HSBC 2008 Annual Report Download - page 150

HSBC HOLDINGS PLC
Report of the Directors: Impact of Market Turmoil (continued)
Overview > Global Banking and Markets ABSs / Stress analysis // Business model > ABSs / SPEs
148
Global Banking and Markets available-for-sale ABSs exposure
At 31 December 2008 At 31 December 2007
Directly
held1 SPEs Total
Directly
held1
SPEs Total
US$m US$m US$m US$m US$m US$m
Total carrying amount of net principal
exposure ............................................................ 35,736 14,610 50,346 43,826 32,105 75,931
– which includes sub-prime/Alt-A exposure .. 5,155 3,516 8,671 11,801 11,664 23,465
Available-for-sale reserves relating to sub-
prime/Alt-A exposure ....................................... (5,920) (3,573) (9,493) (1,122) – (1,122)
Half year to Half year to Half year to
31 December 2008 30 June 2008 31 December 2007
Directly
held1
US$m
SPEs
US$m
Total
US$m
Directly
held1
US$m
SPEs
US$m
Total
US$m
Directly
held1
US$m
SPEs
US$m
Total
US$m
Impairment charge:
– borne by HSBC ...................... 224 – 224 55 – 55 – – –
– allocated to capital note
holders .................................... – 159 159 – 134 134 – – –
Total impairment charge ................. 224 159 383 55 134 189 – – –
1 ‘Directly held’ includes both assets held by Solitaire where HSBC provides first loss protection and those assets held directly by the
Group.
Structured investment vehicles and
securities investment conduits (special
purpose entities)
In the table above, the total carrying amount of
ABSs on the balance sheet in respect of SPEs
represent holdings in which significant first loss
protection is provided through the capital notes
issued by the structured investment conduits
(‘SIC’s), excluding Solitaire. The economic first
loss protection remaining at 31 December 2008
amounted to US$2.2 billion (2007: US$2.3 billion).
As set out on page 174, on an IFRS accounting basis
the impairment charge of US$293 million was
allocated to the capital note holders at
31 December 2008 (2007: n/a).
At each balance sheet date, an assessment is
made as to whether there is any objective evidence
of impairment in the value of available-for-sale
ABSs. Impairment charges incurred on assets held
by these SPEs are offset by a credit to the
impairment line for the amount of the loss allocated
to capital note holders.
Impairments recognised at 31 December 2008
from assets held directly or within Solitaire in
recognition of the first loss protection of
US$1.2 billion provided by HSBC through credit
enhancement were US$279 million (2007: nil),
based on a notional principal value of securities
which were impaired of US$570 million (2007: nil).
The low level of impairment recognised in
comparison with the deficit in the available-for-sale
reserve is a reflection of the credit quality and
seniority of the assets held.
Sub-prime and Alt-A residential mortgage-
backed securities
Management’s current assessment of the holdings of
available-for-sale ABSs with the most sensitivity to
possible future impairment is focused on sub-prime
and Alt-A residential mortgage-backed securities
(‘MBS’s).
Excluding holdings in the SPEs discussed
above, available-for-sale holdings in these categories
within Global Banking and Markets amounted to
US$5.2 billion at 31 December 2008 (2007:
US$11.8 billion). During the year ended
31 December 2008, the movement in fair values of
these securities taken to equity was a reduction of
US$4.8 billion. The deficit in the available-for-sale
fair value reserve as at 31 December 2008 in relation
to these securities was US$5.9 billion (2007:
US$1.1 billion).
The main factors in the reduction in fair value
of these securities over the period were the effects
of reduced market liquidity and negative market
sentiment. The level of actual credit losses
experienced was low in 2008, notwithstanding the
deterioration in the performance of the underlying
mortgages in the period as US house prices fell and
defaults increased. The absence of material credit
losses is judged to be attributable to the seniority of
the tranches held by HSBC as well as the priority for
cash flow held by these tranches.