HSBC 2005 Annual Report Download - page 147

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contributed to increased vehicle finance lending.
With the exception of the areas immediately affected
by Hurricane Katrina, the US housing market
remained strong, supported by low interest rates and
transaction costs, and increased availability of credit.
Within the US, HSBC’s portfolios remained
geographically diverse, and were largely secured by
first lien positions.
Although increased mortgage borrowing has
contributed to the record level of consumer debt
burden in the US, levels have largely stabilised and
are expected to decline gradually, as incomes rise
sufficiently to repay debt, notwithstanding higher
interest rates. Bankruptcy filings increased sharply in
the second half of 2005 as a result of a change in
legislation, but receded to more modest levels by the
end of the year. This has continued into 2006.
Notwithstanding the effect of additional impairment
allowances required for the Hurricane Katrina and
increased bankruptcy filings, delinquency rates
continued to fall across the majority of portfolios
during 2005, and trends in lending quality improved.
In Mexico, HSBC utilised well-developed
distribution capabilities and enhanced marketing
initiatives to grow consumer lending, card and
mortgages. Net interest margin was partially offset
by a lower interest rate environment during the year.
In the UK, growth in personal lending was
mainly in the mortgage market, where HSBC
focused on retaining existing customers, and
increasing market share through competitive pricing
and marketing strategies. Fixed rate mortgages were
the main driver of growth, against the background of
a more subdued market. Overall, the secured
mortgage portfolio represented 64 per cent of total
lending to personal customers in the UK, and
although delinquency increased modestly during
2005, losses remained negligible.
The unsecured portfolio in the UK also
continued to expand, driven by credit and charge
cards, and to a lesser extent unsecured personal
lending, though growth in gross lending was largely
offset by the US$1 billion write-off mentioned
above. In response to prevailing market conditions,
which saw a progressive rise in personal
indebtedness, bankruptcies and delinquencies over
the course of 2005, HSBC revised credit scorecards,
adopted positive credit reference data, further
centralised underwriting, and expanded its
origination and collection analytics and efforts. As a
result, there were indicators in the second half of the
year that the credit quality of more recent unsecured
lending vintages had improved.
Personal lending in Hong Kong remained
subdued in 2005. The mortgage market remained
intensely competitive, with competitors offering very
low rates, along with up-front cash incentives to
attract new mortgage business. Overall mortgage
balances, excluding the reduction in balances under
the GHOS, which remained suspended, were broadly
flat compared with December 2004. Credit quality
continued to improve, with consumers benefiting
from employment levels and rising property prices,
with a notable reduction in the level of negative
equity on mortgage balances.
In contrast with Hong Kong, personal lending in
the Rest of Asia-Pacific grew strongly in most
countries in 2005, boosted by a series of mortgage
and credit card campaigns during the year and
growth in the card base, which added 1.6 million
cards, to reach 6.3 million cards in issue at the end of
2005.
Growth was also notable in Brazil, where
marketing and new product launches contributed to
growth of 44 per cent in personal unsecured lending,
as consumer sentiment improved with economic
growth. Credit quality deteriorated, notably in the
consumer finance business, however, actions taken
to mitigate this, notably through tightening
underwriting, delivered an improvement in the
fourth quarter.
Elsewhere, credit quality remained relatively
stable, although HSBC continued to monitor
carefully those portfolios that possess the greatest
potential for future economic stress. Delinquency
and loss trends differed across jurisdictions,
reflecting these varied conditions.
Non-traditional lending
In response to customer demand, HSBC offers
interest only residential mortgage loans in more
developed markets. These loans allow customers to
pay only accruing interest for a period of time, and
provide customers with the repayment flexibility
inherent in the structures of such products. An
increasing number of customers prefer to make one-
off, or irregular capital reduction payments through
the lifetime of such loans, reflecting their individual
income patterns.
HSBC underwrites and prices these loans in a
manner appropriate to compensate for their risk by
ensuring, for example, that loan-to-value ratios are
more conservative than for traditional mortgage
lending. HSBC does not offer loans which are
designed to expose customers to the risk of negative
amortisation.