HSBC 2004 Annual Report Download - page 140

HSBC HOLDINGS PLC
Financial Review (continued)
138
These portfolio provisions are generally
reassessed monthly and charges for new provisions,
or releases of existing provisions, are calculated for
each separately identified portfolio.
Individually assessed accounts
Specific provisions on individually assessed
accounts are determined by an evaluation of the
exposures case-by-case. This procedure is applied to
all accounts that do not qualify for, or are not subject
to, a portfolio-based approach outlined above. In
determining such provisions on individually assessed
accounts, the following factors are considered:
• the Group’ s aggregate exposure to the customer
(including contingent liabilities);
• the viability of the customer’s business model
and capability to trade successfully out of
financial difficulties and generate sufficient cash
flow to service debt obligations;
• the likely dividend available on liquidation or
bankruptcy;
• the extent of other creditors’ commitments
ranking ahead of, or pari passu with, the Group
and the likelihood of other creditors continuing
to support the company;
• the complexity of determining the aggregate
amount and ranking of all creditor claims and
the extent to which legal and insurance
uncertainties are evident;
• the amount and timing of expected receipts and
recoveries;
• the realisable value of security (or other credit
mitigants) and likelihood of successful
repossession;
• the deduction of any costs involved in recovery
of amounts outstanding;
• the ability of the borrower to obtain and make
payments in the relevant foreign currency if
loans are not in local currency; and,
• where available, the secondary market price for
the debt.
Group policy requires a review of the level of
specific provisions on individual facilities above
materiality thresholds at least half-yearly, or more
regularly where individual circumstances require.
This will normally include a review of collateral held
(including re-confirmation of its enforceability) and
an assessment of actual and anticipated receipts. For
significant commercial and corporate debts,
specialised loan ‘work-out’ teams with experience in
insolvency and specific market sectors are used. This
expertise enables likely losses on significant
individual exposures to be assessed more accurately.
Releases on individually calculated specific
provisions are recognised whenever the Group has
reasonable evidence that the established estimate of
loss has been reduced.
Cross-border exposures
Specific provisions are established in respect of
cross-border exposures to countries assessed by
management to be vulnerable to foreign currency
payment restrictions. This assessment includes
analysis of both economic and political factors.
Economic factors include the level of external
indebtedness, the debt service burden and access to
external sources of funds to meet the debtor
country’ s financing requirements. Political factors
taken into account include the stability of the country
and its government, potential threats to security and
the quality and independence of the legal system.
Provisions are applied to all qualifying
exposures within these countries unless these
exposures:
• are performing, trade-related and of less than
one year’ s maturity;
• are mitigated by acceptable security cover which
is, other than in exceptional cases, held outside
the country concerned; or
• are represented by securities held for trading
purposes for which a liquid and active market
exists, and which are marked to market daily.
General provisions
General provisions augment specific provisions and
provide cover for loans which are impaired at the
balance sheet date but which will not be individually
identified as such until some time in the future.
HSBC requires each operating company to maintain
a general provision which is determined after taking
into account:
• historical loss experience in portfolios of similar
risk characteristics, for example, by industry
sector, loan grade or product;
• the estimated period between a loss occurring
and that loss being identified and evidenced by
the establishment of a specific provision against
that loss; and
• management’ s judgement as to whether the
current economic and credit conditions are such
that the actual level of inherent losses is likely to
be greater or less than that suggested by