HSBC 2009 Annual Report Download - page 207

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The collective impairment allowance is
determined having taken into account:
• historical loss experience in portfolios of similar
credit risk characteristics (for example, by
industry sector, risk rating or product segment);
• 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 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 relevant portfolio. In general, the periods used
vary between four and twelve months although, in
exceptional cases, longer periods are warranted.
The basis on which impairment allowances for
incurred but not yet identified losses is established in
each reporting entity is documented and reviewed by
senior Finance and Credit Risk management to
ensure conformity with Group policy.
Homogeneous groups of loans
Two methodologies are used to calculate impairment
allowances where large numbers of relatively low-
value assets are managed using a portfolio approach,
typically:
• low-value, homogeneous small business
accounts in certain countries or territories;
• residential mortgages that have not been
individually assessed;
• credit cards and other unsecured consumer
lending products; and
• motor vehicle financing.
When appropriate empirical information is
available, the Group uses roll rate methodology. This
employs a statistical analysis of historical trends of
default and the amount of consequential loss, based
on the delinquency of accounts within a portfolio of
homogeneous accounts. Other historical data and
current economic conditions are also evaluated when
calculating the appropriate level of impairment
allowance required to cover inherent loss. In certain
highly developed markets, models also take into
account behavioural and account management
trends revealed in, for example, bankruptcy and
rescheduling statistics.
When the portfolio size is small, or when
information is insufficient or not reliable enough
to adopt a roll rate methodology, the Group uses a
basic formulaic approach based on historical loss
rate experience.
Generally, historical experience is the most
objective and relevant information from which to
begin to assess inherent loss within each portfolio. In
circumstances where historical loss experience
provides less relevant information about the inherent
loss in a given portfolio at the balance sheet date –
for example, where there have been changes in
economic conditions or regulations – management
considers the more recent trends in the portfolio risk
factors which may not be adequately reflected in its
statistical models and, subject to guidance from
Group Finance and GMO Risk, adjusts impairment
allowances accordingly.
Roll rates, loss rates and the expected timing of
future recoveries are regularly benchmarked against
actual outcomes to ensure they remain appropriate.
Write-off of loans and advances
Loans are normally written off, either partially or in
full, when there is no realistic prospect of further
recovery. Where loans are secured, this is generally
after receipt of any proceeds from the realisation of
security. In circumstances where the net realisable
value of any collateral has been determined and there
is no reasonable expectation of further recovery,
write off may be earlier.
In the case of residential mortgages and second
lien loans in HSBC Finance, loan carrying amounts
in excess of net realisable value are written off at or
before the time foreclosure is completed or when
settlement is reached with the borrower. If there is
no reasonable expectation of recovery, and
foreclosure is pursued, unconstrained by delays
required by law or regulation, the loan is normally
written off no later than the end of the month in
which the loan becomes 180 days contractually
past due.
Unsecured personal facilities, including credit
cards, are generally written off at between 150 and
210 days past due, the standard period being the end
of the month in which the account becomes 180 days
contractually delinquent. Write-off periods may be
extended, generally to no more than 360 days past
due but in very exceptional circumstances exceeding
that figure, in a few countries where local regulation
or legislation constrain earlier write-off, or where the
realisation of collateral for secured real estate
lending extends to this time.