HSBC 2006 Annual Report Download - page 178

HSBC HOLDINGS PLC
Report of the Directors: The Management of Risk (continued)
Credit risk > Credit risk management / Exposure
176
Collectively assessed allowances are generally
calculated monthly and charges for new allowances,
or reversals of existing allowances, are determined
for each separately identified portfolio.
Impairment allowances
When impairment losses occur, HSBC reduces the
carrying amount of loans and advances and held-to-
maturity financial investments through the use of an
allowance account. When impairment of available-
for-sale financial assets occurs, the carrying amount
of the asset is reduced directly.
Loan write-offs
Loans, and the related impairment allowances, are
normally written off, either partially or in full, in the
case of that portion of the loan amount not covered
by the value of security, when there is no realistic
prospect of further recovery; and in the case of
secured balances, after proceeds from the realisation
of security have been received. Unsecured consumer
facilities are normally written off between 150 and
210 days overdue. In HSBC Finance, this period is
generally extended to 300 days overdue (240 days
for real estate secured products).
Instances of write-off periods exceeding
360 days overdue are few, but can arise where
certain consumer finance accounts are deemed
collectible beyond this point or where, in a few
countries, regulation or legislation constrain earlier
write-off.
In the event of bankruptcy, or analogous
proceedings, write-off can occur earlier.
Cross-border exposures
Management assesses the vulnerability of countries
to foreign currency payment restrictions when
considering impairment allowances on cross-border
exposures. This assessment includes an analysis of
the economic and political factors existing at the
time. Economic factors include the level of external
indebtedness, the debt service burden and access to
external sources of funds to meet the debtor
country’s financing requirements. Political factors
taken into account include the stability of the country
and its government, threats to security, and the
quality and independence of the legal system.
Impairment allowances are applied to all
qualifying exposures within these countries unless
these exposures and the inherent risks are:
• performing, trade-related and of less than one
year’s maturity;
• mitigated by acceptable security cover which is,
other than in exceptional cases, held outside the
country concerned;
• in the form of securities held for trading
purposes for which a liquid and active market
exists, and which are measured at fair value
daily;
• performing facilities with principal (excluding
security) of US$1 million or below; or
• performing facilities with maturity dates shorter
than three months.
Credit exposure
Maximum exposure to credit risk
(Audited)
Factors which had a direct impact on changes in
HSBC’s maximum exposure to credit risk during
2006 related to the curtailment of growth in
mortgage lending in the US in response to
deteriorating conditions, and slowed growth in UK
personal unsecured lending following an increase in
personal bankruptcies and IVAs. Elsewhere, growth
reflected underlying economic trends on a
geographic basis.
The following table presents the maximum
exposure to credit risk of balance sheet and off
balance sheet financial instruments, before taking
account of any collateral held or other credit
enhancements unless such credit enhancements meet
offsetting requirements as set out in Note 2(m) on
the Financial Statements. For financial assets
recognised on the balance sheet, the exposure to
credit risk equals their carrying amount. For
financial guarantees granted, the maximum exposure
to credit risk is the maximum amount that HSBC
would have to pay if the guarantees are called upon.
For loan commitments and other credit related
commitments that are irrevocable over the life of the
respective facilities, the maximum exposure to credit
risk is the full amount of the committed facilities.