HSBC 2003 Annual Report Download - page 140

HSBC HOLDINGS PLC
Financial Review (continued)
138
Each operating company is required to
implement credit policies, procedures and lending
guidelines which conform to HSBC Group standards,
with credit approval authorities delegated from the
Board of Directors of HSBC Holdings to the relevant
Chief Executive Officer. In each major subsidiary,
management includes a Chief Credit Officer who, in
most cases, reports to his local Chief Executive
Officer on credit-related issues. In the case of
Household, the Chief Credit Officer reports to the
Chief Operating Officer of that business, in line with
historic practice. All Chief Credit Officers have a
functional reporting line to the Group General
Manager, Group Credit and Risk.
Each operating company is responsible for all
assets in its portfolio, including those subject to
central approval by Group Credit and Risk, and for
managing its own risk concentrations on market
sector, geographical and product bases. Local
systems are in place throughout the Group to enable
operating companies to control and monitor
exposures by customer and counterparty.
Special attention is paid to problem loans. When
appropriate, specialist units are established by
HSBC’s operating companies to provide customers
with intensive management and control support in
order to help them avoid default wherever possible
and maximise recoveries. Regular audits of operating
companies’ credit processes are undertaken by
HSBC’s Internal Audit function. Audits include
consideration of the completeness and adequacy of
credit manuals and lending guidelines, an in-depth
analysis of a representative sample of accounts, an
overview of homogenous portfolios of similar assets
to assess the quality of the loan book and other
exposures, and adherence to Group standards and
policies in the extension of credit facilities.
Individual accounts are reviewed to ensure that
facility grades are appropriate, that credit and
collection procedures have been properly followed
and that, where an account or portfolio evidences
deterioration, adequate provisions are raised in
accordance with the Group’s established processes.
Internal Audit will discuss with management facility
gradings they consider to be inappropriate, and their
subsequent recommendations for revised grades must
then be assigned to the facilities concerned.
Provisions for bad and doubtful debts
It is HSBC policy that each operating company
makes provision for bad and doubtful debts promptly
when required and on a consistent basis in
accordance with established Group guidelines.
HSBC’s grading process for credit facilities
extended by members of the Group is designed to
highlight exposures requiring greater management
attention based on a higher probability of default and
potential loss. Management particularly focuses on
the appropriateness of grades assigned to facilities to
those borrowers and portfolio segments classified
below satisfactory grades. Amendments, where
necessary, are required to be undertaken promptly.
Management also regularly performs an assessment
of the adequacy of the established provisions for bad
and doubtful debts by conducting a detailed review
of the loan portfolio, comparing performance and
delinquency statistics against historical trends and
undertaking an assessment of current economic
conditions.
There are two types of provision, specific and
general, as discussed below.
Specific provisions
Specific provisions represent the quantification of
actual and inherent losses from homogenous
portfolios of assets and individually identified
accounts. Specific provisions are deducted from
loans and advances in the balance sheet. Following
the acquisition of Household, the majority of specific
provisions are now determined on a portfolio basis.
Portfolios
Where homogenous groups of assets are reviewed on
a portfolio basis (e.g. credit cards, other unsecured
consumer lending, motor vehicle financing and
residential mortgage loans), two alternative methods
are used to calculate specific provisions:
• When appropriate empirical information is
available, the Group utilises roll rate
methodology (a statistical analysis of historical
trends of the probability of default and amount
of consequential loss, assessed at each time
period for which payments are overdue), other
historical data and an evaluation of current
economic conditions, to calculate an appropriate
level of specific provision based on inherent
loss. Additionally, in certain highly developed
markets, sophisticated models also take into
account behavioural and account management
trends such as bankruptcy and restructuring
statistics. Roll rates are regularly benchmarked