HSBC 2015 Annual Report Download - page 204

Report of the Directors: Risk (continued)
Appendix to Risk – Policies and practices
HSBC HOLDINGS PLC
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collateral for secured real estate lending takes this time.
For secured personal facilities, final write-off should generally occur within 60 months of the default at the latest.
In the event of bankruptcy or analogous proceedings, write-off may occur earlier than at the periods stated above. Collections
procedures may continue after write-off.
Impairment methodologies
(Audited)
To identify objective evidence of impairment for available-for-sale ABSs, an industry standard valuation model is normally
applied which uses data with reference to the underlying asset pools and models their projected future cash flows. The
estimated future cash flows of the securities are assessed at the specific financial asset level to determine whether any of
them are unlikely to be recovered as a result of loss events occurring on or before the reporting date.
The principal assumptions and inputs to the models are typically the delinquency status of the underlying loans, the probability
of delinquent loans progressing to default, the prepayment profiles of the underlying assets and the loss severity in the event
of default. However, the models utilise other variables relevant to specific classes of collateral to forecast future defaults
and recovery rates. Management uses externally available data and applies judgement when determining the appropriate
assumptions in respect of these factors. We use a modelling approach which incorporates historically observed progression rates
to default to determine if the decline in aggregate projected cash flows from the underlying collateral will lead to a shortfall in
contractual cash flows. In such cases, the security is considered to be impaired.
In respect of collateralised debt obligations (‘CDO’s), expected future cash flows for the underlying collateral are assessed to
determine whether there is likely to be a shortfall in the contractual cash flows of the CDO.
When a security benefits from a contract provided by a monoline insurer that insures payments of principal and interest, the
expected recovery on the contract is assessed in determining the total expected credit support available to the ABS.
Loan management unit
The HSBC Loan Management Unit (‘LMU’) is a front line customer contact department within Wholesale Credit and Market
Risk that assumes responsibility for managing business customer relationships requiring intensive and close control where the
bank’s lending is at risk. LMU operates on a regional basis across the Group and is independent of the originating business
management units. It reports locally to the Regional Head of Wholesale Credit and Market Risk. Customers are identified and
transferred to LMU by business management or the Wholesale Credit and Market Risk approval teams.
Customers managed by LMU are normally operating outside the Group’s risk appetite. They typically show symptoms of
significant financial difficulty, the management team displays limited experience of managing a business in distress and the
management and financial information provided to the Group is insufficient and unreliable.
The levels of customer exposure under management and the size of the LMU team varies between countries depending on the
breadth of business undertaken locally but LMU will always manage highly distressed situations where individual customer
exposure exceeds $1.5m.
The primary focus of LMU is to protect the bank's capital and minimise losses by working consensually with customers to
promote and support viable recovery strategies wherever achievable, with the ultimate intention of returning the customer
to front line relationship management. In some cases, rehabilitation is not possible and LMU will consider a range of options
to protect the bank's exposure and solvency of the customer. On occasion, it is not possible to find a satisfactory solution and
the customer may file for insolvency or local equivalent. In all outcomes, LMU seeks to treat customers fairly, sympathetically
and positively, in a professional way with transparent processes and procedures.
Remediation and restructuring strategies available in the business and LMU include granting a customer various types of
concessions while seeking to enhance the ability of the customer to ultimately repay the Group which could include enhancing
the overall security available to the Group. Any decision to approve a concession will be a function of the regions specific
country and sector appetite, the key metrics of the customer, the market environment, the loan structure and security.
Internal reviews on customers managed directly by LMU are performed on a scheduled basis in accordance with relevant
accounting guidelines, credit policies and national banking regulations. Under certain circumstances, concessions granted may
result in the loan being classified as a renegotiated loan.
Collateral and other credit enhancements held
(Audited)
Loans and advances held at amortised cost
The Group’s practice is to lend on the basis of customers’ ability to meet their obligations out of cash flow resources rather
than rely on the value of security offered. Depending on a customer’s standing and the type of product, facilities may
be provided without security. For other lending, a charge over collateral is obtained and considered in determining the credit
decision and pricing. In the event of default, the bank may utilise the collateral as a source of repayment. Depending on its
form, collateral can have a significant financial effect in mitigating our exposure to credit risk.