HSBC 2012 Annual Report Download - page 132

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
Risk > Areas of special interest / Top and emerging risks
130
placement of funds directly with central banks in the
most highly-rated countries.
Our businesses in peripheral eurozone countries
are funded from a mix of local deposits, local
wholesale funding and intra-Group loans extended
from HSBC operations with surplus funds. Intra-
Group funding carries the risk that a member country
might exit the eurozone and redenominate its
national currency, which could result in a significant
currency devaluation. A description of risks relating
to currency redenomination in the event of the exit
of a eurozone member is provided on page 131.
Risk management and contingency planning
There is an established framework for dealing with
counterparty and systemic crisis situations, both
regionally and globally, which is complemented by
regular specific and enterprise-wide stress testing
and scenario planning. The framework functions
both in pre and in-crisis situations and ensures that
we have detailed operational plans in the event of
an adverse scenario materialising. It was deployed in
2011 and has continued to operate throughout 2012
to ensure that pre-crisis preparation remains apposite
and robust.
The main focus of preparation for eurozone exit
continues to be on Greece and Spain although, as the
eurozone situation has developed in 2012, we have
also considered other scenarios including contagion
risk to non-eurozone countries or the exit of a higher
impact eurozone member. Management actions
include regular meetings of a Eurozone Major
Incident Group and a tested regional eurozone
contingency plan covering all global businesses and
functions. The plan considers payments, legal, client
account, internal and external communication and
regulatory and compliance issues associated with
eurozone breakup.
Personal lending – US lending
The slight improvement in US economic conditions
continued throughout 2012. Real GDP grew by 2.2%
and consumer spending growth remained moderate.
Threats to economic growth remained, primarily
with the uncertainty in the housing market and
elevated unemployment levels, although both of
them demonstrated modest improvements during the
year.
We remained focused on managing the run-off
of balances in our HSBC Finance portfolio and
completed the sales of our US Card and Retail
Services business and 195 retail branches principally
in upstate New York in 2012. Total lending
balances, including loans held for sale, within HSBC
Finance were US$43bn at 31 December 2012, a
decline of US$6.8bn compared with the end of 2011.
The rate at which balances in the CML portfolio are
declining continues to be affected by the lack of
refinancing opportunities available to customers and
the continued impact of the temporary suspension of
foreclosure activity in 2010. Foreclosure processing
has now resumed in substantially all states, although
there continues to be a backlog of loans which have
not yet been referred to foreclosure. In addition, our
loan modification programmes, which are designed
to improve cash collections and avoid foreclosure,
continued to slow repayment rates.
In the third quarter of 2012, we reclassified non-
real estate personal loan balances of US$3.7bn,
net of impairment allowances, from our consumer
finance portfolio to ‘Assets held for sale’ as we
actively marketed the portfolio. We also identified
real estate secured loan balances, with a carrying
amount of US$3.8bn which, as part of our strategy,
we have announced that we plan to actively market
in multiple transactions generally over the next two
years. At 31 December 2012, the carrying value of
the non-real estate and the real estate secured loans
which we intend to sell was approximately US$1bn
greater than their estimated fair value. We expect to
recognise a loss on sale for these loans over the next
few years, the actual amount of which will depend
on market conditions at the time of the sales.
Total mortgage lending in the US was US$55bn
at 31 December 2012, a decline of 7% compared
with the end of 2011, mainly due to the continued
run-off of the CML portfolio.
Top and emerging risks
(Unaudited)
Identifying and monitoring top and emerging risks
is integral to our approach to risk management. We
define a ‘top risk’ as being a current, emerged risk
which has arisen across any of our risk categories,
regions or global businesses and has the potential to
have a material impact on our financial results or our
reputation and the sustainability of our long-term
business model, and which may form and crystallise
within a one-year horizon. We consider an
‘emerging risk’ to be one which has large uncertain
outcomes that may form beyond a one-year horizon
which, if they were to crystallise, could have a
material effect on our long-term strategy. Our top
and emerging risk framework enables us to focus
on current and forward looking aspects of our risk
exposures and ensure our risk profile remains in line
with our risk appetite and that our appetite remains
appropriate. Our current top and emerging risks are
as follows: