HSBC 2003 Annual Report Download - page 163

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(Form C1) guidelines and therefore exclude the
exposures of insurance subsidiaries. HSBC’s
insurance subsidiaries’ exposures to Argentina as at
31 December 2003 amounted to total assets of
US$0.7 billion, of which US$0.5 billion related to
long-term assurance assets attributable to
policyholders, mainly comprising loans to the
Argentine Government received in exchange for debt
securities. Overall, in-country provisions of US$198
million were held against gross customer non-
government loans of US$456 million. There were
also cross-border provisions of US$118 million held
against exposures to customers in Argentina.
During 2003, HSBC recovered some
US$122 million equivalent of general credit
provisions raised in 2001 as the credit portfolio
stabilised and non-performing accounts fell due to
success in collections and a better environment. The
improved environment reflects both political and
economic progress in the period. The return of a
democratically elected president substantially
improved the political scene and economically the
country began to grow again, driven by improved
sentiment and the impact on the export sector of the
massive devaluation suffered since 2001.
Argentina, however, continues to face, and must
resolve, fundamental structural challenges including
reaching a settlement with its international creditors.
HSBC continues to monitor developments in
Argentina closely and plans to continue to operate
there and contribute to a revitalised financial sector.
However, HSBC is prepared to take the necessary
actions if required to protect the value of its
shareholders’ interests in the event of unforeseen
political or economic events.
Risk elements in the loan portfolio
The SEC requires disclosure of credit risk elements
under the following headings that reflect US
accounting practice and classifications:
• loans accounted for on a non-accrual basis;
• accruing loans contractually past due 90 days or
more as to interest or principal; and
• troubled debt restructurings not included in the
above.
In accordance with UK accounting practice, a
number of operating companies suspend interest
rather than ceasing to accrue. This additional
category is also reported below, as are assets
acquired in exchange for advances.
Non-performing loans and advances1
31 December
2003
US$m
31 December
2002
US$m
Banks .............................................. 24 17
Customers
– Household..................................... 4,706 –
– Other HSBC.................................. 10,344 10,523
15,050 10,523
Total non-performing loans and
advances....................................... 15,074 10,540
Total provisions cover as a
percentage of non-performing
loans and advances ...................... 91.0% 86.7%
1Net of suspended interest.
Non-performing customer loans1 and related
specific provisions outstanding by geographical
segment
2003 2002
Non-
performing
loans
Specific
Provisions
Non-
Performing
loans
Specific
p
rovisions
US$m US$m US$
m
US$
m
Europe................ 5,701 3,554 4,495 2,774
Hong Kong......... 1,671 629 1,724 688
Rest of Asia-
Pacific ........... 1,538 981 2,055 1,321
North America ... 5,444 5,184 1,773 1,482
South America ... 696 530 476 341
15,050 10,878 10,523 6,606
1 Net of suspended interest.
Total non-performing loans to customers increased
by US$4,527 million during 2003, largely as a
consequence of the Household acquisition. At
31 December 2003, non-performing loans
represented 2.8 per cent of total lending compared
with 2.9 per cent at 31 December 2002.
Portfolio provisioning methodologies for
unsecured personal finance (using roll rates or loss
rates) normally leads to a provision coverage of
non-performing loans in excess of 100 per cent, as
significant loss or roll rates are applied to performing
loans. As a consequence, therefore, of the acquisition
of Household, the overall coverage of
non-performing loans has risen from 86.7 per cent
at 31 December 2002 to 91.0 per cent at
31 December 2003. The overall specific provision
coverage of non-performing loans similarly
increased from 62.8 per cent to 72.3 per cent.
Excluding the impact of Household, the coverage
percentage declined to 60.8 per cent. This was due to
US$936 million of write-offs of largely provided