HSBC 2015 Annual Report Download - page 357

HSBC HOLDINGS PLC
355
Strategic Report Financial Review Corporate Governance Financial Statements Shareholder Information
those which return to performing status following renegotiation. Where collectively assessed loan portfolios include significant levels of loan
forbearance, portfolios are segmented to reflect the different credit risk characteristics of forbearance cases, and estimates are made of the
incurred losses inherent within each forbearance portfolio segment. Forbearance activities take place in both retail and wholesale loan
portfolios, but our largest concentration is in the US, in HSBC Finance’s CML portfolio.
The exercise of judgement requires the use of assumptions which are highly subjective and very sensitive to the risk factors, in particular
to changes in economic and credit conditions across a large number of geographical areas. Many of the factors have a high degree of
interdependency and there is no single factor to which our loan impairment allowances as a whole are sensitive.
Impairment of loans and advances
Losses for impaired loans are recognised when there is objective evidence that impairment of a loan or portfolio of loans has
occurred. Impairment allowances that are calculated on individual loans or on groups of loans assessed collectively are
recorded as charges to the income statement and are recorded against the carrying amount of impaired loans on the balance
sheet. Losses which may arise from future events are not recognised.
Individually assessed loans and advances
The factors considered in determining whether a loan is individually significant for the purposes of assessing impairment
include the size of the loan, the number of loans in the portfolio, the importance of the individual loan relationship and how
this is managed. Loans that are determined to be individually significant based on the above and other relevant factors will be
individually assessed for impairment, except when volumes of defaults and losses are sufficient to justify treatment under a
collective methodology.
Loans considered as individually significant are typically to corporate and commercial customers, are for larger amounts and
are managed on an individual basis. For these loans, HSBC considers on a case-by-case basis at each balance sheet date
whether there is any objective evidence that a loan is impaired. The criteria used to make this assessment include:
• known cash flow difficulties experienced by the borrower;
• contractual payments of either principal or interest being past due for more than 90 days;
• the probability that the borrower will enter bankruptcy or other financial realisation;
• a concession granted to the borrower for economic or legal reasons relating to the borrower’s financial difficulty that
results in forgiveness or postponement of principal, interest or fees, where the concession is not insignificant; and
• there has been deterioration in the financial condition or outlook of the borrower such that its ability to repay is considered
doubtful.
For loans where objective evidence of impairment exists, impairment losses are determined considering the following factors:
• HSBC’s aggregate exposure to the customer;
• the viability of the customer’s business model and its capacity to trade successfully out of financial difficulties and generate
sufficient cash flow to service debt obligations;
• the amount and timing of expected receipts and recoveries;
• the likely dividend available on liquidation or bankruptcy;
• the extent of other creditors’ commitments ranking ahead of, or pari passu with, HSBC and the likelihood of other creditors
continuing to support the company;
• the complexity of determining the aggregate amount and ranking of all creditor claims and the extent to which legal and
insurance uncertainties are evident;
• the realisable value of security (or other credit mitigants) and likelihood of successful repossession;
• the likely costs of obtaining and selling collateral as part of foreclosure;
• the ability of the borrower to obtain, and make payments in, the currency of the loan if not denominated in local currency;
and
• when available, the secondary market price of the debt.
The determination of the realisable value of security is based on the most recently updated market value at the time the
impairment assessment is performed. The value is not adjusted for expected future changes in market prices, though
adjustments are made to reflect local conditions such as forced sale discounts.
Impairment losses are calculated by discounting the expected future cash flows of a loan, which include expected future
receipts of contractual interest, at the loan’s original effective interest rate or an approximation thereof, and comparing the
resultant present value with the loan’s current carrying amount. The impairment allowances on individually significant
accounts are reviewed at least quarterly and more regularly when circumstances require.