HSBC 2011 Annual Report Download - page 121

119
Overview Operating & Financial Review Corporate Governance Financial Statements Shareholder Information
We expect low growth to continue in 2012
despite the projected continuing fiscal and monetary
expansion and positive business outlook. However,
political gridlock continues to cast doubts on the
administration’s ability to approve a medium-term
fiscal consolidation plan aimed at reducing public
debt to more sustainable levels while pursuing
expansionary policies. A European banking crisis is
likely to cause severe damage to the global financial
system, including the US, and will certainly affect
the credit supply to consumers and businesses there,
despite strong liquidity and de-leveraging by US
banks during 2011.
We continue to closely monitor events and
have stress-tested our capital position for potential
scenarios at Group level and for the US business
only. These results inform Group and US-specific
capital planning and risk appetite setting as part of
our annual operating planning process.
Middle East and North Africa
(Unaudited)
Although significant unrest and political changes
were witnessed in the Middle East and North Africa
in 2011, the majority of the Group’s exposures in
the region were concentrated in our associate
investment in Saudi Arabia and in the UAE, where
the respective political landscapes remained stable
and economic growth continued to recover. In the
countries in which we have a presence and there was
unrest or political change (or which exhibited similar
socio-economic, political and demographic profiles
to countries experiencing unrest), we continued to
carefully monitor and respond to developments
while assisting our customers in managing their
own risks in the volatile environment.
We also continued to work closely with Dubai
World and the various entities related to the
Government of Dubai to address their prevailing
issues. In March 2011, Dubai World signed a final
deal with HSBC and other creditors restructuring
US$25bn of its debt. The arrangement extends loan
maturities for five to eight years at discounted rates,
allowing Dubai World to sell off its non-core assets
while focusing on its core earnings businesses.
Commercial real estate
(Unaudited)
Our exposure to the commercial real estate sector is
concentrated in Hong Kong, the UK and North
America. The market in Hong Kong was relatively
buoyant in 2011; however, transaction volumes
declined and asset prices began to stabilise following
initiatives taken by supervisory authorities. The UK
continued to exhibit relative strength in London and
the South East, though many other regions were
negatively affected by weak growth in the UK
economy. We are closely monitoring re-financing
requirements in the UK market over the next two
to three years. In North America, the market has
continued to be relatively stable, in part supported
by the low levels of interest rates.
On a constant currency basis, the aggregate of
our commercial real estate and other property-related
lending was US$113bn at 31 December 2011, an
increase of 7% compared with 31 December 2010,
representing 12% of total loans and advances to
customers. In 2011, credit quality across this sector
showed some deterioration from 2010 and there
remains risk of stress in certain markets.
Accordingly, across our portfolios, credit risk is
mitigated by long-standing and conservative policies
on asset origination which focus on relationships
with long-term customers and limited initial
leverage. Group Risk, in conjunction with major
subsidiaries, designates real estate as a Controlled
Sector and, accordingly, implements enhanced
exposure approval, monitoring and reporting
procedures. We set and monitor risk appetite limits
for the sector at both Group and regional levels to
detect and prevent higher risk concentrations. A
quarterly report comparing the risk-weighted
exposures of the regions and global businesses
with these appetite limits is provided to senior
management. While individual regions may differ
with regard to local market regulatory and legal
structures and real estate market characteristics,
typically, origination LTV ratios would be less than
65% across the Group where loans are secured on
commercial real estate assets. Lending to the sector
also includes lending to large real estate developers
which is typically not secured directly by charges
over the underlying real estate assets.
Personal lending
(Unaudited)
We provide a broad range of secured and unsecured
personal lending products to meet customer needs.
Given the diverse nature of the markets in which
we operate, the product is not standard across
all countries but is tailored to meet local demands
while using appropriate distribution channels and,
wherever possible, global IT platforms.
Personal lending includes advances to customers
for asset purchases, such as residential property and
motor vehicles, where the loans are typically secured
by the assets being acquired. We also offer loans
secured on existing assets, such as first and second
liens on residential property; unsecured lending
products such as overdrafts, credit cards and payroll