HSBC 2010 Annual Report Download - page 133

131
Overview Operating & Financial Review Governance Financial Statements Shareholder Information
Movement in the available-for-sale (‘AFS’) ABSs reserve
(Audited)
2010 2009
Directly
held/
Solitaire39 SPEs Total
Directly
held/
Solitaire39 SPEs Total
US$m US$m US$m US$m US$m US$m
AFS reserve at 1 January .................................... (7,349) (4,864) (12,213) (11,528) (7,204) (18,732)
Increase in fair value of securities ...................... 2,175 1,543 3,718 3,419 704 4,123
Impairment charge:
– borne by HSBC .......................................... 444 – 444 1,422 – 1,422
– allocated to capital note holders40 .............. – 531 531 – 666 666
Repayment of capital .......................................... 540 187 727 431 668 1,099
Other movements ................................................ 88 297 385 (1,093) 302 (791)
AFS reserve at 31 December .............................. (4,102) (2,306) (6,408) (7,349) (4,864) (12,213)
For footnotes, see page 174.
Securities investment conduits
(Audited)
The total carrying amount of ABSs held through
SPEs in the above table represents holdings in
which significant first loss protection is provided
through capital notes issued by SICs, excluding
Solitaire.
At each reporting date, we assess whether there
is any objective evidence of impairment in the
value of the ABSs held by SPEs. Impairment
charges incurred on these assets are offset by a
credit to the impairment line for the amount of the
loss allocated to capital note holders.
The economic first loss protection remaining at
31 December 2010 amounted to US$2.2bn (2009:
US$2.2bn). On an IFRSs accounting basis, the
carrying value of the liability for the capital notes
at 31 December 2010 amounted to US$0.3bn
(2009: US$0.7bn). The impairment charge
recognised during 2010 amounted to US$531m
(2009: US$666m).
At 31 December 2010, the available-for-sale
reserve in respect of securities held by the SICs
was a deficit of US$2.7bn (2009: US$5.2bn).
Of this, US$2.3bn related to ABSs (2009:
US$4.9bn).
Impairments recognised during 2010 from
assets held directly or within Solitaire, in
recognition of the first loss protection of US$1.2bn
we provide through credit enhancement and from
drawings against the liquidity facility we provide,
were US$444m (2009: US$1.4bn). The reduction
in impairment charges compared with 2009 was
due to the stabilising of loss severities and
delinquency roll rates which have resulted in lower
losses in the underlying collateral pools. The level
of impairment recognised in comparison with the
deficit in the available-for-sale reserve was a
reflection of the credit quality and seniority of the
assets held.
Sub-prime and Alt-A residential mortgage-
backed securities
(Audited)
The assets which are most sensitive to possible
future impairment are sub-prime and Alt-A
residential MBSs. Available-for-sale holdings
in these higher risk categories where HSBC does
not benefit from significant first loss protection
amounted to US$3.8bn at 31 December 2010
(2009: US$4.9bn). For these securities the
cumulative fair value losses not recognised in the
income statement at 31 December 2010 was
US$1.6bn (2009: losses of US$3.2bn). Other
holdings in these higher risk categories classified as
available-for-sale are held in vehicles where third
party first loss protection exists, as described in the
section on securities investment conduits, above.
During 2010, the credit ratings on certain ABSs
held directly by HSBC, Solitaire and the SICs were
downgraded. A downgrade of a security’s credit
rating is not, of itself, evidence of impairment.
Consequently, the actions of the rating agencies
alone have no direct impact on the measurement
of impairment losses. The impairment losses
recognised on these securities at 31 December 2010
are set out above.
Impairment methodologies
(Audited)
The accounting policy for impairment and
indicators of impairment is set out in Note 2j on the
Financial Statements.
For available-for-sale ABSs, to identify
objective evidence of impairment, an industry
standard valuation model is normally applied which
uses data with reference to the underlying asset