HSBC 2009 Annual Report Download - page 206

HSBC HOLDINGS PLC
Report of the Directors: Risk (continued)
Credit risk > Management
204
amount of the asset is reduced directly. For further
details, see ‘Accounting policies’ on page 369.
Impairment allowances may be assessed and
created either for individually significant accounts
or, on a collective basis, for groups of individually
significant accounts for which no evidence of
impairment has been individually identified or for
high-volume groups of homogeneous loans that are
not considered individually significant.
It is HSBC’s policy that each operating
company creates allowances for impaired loans
promptly and consistently.
Management regularly evaluates the adequacy
of the established allowances for impaired loans by
conducting a detailed review of the loan portfolio,
comparing performance and delinquency statistics
with historical trends and assessing the impact of
current economic conditions.
Individually assessed impairment allowances
These are determined by evaluating exposure to loss,
case by case, on all individually significant accounts
and all other accounts that do not qualify for the
collective assessment approach outlined below.
Loans are treated as impaired as soon as there is
objective evidence that an impairment loss has been
incurred. The criteria used by HSBC to determine
that there is such objective evidence include:
• known cash flow difficulties experienced by the
borrower;
• past due contractual payments of either principal
or interest;
• breach of loan covenants or conditions;
• the probability that the borrower will enter
bankruptcy or other financial realisation; and
• a significant downgrading in credit rating by an
external credit rating agency.
In determining the level of allowances on such
accounts, the following factors are typically
considered:
• HSBC’s aggregate exposure to the customer;
• the viability of the customer’s business model
and their capacity to trade successfully out of
financial difficulties, generating sufficient cash
flow to service debt obligations;
• the ability of the borrower to obtain, and make
payments in, the currency of the loan if not
denominated in local currency;
• the amount and timing of expected receipts and
recoveries;
• the extent of other creditors’ commitments
ranking ahead of, or pari passu with, HSBC and
the likelihood of other creditors continuing to
support the company;
• the complexity of determining the aggregate
amount and ranking of all creditor claims and
the extent to which legal and insurance
uncertainties are evident;
• the value of security and likelihood of
successfully realising it;
• the existence of other credit mitigants and the
ability of the providers of such credit mitigants
to deliver as contractually committed; and
• when available, the secondary market price of
the debt.
The level of impairment allowances on
individually significant accounts that are above
defined materiality thresholds is reviewed at
least semi-annually, and more regularly when
circumstances require. This normally encompasses
re-assessment of the enforceability of any collateral
held and of actual and anticipated receipts. For
significant commercial and corporate debts,
specialised loan ‘work-out’ teams with experience in
insolvency and specific market sectors are used to
manage the lending and assess likely losses.
Individually assessed impairment allowances
are only released when there is reasonable and
objective evidence of a reduction in the established
loss estimate.
Collectively assessed impairment allowances
Impairment is assessed on a collective basis in two
circumstances:
• to cover losses that have been incurred but have
not yet been identified on loans subject to
individual assessment; and
• for homogeneous groups of loans that are not
considered individually significant.
Incurred but not yet identified impairment
Individually assessed loans for which no evidence of
impairment has been specifically identified on an
individual basis are grouped together according to
their credit risk characteristics. A collective
impairment allowance is calculated to reflect
impairment losses incurred at the balance sheet date
which will only be individually identified in the
future.