HSBC 2004 Annual Report Download - page 141

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historical experience.
The estimated period between a loss occurring
and its identification (as evidenced by the
establishment of a specific provision for this loss) is
determined by local management for each identified
portfolio. In general, the periods used vary between
four and twelve months.
In normal circumstances, historical experience
is the most objective and accurate framework used to
assess inherent loss within each portfolio. Historical
loss experience is generally benchmarked against the
weighted average annual rate of losses over a five-
year period.
In certain circumstances, economic conditions
are such that historical loss experience provides
insufficient evidence of the inherent loss in a given
portfolio. In such circumstances, management uses
its judgement, supported by relevant experience
from similar situations, to determine an appropriate
general provision.
The basis used to establish the general provision
within each reporting entity is documented, and is
reviewed by senior Group credit management for
conformity with Group policy.
Suspended and non-accrual interest
For individually assessed accounts, loans are
designated as non-performing as soon as
management has doubts as to the ultimate
collectibility of principal or interest, or when
contractual payments of principal or interest are
90 days overdue. When a loan is designated as non-
performing, interest is not normally credited to the
profit and loss account and either interest accruals
will cease (‘non-accrual loans’ ) or interest will be
credited to an interest suspense account in the
balance sheet which is netted against the relevant
loan (‘suspended interest’ ).
Within portfolios of low value, high volume,
homogeneous loans, interest will normally be
suspended on facilities 90 days or more overdue. In
certain operating subsidiaries, interest income on
credit cards may continue to be included in earnings
after the account is 90 days overdue, provided that a
suitable provision is raised against the portion of
accrued interest which is considered to be
irrecoverable.
The designation of a loan as non-performing and
the suspension of interest may be deferred for up to
12 months in either of the following situations:
• cash collateral is held covering the total of
principal and interest due and the right of set-off
is legally sound; or
• the value of any net realisable tangible security
is considered more than sufficient to cover the
full repayment of all principal and interest due
and credit approval has been given to the
rolling-up or capitalisation of interest payments.
On receipt of cash (other than from the
realisation of security), the overall risk is re-
evaluated and, if appropriate, suspended or non-
accrual interest is recovered and taken to the profit
and loss account. Amounts received from the
realisation of security are applied first to the
repayment of outstanding indebtedness, with any
surplus used to recover specific provisions and then
suspended interest.
Charge-offs
Loans (and the related provisions) are normally
charged off, either partially or in full, when there is
no realistic prospect of recovery of these amounts
and when the proceeds from the realisation of
security have been received. Unsecured consumer
facilities are charged off between 150 and 210 days
overdue. In the case of HSBC Finance, this period is
generally extended to 300 days overdue (270 days
for real estate secured products). There are no cases
where the charge-off period exceeds 360 days except
for the UK where certain consumer finance accounts
are still deemed collectible beyond this point. In the
case of bankruptcy, charge-off can occur earlier.
US banks typically write off problem lending
more quickly than is the practice in the UK. This
means that HSBC’s reported levels of credit risk
elements and associated provisions are likely to be
higher than those of comparable US banks.
Restructuring of loans
Restructuring activity is designed to manage
customer relationships, maximise collection
opportunities and avoid foreclosure or repossession,
if possible. Following restructuring, an overdue
consumer account will normally be reset to current
status. Restructuring policies and practices are based
on indicators or criteria which, in the judgement of
local management, evidence the probability that
payment will continue. These policies are
continually reviewed and their application varies
depending upon the nature of the market, the product
and the availability of empirically based data. Where
empirical evidence indicates an increased propensity
to default on restructured accounts, the use of roll
rate methodologies for the calculation of provisions
results in the increased default propensity being
reflected in provisions.