HSBC 2012 Annual Report Download - page 141

139
Overview Operating & Financial Review Corporate Governance Financial Statements Shareholder Information
Credit risk is the risk of financial loss if a
customer or counterparty fails to meet an
obligation under a contract. It arises
principally from direct lending, trade finance
and leasing business, but also from certain
other products such as guarantees and credit
derivatives and from holding assets in the
form of debt securities.
There were no material changes to our policies and
practices for the management of credit risk in 2012.
A summary of our current policies and
p
ractices regarding credit risk is provided in
the Appendix to Risk on page 252.
Summary of credit risk in 2012
(Unaudited)
Maximum exposure to credit risk
At 31 December
2012 2011
US$m US$m
Trading assets ................................ 367,177 309,449
Financial assets designated at
fair value .................................... 12,714 12,926
Derivatives ..................................... 357,450 346,379
Loans and advances held at
amortised cost ............................ 1,150,169 1,121,416
– to banks ................................... 152,546 180,987
– to customers ............................ 997,623 940,429
Financial investments .................... 415,312 392,834
Assets held for sale ........................ 9,292 37,808
Other assets .................................... 203,561 192,024
Off-balance sheet exposures .......... 624,462 694,228
– financial guarantees and
similar contracts .................... 44,993 39,324
– loan and other credit-related
commitments ......................... 579,469 654,904
3,140,137 3,107,064
In 2012, net loans and advances to customers
continued to represent our most significant exposure
to credit risk, making up 32% of total credit
exposure compared with 30% in 2011. Other
significant components of our credit exposures were
financial investments at 13%, unchanged from 2011,
trading assets at 12% (2011: 10%) and derivatives at
11% (unchanged from 2011). Loans and advances to
banks fell as a proportion of the Group’s credit
exposure from 6% in 2011 to 5% in 2012. Off-
balance sheet assets contributed 20% of our total
credit exposure, mainly relating to loan and other
credit-related commitments (2011: 22%).
Of our net loans and advances to customers,
corporate and commercial lending made up the
largest proportion at 51% (2011: 49%), with
significant exposures in Europe, Hong Kong and
Rest of Asia-Pacific. First lien residential mortgages
represented 30% of total gross loans and advances,
mainly in the UK, the US and Hong Kong. Other
personal lending (including second lien residential
mortgages) made up the bulk of the remaining
exposure.
Loans and advances excluding held for sale: total
exposure, impairment allowances and charges
(Unaudited)
2012 2011
US$bn US$bn
At 31 December
Total gross loans and advances (A) 1,166.3 1,139.1
Impairment allowances ................... 16.2 17.6
– as a percentage of A ................ 1.39% 1.55%
Loans and advances net of
impairment allowances.................. 1,150.2 1,121.5
Year ended 31 December
Impairment charges ........................ 8.2 11.5
The increase in corporate and commercial
lending stemmed mainly from Europe, due to a rise
in overdrafts which did not meet accounting criteria
for netting against corresponding current account
balances. Increases in North America reflected
CMB’s focus on target segments in the US, partly
offset by the continued decline in balances in the
run-off CML portfolio. In addition, during the year
we reclassified US$3.7bn of non-real estate personal
loan balances in the CML portfolio and US$2.2bn of
lending balances associated with certain operations
in Latin America, net of impairment allowances, to
‘Assets held for sale’. The disposal of the Card and
Retail Services business in the US during the year
did not contribute to the decline as the related
balances had been transferred to ‘Assets held for
sale’ during 2011.
The increase in first lien residential mortgages
reflected the success of marketing campaigns and
competitive pricing in the UK, the continued strength
of the property market in Hong Kong and distribution
network expansion in Rest of Asia-Pacific.
Within net loans and advances, loan impairment
allowances fell by US$1.4bn, driven by run-off in the
CML portfolio and the reclassification of non-real
estate personal loan balances to ‘Assets held for sale’.
Trading assets include debt securities
(principally government and government-related
securities), reverse repo and stock borrowing
balances. Balances recovered in 2012 from the
subdued levels seen at the end of 2011, when client
activity declined due to the eurozone debt concerns
dominating the global economy.
Loans and advances to banks fell, driven by a
reduction in reverse repo balances, in part reflecting