HSBC 2015 Annual Report Download - page 200

Report of the Directors: Risk (continued)
Appendix to Risk – Policies and practices
HSBC HOLDINGS PLC
198
For loan restructurings in wholesale lending, indicators of significant concerns regarding a borrower’s ability to pay include:
• the debtor is currently in default on any of its debt;
• the debtor has declared or is in the process of declaring bankruptcy or entering into a similar process;
• there is significant doubt as to whether the debtor will continue to be a going concern;
• currently, the debtor has securities that have been delisted, are in the process of being delisted, or are under threat of
being delisted from an exchange as a result of trading or financial difficulties;
• based on estimates and projections that only encompass current business capabilities, the Group forecasts that the
debtor’s entity-specific cash flows will be insufficient to service the debt (both interest and principal) in accordance with the
contractual terms of the existing agreement through maturity. In this instance, actual payment default may not yet have
occurred; and
• absent the modification, the debtor cannot obtain funds from sources other than its existing creditors at an effective
interest rate equal to the current market interest rate for similar debt for a non-distressed debtor.
Where the modification of a loan’s contractual payment terms represents a concession for economic or legal reasons relating
to the borrower’s financial difficulty, and is a concession that we would not otherwise consider, then the renegotiated loan
is disclosed as impaired in accordance with our impaired loan disclosure convention described in more detail on page 354,
unless the concession is insignificant and there are no other indicators of impairment. Insignificant concessions are primarily
restricted to our CML portfolio in HSBC Finance, where loans which are in the early stages of delinquency (less than 60 days
delinquent) and typically have the equivalent of two payments deferred for the first time, are excluded from our impaired loan
classification, as the contractual payment deferrals are deemed to be insignificant compared with payments due on the loan as
a whole. For details of HSBC Finance’s loan renegotiation programmes and portfolios, see pages 129 and 145.
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 insignificant 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 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.
For retail lending the minimum period of payment performance required depends on the nature of loans in the portfolio,
but is typically between six and twelve months. Where portfolios have more significant levels of forbearance activity, such
as that undertaken by HSBC Finance, the minimum repayment performance period required may be substantially more
(for further details on HSBC Finance see page 145). 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 (in the case of HSBC Finance, in certain circumstances,
for example where debt has been restructured in bankruptcy proceedings, fewer or no qualifying payments may be required).
The qualifying payments are required in order to demonstrate that the renegotiated terms are sustainable for the borrower.
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 concession is not significant and the contractual cash flows
are expected to be collected in full following the renegotiation.