HSBC 2015 Annual Report Download - page 199

HSBC HOLDINGS PLC
197
Strategic Report Financial Review Corporate Governance Financial Statements Shareholder Information
Quality classification definitions
• ‘Strong’ exposures demonstrate a strong capacity to meet financial commitments, with negligible or low probability of default and/or low
levels of expected loss. Retail accounts operate within product parameters and only exceptionally show any period of delinquency.
• ‘Good’ exposures require closer monitoring and demonstrate a good capacity to meet financial commitments, with low default risk. Retail
accounts typically show only short periods of delinquency, with any losses expected to be minimal following the adoption of recovery
processes.
• ‘Satisfactory’ exposures require closer monitoring and demonstrate an average to fair capacity to meet financial commitments, with
moderate default risk. Retail accounts typically show only short periods of delinquency, with any losses expected to be minor following
the adoption of recovery processes.
• ‘Sub-standard’ exposures require varying degrees of special attention and default risk is of greater concern. Retail portfolio segments
show longer delinquency periods of generally up to 90 days past due and/or expected losses are higher due to a reduced ability to
mitigate these through security realisation or other recovery processes.
• ‘Impaired’ exposures have been assessed as impaired. These include wholesale exposures where the bank considers that either the
customer is unlikely to pay its credit obligations in full, without recourse by the bank to the actions such as realising security if held, or the
customer is past due more than 90 days on any material credit obligation; retail accounts include loans and advances classified as EL9 to
EL10, and for those classified EL1 to EL8 they are greater than 90 days past due unless individually they have been assessed as not
impaired; and renegotiated loans that have met the requirements to be disclosed as impaired and have not yet met the criteria to be
returned to the unimpaired portfolio (see below).
The customer risk rating (‘CRR’) 10-grade scale summarises a more granular underlying 23-grade scale of obligor probability of
default (‘PD’). All HSBC customers are rated using the 10- or 23-grade scale, depending on the degree of sophistication of the
Basel II approach adopted for the exposure.
Each CRR band is associated with an external rating grade by reference to long-run default rates for that grade, represented by
the average of issuer-weighted historical default rates. This mapping between internal and external ratings is indicative and
may vary over time.
The expected loss (‘EL’) 10-grade scale for retail business summarises a more granular underlying EL scale for this customer
segment; this combines obligor and facility/product risk factors in a composite measure.
For debt securities and certain other financial instruments, external ratings have been aligned to the five quality classifications
based upon the mapping of related CRR to external credit grade.
Renegotiated loans and forbearance
(Audited)
A range of forbearance strategies is employed in order to improve the management of customer relationships, maximise
collection opportunities and, if possible, avoid default, foreclosure or repossession. They include extended payment terms, a
reduction in interest or principal repayments, approved external debt management plans, debt consolidations, the deferral of
foreclosures and other forms of loan modifications and re-ageing.
Our policies and practices are based on criteria which enable local management to judge whether repayment is likely to
continue. These typically provide a customer with terms and conditions that are more favourable than those provided initially.
Loan forbearance is only granted in situations where the customer has showed a willingness to repay their loan and is
expected to be able to meet the revised obligations.
Identifying renegotiated loans
The contractual terms of a loan may be modified for a number of reasons including changing market conditions, customer
retention and other factors not related to the current or potential credit deterioration of a customer. When the contractual
payment terms of a loan are modified because we have significant concerns about the borrower’s ability to meet contractual
payments when due, these loans are classified as ‘renegotiated loans’.
For retail lending our credit risk management policy sets out restrictions on the number and frequency of renegotiations, the
minimum period an account must have been opened before any renegotiation can be considered and the number of qualifying
payments that must be received. The application of this policy varies according to the nature of the market, the product and
the management of customer relationships through the occurrence of exceptional events. When considering whether there is
significant concern regarding a customer’s ability to meet contractual loan repayments when due, we assess the customer’s
delinquency status, account behaviour, repayment history, current financial situation and continued ability to repay. If the
customer is not meeting contractual repayments or it is evident that they will be unable to do so without the renegotiation,
there will be a significant 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.