HSBC 2012 Annual Report Download - page 131

129
Overview Operating & Financial Review Corporate Governance Financial Statements Shareholder Information
Refinance risk, which is subject to close
scrutiny in key commercial real estate markets, is
the risk that a loan which is due to be repaid through
refinancing over the short term cannot, at maturity,
be refinanced on current market terms. Such cases
may either lead to the loan being treated as impaired
because the borrower’s ability to pay is considered
doubtful or, if refinanced by HSBC, may result in it
being treated as a renegotiated loan because of the
degree of forbearance required (see page 158 for
a description of renegotiated loans). In commercial
real estate markets, refinance risk can arise
particularly when a loan is serviced exclusively by
the property to which it relates, i.e. when the bank
does not, or is not able to, place principal reliance
on other cash flows available to the borrower.
We monitor the commercial real estate portfolio,
assessing those drivers that may indicate potential
issues with refinancing. The principal driver is the
vintage of the loan, where origination reflected
previous market norms which no longer apply in the
current market. Examples are higher loan-to-value
ratios and/or lower interest cover ratios. The range
of refinancing sources in the local market is also an
important consideration, with concern increasing
when this is restricted to banks and when bank
liquidity is limited. In addition, the quality of
underlying fundamentals such as tenant reliability,
ability to let, and the condition of the property itself
is also important, as it influences property value.
With the exception of the UK, in our material
commercial real estate portfolios globally, the
behaviour of the market and the quality of assets
does not cause undue concern. In the UK, the above
drivers combine to cause a concern regarding our
sensitivity to risks of refinance that warrant
enhanced management attention.
At 31 December 2012, the UK had US$24.5bn
of commercial real estate loans, of which US$7.4bn
were due to be refinanced within the next 12 months,
of which US$2.4bn were assessed as possessing
characteristics that indicated an increased risk of
refinancing difficulty. Such cases are monitored
closely with US$1.9bn already under special
management within our Loan Management Units.
US$0.9bn were disclosed as impaired with
impairment allowances of US$0.4bn. Where these
loans are not considered impaired it is because,
while they may possess characteristics that indicate a
potential issue with refinancing, as described above,
there is no evidence to indicate that all contractual
cash flows will not be recovered or that the loans
will need to be refinanced on terms we would
consider below market norms.
The relevance of current market conditions to
impairment assessment is particularly relevant over
a 12-month period. Over a 12 to 24-month horizon,
US$3.3bn of UK commercial real estate and
other property-related lending loans are due to be
refinanced. Reviews of more sensitive assets due
between 12 and 24 months have been conducted
to ensure that there are no further cases currently
requiring special management or that should be
considered impaired.
Eurozone crisis
Eurozone countries are members of the EU and
part of the euro single currency bloc. The peripheral
eurozone countries are those that have exhibited
levels of market volatility that exceeded other
eurozone countries, demonstrating fiscal or political
uncertainty which may persist through the first half
of 2013. In 2012, in spite of improvements through
austerity and structural reforms, the peripheral
eurozone countries of Greece, Ireland, Italy,
Portugal, Spain and Cyprus continued to exhibit
a high ratio of sovereign debt to GDP or short to
medium-term maturity concentration of their
liabilities, with Greece, Spain and Cyprus seeking
assistance.
Exposure to eurozone countries is analysed in
the table on page 193.
Risk reduction in 2012
At 31 December 2012, our net exposure to the
peripheral eurozone countries was US$38bn,
including net exposure to sovereign borrowers,
agencies and banks of US$12bn. During the year,
we continued to reduce our overall net exposure
to sovereigns, agencies and banks of peripheral
eurozone countries. In addition, we continued to
actively reduce exposures to counterparties
domiciled in other eurozone countries that had
exposures to sovereigns and/or banks in peripheral
eurozone countries of sufficient size to threaten their
on-going viability in the event of an unfavourable
conclusion to the current crisis.
This was undertaken through an analysis of
publicly available information, reviews of external
analyst reports and meetings with the counter-
parties’ officials. Vulnerable counterparties were
identified and subjected to enhanced monitoring, and
our exposure was managed in a similar manner to
the monitoring and management of direct exposures
to the peripheral eurozone countries. One of the
primary issues underpinning this process was the
management of our surplus liquidity, resulting in the