HSBC 2009 Annual Report Download - page 228

HSBC HOLDINGS PLC
Report of the Directors: Risk (continued)
Credit risk > Credit quality > Risk ratings / Financial instruments by credit quality
226
Quality classification definitions
• ‘Strong’: exposures demonstrate a strong
capacity to meet financial commitments, with
negligible or low probability of default and/or
low levels of expected loss. Retail accounts
operate within product parameters and only
exceptionally show any period of delinquency.
• ‘Medium-good’: exposures require closer
monitoring and demonstrate a good capacity to
meet financial commitments, with low default
risk. Retail accounts typically show only short
periods of delinquency, with any losses
expected to be minimal following the adoption
of recovery processes.
• ‘Medium-satisfactory’: exposures require closer
monitoring and demonstrate an average to fair
capacity to meet financial commitments, with
moderate default risk. Retail accounts typically
show only short periods of delinquency, with
any losses expected to be minor following the
adoption of recovery processes.
• ‘Sub-standard’: exposures require varying
degrees of special attention and default risk is of
greater concern. Retail portfolio segments show
longer delinquency periods of generally up to
90 days past due and/or expected losses are
higher due to a reduced ability to mitigate these
through security realisation or other recovery
processes.
• ‘Impaired’: exposures have been assessed,
individually or collectively, as impaired.
Risk rating scales
The Customer Risk Rating (‘CRR’) 10-grade scale
above summarises a more granular underlying
22-grade scale of obligor probability of default
(‘PD’). All distinct HSBC customers are rated using
one of these two PD scales, depending on the degree
of sophistication of the Basel II approach adopted for
the exposure.
The Expected Loss (‘EL’) 10-grade scale for
retail business summarises a more granular
underlying EL scale for these customer segments;
this combines obligor and facility/product risk
factors in a composite measure.
For debt securities and certain other financial
instruments, external ratings have been aligned to the
five quality classifications. The ratings of Standard
and Poor’s are cited, with those of other agencies
being treated equivalently. Debt securities with
short-term issue ratings are reported against the
long-term rating of the issuer of those securities. If
major rating agencies have different ratings for the
same debt securities, a prudent rating selection is
made in line with regulatory requirements.
Additional credit quality information in respect
of HSBC’s consolidated holdings of ABSs and
assets held in consolidated SIVs and conduits is
provided on pages 160 to 161 and 182 to 183,
respectively.
For the purpose of the following disclosure,
retail loans which are past due up to 89 days and are
not otherwise classified as EL9 or EL10, are
separately classified as past due but not impaired.
The following tables set out the Group’s
distribution of financial instruments by measures of
credit quality: