HSBC 2015 Annual Report Download - page 201

HSBC HOLDINGS PLC
199
Strategic Report Financial Review Corporate Governance Financial Statements Shareholder Information
Derecognition of renegotiated loans
(Audited)
Loans that have been identified as renegotiated retain this designation until maturity or derecognition. When a loan is
restructured as part of a forbearance strategy and the restructuring results in derecognition of the existing loan, the new loan
is disclosed as renegotiated.
When determining whether a loan that is restructured should be derecognised and a new loan recognised, we consider the
extent to which the changes to the original contractual terms result in the renegotiated loan, considered as a whole, being a
substantially different financial instrument. The following are examples of circumstances that individually are likely to result in
this test being met and derecognition accounting being applied:
• an uncollateralised loan becomes fully collateralised or vice versa;
• removal or addition of debt-to-equity conversion features attached to the loan agreement that have substance;
• a change in the currency in which the principal or interest is denominated, other than a conversion at a current market rate;
or
• a change in the obligor.
The following are examples of factors that we consider may indicate that the revised loan is a substantially different financial
instrument, but are unlikely to be conclusive in themselves:
• conditions added to the contract that substantially alter the credit risk of the loan (e.g. conditions on how the customer’s
business will be conducted in order to meet the revised terms of the loan);
• guarantees are put in place that are expected to substantially change the source of repayment and it is fully expected that
the guarantees have value;
• rate structure changes (that are not existing contractual features) or debt consolidation where these changes are not purely
a concession to allow the obligor to pay a monthly amount that is affordable given its credit distressed circumstances;
• a change in the liquidation preference or ranking of the instrument that is not a debt-to-equity conversion; or
• the collateral level (as a % of the loan) has doubled and the resulting coverage is more than 50%.
Renegotiated loans and recognition of impairment allowances
(Audited)
For retail lending, renegotiated loans are segregated from other parts of the loan portfolio for collective impairment
assessment to reflect the higher rates of losses often encountered in these segments. When empirical evidence indicates an
increased propensity to default and higher losses on such accounts, such as for re-aged loans in the US, the use of roll-rate (or
discounted cash flow) methodology ensures these factors are taken into account when calculating impairment allowances by
applying roll rates specifically calculated on the pool of loans subject to forbearance. When the portfolio size is small or when
information is insufficient or not reliable enough to adopt a roll-rate (or discounted cash flow) methodology, a basic formulaic
approach based on historical loss rate experience is used. As a result of our collective impairment methodology, we recognise
collective impairment allowances on homogeneous groups of loans, including renegotiated loans, where there is historical
evidence that there is a likelihood that loans in these groups will progress through the various stages of delinquency, and
ultimately prove irrecoverable as a result of events occurring before the balance sheet date. This treatment applies
irrespective of whether or not those loans are presented as impaired in accordance with our impaired loans disclosure
convention.
In the corporate and commercial sectors, renegotiated loans are typically assessed individually. Credit risk ratings are intrinsic
to the impairment assessment. A distressed restructuring is classified as an impaired loan. The individual impairment
assessment takes into account the higher risk of the non-payment of future cash flows inherent in renegotiated loans.
Corporate and commercial forbearance
In the corporate and commercial sectors, forbearance activity is undertaken selectively where it has been identified that
repayment difficulties against the original terms have already materialised, or are very likely to materialise. These cases are
treated as impaired loans where:
• the customer is experiencing, or is very likely to experience, difficulty in meeting a payment obligation to the Group (i.e.
due to current credit distress); and
• the Group is offering to the customer revised payment arrangements which constitute a concession (i.e. it is offering terms
it would not normally be prepared to offer).
These cases are described as distressed restructurings. The agreement of a restructuring which meets the criteria above
requires all loans, advances and counterparty exposures to the customer to be treated as impaired. Against the background
of this requirement, as a customer approaches the point at which it becomes clear that there is an increasing risk that a
restructuring of this kind might be necessary, the exposures will typically be regarded as sub-standard to reflect the