HSBC 2008 Annual Report Download - page 37

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weakening property market led to higher impairment
charges against construction companies and
businesses dependent upon the real estate sector,
particularly in the final quarter of the year.
Impairment charges against banks rose due to some
exposure to the Icelandic banks in 2008. In addition,
rising levels of personal indebtedness resulted in
lower releases and recoveries of charges than in
2007.
Higher loan impairment and other credit risk
provisions within Global Banking and Markets in
Europe reflected increased charges against certain
corporate accounts and impairment recorded on
available-for-sale debt securities.
In Mexico, loan impairment charges rose by
US$513 million or 69 per cent, primarily in the
credit card portfolio. This was due to a combination
of higher lending volumes from organic expansion
and higher delinquency rates which were driven by
a deterioration in credit quality as the portfolio
continued to season and move into the later stages of
delinquency. Management took action to enhance
collection activity and improve the quality of new
business. Impairment charges in the commercial
portfolio also rose due to credit quality deterioration
among small and medium-sized enterprises as the
economy weakened.
In Hong Kong, the rise in loan impairment
charges was driven by weakness in parts of the
export sector within the commercial portfolio in the
second half of 2008. In Global Banking and Markets,
credit impairment charges within Balance Sheet
Management principally reflected losses on debt
securities and paper issued by financial institutions
previously rated at investment grade which failed in
the year.
In Rest of Asia-Pacific, the growth in loan
impairment charges reflected a combination of the
expansion of consumer lending and credit quality
deterioration in India and the Middle East. In
addition, higher impairment charges in Commercial
Banking were driven by a deterioration in credit
quality in the second half of the year.
For the Group as a whole, the aggregate
outstanding customer loan impairment allowances
at 31 December 2008 of US$23.9 billion represented
2.6 per cent of gross customer advances (net of
reverse repos and settlement accounts), compared
with 2.0 per cent at the end of 2007.
2007 compared with 2006
Reported loan impairment charges and other credit
risk provisions were US$17.2 billion, a 63 per cent
increase over 2006.
Loan impairment charges increased by 58 per
cent, reflecting substantially higher losses in the US
consumer finance loan book, primarily in mortgage
lending, but also in the credit cards portfolio in the
final part of the year. US delinquency rates increased
during 2007 as falling house prices constrained
customers’ ability to refinance their loans.
The rise in Group charges also reflected an
underlying 7 per cent increase in lending to
customers (excluding lending to the financial sector
and settlement accounts).
In North America, loan impairment charges
increased 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. Loan impairment
charges rose by 41 per cent to US$3.1 billion and by
139 per cent to US$4.1 billion in the mortgage
services business and in consumer lending,
respectively. 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, as
well as in second lien products and stated income
products.
US card services experienced an increase 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 to
near historical levels, and a shift in portfolio mix to
higher levels of non-prime loans.
In the UK, loan impairment charges rose,
primarily in the consumer finance business.
Delinquency rates on mortgages in the UK offered
through HSBC Finance remained stable throughout
2007, with delinquency rates for loans offered in
2006 and 2007 lower than in the preceding two