HSBC 2012 Annual Report Download - page 169

167
Overview Operating & Financial Review Corporate Governance Financial Statements Shareholder Information
generally determined through a combination of
professional and internal valuations and physical
inspection. The frequency of revaluation is
undertaken on a similar basis to commercial real
estate loans and advances; however, for financing
activities in corporate and commercial lending that
are not predominantly commercial real estate-
oriented, collateral value is not as strongly correlated
to principal repayment performance. Collateral
values will generally be refreshed when an obligor’s
general credit performance deteriorates and it is
necessary to assess the likely performance of
secondary sources of repayment should reliance
upon them prove necessary. For this reason, the table
above reports values only for customers with CRR 8
to 10, recognising that these loans and advances
generally have valuations which are comparatively
recent. For the table above, cash is valued at its
nominal value and marketable securities at their
fair value.
The difference between the collateral value and
the value of partially collateralised lending disclosed
in the tables above cannot be directly compared with
any impairment allowances recognised in respect of
impaired loans, as the loans may be performing in
accordance with their contractual terms. When
loans are not performing in accordance with their
contractual terms, the recovery of cash flows may be
affected by other cash resources of the customer, or
other credit risk enhancements not quantified for the
tables above. The Group’s policy for determining
impairment allowances, including the effect of
collateral on these impairment allowances, is
described on page 258.
Loans and advances to banks
The following table shows loans and advances to
banks, including off-balance sheet loan
commitments by level of collateral.
Loans and advances to banks including loan commitments by level of collateral
(Audited)
Europe
Hong
Kong
Rest of
Asia-Pacific MENA
North
America
Latin
America Total
US$m US$m US$m US$m US$m US$m US$m
At 31 December 2012
Not collateralised ........................ 36,043 24,622 40,694 7,290 9,050 12,838 130,537
Fully collateralised ..................... 25,496 2,294 5,667 – 811 3,691 37,959
Partially collateralised (A)........... 62 1,459 1,207 – – – 2,728
– collateral value on A ............ 61 1,452 1,135 – – – 2,648
61,601 28,375 47,568 7,290 9,861 16,529 171,224
At 31 December 2011
Not collateralised ........................ 25,896 34,892 42,586 9,337 14,132 19,516 146,359
Fully collateralised ..................... 31,515 1,365 6,927 32 978 1,238 42,055
Partially collateralised (B)........... 146 50 445 – 784 114 1,539
– collateral value on B ............ 104 50 207 – 702 88 1,151
57,557 36,307 49,958 9,369 15,894 20,868 189,953
The collateral used in the assessment of the
above lending relates primarily to cash and
marketable securities. Loans and advances to banks
are typically unsecured. Certain products such as
reverse repos and stock borrowing are effectively
collateralised and have been included in the
above as fully or partly collateralised. The fully
collateralised loans and advances to banks for
Europe in the table above consist primarily of
reverse repo agreements and stock borrowing.
Derivatives
The International Swaps and Derivatives Association
(‘ISDA’) Master Agreement is our preferred
agreement for documenting derivatives activity. It
provides the contractual framework within which
dealing activity across a full range of over-the-
counter (‘OTC’) products is conducted, and
contractually binds both parties to apply close-out
netting across all outstanding transactions covered
by an agreement if either party defaults or another
pre-agreed termination event occurs. It is common,
and our preferred practice, for the parties to execute
a Credit Support Annex (‘CSA’) in conjunction
with the ISDA Master Agreement. Under a CSA,
collateral is passed between the parties to mitigate
the counterparty risk inherent in outstanding
positions. The majority of our CSAs are with
financial institutional clients.
We manage our counterparty exposure arising
due to market risk on OTC derivative contracts
through the use of collateral agreements with
counterparties and netting agreements. We do not
currently undertake active management of our