HSBC 2006 Annual Report Download - page 177

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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 assessed impairment allowances are
only reversed when the Group has reasonable and
objective evidence of a reduction in the established
loss estimate.
Collectively assessed impairment allowances
Impairment is assessed on a collective basis in two
circumstances:
• to cover losses which have been incurred but
have not yet been identified on loans subject to
individual assessment; and
• for homogeneous groups of loans that are not
considered individually significant.
Incurred but not yet identified impairment
Individually assessed loans for which no evidence of
impairment has been specifically identified on an
individual basis are grouped together according to
their credit risk characteristics. A collective loan loss
allowance is calculated to reflect impairment losses
incurred at the balance sheet date which will only be
individually identified in the future.
The collective impairment allowance is
determined having taken into account:
• historical loss experience in portfolios of similar
credit risk characteristics (for example, by
industry sector, risk rating or product segment);
• the estimated period between impairment
occurring and the loss being identified and
evidenced by the establishment of an
appropriate allowance against the individual
loan; and
• management’s experienced judgement as to
whether current economic and credit conditions
are such that the actual level of inherent losses is
likely to be greater or less than that suggested by
historical experience.
The period between a loss occurring and its
identification is estimated by local management for
each identified portfolio. In general, the periods used
vary between four and twelve months although, in
exceptional cases, longer periods are warranted.
The basis on which impairment allowances for
incurred but not yet identified losses is established in
each reporting entity is documented and reviewed by
senior Group Credit and Risk management to ensure
conformity with Group policy.
Homogeneous groups of loans
Two methodologies are used to calculate impairment
allowances where large numbers of relatively low-
value assets are managed using a portfolio approach,
typically:
• low-value, homogeneous small business
accounts in certain countries or territories;
• residential mortgages that have not been
individually assessed;
• credit cards and other unsecured consumer
lending products; and
• motor vehicle financing.
When appropriate empirical information is
available, the Group uses roll rate methodology. This
employs a statistical analysis of historical trends of
default and the amount of consequential loss, based
on the delinquency of accounts within a portfolio of
homogeneous accounts. Other historical data and
current economic conditions are also evaluated when
calculating the appropriate level of impairment
allowance required to cover inherent loss. In certain
highly developed markets, models also take into
account behavioural and account management trends
revealed in, for example, bankruptcy and
rescheduling statistics.
When the portfolio size is small, or when
information is insufficient or not reliable enough to
adopt a roll rate methodology, a formulaic approach
is used which allocates progressively higher
percentage loss rates the longer a customer’s loan is
overdue. Loss rates reflect the discounted expected
future cash flows for a portfolio.
In normal circumstances, historical experience
is the most objective and relevant information from
which to assess inherent loss within each portfolio.
In circumstances where historical loss experience
provides less relevant information about the inherent
loss in a given portfolio at the balance sheet date –
for example, where there have been changes in
economic conditions or regulations – management
considers the more recent trends in the portfolio risk
factors which may not be adequately reflected in its
statistical models and, subject to guidance from
Group Credit and Risk, adjusts impairment
allowances accordingly.
Roll rates, loss rates and the expected timing of
future recoveries are regularly benchmarked against
actual outcomes to ensure they remain appropriate.