HSBC 2007 Annual Report Download - page 205

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factors which may not be adequately reflected in its
statistical models and, subject to guidance from
Group Finance and Group Risk, adjusts impairment
allowances accordingly.
Roll rates, loss rates and the expected timing of
future recoveries are regularly benchmarked against
actual outcomes to ensure they remain appropriate.
Write-off of loans and advances
Loans are normally written off, either partially or in
full, when there is no realistic prospect of further
recovery. Where loans are secured, this is generally
after receipt of any proceeds from the realisation of
security.
In the case of residential mortgages and second
lien loans in HSBC Finance, loan carrying amounts
in excess of net realisable value are written off at or
before the time foreclosure is completed or when
settlement is reached with the borrower. If
foreclosure is not pursued, and there is no reasonable
expectation of recovery, the loan is normally written
off no later than the end of the month in which the
loan becomes 240 days contractually past due.
Unsecured personal facilities, including credit
cards, are generally written off at between 150 and
210 days past due, the standard period being the end
of the month in which the account becomes 180 days
contractually delinquent. This period may be
extended, generally to 300 days past due but in no
event exceeding 360 days past due, in the case of a
small proportion of HSBC Finance’s cards business
and unsecured personal facilities other than credit
cards.
Cases of write-off periods exceeding 360 days
past due are few but arise, for example, in a few
countries where local regulation or legislation
constrain earlier write-off, or where the realisation of
collateral for secured real estate lending takes place
at this time.
In the event of bankruptcy or analogous
proceedings, write-off can occur earlier than at the
periods stated above. Collections procedures may
continue after write-off.
Cross-border exposures
Management assesses the vulnerability of countries
to foreign currency payment restrictions when
considering impairment allowances on cross-border
exposures. This assessment includes an analysis of
the economic and political factors existing at the
time. 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, threats to security, and the
quality and independence of the legal system.
Impairment allowances are assessed in respect
of all qualifying exposures within these countries
unless these exposures and the inherent risks are:
• performing, trade-related and of less than one
year’s maturity;
• mitigated by acceptable security cover which is,
other than in exceptional cases, held outside the
country concerned;
• in the form of securities held for trading
purposes for which a liquid and active market
exists, and which are measured at fair value
daily;
• performing facilities with principal (excluding
security) of US$1 million or below; or
• performing facilities with maturity dates shorter
than three months.
Credit exposure
Maximum exposure to credit risk
(Audited)
HSBC’s exposure to credit risk is spread over
several asset classes, including trading assets, loans
to customers, loans to banks and financial
investments. Recently, loss experience has mainly
affected personal lending portfolios. Thus, in 2007,
94 per cent of loan impairment charges arose in
Personal Financial Services, broadly in line with
2006.
The deterioration of credit conditions in the
US mortgage market was the most significant factor
affecting HSBC’s exposure to credit risk during
2007. A full discussion of this issue can be found
in the commentary on Areas of Special Interest on
page 216.
The following table presents the maximum
exposure to credit risk of balance sheet and off-
balance sheet financial instruments, before taking
account of any collateral held or other credit
enhancements unless such credit enhancements meet
offsetting requirements as set out in Note 2m on the
Financial Statements. For financial assets recognised
on the balance sheet, the exposure to credit risk
equals their carrying amount. For financial
guarantees granted, the maximum exposure to credit
risk is the maximum amount that HSBC would have
to pay if the guarantees were called upon. For loan
commitments and other credit-related commitments
that are irrevocable over the life of the respective