HSBC 2012 Annual Report Download - page 258

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
Risk > Appendix – Risk policies and practices > Credit risk
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for the borrower. For corporate and commercial loans, which are individually assessed for impairment and where
non-monthly payments are more commonly agreed, the history of payment performance will depend on the
underlying structure of payments agreed as part of the restructure.
Renegotiated loans are classified as unimpaired where the renegotiation has resulted from significant concern about
a borrower’s ability to meet their contractual payment terms but the renegotiated terms are based on current market
rates and contractual cash flows are expected to be collected in full following the renegotiation. Unimpaired
renegotiated loans also include previously impaired renegotiated loans that have demonstrated satisfactory
performance over a period of time or have been assessed based on all available evidence as having no remaining
indicators of impairment.
Loans that have been identified as renegotiated retain this designation until maturity or derecognition. When a loan is
restructured as part of a forbearance strategy and the restructuring results in derecognition of the existing loan, such
as in some debt consolidations, the new loan is disclosed as renegotiated.
When determining whether a loan that is restructured should be derecognised and a new loan recognised, we consider
the extent to which the changes to the original contractual terms result in the renegotiated loan, considered as a
whole, being a substantially different financial instrument. The following are examples of circumstances that are
likely to result in this test being met and derecognition accounting being applied:
• an uncollateralised loan becomes fully collateralised;
• the addition or removal of cross collateralisation provisions;
• multiple facilities are consolidated into a single new facility;
• removal or addition of conversion features attached to the loan agreement;
• a change in the currency in which the principal or interest is denominated;
• a change in the liquidation preference or ranking of the instrument; or
• the contract is altered in any other manner so that the terms under the new or modified contract are substantially
different from those under the original contract.
The following are examples of factors that we consider may indicate that the revised loan is a substantially different
financial instrument, but are unlikely to be conclusive in themselves:
• change in guarantees or loan covenants provided;
• less significant changes to collateral arrangements; or
• the addition of repayment provisions or prepayment premium clauses.
Renegotiated loans and recognition of impairment allowances
(Audited)
For retail lending, renegotiated loans are segregated from other parts of the loan portfolio for collective impairment
assessment to reflect the higher rates of losses often encountered in these segments. When empirical evidence
indicates an increased propensity to default and higher losses on such accounts, such as for re-aged loans in the US,
the use of roll-rate methodology ensures these factors are taken into account when calculating impairment allowances
by applying roll rates specifically calculated on the pool of loans subject to forbearance. When the portfolio size is
small or when information is insufficient or not reliable enough to adopt a roll-rate methodology, a basic formulaic
approach based on historical loss rate experience is used. As a result of our roll-rate methodology, we recognise
collective impairment allowances on homogeneous groups of loans, including renegotiated loans, where there is
historical evidence that there is a likelihood that loans in these groups will progress through the various stages of
delinquency, and ultimately prove irrecoverable as a result of events occurring before the balance sheet date. This
treatment applies irrespective of whether or not those loans are presented as impaired in accordance with our
impaired loans disclosure convention. When we consider that there are additional risk factors inherent in the
portfolios that may not be fully reflected in the statistical roll rates or historical experience, these risk factors are
taken into account by adjusting the impairment allowances derived solely from statistical or historical experience.
For further details of the risk factor adjustments see ‘Critical accounting policies’ on page 54.
In the corporate and commercial sectors, renegotiated loans are typically assessed individually. Credit risk ratings are
intrinsic to the impairment assessment. A distressed restructuring is classified as an impaired loan. The individual
impairment assessment takes into account the higher risk of the non-payment of future cash flows inherent in
renegotiated loans.