HSBC 2012 Annual Report Download - page 257

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Overview Operating & Financial Review Corporate Governance Financial Statements Shareholder Information
concern regarding their ability to meet contractual payments, and the loan will be disclosed as impaired, unless the
concession granted is insignificant as discussed below.
For loan restructurings in wholesale lending, indicators of significant concerns regarding a borrower’s ability to pay
include:
• the debtor is currently in default on any of its debt;
• the debtor has declared or is in the process of declaring bankruptcy or entering into a similar process;
• there is significant doubt as to whether the debtor will continue to be a going concern;
• currently, the debtor has securities that have been delisted, are in the process of being delisted, or are under
threat of being delisted from an exchange as a result of trading or financial difficulties;
• based on estimates and projections that only encompass the current business capabilities, the bank forecasts
that the debtor’s entity-specific cash flows will be insufficient to service the debt (both interest and principal) in
accordance with the contractual terms of the existing agreement through maturity. Thus actual payment default
may not yet have occurred; and
• absent the modification, the debtor cannot obtain funds from sources other than the existing creditors at an
effective interest rate equal to the current market interest rate for similar debt for a non-distressed debtor.
Where the modification of contractual payment terms of a loan represents a concession for economic or legal reasons
relating to the borrower’s financial difficulty, and is a concession that we would not otherwise consider, then the
renegotiated loan is disclosed as impaired in accordance with our impaired loan disclosure convention described
in more detail on page 162, unless the concession is insignificant and there are no other indicators of impairment.
Insignificant concessions are primarily restricted to our CML portfolio in HSBC Finance, where loans which are in
the early stages of delinquency (less than 60 days delinquent), and typically have the equivalent of two payments
deferred for the first time, are excluded from our impaired loan classification as the contractual payment deferrals are
deemed to be insignificant compared with payments due on the loan as a whole. For details of HSBC Finance’s loan
renegotiated programmes and portfolios, see pages 158 to 162.
Credit quality classification of renegotiated loans
(Audited)
Under IFRSs, an entity is required to assess whether there is objective evidence that financial assets are impaired
at the end of each reporting period. A loan is impaired, and an impairment allowance is recognised, when there is
objective evidence of a loss event that has an effect on the cash flows of the loan which can be reliably estimated.
When we grant a concession to a customer that we would not otherwise consider, as a result of their financial
difficulty, this is objective evidence of impairment and impairment losses are measured accordingly.
A renegotiated loan is presented as impaired when:
• there has been a change in contractual cash flows as a result of a concession which the lender would otherwise
not consider, and
• it is probable that without the concession, the borrower would be unable to meet contractual payment obligations
in full.
This presentation applies unless the concession is insignificant and there are no other indicators of impairment.
The renegotiated loan will continue to be disclosed 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 typically comprises a history of
payment performance against the original or revised terms, as appropriate to the circumstances. For loans that are
assessed for impairment on an individual basis, all available evidence is assessed on a case by case basis.
For retail lending the minimum period of payment performance required depends on the nature of loans in the
portfolio, but is typically not less than six months. Where portfolios have more significant levels of forbearance
activity, such as that undertaken by HSBC Finance, the minimum repayment performance period required may be
substantially more (for further details on HSBC Finance see page 150). Payment performance periods are monitored
to ensure they remain appropriate to the levels of recidivism observed within the portfolio. These performance
periods are in addition to the receipt of a minimum of two payments within a 60 day period which must be received
for the customer to initially qualify for the renegotiation (in the case of HSBC Finance, in certain circumstances, for
example where debt has been restructured in bankruptcy proceedings, fewer or no qualifying payments may be
required). The qualifying payments are required in order to demonstrate that the renegotiated terms are sustainable