HSBC 2006 Annual Report Download - page 209

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This increase was chiefly attributable to Mexico and,
to a lesser extent, Brazil. Strong growth in personal
and commercial lending in Mexico resulted in higher
new charges. In Brazil, new charges rose by 11 per
cent, a significant reduction from the 52 per cent rise
reported in 2005, as credit quality improved
following enhancements made to underwriting
procedures during 2005 and 2006.
Latin American releases and recoveries went up
by 7 per cent, largely in Mexico as a result of more
stable political and economic conditions.
Year ended 31 December 2005 compared
with year ended 31 December 2004
(Unaudited)
Loan impairment charges were US$7,860 million, an
increase of 27 per cent compared with 2004.
Acquisitions accounted for US$107 million of the
rise and US$498 million reflected the non-recurrence
of the general provision release in 2004. The total
charge remained dominated by the personal sector,
with losses in these portfolios representing 92 per
cent of the Group’s net loan impairment charge. On
a constant currency basis, the trends were as follows.
New allowances for loan impairment charges
were US$10,140 million, an increase of 13 per cent
compared with 2004. Releases and recoveries of
allowances increased by 4 per cent to
US$2,280 million. Including a general provision
release of US$498 million in 2004, releases and
recoveries decreased by 15 per cent.
In Europe, growth in UK personal lending and
a weakening in credit quality were the principal
causes of a 50 per cent increase in new loan
impairment charges to US$3,042 million in 2005.
Slower economic growth and weaker employment
conditions were compounded by a change in
legislation in 2004 that relaxed conditions for
personal bankruptcies, which rose to record highs by
the final quarter of 2005. In response to these trends
in the personal portfolio, HSBC tightened
underwriting controls, focusing more on existing
relationships and changing the product mix towards
lower risk customers. These actions, together with
further centralisation of underwriting approvals and
revised reward programmes, assisted in mitigating
the rate of growth in new impairment charges
towards the end of 2005. In the commercial sector,
there were a number of individually significant new
charges raised in the fourth quarter, as well as a
higher rate of new allowances. Although credit
charges remained low by historic standards, the trend
is progressively moving back to more normal levels.
Elsewhere in Europe, France and Italy saw declines
in new allowances, due to the sale of a consumer
finance subsidiary during the year and the non-
recurrence of corporate charges, respectively. In
Turkey, new allowances have increased in line with
the growth in the personal loan portfolio.
Releases and recoveries in Europe were
US$1,058 million, an increase of 23 per cent.
Including a general provision release of
US$162 million in 2004, releases and recoveries
were broadly in line. Increased releases in Turkey,
largely reflecting higher volumes offset the non-
recurrence of the general provision release in
Switzerland.
New impairment allowances in Hong Kong
were US$359 million, a rise of 51 per cent. This was
partially attributable to a small number of individual
allowances for corporate and commercial customers.
However, overall credit quality improved, evidenced
by a decline in impaired loans as a proportion of
gross advances, reflecting a strong economy with
low unemployment.
Releases and recoveries in Hong Kong declined
by 53 per cent, including the non-recurrence of a
general provision release of US$223 million in 2004.
Excluding this, releases and recoveries fell by 9 per
cent to US$213 million as the significant number of
large corporate releases in 2004 was not repeated.
The general provision release last year reflected a
review of historical loss experience and the
improved market environment.
The effect of strong growth in advances in the
Rest of Asia-Pacific produced an 11 per cent rise in
new impairment allowances to US$470 million. In
particular, increased allowances in Taiwan were
driven by a combination of loan growth and an
increase in credit card delinquency. There were
further increases in Indonesia and the Philippines
due to growth in advances, with credit quality stable
in both countries. These were partially offset by
declines in mainland China and Singapore. In
general, across the region, advances to customers
rose and credit quality improved. Non-performing
assets, as a percentage of advances, fell across most
major countries.
In the Rest of Asia-Pacific, releases and
recoveries rose by 6 per cent to US$334 million,
including the US$48 million general provision
release in 2004. Excluding this, releases and
recoveries were 24 per cent higher than 2004. There
were higher releases and recoveries across most
countries in the region reflecting the strong
economic environment, although in Malaysia and
Singapore there were declines, due to the non-
recurrence of the general provision releases in 2004.