HSBC 2011 Annual Report Download - page 133

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Overview Operating & Financial Review Corporate Governance Financial Statements Shareholder Information
minimum and reduce capital repayments as
available. Despite Europe, and the UK in particular,
holding the single largest retail lending portfolio in
the Group, renegotiations of retail loans in this
region were limited due to the quality of the
residential mortgage book.
Forbearance activity within the Middle East and
Latin America (primarily in Mexico and Brazil) was
predominately undertaken in the commercial real
estate and corporate and commercial sectors.
Forbearance activity within Hong Kong and Rest of
Asia-Pacific was insignificant.
HSBC Finance loan modifications and re-ageing
(Unaudited)
HSBC Finance maintains loan modification and
re-age (‘loan renegotiation’) programmes in order to
manage customer relationships, improve collection
opportunities and, if possible, avoid foreclosure.
Since 2006, HSBC Finance has implemented
an extensive loan renegotiation programme, and a
significant portion of its loan portfolio has been
subject to renegotiation at some stage in the life of
the customer relationship as a consequence of the
economic conditions in the US and the nature of
HSBC Finance’s customer base.
From late 2009 and continuing into 2011, the
volume of loans that qualify for a new modification
has reduced significantly. We expect this to continue
to decline as HSBC Finance believes a decreasing
percentage of its customers with unmodified loans
would benefit from loan modification in a way that
would avoid non-payment of future cash flows. In
addition, volumes of new loan modifications are
expected to decrease due to improvements in
economic conditions over the long-term, the
cessation of new real estate secured and personal
non-credit card receivables originations, the
continued run-off of the portfolio and, beginning in
the second quarter of 2010, more stringent qualifying
payment requirements for loan modifications.
Overview by type of loan renegotiation programme in
HSBC Finance
• A temporary modification is a change to the contractual
terms of a loan that results in the giving up of a right to
contractual cash flows over a pre-defined period of time.
With a temporary modification the loan is expected to revert
back to the original contractual terms including the interest
rate charged after the modification period. An example is
reduced interest payments.
A substantial number of HSBC Finance modifications
involve interest rate reductions. These modifications
lower the amount of interest income HSBC Finance is
contractually entitled to receive in future periods.
Historically, modifications have generally been for a period
of six months although extended modification periods are
now more common.
Loans that have been temporarily modified within HSBC
Finance remain classified as impaired until they have
demonstrated a history of payment performance against the
original terms for typically 18 months after the modification
date.
• A permanent modification is a change to the contractual
terms of a loan that results in giving up a right to contractual
cash flows over the life of the loan. An example is a
permanent reduction in the interest rate charged.
Permanent or very long-term modifications, which are due
to an underlying hardship event, remain classified as
impaired for their full life.
• The term ‘re-age’ is a renegotiation whereby the contractual
delinquency status of a loan is reset to current after
demonstrating payment performance. The overdue principal
and/or interest is deferred and paid at a later date. Loan re-
ages enable customers who have been unable to make a
small number of payments to have their loan delinquency
status reset to current, thus remediating overdue balances
that affect their credit score.
Loans that have been re-aged remain classified as impaired
until they have demonstrated a history of payment
performance against the original contractual terms for at
least 12 months.
A temporary or permanent modification may also lead to a
re-ageing of the loan although a loan may be re-aged
without any modification to the original terms and
conditions of the loan.
Qualifying criteria
For an account to qualify for renegotiation it must
meet certain criteria. However, HSBC Finance
retains the right to decline a renegotiation. The
extent to which HSBC Finance renegotiates
accounts that are eligible under its existing policies
will vary depending upon its view of prevailing
economic conditions and other factors which may
change from year to year. In addition, exceptions to
policies and practices may be made in specific
situations in response to legal or regulatory
agreements or orders.