HSBC 2005 Annual Report Download - page 364

HSBC HOLDINGS PLC
Notes on the Financial Statements (continued)
362
end of each time period for which payments were overdue), other historical data and an evaluation of current
economic conditions to calculate an appropriate level of specific provision based on inherent loss.
Additionally, in certain highly developed markets, sophisticated models taking into account behavioural and
account management trends such as bankruptcy and rescheduling statistics were used. Roll rates were
regularly benchmarked against actual outcomes to ensure they remained appropriate.
− In other cases, when information was insufficient or not sufficiently reliable to adopt a roll rate
methodology, HSBC adopted a formulaic approach which allocated progressively higher loss rates in line
with the period of time for which a customer’s loan was overdue.
Individually assessed accounts
Specific provisions on individually assessed accounts were determined by an evaluation of the exposures on a
case-by-case basis. This procedure was applied to all accounts that did not qualify for, or were not subject to, a
portfolio-based approach. In determining such provisions on individually assessed accounts, the following
factors were considered:
− HSBC’s aggregate exposure to the customer (including contingent liabilities);
− the viability of the customer’s business model and its capability to trade successfully out of financial
difficulties and generate sufficient cash flow to service its debt obligations;
− 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 were evident;
− the amount and timing of expected receipts and recoveries;
− the realisable value of security (or other credit mitigants) and likelihood of successful repossession;
− the deduction of any costs involved in recovery of amounts outstanding;
− the ability of the borrower to obtain, and make payments in, the currency of the loan if not in local currency;
and
− when available, the secondary market price of the debt.
Releases of individually calculated specific provisions were recognised whenever HSBC had reasonable
evidence that the established estimate of loss had reduced.
Cross-border exposures
Specific provisions were established in respect of cross-border exposures to countries assessed by management
to be vulnerable to foreign currency payment restrictions. This assessment included analysis of both economic
and political factors.
Provisions were applied to all qualifying exposures within these countries unless these exposures:
− were performing, trade-related and of less than one year’s maturity;
− were mitigated by acceptable security cover which was, other than in exceptional cases, held outside the
country concerned; or
− were represented by securities held for trading purposes for which a liquid and active market existed, and
which were marked to market daily.
General provisions
General provisions augmented specific provisions and provided cover for loans that were impaired at the balance
sheet date but which would not be individually identified as such until some time in the future. HSBC required
operating companies to maintain a general provision, which was determined after taking into account: