HSBC 2001 Annual Report Download - page 104

HSBC HOLDINGS PLC
Financial Review (continued)
102
• if loans are not in local currency, the ability of
the borrower to obtain the relevant foreign
currency.
Where specific provisions are raised on a
portfolio basis, the level of provisioning takes into
account management’s assessment of the portfolio’s
structure, past and expected credit losses, business
and economic conditions, and any other relevant
factors. The principal portfolios evaluated on a
portfolio basis are credit cards and other unsecured
consumer lending products. HSBC has in place a
minimum provisioning standard for all consumer
lending products based on time of delinquency. For
portfolios of non-mortgage personal lending, the
policy, which is based on historical loss experience,
is to have provided 100 per cent after 180 days
delinquency.
General provisions
General provisions augment specific provisions and
provide cover for loans which are impaired at the
balance sheet date but which will not be identified as
such until some time in the future. HSBC requires
operating companies to maintain a general provision
which is determined taking into account the structure
and risk characteristics of each company’s loan
portfolio. Historical levels of latent risk are regularly
reviewed by each operating company to determine
that the level of general provisioning continues to be
appropriate. Where entities operate in a significantly
higher risk environment, an increased level of
general provisioning will apply, taking into account
local market conditions and economic and political
factors.
General provisions are deducted from loans and
advances to customers in the balance sheet but,
unlike specific provisions, are included in tier 2
capital when calculating HSBC’s capital base for
regulatory purposes.
Loans on which interest is suspended
Provided that there is a realistic prospect of interest
being paid at some future date, interest on non-
performing loans is charged to the customer’ s
account. However, the interest is not credited to the
profit and loss account but to an interest suspense
account in the balance sheet which is netted against
the relevant loan. On receipt of cash (other than from
the realisation of security), suspended interest is
recovered and taken to the profit and loss account. A
specific provision of the same amount as the interest
receipt is then raised against the principal balance.
Amounts received from the realisation of security are
applied to the repayment of outstanding
indebtedness, with any surplus used to recover any
specific provisions and then suspended interest.
Non-accrual loans
Where the probability of receiving interest payments
is remote, interest is no longer accrued and any
suspended interest balance is written off.
Loans are not reclassified as accruing until
interest and principal payments are up-to-date and
future payments are reasonably assured.
Assets acquired in exchange for advances in
order to achieve an orderly realisation continue to be
reported as advances. The asset acquired is recorded
at the carrying value of the advance disposed of at
the date of the exchange and provisions are based on
any subsequent deterioration in its value.
Outstanding provisions
Aggregate customer bad and doubtful debt
provisions at 31 December 2001 were in line with 31
December 2000 and at US$8.2 billion represented
2.57 per cent of gross customer advances compared
with 2.73 per cent at 31 December 2000. In Hong
Kong and the Rest of Asia-Pacific, continuing
resolution of previously provided debt contributed to
outstanding provisions falling by US$533 million as
amounts were charged off. This fall was offset in
Latin America where the stock of provisions rose by
US$492 million, in essence reflecting the US$600
million additional provision raised in respect of
Argentine risk.
Excluding Argentina, general provisions reduced
slightly to 0.71 per cent of gross customer lending
(excluding reverse repo transactions and settlement
accounts). In Argentina, general provisions were
augmented by US$600 million in view of the severe
economic conditions and political turmoil
culminating in the declaration of a default by the
Government. Following this substantial increase
general provision coverage stood at 30.7 per cent of
customer lending at 31 December 2001 or 49.7 per
cent of customer lending excluding the loans
outstanding from the Argentine Government which
arose as a result of a swap of Government bonds
from domestic creditors.