HSBC 2009 Annual Report Download - page 216

HSBC HOLDINGS PLC
Report of the Directors: Risk (continued)
Credit risk > Concentration of exposure / Areas of special interest > Wholesale lending / Personal lending
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At 31 December 2009, HSBC had in-country
foreign currency and cross-border amounts
outstanding to counterparties in The Netherlands of
between 0.75 per cent and 1 per cent of total assets;
in aggregate, US$19.6 billion.
At 31 December 2008, HSBC had in-country
foreign currency and cross-border amounts
outstanding to counterparties in Japan of between
0.75 per cent and 1.0 per cent of total assets; in
aggregate, US$24.4 billion.
At 31 December 2007, HSBC had in-country
foreign currency and cross-border amounts
outstanding to counterparties in Hong Kong,
Belgium and Ireland of between 0.75 per cent and
1.0 per cent of total assets. The aggregate in-
country foreign currency and cross-border amounts
outstanding were Hong Kong, US$19.7 billion,
Belgium, US$19.3 billion and Ireland,
US$19.3 billion.
Areas of special interest
Wholesale lending
(Unaudited)
Wholesale lending covers the range of credit
facilities granted to sovereign borrowers, banks,
non-bank financial institutions and major corporate
entities. The Group’s wholesale portfolios are well
diversified across geographical and industry
sectors, with exposure subject to portfolio controls
governing concentration risk. Overall credit quality
showed some signs of deterioration during 2009, as
companies were affected by the global economic
downturn, although in the second half credit
conditions eased on the back of successful
refinancing activity earlier in the year.
The widespread intervention by many
governments to stabilise and, in some cases to
recapitalise, banks and other financial
intermediaries had a positive effect in reducing
fears of a systemic threat to financial markets.
Notwithstanding this, many wholesale customers
and counterparties faced the twin challenges of a
reduction in available credit and liquidity, and
reduced demand for their products and services;
this encouraged them to reduce indebtedness
through portfolio disposals, extend the duration of
short-term finance and focus increasingly on cost
efficiency.
HSBC has worked closely with its customers
to identify problem areas early and minimise the
likelihood and impact of potentially adverse
situations. During 2009, the Group improved the
structure of its credit exposures by, for example,
adjusting tenor and adding collateral in response to
the heightened risks. HSBC also played a positive
role in maintaining credit supply, where possible.
Commercial real estate
Commercial real estate and other property-related
lending at 31 December 2009 of US$100 billion
declined by 8 per cent from 31 December 2008
on a constant currency basis and represented 11 per
cent of total loans and advances to customers. In
2009, the sector experienced a deterioration in
credit quality, particularly in parts of Europe,
including the UK, and in the Middle East and
North America, due to a decline in asset values, a
rise in rent shortfalls from vacant properties or non-
payment, a contraction in demand for new housing,
a prospective fall in rental cash flows and
significantly restricted refinancing options. As
a result of these factors, portfolio impairment
occurred in a limited number of cases. The Group’s
long-standing policies on asset origination which
focus on relationships with long-term customers
and appropriate initial leverage and interest
coverage ratios played a key role in minimising
impairment. While individual regions differ in their
approach, the Group’s origination loan-to-value
ratios are typically less than 65 per cent.
Automotive sector
The global automotive industry has seen a
significant deterioration in market conditions and
prospects over a prolonged period, as new entrants
and legacy cost issues, primarily in the US and
Europe, have taken effect. Declining sales volumes,
exacerbated by the current economic downturn,
have increased the incidence of financial stress on
equipment manufacturers, suppliers and dealers.
In the second half of 2009, the industry saw some
consolidation and, although there were tentative
signs of an increase in sales, these should be viewed
in the light of the various government scrappage
schemes for older vehicles in the US and Europe.
HSBC has adopted a cautious approach
towards this industry for a number of years,
prioritising commitments to stronger global
manufacturers and limiting exposure to those firms
considered most likely to be affected by an industry
downturn. As a result, HSBC did not have any
significant direct exposure to the major US vehicle
manufacturers which entered Chapter 11
bankruptcy restructuring during 2009. HSBC had
some exposure to North American vehicle dealers
and suppliers, but this was minimal in the context
of the Group. Exposure to the industry is controlled
by a global appetite cap that is reviewed regularly
at the Group Risk Management Meeting.