HSBC 2004 Annual Report Download - page 139

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place throughout the Group to enable operating
companies to control and monitor exposures by
customer and counterparty.
Special attention is paid to problem loans. When
appropriate, specialist units are established by
HSBC’s operating companies to provide customers
with intensive management and control support in
order to help them avoid default wherever possible
thereby maximising recoveries for HSBC.
Regular audits of operating companies’ credit
processes are undertaken by HSBC’ s Internal Audit
function. Audits include consideration of the
completeness and adequacy of credit manuals and
lending guidelines, an in-depth analysis of a
representative sample of accounts, an overview of
homogeneous portfolios of similar assets to assess
the quality of the loan book and other exposures, and
adherence to Group standards and policies in the
extension of credit facilities. Individual accounts are
reviewed to ensure that facility grades are
appropriate, that credit and collection procedures
have been properly followed and that, where an
account or portfolio evidences deterioration,
adequate provisions are raised in accordance with
the Group’ s established processes. Internal Audit
will discuss with management facility gradings they
consider to be inappropriate, and their subsequent
recommendations for revised grades must then be
assigned to the facilities concerned.
Provisions for bad and doubtful debts
It is HSBC’ s policy that each operating company
make provision for bad and doubtful debts promptly
when required and on a consistent basis in
accordance with established Group guidelines.
HSBC’s grading process for credit facilities
extended by members of the Group is designed to
highlight exposures requiring greater management
attention based on a higher probability of default and
potential loss. Management particularly focuses on
facilities to those borrowers and portfolio segments
classified below satisfactory grades. Amendments to
facility grades, where necessary, are required to be
undertaken promptly. Management also regularly
evaluates the adequacy of the established provisions
for bad and doubtful debts by conducting a detailed
review of the loan portfolio, comparing performance
and delinquency statistics to historical trends and
assessing the impact of current economic conditions.
Two types of provision are in place: specific and
general. These are discussed below.
Specific provisions
Specific provisions represent the quantification of
actual and inherent losses from homogeneous
portfolios of assets and individually identified
accounts. In addition, specific provisions for the
sovereign risk inherent in cross-border credit
exposures are established for certain countries.
Specific provisions are deducted from loans and
advances in the balance sheet.
Portfolios
Where homogeneous groups of assets are reviewed
on a portfolio basis, for example credit cards, other
unsecured consumer lending, motor vehicle
financing and residential mortgage loans, two
alternative methods are used to calculate specific
provisions:
• When appropriate empirical information is
available, the Group utilises roll rate
methodology (a statistical analysis of historical
trends of the probability of default and amount
of consequential loss, assessed at each time
period for which payments are overdue), other
historical data and an evaluation of current
economic conditions, to calculate an appropriate
level of specific provision based on inherent
loss. In certain highly developed markets,
sophisticated models also take into account
behavioural and account management trends
such as bankruptcy and restructuring statistics.
Roll rates are regularly benchmarked against
actual outcomes to ensure that they remain
appropriate.
• When the portfolio size is less than
US$20 million or when information is
insufficient or not sufficiently reliable for a roll
rate methodology to be adopted, the Group uses a
formulaic method which allocates progressively
higher loss rates in line with the period of time
through which a customer’ s loan is overdue.
The Group intends to extend the use of the roll
rate methodologies to all homogeneous portfolios of
assets (for calculating specific provisions) as
information becomes available.
The portfolio approach is applied to accounts in
the following portfolios:
• low value, homogeneous small business
accounts in certain jurisdictions;
• residential mortgages less than 90 days overdue;
and
• credit cards and other unsecured consumer
lending products.