HSBC 2003 Annual Report Download - page 367

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At 31 December 2003, the sensitivity of the current fair value of the interest-only strip receivables to an
immediate 10 per cent and 20 per cent unfavourable change in assumptions are presented in the table below.
These sensitivities are based on assumptions used to value interest-only strip receivables at 31 December 2003.
Real Estate
Secured Auto Finance
MasterCard/
Visa
Private
Label
Personal
Non-Credit
Card
Carrying value (fair value) of interest- only
strip receivables (US$ millions)................ 5157301146345
Weighted-average life (in years) ................... 0.7 1.9 0.6 0.7 1.6
Payment speed assumption (annual rate)....... 21.7% 38.1% 80.5% 76.2% 44.2%
Impact on fair value of 10% adverse
change (US$ millions) .......................... – (31) (26) (12) (26)
Impact on fair value of 20% adverse
change (US$ millions) .......................... – (59) (48) (22) (51)
Expected credit losses (annual rate) .............. 1.8% 7.4% 5.4% 5.8% 10.1%
Impact on fair value of 10% adverse
change (US$ millions) .......................... – (52) (28) (18) (66)
Impact on fair value of 20% adverse
change (US$ millions) .......................... (1) (104) (56) (36) (131)
Discount rate on residual cash flows (annual
rate)........................................................... 13.0% 10.0% 9.0% 10.0% 11.0%
Impact on fair value of 10% adverse
change (US$ millions) .......................... – (10) (3) (1) (4)
Impact on fair value of 20% adverse
change (US$ millions) .......................... – (19) (6) (1) (8)
Variable returns to investors (annual rate)..... 1.3% – 1.8% 2.7% 2.2%
Impact on fair value of 10% adverse
change (US$ millions) .......................... – – (10) (9) (14)
Impact on fair value of 20% adverse
change (US$ millions) .......................... – – (19) (17) (28)
These sensitivities are hypothetical and should not be considered to be predictive of future performance. As the
figures indicate, the change in fair value based on a 10 per cent variation in assumptions cannot necessarily be
extrapolated because the relationship of the change in assumption to the change in fair value may not be linear.
Also, in this table, the effect of a variation in a particular assumption on the fair value of the residual cash flow
is calculated independently from any change in another assumption. In reality, changes in one factor may
contribute to changes in another (for example, increases in market interest rates may result in lower
prepayments) which might magnify or counteract the sensitivities. Furthermore, the estimated fair values as
disclosed should not be considered indicative of future earnings on these assets.
Static pool credit losses are calculated by summing actual and projected future credit losses and dividing them
by the original balance of each pool of asset. Due to the short term revolving nature of MasterCard and Visa,
and private label loan balances, the weighted-average percentage of static pool credit losses is not considered to
be materially different from the weighted-average charge-off assumptions used in determining the fair value of
interest-only strip receivables in the table above. At 31 December 2003, static pool credit losses for auto finance
loans securitised in 2003 were estimated to be 11.5 per cent.