HSBC 2015 Annual Report Download - page 333

HSBC HOLDINGS PLC
331
Strategic Report Financial Review Corporate Governance Financial Statements Shareholder Information
Impairment of loans and advances
Nature of the area of focus Matters discussed with the GAC
Impairment allowances represent management's best estimate of
the losses incurred within the loan portfolios at the balance sheet
date. They are calculated on a collective basis for portfolios of loans
of a similar nature and on an individual basis for significant loans.
The calculation of both collective and individual impairment
allowances is inherently judgemental for any bank.
Collective impairment allowances are calculated using statistical
models which approximate the impact of current economic and
credit conditions on large portfolios of loans. The inputs to these
models are subject to management judgement and model overlays
are often required.
For specific impairments, judgement is required to determine when
an impairment event has occurred and then to estimate the
expected future cash flows related to that loan.
The audit was focused on impairment due to the materiality of the
balances and the subjective nature of the calculation. The largest
loan portfolios are in Europe and Asia. The most significant
impairment allowances are in Europe, North America and Latin
America.
The policies and methodologies used by HSBC were discussed with
the GAC. The impairment policies and practices applied are consistent
with the requirements of IFRS. The methodologies used to calculate
collective impairment allowances are relatively standard which means
that modelling risk is low but that changes in individual inputs can
have a significant bearing on the impairment charge.
The discussion covered positive observations around the governance
supporting changes to model inputs and our observations on
suggested enhancements to documentation.
At each GAC and Group Risk Committee meeting there was a
discussion on changes to risk factors and other inputs within the
collective allowance models as well as discussions on individually
significant loan impairments. In light of the further deterioration in
the spot price of oil, a specific discussion on the exposures to the oil
and gas sector was held with GAC at the year end. This discussion
considered the appropriate treatment of the Group’s exposure within
the collective impairment calculation and the additional $0.2bn
increase at the year-end.
Procedures performed to support our discussions and conclusions
• The controls management has established to support their collective and specific impairment calculations were tested.
• For collective impairment this included controls over the appropriateness of models used to calculate the charge, the process of
determining key assumptions and the identification of loans to be included within the calculation.
• For specific impairment charges on individual loans this included controls over the compilation and review of the credit watch list, credit
file review processes, approval of external collateral valuation vendors and review controls over the approval of significant individual
impairments.
• For collective allowances the appropriateness of the modelling policy and methodology used for material portfolios was independently
assessed by reference to the accounting standards and market practices and model calculations were tested through re-performance
and code review.
• The appropriateness of management’s judgements was also independently considered in respect of calculation methodologies and
segmentation, economic factors and judgemental overlays, period of historical loss rates used, loss emergence periods, cure rates for
impaired loans and the valuation of recovery assets and collateral.
• For specific allowances the appropriateness of provisioning methodologies and policies was independently assessed for a sample of
loans across the portfolio selected on the basis of risk. An independent view was formed on the levels of provisions booked based on the
detailed loan and counterparty information in the credit file. Calculations within a sample of discounted cash flow models were re-
performed.
Relevant references in the Annual Report and Accounts 2015
Impaired loans, page 128.
Areas of special interest, page 116.
GAC Report, page 262.
Note 1 (j): Impairment of loans and advances, page 354.