HSBC 2002 Annual Report Download - page 126

HSBC HOLDINGS PLC
Financial Review (continued)
124
actual level of inherent losses is greater or less
than that suggested by historical experience.
Loss experience is defined as the annual new
provisions (net of recoveries for personal lending)
over a five-year period. These loss rates are applied
to all loans, other than those for which a specific
provision has been established in order to develop an
estimate of the level of losses inherent in the
portfolio at the reporting date. Management reviews
the need to hold a different level of general
allowance than that suggested by historical loss rates
by reference to current economic conditions and loan
gradings. Any adjustment made as a result of this
management judgement, and the basis for this
adjustment for each reporting entity, is documented
and reviewed by senior Group credit management.
The estimated period between losses occurring
and establishment of a specific provision for this loss
is determined by management for each identified
portfolio, having regard to the robustness of the
specific provisioning process and the availability of
information on which to assess specific provisions.
In general, the periods used vary between four
and nine months. In certain circumstances, such as
Argentina in 2001, economic conditions are such that
it is clear that historical loss experience provides
little evidence as to the inherent loss. In such
circumstances management will use their judgement
and any relevant experience from similar situations
to determine an appropriate provision.
Charge offs
Loans (and the related provisions) are charged off
either partially or in full when there is no prospect of
recovery of these amounts. HSBC therefore
generally writes off loans less quickly than US banks
leading to a higher reported level of credit risk
elements and associated provisions. New provisions
rather than amounts written off should be taken as
indications of current loss trends.
Loans on which interest is suspended
Provided that there is a realistic prospect of interest
being paid at some future date, interest on non-
performing loans is charged to the customer’ s
account. However, the interest is not credited to the
profit and loss account but to an interest suspense
account in the balance sheet which is netted against
the relevant loan. On receipt of cash (other than from
the realisation of security), suspended interest is
recovered and taken to the profit and loss account. A
specific provision of the same amount as the interest
receipt is then raised against the principal balance.
Amounts received from the realisation of security are
applied to the repayment of outstanding
indebtedness, with any surplus used to recover any
specific provisions and then suspended interest.
Non-accrual loans
Where the probability of receiving interest payments
is remote, interest is no longer accrued and any
suspended interest balance is written off.
Loans are not reclassified as accruing until
interest and principal payments are up-to-date and
future payments are reasonably assured.
Assets acquired in exchange for advances in
order to achieve an orderly realisation continue to be
reported as advances. The asset acquired is recorded
at the carrying value of the advance disposed of at
the date of the exchange and provisions are based on
any subsequent deterioration in its value.