HSBC 2014 Annual Report Download - page 55

HSBC BANK PLC
Report of the Directors: Risk (continued)
53
Commercial real estate lending
(Unaudited)
Commercial real estate lending includes the financing of
corporate, institutional and high net worth individuals
investing primarily in income producing assets and, to a
lesser extent construction and development of the same.
The business focusses mainly on traditional core asset
classes such as retail, offices, light industrial and
residential building projects.
Refinance risk in commercial real estate
Commercial real estate lending tends to require the
repayment of a significant proportion of the principal at
maturity. Typically, a customer will arrange repayment
through the acquisition of a new loan to settle the
existing debt. Refinance risk is the risk that a customer,
being unable to repay their debt on maturity, is unable
to refinance the debt at commercial rates. We monitor
our commercial real estate portfolio closely, assessing
those drivers that may indicate potential issues with
refinancing. The principal driver is the vintage of the
loan, when origination reflected previous market norms
which no longer apply in the current market. Examples
might be higher loan-to-value (‘LTV’) ratios and/or lower
interest cover ratios. The range of refinancing sources in
the local market is also an important consideration, with
risk increasing when lenders are restricted to banks and
when bank liquidity is limited. In addition, underlying
fundamentals such as the reliability of tenants, the
ability to let and the condition of the property are
important, as they influence property values.
Across the group’s commercial real estate portfolios the
behaviour of markets and the quality of assets did not
cause undue concern in 2014.
At 31 December 2014, the UK business had £14.0 billion
of commercial real estate loans, of which £3.8 billion
were due to be refinanced within the next 12 months.
Within these balances, cases subject to close monitoring
within the Loan Management unit amounted to £1.3
billion; £0.8 billion were impaired, against which
impairment allowances of £0.4 billion have been raised.
Where these loans are not considered impaired it is
because there is no evidence to indicate that all
contractual cash flows will not be recovered or that the
loans will need to be refinanced on terms the group
would consider below market norms.
Collateral on loans and advances
It is the group’s practice to lend on the basis of the
customer’s ability to meet their obligations out of their
cash flow resources rather than rely on the value of
security offered. Depending on the customer’s standing
and the type of product, facilities may be provided
unsecured. For other lending a charge over collateral is
obtained and considered in determining the credit
decision and pricing. In the event of a default, the group
may utilise the collateral as a source of repayment.
Depending on its form, collateral can have a significant
financial effect in mitigating exposure to credit risk.
Collateral held is analysed separately for commercial real
estate and for other corporate and commercial and
financial (non-bank) lending. This reflects the differing
nature of collateral held on these portfolios. In each
case, the analysis includes off-balance sheet
commitments.
The collateral measured in the tables below consists of
fixed first charges on real estate and charges over cash
and marketable financial instruments. The values in the
tables represent the expected market value on an open
market basis; no adjustment has been made to the
collateral for any expected costs of recovery. Cash is
valued at its nominal value and marketable securities at
their fair value. The LTV ratios presented are calculated
by directly associating loans and advances with the
collateral that individually and uniquely supports each
facility. Where collateral assets are shared by multiple
loans and advances, whether specifically or, more
generally, by way of an all monies charge, the collateral
value is pro- rated across the loans and advances
protected by the collateral. Other types of collateral
which are commonly taken for corporate and
commercial lending such as unsupported guarantees and
floating charges over the assets of a customer’s business
are not measured in the tables below. While such
mitigants have value, often providing rights in
insolvency, their assignable value is not sufficiently
certain and they are therefore assigned no value for
disclosure purposes.
The value of commercial real estate collateral is
determined by using a combination of professional and
internal valuations and physical inspections. Due to the
complexity of valuing collateral for commercial real
estate, local valuation policies determine the frequency
of review on the basis of local market conditions.
Revaluations are sought with greater frequency as
concerns over the performance of the collateral or the
direct obligor increase.