HSBC 2007 Annual Report Download - page 157

155
Year ended 31 December 2006 compared
with year ended 31 December 2005
The charge for loan impairments and other credit
risk provisions was US$10.6 billion, a 36 per cent
increase over that reported in 2005. The analysis that
follows is on an underlying basis.
Charges increased by 30 per cent, reflecting:
• increased loss experience in the US mortgage
services business, particularly in second lien,
portions of first lien and ARMs acquired from
correspondent brokers and banks in 2005 and in
the first half of 2006;
• 10 per cent underlying lending growth
(excluding lending to the financial sector and
settlement accounts), notably in the UK, the US,
Mexico, Brazil and Asia;
• the continuing effect in the UK of consumer
recourse to formal debt mitigation
arrangements;
• credit deterioration, principally in the first half
of 2006, in unsecured personal and credit card
lending in Taiwan and Indonesia; offset by
• the non-recurrence of a surge in bankruptcy
filings in the US in the fourth quarter of 2005
and the effect of hurricane Katrina; and
• a continued benign commercial and corporate
credit environment.
In Europe, net loan impairment charges rose by
10 per cent to US$2.2 billion. In the UK, net charges
rose by a modest 4 per cent as growth in the personal
customer impairment charge, which was broadly in
line with lending growth, was partially offset by
favourable movements on the impairment charge for
commercial loans in a robust corporate credit
environment. The personal sector continued to
experience higher levels of IVA and bankruptcy
filings, following an easing of bankruptcy
regulations in 2004, growth in consumer
indebtedness and a rise in unemployment. This was
mitigated by action taken on underwriting and
collections. In France, the non-recurrence of several
significant recoveries in 2005 resulted in an increase
in net loan impairment charges in 2006.
Loan impairment charges in Hong Kong
remained low at US$172 million, underpinned by
robust personal and commercial credit quality in a
strong economy with low unemployment.
In Rest of Asia-Pacific, loan impairment
charges rose sharply to US$512 million. Taiwan and
Indonesia experienced credit deterioration during
2006, although the problem peaked in the first half
of the year. Taiwan was affected by the imposition
of a mandatory government debt renegotiation
scheme which allowed customers to extend and
heavily discount repayment terms, leading to
market-wide credit losses. Indonesia was also
affected by regulations, specifically with respect to
minimum re-payment terms which compounded
higher impairments brought about by a reduction in
fuel subsidies. Elsewhere in Rest of Asia-Pacific,
credit quality was stable.
In North America, the net loan impairment
charge increased significantly, by 32 per cent to
US$6.8 billion, largely in the second half of 2006,
driven by the credit deterioration in US sub-prime
mortgages described in the first bullet point above.
The effects of the decline in US house price inflation
and rising interest rates during 2006 were
accentuated by the increased percentage of second
lien loan originations to total loans originated in
2005 and the first half of 2006, and the underwriting
of stated income (low documentation) products. The
US net loan impairment charges increased by 37 per
cent after taking into account the most recent trends
in delinquency and loss severity, projecting the
probable impact of re-pricing ARMs, and
incorporating the effect of re-pricing on second lien
loans. Further details are provided on page 217.
Credit delinquency in other parts of the mortgage
portfolio and in other US businesses rose modestly,
driven by unusually low levels at the end of 2005,
and growing loan maturity in 2006. Partially
offsetting the effects of credit deterioration were a
decline in bankruptcy filings following the surge at
the end of 2005, relatively low unemployment and a
fall in exposure estimated to result from hurricane
Katrina.
In Latin America, the rise in impairment
charges by 24 per cent to US$938 million was
largely recorded in Mexico and, to a lesser extent,
Brazil and Argentina. In Mexico, strong loan growth,
particularly in 2006, led to increased loan
impairment charges. In Brazil, the credit weaknesses
seen in 2005 and the first half of 2006, particularly
in the consumer market, were mitigated by changes
to underwriting procedures. Net charges in Brazil
increased by 7 per cent compared with 54 per cent in
2005 and declined in the second half of 2006
compared with the first half. In Argentina, net
charges rose as a result of the non-recurrence of
releases and recoveries in 2005.
The aggregate outstanding customer loan
impairment allowances at 31 December 2006 of
US$13.6 billion represented 1.6 per cent of gross
customer advances (net of reverse repos and