HSBC 2012 Annual Report Download - page 450

HSBC HOLDINGS PLC
Notes on the Financial Statements (continued)
16 – Fair values of financial instruments not carried at fair value
448
The following is a list of financial instruments whose carrying amount is a reasonable approximation of fair value
because, for example, they are short-term in nature or reprice to current market rates frequently:
Assets
Cash and balances at central banks
Items in the course of collection from other banks
Hong Kong Government certificates of indebtedness
Endorsements and acceptances
Short-term receivables within ‘Other assets’
Accrued income
Liabilities
Hong Kong currency notes in circulation
Items in the course of transmission to other banks
Investment contracts with discretionary participation features within ‘Liabilities under insurance contracts’
Endorsements and acceptances
Short-term payables within ‘Other liabilities’
Accruals
Analysis of loans and advances to customers by geographical segment
At 31 December 2012 At 31 December 2011
Carrying
amount
Fair
value
Carrying
amount
Fair
value
US$m US$m US$m US$m
Loans and advances to customers
Europe ....................................................................................................... 463,440 453,382 434,336 426,039
Hong Kong ............................................................................................... 173,613 171,926 157,665 154,054
Rest of Asia-Pacific .................................................................................. 138,119 138,015 123,868 123,662
Middle East and North Africa .................................................................. 28,086 27,954 25,875 25,758
North America .......................................................................................... 140,756 128,637 142,747 128,608
Latin America ........................................................................................... 53,609 53,827 55,938 56,364
997,623 973,741 940,429 914,485
Valuation
The calculation of fair value incorporates HSBC’s estimate of the amount at which financial assets could be
exchanged, or financial liabilities settled, between knowledgeable, willing parties in an arm’s length transaction. It
does not reflect the economic benefits and costs that HSBC expects to flow from the instruments’ cash flows over
their expected future lives. Other reporting entities may use different valuation methodologies and assumptions in
determining fair values for which no observable market prices are available.
The fair values of loans and advances to customers in the US are substantially lower than their carrying amount,
reflecting the market conditions at the balance sheet date. The secondary market demand and estimated value for US
loans and advances has been heavily influenced by the challenging economic conditions during the past number of
years, including house price depreciation, rising unemployment, changes in consumer behaviour, changes in discount
rates and the lack of financing options available to support the purchase of loans and advances. Many investors are
non-bank financial institutions or hedge funds with high equity levels and a high cost of debt. For certain consumer
loans, investors take a more conservative view of future performance than HSBC. As a result, third parties are likely
to assume higher charge-off levels and/or slower voluntary prepayment speeds than HSBC believes will ultimately
be the case. The investor discount rates reflect this difference in the overall cost of capital as well as the potential
volatility in the underlying cash flow assumptions, the combination of which may yield a significant pricing discount
from HSBC’s intrinsic value.
There was a modest decrease year on year in the fair value of loans and advances to customers in Europe relative to
their carrying amount, largely in the UK mortgage portfolio which is sensitive to changes in market pricing between
the balance sheet dates given its size and the competitive UK market. We also enhanced fair value estimation
processes for mortgage and corporate lending in the UK to reflect risk factors, product characteristics and prepayment
estimates at a more granular level. This overall decrease was mitigated by higher valuations of ABSs classified as
loans and receivables following improved market appetite for such securities.