HSBC 2007 Annual Report Download - page 156

HSBC HOLDINGS PLC
Report of the Directors: Financial Review (continued)
Loan impairment charges
154
constrained customers’ ability to refinance their
loans and led to deterioration in credit markets;
• an underlying 7 per cent increase in lending to
customers (excluding lending to the financial
sector and settlement accounts); and
• a sharp increase in loan impairment charges in
Mexico, primarily due to portfolio growth,
seasoning, and higher delinquency rates on
credit cards; offset by
• a continued benign environment for commercial
and corporate credit in all regions.
In Europe, loan impairment charges rose by
10 per cent to US$2.5 billion. Overall credit quality
remained broadly stable. In the UK, loan impairment
charges rose, primarily in consumer finance lending
outside HSBC Bank; within HSBC Bank, steps taken
in 2006 to tighten underwriting standards led to an
improvement in loan impairment trends. Corporate
loan impairment charges remained low in absolute
terms although they were 23 per cent higher than the
level incurred in 2006. In the UK, increased loan
impairment charges principally reflected allowances
on two large corporate accounts and the ongoing
effect of IVAs on the micro business segment.
Loan impairment charges in Hong Kong
continued at a low level and in line with 2006 at
US$231 million, despite strong balance sheet
growth. This reflected good credit quality and robust
economic conditions.
In Rest of Asia-Pacific, loan impairment
charges rose by 17 per cent to US$616 million. Loan
impairment charges were significantly lower in
Taiwan due to the non-recurrence of impairment
charges in 2006 which resulted from regulatory
intervention in the card market and the imposition of
a government debt negotiation scheme. In Indonesia,
performance improved on 2006 when loan
impairment charges were affected by the
introduction of minimum repayment terms. These
factors were offset by an increase in corporate loan
impairment charges in several countries, higher loan
impairment charges in India due to balance sheet
growth and higher loss rates on credit cards, and a
deterioration in the Malaysian mortgage portfolio
due to rising interest rates.
In North America, loan impairment charges
posted a steep rise, increasing by 79 per cent to
US$12.2 billion. The main factor driving this
deterioration was the impact of the weaker housing
market on both economic activity and the ability of
borrowers to extend or refinance debt. In addition,
seasoning and mix change within the credit cards
portfolio, and increases in bankruptcy filings after
the exceptionally low levels seen in 2006 following
changes in legislation, added to loan impairment
charges.
The real estate secured portfolios experienced
continuing deterioration in credit quality as a lack of
demand for securitised sub-prime mortgages and
falls in house prices severely restricted refinancing
options for many customers. In the mortgage
services business, loan impairment charges rose
by 41 per cent to US$3.1 billion while, in consumer
lending, loan impairment charges rose by 139 per
cent to US$4.1 billion. Delinquency rates exceeded
recent historical trends, particularly for those loans
originated in 2005 and 2006. Performance was
weakest in housing markets which had previously
experienced the steepest home price appreciation and
in respect of second lien products and stated income
products.
US card services experienced a rise in loan
impairment charges from a combination of growth in
balances, higher losses in the final part of the year as
the economy slowed, a rise in bankruptcy rates
approaching historical levels, and a shift in portfolio
mix to higher levels of non-prime loans. Further
details are provided on page 220.
In Latin America, loan impairment charges
rose sharply, by 53 per cent to US$1.7 billion, driven
by portfolio growth, normal seasoning and higher
delinquency rates on credit cards. Loan impairment
charges for small and medium-sized businesses
lending in Mexico also increased. Partly offsetting
these was an improvement in personal and
commercial delinquency rates in Brazil.
For the Group as a whole, the aggregate
outstanding customer loan impairment allowances
at 31 December 2007 of US$19.2 billion represented
2.0 per cent of gross customer advances (net of
reverse repos and settlement accounts), compared
with 1.6 per cent at year-end 2006.
Impaired loans to customers were
US$18.3 billion at 31 December 2007 compared
with US$13.8 billion at 31 December 2006. On a
constant currency basis, impaired loans to customers
were 28 per cent higher than in 2006 compared with
customer lending growth (excluding loans to the
financial sector and settlement accounts) of
7 per cent.