HSBC 2011 Annual Report Download - page 135

133
Overview Operating & Financial Review Corporate Governance Financial Statements Shareholder Information
Corporate and Commercial forbearance
(Unaudited)
For the current policies and procedures
regarding forbearance in the corporate and
commercial sector, see the Appendix to Risk
on page 188.
The majority of the increase in renegotiated loans
activity for the commercial real estate sector in 2011
arose in Europe, which increased by US$617m. This
increase predominately related to the renegotiation
of a large exposure together with high levels of
forbearance in the UK towards the end of 2011
reflecting current economic conditions, including a
weakening in property values and a reduction in
institutions funding commercial real estate lending.
In the corporate and commercial sector the
increase in renegotiated loans in 2011 was again a
result of increased forbearance activity in Europe.
The increase related to renegotiations of a small
number of larger lending arrangements provided to
European corporate entities and economic pressures
in Europe more generally. This was partially offset
by repayments and write-offs of renegotiated loans
in Europe, Rest of Asia-Pacific and Latin America.
In the financial sector the increase in
renegotiated loans in 2011 primarily related to
financial difficulties in one financial sector entity. In
the government sector renegotiation activity was
wholly due to increases in Latin America caused by
term extension restructurings of municipal and local
authority facilities.
Impaired loans disclosure
(Audited)
During 2011 we adopted a revised disclosure
convention for the presentation of impaired loans
and advances which affects the disclosure of loans
and advances in the geographical regions with
significant levels of forbearance activity. The
previous impaired loan disclosure convention was
that impaired loans and advances were those
classified as CRR9, CRR10, EL9 or EL10 and all
retail loans 90 days or more past due, unless
individually they had been assessed as not impaired.
Renegotiated loans that did not meet the above
criteria were classified as ‘neither past due nor
impaired’ or ‘past due but not impaired’ as
appropriate, however these loans were assessed for
impairment in accordance with the Group’s
accounting policy on the recognition of impairment
allowances, as described on page 193.
The revised disclosure convention continues to
be based on internal credit rating grades and, for
retail exposures, 90 days or more past due status.
However, it introduces a more stringent approach to
the assessment of whether renegotiated loans are
presented as impaired. Management believes that
this revised approach better reflects the nature of
risks and inherent credit quality in our loan portfolio
as it is more closely calibrated to the types of
forbearance concession granted and applies stricter
requirements for the performance of renegotiated
loans before they may be presented as no longer
impaired. It also reflects developments in industry
best practice disclosure, as well as a refinement of
loan segmentation in our North America consumer
lending business. The revised disclosure convention
affects the disclosure presentation of impaired loans
but does not affect the accounting policy for the
recognition of impairment allowances.
Under this revised disclosure convention,
impaired loans and advances are those that meet any
of the following criteria:
• loans and advances classified as CRR 9, CRR
10, EL 9 or EL 10 (a description of our internal
credit rating grades is provided on page 191);
• retail exposures 90 days or more past due,
unless individually they have been assessed as
not impaired; or
• renegotiated loans and advances that have been
subject to a change in contractual cash flows as
a result of a concession which the lender would
not otherwise consider, and where it is probable
that without the concession the borrower would
be unable to meet its contractual payment
obligations in full, unless the concession is
insignificant and there are no other indicators
of impairment. Renegotiated loans remain
classified as impaired until there is sufficient
evidence to demonstrate a significant reduction
in the risk of non-payment of future cash flows,
and there are no other indicators of impairment.
For loans that are assessed for impairment on
a collective basis, the evidence to support
reclassification as no longer impaired typically
comprises a history of payment performance against
the original or revised terms, depending on the
nature and volume of forbearance and the credit risk
characteristics surrounding the renegotiation. For
loans that are assessed for impairment on an
individual basis, all available evidence is assessed on
a case by case basis.
In HSBC Finance, where a significant majority
of HSBC’s loan forbearance activity occurs, the
demonstrated history of payment performance is
with reference to the original terms of the contract,
reflecting the higher credit risk characteristics of this