HSBC 2008 Annual Report Download - page 15

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domestic financial systems, to stimulate new lending
and to support systemically important institutions at
risk of failing. Many developed economies have
entered recession and growth has slowed in many
emerging countries, with serious adverse
consequences for asset values, employment,
consumer confidence and levels of economic
activity. Commodity prices have significantly
retrenched, in many cases from recent historical
highs, interest rate yield curves have flattened,
interest rates have fallen in absolute terms and trade
flows have contracted. Global equity markets have
experienced severe declines and various currencies,
including sterling, have depreciated significantly
against the US dollar. Emerging markets have
suffered as portfolio investments have been
repatriated and cross-border inter-bank funding has
been withdrawn. Numerous governments and central
banks have responded by proposing programmes to
make substantial funds and guarantees available to
boost liquidity and confidence in their financial
systems, as well as cutting taxes and lowering
interest rates. It is not known whether these
responses will be effective in addressing the severe
economic and market conditions or whether recently
proposed measures will be implemented as initially
proposed.
HSBC’s earnings are affected by global and
local economic and market conditions. Dramatic
declines in 2007 and 2008 in the housing markets in
the US, the UK and elsewhere have combined with
increasing unemployment to affect negatively the
credit performance of real estate-related exposures,
resulting in significant write-downs of asset values
by financial institutions, including HSBC. These
write-downs, initially of asset-backed securities but
spreading to other securities and loans, have caused
many financial institutions to seek additional capital,
to reduce or eliminate dividends, to merge with
larger and stronger competitors or, in some cases, to
fail.
A worsening of these conditions may exacerbate
the impact of these difficult market conditions on
HSBC and other financial institutions and could
have an adverse effect on HSBC’s operating results.
In particular, the Group may face the following
challenges in connection with these events:
• HSBC’s ability to assess the creditworthiness of
its customers or to estimate the values of its
assets may be impaired if the models and
techniques it uses become less accurate in their
predictions of future behaviour, valuations or
estimates. The process HSBC uses to estimate
losses inherent in its credit exposure or assess
the value of certain assets requires difficult,
subjective and complex judgements. These
include forecasts of economic conditions and
how predicted economic scenarios might impair
the ability of HSBC’s borrowers to repay their
loans or might affect the value of assets. As a
consequence, this process may be less capable
of making accurate estimates which, in turn,
may undermine the reliability of the process.
• The demand for borrowing from creditworthy
customers may diminish as economic activity
slows.
• Lower interest rates will reduce net interest
income earned by HSBC on its excess deposits.
• HSBC’s ability to borrow from other financial
institutions or to engage in funding transactions
on favourable terms, or at all, could be
adversely affected by further disruption in the
capital markets or deteriorating investor
sentiment.
• Market developments may affect consumer
confidence and may cause declines in credit
card usage and adverse changes in payment
patterns, leading to increases in delinquencies
and default rates, write-offs and loan
impairment charges beyond HSBC’s
expectations.
• Loan impairment allowances and write-offs are
likely to rise as a result of a deterioration in
payment patterns and increased delinquencies
and default rates caused by weakening
consumer confidence and increased business
failures. A worsening of these economic factors
may exacerbate the adverse effects of these
difficult market conditions on HSBC and others
in the financial services industry.
• HSBC expects to face increased regulation and
supervision of the financial services industry,
following new or proposed regulatory measures
in countries in which it operates.
• Trade and capital flows may further contract as
a result of protectionist measures being
introduced in certain markets.
• Increased government ownership and
control over financial institutions and further
consolidation in the financial industry, which
could significantly alter the competitive
landscape.
As a worldwide financial institution, HSBC
is exposed to these developments across all its
businesses, both directly and through their impact
on its customers and clients. Local variations exist,
however, reflecting regional circumstances and