HSBC 2009 Annual Report Download - page 164

HSBC HOLDINGS PLC
Report of the Directors: Impact of Market Turmoil (continued)
Overview of exposures > Significant movements / Monolines
162
Analysis of exposures and significant
movements
The majority of the reduction in the holdings of ABS
resulted from the disposal of securities issued by
government sponsored entities. Further reductions
arose largely as a result of principal repayments.
Sub-prime residential mortgage-related
assets
Sub-prime residential mortgage-related
assets included US$3,746 million (2008:
US$5,894 million) relating to US originated assets
and US$1,141 million (2008: US$1,100 million)
relating to UK non-conforming residential mortgage-
related assets. Of the non-high grade assets held
of US$1,712 million, US$1,604 million (2008:
US$1,426 million) related to US originated assets,
reflecting the higher quality of the UK originated
assets.
A modest increase in observable values of sub-
prime assets took place in 2009. However, further
impairment of US$559 million on assets classified as
available for sale was recognised in 2009 (2008:
US$50 million) as losses were incurred under
current accounting impairment rules which require
the full fair value deficit to be recognised when
objective evidence of impairment as a result of a loss
event has an impact on the estimated future cash
flows of the instrument, without reference to the
amount of the expected loss. The expectation of
losses on the underlying assets did not increase from
that at 31 December 2008. Of the impairment above,
US$312 million (2008: nil) occurred in the SICs and
was borne by the capital note holders.
US Alt-A residential mortgage-related assets
During 2009, spreads on Alt-A mortgage-related
assets tightened modestly from the levels seen in
2008 and no further deterioration was experienced
in the second half of 2009. Further impairments of
US$1,372 million (2008: US$510 million) were
recorded in respect of Alt-A mortgage-related assets
as losses were incurred under the current accounting
rules described in the paragraph above, without
reference to the amount of expected loss. The
expectation of losses in the underlying assets did
not increase from that at 31 December 2008. Of
the impairment above, US$346 million (2008:
US$281 million) occurred in the SICs and was
borne by the capital note holders.
During the first half of 2009, the credit ratings
on a proportion of ABSs held directly by HSBC,
Solitaire and the SICs were downgraded. In
particular, Moody’s Investor Services downgraded
the ratings on substantially all the Group’s holdings
of US Alt-A residential MBSs issued in 2006 and
2007. The downgrade of assets is reflected in the
disclosure of fair value movements in the above
tables as if the downgrade had taken effect on
1 January 2009.
The following table shows the vintages of the
collateral assets supporting HSBC’s holdings of US
sub-prime and Alt-A MBSs. Market prices for these
instruments generally incorporate higher discounts
for later vintages. The majority of HSBC’s holdings
of US sub-prime MBSs are originated pre-2007;
holdings of US Alt-A MBSs are more evenly
distributed between pre- and post-2007 vintages.
Vintages of US sub-prime and Alt-A mortgage-backed securities
Gross principal15 of US sub-prime
mortgage-backed securities
at 31 December
Gross principal15 of US Alt-A
mortgage-backed securities
at 31 December
2009 2008 2009 2008
US$m US$m US$m US$m
Mortgage vintage
Pre-2006 ........................................................................ 1,748 2,012 2,108 2,695
2006 .............................................................................. 2,827 4,287 6,225 7,712
2007 .............................................................................. 1,187 1,588 5,213 6,453
5,762 7,887 13,546 16,860
For footnote, see page 195.
US Government agency and sponsored
enterprises mortgage-related assets
During 2009, HSBC reduced its holdings of US
Government agency and sponsored enterprises
mortgage-related assets by US$7,862 million.
Other residential mortgage-related assets
The majority of other residential mortgage-related
assets were originated in the UK (2009:
US$4,744 million; 2008: US$4,568 million). No
impairments were recognised in respect of these UK