HSBC 2006 Annual Report Download - page 198

HSBC HOLDINGS PLC
Report of the Directors: The Management of Risk (continued)
Credit risk > Credit quality / Impairment allowances and charges
196
Interest forgone on impaired loans
(Audited)
Interest income that would have been recognised
under the original terms of impaired and restructured
loans amounted to approximately US$104 million in
2006, compared with US$275 million in 2005 and
US$280 million in 2004. Interest income from such
loans of approximately US$276 million was
recorded in 2006, compared with US$120 million
in 2005.
Renegotiated loans
(Audited)
Restructuring activity is designed to manage
customer relationships, maximise collection
opportunities and, if possible, avoid foreclosure or
repossession. Such activities include extended
payment arrangements, approved external debt
management plans, deferring foreclosure,
modification, loan rewrites and/or deferral of
payments pending a change in circumstances.
Following restructuring, an overdue consumer
account is normally reset from delinquent to current
status. Restructuring policies and practices are based
on indicators or criteria which, in the judgement of
local management, indicate that repayment will
probably continue. These policies are required to be
kept under continual review and their application
varies according to the nature of the market, the
product, and the availability of empirically based
data. When empirical evidence indicates an
increased propensity to default on restructured
accounts, the use of roll rate methodology ensures
this factor is taken into account when calculating
impairment allowances.
Renegotiated loans that would otherwise be
past due or impaired totalled US$20.7 billion at
31 December 2006 (2005: US$18.1 billion).
Restructuring is most commonly applied to
consumer finance portfolios. The largest
concentration is in the US, and amounts to
US$16.7 billion (2005: US$14.2 billion) or
81 per cent (2005: 79 per cent) of the total
renegotiated loans. The increase was substantially
driven by credit deterioration in second lien, some
portions of first lien, and adjustable-rate mortgages
in the US mortgage services book as detailed on
page 189. The majority of restructured amounts arise
from secured lending.
Collateral and other credit enhancements
obtained
(Audited)
HSBC obtained assets by taking possession of
collateral held as security, or calling upon other
credit enhancements, as follows:
(Audited) Carrying amount
obtained in:
2006 2005
US$m US$m
Nature of assets
Residential property ................. 1,716 1,171
Commercial and industrial
property ................................ 6 26
Other ........................................ 215 138
1,937 1,335
Repossessed properties are made available for
sale in an orderly fashion, with the proceeds used to
reduce or repay the outstanding indebtedness. Where
excess funds are available after the debt has been
repaid, they are available either for other secured
lenders with lower priority or are returned to the
customer. HSBC does not generally occupy
repossessed properties for its business use. The
majority of repossessed properties arose in HSBC
Finance.