HSBC 2004 Annual Report Download - page 160

HSBC HOLDINGS PLC
Financial Review (continued)
158
quarter, improved collections and the sales of
charged-off accounts. In Europe, excluding
HSBC Finance, releases and recoveries were
US$344 million higher, of which US$51 million
arose from currency translation effects. At
constant currencies, the increase reflected
releases of provisions in the energy, utilities and
petroleum sectors in the UK and manufacturing
and transport equipment sectors in France, while
recoveries benefited from the sale in the
secondary market of loans to a borrower in the
engineering sector. In North America, excluding
HSBC Finance, releases and recoveries
increased by US$126 million. The improvement
reflected an ongoing workout programme to
reduce the legacy bad debt portfolio in Mexico,
higher repayments of previously non-
performing loans in the US and the sale of
impaired loans in the US secondary market. In
Hong Kong, the benign credit environment and
rising house prices contributed to a rise in
releases and recoveries for residential
mortgages. This offset a general fall in the levels
of releases and recoveries in the Hong Kong
commercial sector that was also evident across
the Rest of Asia-Pacific. The sharp increase in
releases and recoveries in South America largely
reflected the inclusion of the Losango consumer
lending business and organic growth in Brazil,
together with successful collections activities in
Argentina.
• The general provision release of
US$436 million in 2004 compared with a
release of US$121 million in 2003. In Hong
Kong, the net release of US$224 million
reflected a reduction in the estimated latent loan
losses at 31 December 2004. Estimates of latent
losses reflect the historical experience of the rate
at which such losses occur and are based on the
structure of the credit portfolio and the
economic and credit conditions prevailing at the
balance sheet date. A similar situation was seen
in Malaysia, Singapore and Indonesia where
stable economic conditions were reflected in an
improvement in credit quality and reduction in
latent loan losses. As a result, the net charge for
the Rest of Asia-Pacific in 2003 became a net
release in 2004. In North America, the small
general provision release compared with a
charge of US$136 million in 2003 and reflected
an improvement in the economic outlook and
delinquency roll-rate trends in HSBC Finance
Corp, and a smaller charge in Mexico. In
Europe, the increase in general provisions
required from the growth in lending balances
was offset by the impact of the improvement in
both historical loss experience and credit
conditions in general. The substantial general
provision release in South America in 2003
reflecting improved collections and an
improvement in the general quality of the loan
book in Argentina was not repeated in 2004.
Year ended 31 December 2003 compared
with year ended 31 December 2002
The increase in the level of new specific provisions
was principally driven by:
• New provisions in North America, which were
US$4,563 million higher than in 2002,
essentially reflected the acquisition of HSBC
Finance Corporation, which reported
US$4,580 million of new provisions. The
majority of HSBC Finance’ s customer loans are
in the consumer finance sector and are
geographically well-spread across the United
States. During the period since its acquisition,
HSBC Finance Corporation’ s new provisions
reflected the impact of the weak economy,
including higher personal bankruptcy filings and
a higher level of amounts becoming past due. In
the latter part of 2003, there were signs of an
improvement in credit quality and delinquency
levels stabilised. At 31 December 2003, HSBC
Finance’ s two-month-and-over consumer
contractual delinquency ratio was 5.8 per cent.
A charge of US$48 million from HSBC Mexico
arose from consumer lending and credit card
portfolios, which are provisioned on a portfolio
basis. In Canada, new provisions in 2003 were
US$66 million lower than in 2002, when
significant new provisions for a small number of
commercial facilities were necessary, most
notably in the telecommunications sector.
• In Europe, new provisions were US$522 million
higher than in 2002 of which US$193 million
related to HSBC Finance Corporation’s UK
consumer finance business, which is
provisioned on a portfolio basis. Elsewhere in
the UK, the increase in new provisions in
personal lending reflected the growth in loan
portfolios. In the corporate and commercial
portfolio, new provisions were raised to cover a
number of accounts in the energy and
manufacturing sectors. In France, there were
higher provisions, principally due to the
deterioration of a borrower in the engineering
sector.
• New provisions in Hong Kong were
US$127 million higher than in 2002. Higher
levels of new provisions were required in the