HSBC 2008 Annual Report Download - page 197

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undertaken by HSBC’s Internal Audit function.
Audits include consideration of the adequacy and
clarity of credit policy/procedure manuals; an
in-depth analysis of a representative sample of
accounts; an overview of homogeneous portfolios
of similar assets to assess the quality of the loan
book and other exposures; consideration of any
oversight or review work performed by credit risk
management functions and the adequacy of
impairment calculations; a review of analytical
model governance and implementation; a review of
management objectives and a check that Group and
local standards and policies are adhered to in the
approval and management of credit facilities.
Individually significant accounts are reviewed
on a sample basis to ensure that risk ratings are
appropriate, that credit and collection procedures
have been properly followed and that, when an
account or portfolio evidences deterioration,
impairment allowances are raised in accordance with
the Group’s established procedures. Internal Audit
discusses with management any risk ratings it
considers to be inappropriate; after discussion, its
final recommendations for revised ratings must then
be adopted.
Credit quality
(Audited)
HSBC’s credit risk rating systems and processes
differentiate exposures in order to highlight those
with greater risk factors and higher potential severity
of loss. In the case of individually significant
accounts, risk ratings are reviewed regularly and any
amendments are implemented promptly. Within the
Group’s retail businesses, risk is assessed and
managed using a wide range of risk and pricing
models to generate portfolio data.
HSBC’s historical, seven-grade risk rating
system based on a judgemental assessment of the
likelihood and impact of delinquency was
superseded in 2008 for financial reporting purposes,
as for those of all significant risk management
decisions employing credit risk ratings, by a more
risk-sensitive and granular methodology. This
facilitates the IRB approach under Basel II adopted
by the Group to support calculation of its minimum
credit regulatory capital requirement.
The integration of this methodology into
HSBC’s risk processes and structures is well
advanced and supports reporting on the new basis to
senior management in line with the Group’s IRB
obligations. For further details, please see ‘Credit
quality of financial instruments’ on page 217.
Impairment assessment
(Audited)
When impairment losses occur, HSBC reduces the
carrying amount of loans and advances through the
use of an allowance account. When impairment of
available-for-sale financial assets and held-to-
maturity financial investments occurs, the carrying
amount of the asset is reduced directly. For further
details on the accounting policy for impairment of
available-for-sale debt and equity securities, see
‘Accounting policies’ on page 350.
Impairment allowances may be assessed and
created either for individually significant accounts
or, on a collective basis, for groups of individually
significant accounts for which no evidence of
impairment has been individually identified or for
high-volume groups of homogeneous loans that are
not considered individually significant.
It is HSBC’s policy that each operating
company creates allowances for impaired loans
promptly and consistently.
Management regularly evaluates the adequacy
of the established allowances for impaired loans by
conducting a detailed review of the loan portfolio,
comparing performance and delinquency statistics
with historical trends and assessing the impact of
current economic conditions.
Individually assessed impairment allowances
These are determined by evaluating exposure to loss,
case by case, on all individually significant accounts
and all other accounts that do not qualify for the
collective assessment approach outlined below.
Loans are treated as impaired as soon as there is
objective evidence that an impairment loss has been
incurred. The criteria used by HSBC to determine
that there is such objective evidence include:
• known cash flow difficulties experienced by the
borrower;
• past due contractual payments of either principal
or interest;
• breach of loan covenants or conditions;
• the probability that the borrower will enter
bankruptcy or other financial realisation; and
• a significant downgrading in credit rating by an
external credit rating agency.
In determining the level of allowances on such
accounts, the following factors are typically
considered:
• HSBC’s aggregate exposure to the customer;