HSBC 2012 Annual Report Download - page 255

253
Overview Operating & Financial Review Corporate Governance Financial Statements Shareholder Information
Principal objectives of our credit risk management
• to maintain across HSBC a strong culture of responsible lending and a robust risk policy and control framework;
• to both partner and challenge our businesses in defining, implementing and continually re-evaluating our risk
appetite under actual and scenario conditions; and
• to ensure there is independent, expert scrutiny of credit risks, their costs and their mitigation.
Credit quality of financial instruments
(Audited)
Our credit risk rating systems and processes differentiate exposures in order to highlight those with greater risk
factors and higher potential severity of loss. In the case of individually significant accounts that are predominantly
within our wholesale businesses, risk ratings are reviewed regularly and any amendments are implemented promptly.
Within our retail businesses, risk is assessed and managed using a wide range of risk and pricing models to generate
portfolio data.
Our risk rating system facilitates the internal ratings-based (‘IRB’) approach under Basel II adopted by the Group to
support calculation of our minimum credit regulatory capital requirement. For further details see definitions of our
credit quality classifications below.
Special attention is paid to problem exposures in order to accelerate remedial action. When appropriate, our operating
companies use specialist units to provide customers with support to help them avoid default wherever possible.
Group and regional Credit Review and Risk Identification teams regularly review exposures and processes in order
to provide an independent, rigorous assessment of credit risk across the Group, reinforce secondary risk management
controls and share best practice. Internal audit, as a tertiary control function, focuses on risks with a global
perspective and on the design and effectiveness of primary and secondary controls, carrying out oversight audits via
the sampling of global/regional control frameworks, themed audits of key or emerging risks and project audits to
assess major change initiatives.
The five credit quality classifications defined below each encompass a range of more granular, internal credit rating
grades assigned to wholesale and retail lending businesses, as well as the external ratings attributed by external
agencies to debt securities.
There is no direct correlation between the internal and external ratings at granular level, except to the extent each
falls within a single quality classification.
Credit quality classification
(Unaudited)
Debt securities
and other bills Wholesale lending and derivatives Retail lending
External
credit rating
Internal
credit rating
12 month
probability of
default %
Internal
credit rating1
Expected
loss %
Quality classification
Strong ........................... A– and above CRR1 to CRR2 0 – 0.169 EL1 to EL2 0 – 0.999
Good ............................ BBB+ to BBB– CRR3 0.170 – 0.740 EL3 1.000 – 4.999
Satisfactory .................. BB+ to B+ and
unrated CRR4 to CRR5 0.741 – 4.914 EL4 to EL5 5.000 – 19.999
Sub-standard ................ B to C CRR6 to CRR8 4.915 – 99.999 EL6 to EL8 20.000 – 99.999
Impaired ....................... Default CRR9 to CRR10 100 EL9 to EL10 100+ or defaulted2
1 We observe the disclosure convention that, in addition to those classified as EL9 to EL10, retail accounts classified EL1 to EL8 that are
delinquent by 90 days or more are considered impaired, unless individually they have been assessed as not impaired (see page 156,
‘Past due but not impaired gross financial instruments’).
2 The EL percentage is derived through a combination of PD and LGD, and may exceed 100% in circumstances where the LGD is above
100% reflecting the cost of recoveries.