HSBC 2007 Annual Report Download - page 240

HSBC HOLDINGS PLC
Report of the Directors: The Management of Risk (continued)
Credit risk > Loan impairment charge > 2007 / 2006
238
regular levels after an upsurge in 2006 due to
regulatory changes which affected collection activity
and minimum payments.
With corporate and commercial loan impairment
charges low in recent years, releases and recoveries
decreased by 6 per cent to US$220 million.
New loan impairment charges in North America
rose by 76 per cent to US$12.2 billion, driven by the
continued deterioration in credit quality in the US
consumer finance loan portfolio.
US credit quality deteriorated as mortgage
delinquencies rose, house prices declined,
refinancing credit became less available in the
market and the macroeconomic outlook worsened.
The reasons behind the deterioration in US credit
quality, the effects on the US personal lending
portfolio and actions taken as a result are discussed
in more detail on page 217.
Other factors affecting the rise in US loan
impairment charges included normal seasoning of
the portfolio, a higher proportion of unsecured
personal lending and a return to historical norms
from the unusually low levels of bankruptcy filings
experienced in 2006, following changes enacted to
US bankruptcy law in 2005.
Delinquency rates rose across all parts of the
HSBC Finance personal lending portfolio, with
mortgage services and consumer lending
experiencing significant rises in delinquency which
flowed through subsequent stages through to
foreclosure. As the housing downturn began to have
more effect on the broader economy, delinquency
rates in credit cards and vehicle finance rose in the
final quarter of 2007. A change in product mix in the
cards portfolio towards higher yielding products also
contributed to higher impairment charges as this
segment of the portfolio seasoned.
Releases and recoveries in North America
decreased to US$116 million. In the US consumer
finance business, collection staff increased in all
lending portfolios as part of the response to the
deteriorating credit environment.
In Latin America, new loan impairment
charges rose by 63 per cent to US$2.0 billion. The
most significant increase was registered in Mexico,
reflecting strong growth in balances, normal
portfolio seasoning and a rise in delinquency rates
in credit cards. Charges for commercial lending in
Mexico fell as increased delinquency rates in the
small and medium-sized business portfolios were
offset by impairment allowance releases. Products
with high credit losses were discontinued or
restructured. Loan impairment charges in Brazil rose
marginally, due to growth in store loans and credit
cards.
Releases and recoveries in Latin America
increased to US$272 million. In Brazil, credit
models were changed during 2007 to align with
credit behaviour in underlying portfolios.
Year ended 31 December 2006 compared
with year ended 31 December 2005
(Unaudited)
Loan impairment charges increased by
US$2.7 billion, or 34 per cent, compared with 2005.
Acquisitions accounted for US$309 million of the
rise, mainly Metris in the US. On an underlying
basis, the increase was 30 per cent. Personal
Financial Services continued to dominate loan
impairments, representing 94 per cent of the Group’s
charge. On a constant currency basis, the key trends
were as follows.
New allowances for loan impairment charges of
US$12.0 billion increased by 27 per cent compared
with 2005. Releases and recoveries of allowances
were broadly in line with 2005.
In Europe, new loan impairment charges rose
by 9 per cent compared with 2005 to US$3.0 billion.
A challenging credit environment in UK unsecured
lending, which began to deteriorate in the middle of
2005, was the primary cause of the increase,
although this was partly mitigated by continued
benign corporate and commercial impairment
experience. Personal bankruptcies and the use of
IVAs have been on a rising trend since the
introduction of legislation in 2004 that eased filing
requirements, and this was further exacerbated by
the recent active marketing of bankruptcy and IVA
relief through the media by debt advisors.
Additionally, a rise in unemployment, which began
in the middle of 2005, and modest rises in interest
rates added to the strain on some personal customers.
In response, HSBC tightened underwriting controls
in the second half of 2005, reduced its market share
of unsecured personal lending and changed the
product mix of new business towards lower-risk
customers. In 2006, there were early signs of
improvement in more recent unsecured lending. New
loan impairment charges also rose in Turkey, by
30 per cent, mainly due to growth in unsecured
credit card and personal lending as overall credit
quality remained stable. In France, new charges fell,
reflecting a stable credit environment and the
reduction in charges following the sale of a
consumer finance business in the second half of
2005.