HSBC 2008 Annual Report Download - page 350

HSBC HOLDINGS PLC
Notes on the Financial Statements (continued)
Note 2
348
Homogeneous groups of loans and advances
Statistical methods are used to determine impairment losses on a collective basis for homogeneous groups of
loans that are not considered individually significant, because individual loan assessment is impracticable.
Losses in these groups of loans are recorded on an individual basis when individual loans are written off, at
which point they are removed from the group. Two alternative methods are used to calculate allowances on a
collective basis:
− When appropriate empirical information is available, HSBC utilises roll rate methodology. This
methodology employs statistical analyses of historical data and experience of delinquency and default to
estimate the amount of loans that will eventually be written off as a result of the events occurring before the
balance sheet date which HSBC is not able to identify on an individual loan basis, and that can be reliably
estimated. Under this methodology, loans are grouped into ranges according to the number of days past due,
and statistical analysis is used to estimate the likelihood that loans in each range will progress through the
various stages of delinquency and ultimately prove irrecoverable. The estimated loss is the difference
between the present value of expected future cash flows, discounted at the original effective interest rate of
the portfolio, and the carrying amount of the portfolio. Current economic conditions are also evaluated when
calculating the appropriate level of allowance required to cover inherent loss. In certain highly developed
markets, sophisticated models also take into account behavioural and account management trends as
revealed in, for example, bankruptcy and rescheduling statistics.
− In other cases, when the portfolio size is small or when information is insufficient or not reliable enough to
adopt a roll rate methodology, HSBC adopts a formulaic approach which allocates progressively higher
percentage loss rates the longer a customer’s loan is overdue. Loss rates are based on historical experience.
In normal circumstances, historical experience provides the most objective and relevant information from which
to assess inherent loss within each portfolio. In certain circumstances, historical loss experience provides less
relevant information about the inherent loss in a given portfolio at the balance sheet date, for example, where
there have been changes in economic, regulatory or behavioural conditions, such that the most recent trends in
the portfolio risk factors are not fully reflected in the statistical models.
These additional portfolio risk factors may include recent loan portfolio growth and product mix,
unemployment rates, bankruptcy trends, geographic concentrations, loan product features (such as the
ability of borrowers to repay adjustable-rate loans where reset interest rates give rise to increases in interest
charges), economic conditions such as national and local trends in housing markets and interest rates,
portfolio seasoning, account management policies and practices, current levels of write-offs, changes in
laws and regulations and other items which can affect customer payment patterns on outstanding loans,
such as natural disasters. These risk factors, where relevant, are taken into account when calculating the
appropriate level of impairment allowances by adjusting the impairment allowances derived solely from
historical loss experience.
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
A loan (and the related impairment allowance account) is normally written off, either partially or in full, when
there is no realistic prospect of recovery of the principal amount and, for a collateralised loan, when the proceeds
from realising the security have been received.
Reversals of impairment
If the amount of an impairment loss decreases in a subsequent period, and the decrease can be related objectively
to an event occurring after the impairment was recognised, the excess is written back by reducing the loan
impairment allowance account accordingly. The write-back is recognised in the income statement.
Reclassified loans and advances
Where financial assets have been reclassified out of the fair value through profit or loss category to the loans and
receivables category, the effective interest rate determined at the date of reclassification is used to calculate any
impairment losses.