

	Up to 29            days		30-59            days		60-89            days		90-179            days		180 days     and over		Total
	US$m		US$m		US$m		US$m		US$m		US$m
At 30 June 2013
Loans and advances held at amortised cost ..	12,173		2,711		1,098		78		13		16,073
- to banks ................................................	26		−		−		−		−		26
- to customers .........................................	12,147		2,711		1,098		78		13		16,047
Assets held for sale ......................................	384		139		79		20		19		641
- disposal groups ......................................	361		133		76		20		19		609
- non-current assets held for sale .............	23		6		3		−		−		32
Other assets .................................................	111		42		19		12		9		193
- endorsements and acceptances ..............	20		5		2		3		1		31
- other ....................................................	91		37		17		9		8		162
	12,668		2,892		1,196		110		41		16,907
At 30 June 2012
Loans and advances held at amortised cost ..	13,137		2,903		1,307		79		91		17,517
- to banks ................................................	12		−		−		−		−		12
- to customers .........................................	13,125		2,903		1,307		79		91		17,505
Assets held for sale ......................................	270		116		50		6		7		449
- disposal groups ......................................	270		114		50		6		7		447
- non-current assets held for sale .............	−		2		−		−		−		2
Other assets .................................................	168		39		30		10		43		290
- endorsements and acceptances ..............	3		1		−		−		1		5
- other ....................................................	165		38		30		10		42		285
	13,575		3,058		1,387		95		141		18,256
At 31 December 2012
Loans and advances held at amortised cost ..	14,236		3,189		1,262		200		24		18,911
- to banks ................................................	10		-		-		-		-		10
- to customers .........................................	14,226		3,189		1,262		200		24		18,901
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

 

END

 

 

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