HSBC 2012 Annual Report Download - page 164

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
Risk > Credit risk > Credit quality of financial instruments / Collateral
162
the revised interest payments as a prerequisite.
Similarly, for principal payment modifications,
we require the customer to be capable of complying
with the revised terms as a necessary pre-condition.
When principal payments are modified and
permanent forgiveness results, or when it is
otherwise considered that there is no longer a
realistic prospect of recovering outstanding
principal, the affected balances are written off.
When principal repayments are postponed, the
customer is expected to be able to pay in line with
the renegotiated terms, including meeting the
postponed principal repayment if due from
refinancing. In all cases, a loan renegotiation is
only granted when it is expected that the customer
will be able to meet the revised terms.
Renegotiated loan balances in the manufacturing
and international trade services sector increased in
2012, mainly in Latin America from the restructuring
of a small number of loans in Mexico. In the Middle
East and North Africa, renegotiated loan balances
decreased, partly due to the repayment of a significant
loan in the UAE.
Impaired loans
(Audited)
Impaired loans and advances are those that meet
any of the following criteria:
• loans and advances classified as CRR 9,
CRR 10, EL 9 or EL 10 (a description of our
internal credit rating grades is provided on
page 253);
• retail exposures 90 days or more past due,
unless individually they have been assessed
as not impaired; or
• renegotiated loans and advances that have been
subject to a change in contractual cash flows as
a result of a concession which the lender would
not otherwise consider, and where it is probable
that without the concession the borrower would
be unable to meet its contractual payment
obligations in full, unless the concession is
insignificant and there are no other indicators
of impairment. Renegotiated loans remain
classified as impaired until there is sufficient
evidence to demonstrate a significant reduction
in the risk of non-payment of future cash flows,
and there are no other indicators of impairment.
For loans that are assessed for impairment
on a collective basis, the evidence to support
reclassification as no longer impaired typically
comprises a history of payment performance against
the original or revised terms, depending on the
nature and volume of forbearance and the credit
risk characteristics surrounding the renegotiation.
For loans that are assessed for impairment on an
individual basis, all available evidence is assessed
on a case by case basis.
In HSBC Finance, where a significant majority
of HSBC’s loan forbearance activity occurs, the
history of payment performance is assessed with
reference to the original terms of the contract,
reflecting the higher credit risk characteristics of
this portfolio. The payment performance periods are
monitored to ensure they remain appropriate to the
levels of recidivism observed within the portfolio.
Further disclosure about loans subject to
forbearance is provided on page 254. Renegotiated
loans and forbearance disclosures are subject to
evolving industry practice and regulatory guidance.