HSBC 2014 Annual Report Download - page 40

HSBC BANK PLC
Report of the Directors: Risk (continued)
38
Periodic risk-based audits of operating companies’ credit
processes and portfolios are undertaken by the Internal
Audit function. Internal Audit discusses with
management any risk ratings it considers to be
inappropriate; following which its final recommendations
for revised ratings must be adopted.
Renegotiated loans and forbearance
(Audited)
A range of forbearance strategies is employed in order to
improve the management of customer relationships,
maximise collection opportunities and, if possible, avoid
default, foreclosure or repossession. They include
extended payment terms, a reduction in interest or
principal repayments, approved external debt
management plans, debt consolidations, the deferral of
foreclosures and other forms of loan modifications and
re-ageing.
The group’s policies and practices are based on criteria
which enable local management to judge whether
repayment is likely to continue. These typically provide a
customer with terms and conditions that are more
favourable than those provided initially. Loan
forbearance is only granted in situations where the
customer has showed a willingness to repay their loan
and is expected to be able to meet the revised
obligations.
Refinance risk
(Audited)
Personal Lending
Interest only mortgages lending incorporate
bullet/balloon payments at the point of final maturity. In
the UK interest only lending is recognised as a niche,
product that meets a valid customer need. To reduce re-
finance risk, initial onboarding assessment of customers’
affordability is made on a capital repayment basis and
every customer has a credible defined repayment
strategy. Additionally the customer is contacted at least
once during the mortgage term to check the status of
the repayment strategy. In situations where it is
identified that a borrower is expected not to be able
either to repay a bullet/balloon payment then the
customer will either default on the repayment or it is
likely that HSBC may need to apply forbearance to the
loan. In either circumstance this gives rise to a loss event
and an impairment allowance will be considered where
appropriate.
Wholesale Lending
Many types of wholesale lending incorporate
bullet/balloon payments at the point of final maturity;
often, the intention or assumption is that the borrower
will take out a new loan to settle the existing debt.
Where this is true the term refinance risk refers
generally to the possibility that, at the point that such a
repayment is due, a borrower cannot refinance by
borrowing to repay existing debt. In situations where it is
identified that a borrower is expected not to be able
either to repay a bullet/balloon payment or to be
capable of refinancing their existing debt on commercial
terms then the customer will either default on the
repayment or it is likely that HSBC may need to refinance
the loan on terms it would not normally offer in the
ordinary course of business. In either circumstance this
gives rise to a loss event and an impairment allowance
will be considered.
Impairment assessment
(Audited)
It is the group’s policy that each operating company
creates allowances for impaired loans promptly and
consistently.
Impairment allowances may be assessed and created
either for individually significant accounts or, on a
collective basis, for groups of individually significant
accounts for which no evidence of impairment has been
individually identified or for high-volume groups of
homogeneous loans that are not considered individually
significant.
When impairment losses occur, we reduce the carrying
amount of loans and advances through the use of an
allowance account. When impairment of available-for-
sale financial assets and held-to-maturity financial
investments occurs, the carrying amount of the asset is
reduced directly. For further details on the accounting
policy for impairment of available-for-sale debt and
equity securities, see accounting policies in Note 1.
Write-off of loans and advances
(Audited)
For details of our policy on the write-off of loans and
advances, see Note 1 on the Financial Statements.
Personal lending
Property collateral for residential mortgages is
repossessed and sold on behalf of the borrower only
when all normal debt recovery procedures have been
unsuccessful. The carrying amounts of residential
mortgages in excess of net realisable value are fully
provided for, from 180 days contractually past due. We
regularly obtain new appraisals for loans (every 180
days) and adjust carrying value to the most recent
appraisal whether it has increased or decreased as the
best estimate of the cash flows that will be received on
the disposal of the collateral for these collateral
dependent loans.
Unsecured personal facilities, including credit cards, are
generally written off at between 150 and 210 days past
due, the standard period being the end of the month in
which the account becomes 180 days contractually
delinquent. Write-off periods may be extended,
generally to no more than 360 days past due but, in very
exceptional circumstances, to longer than that figure in a
few countries where local regulation or legislation
constrain earlier write off or where the realisation of
collateral for secured real estate lending takes this time.
In retail lending, final write-off should occur within 60
months of the default at the latest.
Wholesale Lending
Wholesale loans and advances are written off where
normal collection procedures have been unsuccessful to
the extent that there appears no realistic prospect of
repayment. These procedures may include a referral of
the business relationship to a Debt recovery company.
Debt reorganisation will be considered at all times and
may involve, in exceptional circumstances and in the
absence of any viable alternative, a partial write-off in