HSBC 2005 Annual Report Download - page 133

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approach outlined below. In determining allowances
on individually assessed accounts, the following
factors are considered:
• HSBC’s aggregate exposure to the customer;
• the viability of the customer’s business model
and the capacity to trade successfully out of
financial difficulties and generate sufficient cash
flow to service debt obligations;
• the amount and timing of expected receipts and
recoveries;
• the likely dividend available on liquidation or
bankruptcy;
• the extent of other creditors’ commitments
ranking ahead of, or pari passu with, HSBC and
the likelihood of other creditors continuing to
support the company;
• the complexity of determining the aggregate
amount and ranking of all creditor claims and
the extent to which legal and insurance
uncertainties are evident;
• the realisable value of security (or other credit
mitigants) and likelihood of successful
repossession;
• the likely deduction of any costs involved in
recovering amounts outstanding;
• the ability of the borrower to obtain and make
payments in the relevant foreign currency if
loans are not in local currency; and
• when available, the secondary market price for
the debt.
Group policy requires the level of impairment
allowances on individual facilities that are above
materiality thresholds to be reviewed at least
half-yearly, and more regularly when individual
circumstances require. The review normally
encompasses collateral held (including re-
confirmation of its enforceability) and an assessment
of actual and anticipated receipts. For significant
commercial and corporate debts, specialised loan
‘work-out’ teams with experience in insolvency and
specific market sectors are used to assess likely
losses on significant individual exposures.
Individually calculated impairment allowances are
only reversed when the Group has reasonable and
objective evidence of a reduction in the established
loss estimate.
Collectively assessed allowances
(Audited IFRS 7 information)
Collectively assessed allowances are made in respect
of (i) losses incurred in portfolios of homogeneous
assets and (ii) losses which have been incurred but
have not yet been identified on loans subject to
individual assessment for impairment.
Homogeneous groups of loans
(Audited IFRS 7 information)
Two approaches are available to calculating
impairment allowances when homogeneous groups
of assets such as credit card loans, other unsecured
consumer lending, motor vehicle financing and
residential mortgage loans are reviewed collectively
on a portfolio basis:
• When appropriate empirical information is
available, the Group uses roll rate methodology
(a statistical analysis of historical trends of the
probability of default and amount of
consequential loss, assessed at each time period
for which payments are overdue), other
historical data and an evaluation of current
economic conditions to calculate an appropriate
level of impairment allowance based on
inherent loss. In certain highly developed
markets, sophisticated models also take into
account behavioural and account management
trends such as those indicated by bankruptcy
and restructuring statistics. Roll rates are
regularly benchmarked to ensure they remain
appropriate.
• When portfolios are less than US$20 million in
size, or when information is insufficient or not
sufficiently reliable for roll rate methodology to
be adopted, the Group uses a simpler method
based on similar principles which assesses
impairment based on historical experience and
current economic conditions.
The portfolio approach is applied to accounts in the
following portfolios:
• low value, homogeneous small business
accounts in certain jurisdictions;
• residential mortgages that have not been
individually assessed or are less than 90 days
overdue (except in HSBC Finance);
• credit cards and other unsecured consumer
lending products; and
• motor vehicle financing.
These portfolio allowances are generally
assessed monthly and charges for new allowances, or
releases of existing allowances, are calculated for
each separately identified portfolio.