HSBC 2014 Annual Report Download - page 51

HSBC BANK PLC
Report of the Directors: Risk (continued)
49
Impaired loans and advances to customers and banks by industry sector
(Audited)
2014
2013
Individually
assessed
Collectively
assessed
Total
Individually
assessed
Collectively
assessed
Total
£m
£m
£m
£m
£m
£m
Banks
17
–
17
24
–
24
Customers
5,487
911
6,398
6,847
1,022
7,869
Personal
683
878
1,561
735
1,003
1,738
Corporate and commercial
4,619
33
4,652
5,789
19
5,808
Financial
185
–
185
323
–
323
At 31 December
5,504
911
6,415
6,871
1,022
7,893
Renegotiated loans and forbearance
(Audited)
The contractual terms of a loan may be modified for
a number of reasons, including changes in market
conditions, customer retention and other factors not
related to the current or potential credit deterioration of
a customer. ‘Forbearance’ describes concessions made
on the contractual terms of a loan in response to an
obligor’s financial difficulties. We classify and report
loans on which concessions have been granted under
conditions of credit distress as ‘renegotiated loans’ when
their contractual payment terms have been modified,
because we have significant concerns about the
borrowers’ ability to meet contractual payments when
due. On renegotiation, where the existing agreement is
cancelled and a new agreement is made on substantially
different terms, or if the terms of an existing agreement
are modified, such that the renegotiated loan is
substantially a different financial instrument, the loan
would be derecognised and recognised as a new loan,
for accounting purposes. However, the newly recognised
financial asset will retain the renegotiated loan
classification. Concessions on loans made to customers
which do not affect the payment structure or basis
of repayment, such as waivers of financial or security
covenants, do not directly provide concessionary relief to
customers in terms of their ability to service obligations
as they fall due and are therefore not included in this
classification.
For retail lending, our credit risk management policy sets
out restrictions on the number and frequency of
renegotiations, the minimum period an account must
have been opened before any renegotiation can be
considered and the number of qualifying payments that
must be received. The application of this policy varies
according to the nature of the market, the product and
the management of customer relationships through the
occurrence of exceptional events.
Credit quality classification of renegotiated loans
(Audited)
Under IFRSs, an entity is required to assess whether
there is objective evidence that financial assets are
impaired at the end of each reporting period. A loan is
impaired and an impairment allowance is recognised
when there is objective evidence of a loss event that has
an effect on the cash flows of the loan which can be
reliably estimated. Granting a concession to a customer
that we would not otherwise consider, as a result of their
financial difficulty, is objective evidence of impairment
and impairment losses are measured accordingly.
A renegotiated loan is presented as impaired when:
• there has been a change in contractual cash flows as a
result of a concession which the lender would
otherwise not consider, and
• it is probable that without the concession, the
borrower would be unable to meet contractual
payment obligations in full.
This presentation applies unless the concession is in-
significant and there are no other indicators of
impairment.
The renegotiated loan will continue to be disclosed as
impaired until there is sufficient evidence to
demonstrate a significant reduction in the risk of non-
payment of future cash flows, and there are no other
indicators of impairment. For loans that are assessed for
impairment on a collective basis, the evidence typically
comprises a history of payment performance against the
original or revised terms, as appropriate to the
circumstances. For loans that are assessed for
impairment on an individual basis, all available evidence
is assessed on a case-by-case basis.
For retail lending the minimum period of payment
performance required depends on the nature of loans in
the portfolio, but is typically not less than six months.
Where portfolios have more significant levels of
forbearance activity the minimum repayment
performance period required may be substantially more.
Payment performance periods are monitored to ensure
they remain appropriate to the levels of recidivism
observed within the portfolio. These performance
periods are in addition to a minimum of two payments
which must be received within a 60-day period for the
customer to initially qualify for the renegotiation. The
qualifying payments are required in order to
demonstrate that the renegotiated terms are sustainable
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 restructuring.
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