HSBC 2009 Annual Report Download - page 15

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financial markets which began in August 2007 put
financial institutions under considerable pressure.
Market turbulence was accompanied by recessionary
conditions in developed economies and a slowdown
in emerging countries, with serious adverse
consequences for asset values, employment,
consumer confidence and levels of economic
activity. The global economy entered the most severe
downturn for 80 years in 2008.
Governments and central banks took concerted
action to make substantial funds and deposit
guarantees available to boost liquidity and
confidence in their financial systems, stimulate
lending and support institutions which were judged
to be at risk of failing. In addition, governments
extended fiscal stimulus programmes and central
banks reduced interest rates. As a consequence,
conditions eased in 2009 and most leading
developed economies began to emerge from
recession, although the pace and depth of recovery
was uneven across economies and asset markets.
The financial services industry continued to face
an unusually high degree of uncertainty.
Despite some evidence of stabilisation in
housing market conditions during 2009, the dramatic
declines of the previous two years, particularly in the
US and the UK, continued to affect adversely the
credit performance of real estate-related exposures.
Higher unemployment undermined consumer
confidence and this, coupled with the deterioration in
house prices, led to lower spending which weakened
economies. This resulted in significant write-downs
of related asset values by financial institutions,
including HSBC. These write-downs, both of direct
lending exposures and of asset-backed securities,
caused many financial institutions to seek additional
capital, to reduce or eliminate dividends, to merge
with larger and stronger competitors and, in some
cases, to fail.
Economic conditions remain fragile, and the risk
exists that major economies may suffer a ‘double
dip’ recession in which the improvements seen in a
number of important markets reverse. This could
have an adverse effect on HSBC’s operating results.
In particular, the Group may face the following
challenges in connection with these events:
• HSBC’s ability to assess the creditworthiness
of its customers or to estimate the values of its
assets may be impaired if the models and
techniques it uses become less accurate in their
predictions of future behaviour, valuations or
estimates. The process HSBC uses to estimate
losses inherent in its credit exposure or assess
the value of certain assets requires difficult,
subjective and complex judgements. These
include forecasts of economic conditions and
how predicted economic scenarios may impair
the ability of HSBC’s borrowers to repay their
loans or affect the value of assets. As a
consequence, this process may be less capable
of making accurate estimates which, in turn,
may undermine the reliability of the process;
• the demand for borrowing from creditworthy
customers may diminish should economic
activity slow;
• a prolonged period of low interest rates will
constrain net interest income earned by HSBC
on its excess deposits;
• HSBC’s ability to borrow from other financial
institutions or to engage in funding transactions
on favourable terms, or at all, could be
adversely affected by any renewed disruption
in the capital markets or deteriorating investor
sentiment;
• market developments may continue to depress
consumer confidence and may cause further
declines in credit card usage and adverse
changes in payment patterns, leading to
increases in delinquencies and default rates,
write-offs and loan impairment charges beyond
HSBC’s expectations;
• loan impairment allowances and write-offs
would be likely to rise in the event of a ‘double
dip’ recession as consumer confidence
weakened and business failures increased;
• HSBC expects to face increased regulation and
supervision of the financial services industry,
following new proposed regulatory measures in
countries in which it operates;
• trade and capital flows may contract as a result
of protectionist measures being introduced in
certain markets; and
• increased government ownership and
control over financial institutions and further
consolidation in the financial industry which
could significantly alter the competitive
landscape.
As a global financial institution, HSBC
is exposed to these developments across all its
businesses, both directly and through their impact
on its customers and clients. Local variations exist,
however, reflecting regional circumstances and
presenting challenges to HSBC which are specific
to those areas. HSBC’s strong balance sheet and
capital position, its roots in emerging markets and