HSBC 2009 Annual Report Download - page 208

HSBC HOLDINGS PLC
Report of the Directors: Risk (continued)
Credit risk > Management / Credit exposure > Maximum exposure / Collateral
206
In the event of bankruptcy or analogous
proceedings, write-off may occur earlier than at the
periods stated above. Collections procedures may
continue after write-off.
Following the earlier decision to cease
underwriting through the Group’s US consumer
mortgage lending business and, given the reduced
ability of customers to refinance their facilities
which changed their historical behaviour patterns,
HSBC Finance shortened the write-off period from
240 days or later to 180 days contractually past due.
The effect of this change was an acceleration of
write-offs which reduced gross loans and advances
by US$3.3 billion, with a corresponding reduction in
impairment allowances and impaired loans. There
has been no significant impact on net loans and
advances or loan impairment charges. The effect on
the current period has been quantified where relevant
to the appropriate disclosure.
Cross-border exposures
Management assesses the vulnerability of countries
to foreign currency payment restrictions when
considering impairment allowances on cross-border
exposures. This assessment includes an analysis of
the economic and political factors existing at the
time. Economic factors include the level of external
indebtedness, the debt service burden and access to
external sources of funds to meet the debtor
country’s financing requirements. Political factors
taken into account include the stability of the country
and its government, threats to security, and the
quality and independence of the legal system.
Impairment allowances are assessed in respect
of all qualifying exposures within these countries
unless these exposures and the inherent risks are:
• performing, trade-related and of less than one
year’s maturity;
• mitigated by acceptable security cover which is,
other than in exceptional cases, held outside the
country concerned;
• in the form of securities held for trading
purposes for which a liquid and active market
exists, and which are measured at fair value
daily;
• performing facilities with a principal (excluding
security) of US$1 million or below; or
• performing facilities with maturity dates shorter
than three months.
Credit exposure
Maximum exposure to credit risk
(Audited)
HSBC’s exposure to credit risk covers a broad range
of asset classes, including derivatives, trading assets,
loans and advances to customers, loans and advances
to banks and financial investments. Credit exposure
in 2009 remained diversified across these asset
classes, though the balance of the Group’s credit
exposure changed in 2009 due to the run-off of
consumer finance assets in the US and greater
deployment of deposit inflows into debt securities. In
addition, a significant decline in volatility in
financial markets led to lower derivative assets and a
reduced exposure to loss in the event of default on
derivative contracts. The lower volatility, steepening
yield curves and narrowing credit spreads resulted in
a fall in the fair value of outstanding derivative
contracts. The level of offsetting derivative balances
moved in line with the decline in balances of
maximum exposure.
There was a deterioration in 2009 in the credit
quality of loans and advances to the commercial
real estate sector, notably in parts of Europe, the
Middle East and North America.
Exposure to personal lending secured on
residential property remained significant. HSBC
suffered from continuing weakness in credit
conditions in the US mortgage market. However, in
the UK, despite lower activity in the housing market
as a whole, the credit quality of HSBC’s mortgage
business remained good throughout 2009 and was
well secured. Exposure to the Hong Kong residential
mortgage market also remained well-secured. For
further commentary on personal lending, see ‘Areas
of Special Interest – Personal Lending’ on page 215.
Loss experience continued to be concentrated in
the personal lending portfolios, primarily in the US
with 75 per cent of loan impairment charges and
other credit risk provisions arising in Personal
Financial Services in 2009 compared with 85 per
cent in 2008. In 2009, 12 per cent of the Group’s
loan impairment charges and other credit risk
provisions arose in Commercial Banking, compared
with 9 per cent in 2008. Loan impairment charges in
Global Banking and Markets were 6 per cent of total,
loan impairment charges and other credit risk
provisions compared with 3 per cent in 2008.
The following table presents the maximum
exposure to credit risk from balance sheet and off-
balance sheet financial instruments, before taking
account of any collateral held or other credit
enhancements (unless such credit enhancements
meet offsetting requirements). For financial assets