HSBC 2007 Annual Report Download - page 352

HSBC HOLDINGS PLC
Notes on the Financial Statements (continued)
Note 2
350
Collectively assessed loans and advances
Impairment is assessed on a collective basis in two circumstances:
– to cover losses which have been incurred but have not yet been identified on loans subject to individual
assessment; and
– for homogeneous groups of loans that are not considered individually significant.
Incurred but not yet identified impairment
Individually assessed loans for which no evidence of loss has been specifically identified on an individual basis
are grouped together according to their credit risk characteristics for the purpose of calculating an estimated
collective loss. This reflects impairment losses that HSBC has incurred as a result of events occurring before
the balance sheet date, which HSBC is not able to identify on an individual loan basis, and that can be reliably
estimated. These losses will only be individually identified in the future. As soon as information becomes
available which identified losses on individual loans within the group, those loans are removed from the group
and assessed on an individual basis for impairment.
The collective impairment allowance is determined after taking into account:
– historical loss experience in portfolios of similar credit risk characteristics (for example, by industry sector,
loan grade or product);
– the estimated period between impairment occurring and the loss being identified and evidenced by the
establishment of an appropriate allowance against the individual loan; and
– management’s experienced judgement as to whether current economic and credit conditions are such that
the actual level of inherent losses at the balance sheet date is likely to be greater or less than that suggested
by historical experience.
The period between a loss occurring and its identification is estimated by local management for each identified
portfolio.
Homogeneous groups of loans and advances
Statistical methods are used to determine impairment losses on a collective basis for homogeneous groups of
loans that are not considered individually significant, because individual loan assessment is impracticable.
Losses in these groups of loans are recorded on an individual basis when individual loans are written off, at
which point they are removed from the group. Two alternative methods are used to calculate allowances on a
collective basis:
− When appropriate empirical information is available, HSBC utilises roll rate methodology. This
methodology employs statistical analyses of historical data and experience of delinquency and default to
estimate the amount of loans that will eventually be written off as a result of the events occurring before the
balance sheet date which HSBC is not able to identify on an individual loan basis, and that can be reliably
estimated. Under this methodology, loans are grouped into ranges according to the number of days past due,
and statistical analysis is used to estimate the likelihood that loans in each range will progress through the
various stages of delinquency and ultimately prove irrecoverable. The estimated loss is the difference
between the present value of expected future cash flows, discounted at the original effective interest rate of
the portfolio, and the carrying amount of the portfolio. Current economic conditions are also evaluated when
calculating the appropriate level of allowance required to cover inherent loss. In certain highly developed
markets, sophisticated models also take into account behavioural and account management trends as
revealed in, for example, bankruptcy and rescheduling statistics.
− In other cases, when the portfolio size is small or when information is insufficient or not reliable enough to
adopt a roll rate methodology, HSBC adopts a formulaic approach which allocates progressively higher
percentage loss rates the longer a customer’s loan is overdue. Loss rates are based on historical experience.
In normal circumstances, historical experience provides the most objective and relevant information from which
to assess inherent loss within each portfolio. In certain circumstances, historical loss experience provides less
relevant information about the inherent loss in a given portfolio at the balance sheet date, for example, where