HSBC 2015 Annual Report Download - page 203

HSBC HOLDINGS PLC
201
Strategic Report Financial Review Corporate Governance Financial Statements Shareholder Information
Impairment assessment
(Audited)
It is our policy that each operating company in HSBC creates impairment allowances for impaired loans promptly and
appropriately, when there is objective evidence that impairment of a loan or portfolio of loans has occurred.
For details of our impairment policies on loans and advances and financial investments, see Note 1j on the Financial
Statements.
Impairment and credit risk mitigation
The existence of collateral has an effect when calculating impairment on individually assessed impaired loans. When we no
longer expect to recover the principal and interest due on a loan in full or in accordance with the original terms and conditions,
it is assessed for impairment. If exposures are secured, the current net realisable value of the collateral is taken into account
when assessing the need for an impairment allowance. No impairment allowance is recognised in cases where all amounts due
are expected to be settled in full on realisation of the security.
Personal lending portfolios are generally assessed for impairment on a collective basis as the portfolios typically consist
of large groups of homogeneous loans. Two methods are used to calculate allowances on a collective basis: a roll-rate
methodology or a more basic formulaic approach based on historical losses. On a yearly basis, we review the impairment
allowance methodology used for retail banking and small business portfolios across the Group to ensure that the assumptions
used in our collective assessment models continued to appropriately reflect the period of time between a loss event occurring
and the account proceeding to delinquency and eventual write-off.
• The historical loss methodology is typically used to calculate collective impairment allowances for secured or low default
portfolios such as mortgages until the point at which they are individually identified and assessed as impaired. For loans
that are collectively assessed using historical loss methodology, the historical loss rate is derived from the average
contractual write-off net of recoveries over a defined period. The net contractual write-off rate is the actual amount of
loss experienced after the realisation of collateral and receipt of recoveries.
• A roll-rate methodology is more commonly adopted for unsecured portfolios when there are sufficient volumes of empirical
data to develop robust statistical models. In certain circumstances mortgage portfolios have a statistically significant
number of defaults and losses available, enabling reliable roll rates to be generated. In these cases a roll-rate methodology
is applied until the point at which the loans are individually identified and assessed as impaired, and the average gross loss
rates by delinquency bucket are adjusted to reflect the future expected cash flows after collateral and other recovery
realisation.
The nature of the collective allowance assessment prevents individual collateral values or loan-to-value (‘LTV’) ratios from
being included within the calculation. However, the loss rates used in the collective assessment are adjusted for the collateral
realisation experiences which will vary depending on the LTV composition of the portfolio. For example, mortgage portfolios
under a historical loss rate methodology with lower LTV ratios will typically experience lower loss history and consequently a
lesser net contractual write-off rate.
For wholesale collectively assessed loans, historical loss methodologies are applied to measure loss event impairments which
have been incurred but not reported. Loss rates are derived from the historical impairment charges or losses recognised on
impaired loans net of recoveries over a defined period, typically no less than 60 months. These historical loss rates are
adjusted by an economic factor which amends the historical averages to better represent current economic conditions
affecting the portfolio. In order to reflect the likelihood of a loss event not being identified and assessed an emergence period
assumption is applied which reflects the period between a loss occurring and its identification. The emergence period is
estimated by management for each identified portfolio. The factors that may influence this estimation include economic and
market conditions, customer behaviour, portfolio management information, credit management techniques and collection and
recovery experiences in the market. The emergence period is assessed empirically on a periodic basis and may vary over time
as these factors change.
Write-off of loans and advances
(Audited)
For details of our policy on the write-off of loans and advances, see Note 1j on the Financial Statements.
In HSBC Finance, the carrying amounts of residential mortgage and second lien loans in excess of net realisable value
are written off at or before the time foreclosure is completed or settlement is reached with the borrower. If there is no
reasonable expectation of recovery, and foreclosure is pursued, the loan is normally written off no later than the end of the
month in which the loan becomes 180 days contractually past due. We regularly obtain new appraisals for these collateral
dependent loans (every 180 days) and adjust carrying values to the most recent appraisal if they have improved or deteriorated
as the best estimate of the cash flows that will be received on the disposal of the collateral.
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