HSBC 2007 Annual Report Download - page 204

HSBC HOLDINGS PLC
Report of the Directors: The Management of Risk (continued)
Credit risk > Credit risk management / Exposure
202
• when available, the secondary market price of
the debt.
The level of impairment allowances on
individually significant accounts that are above
defined materiality thresholds is reviewed at least
semi-annually, and more regularly when
circumstances require. This normally encompasses
re-assessment of the enforceability of any collateral
held and of actual and anticipated receipts. For
significant commercial and corporate debts,
specialised loan ‘work-out’ teams with experience in
insolvency and specific market sectors are used to
manage the lending and assess likely losses.
Individually assessed impairment allowances
are only released when there is reasonable and
objective evidence of a reduction in the established
loss estimate.
Collectively assessed impairment allowances
Impairment is assessed on a collective basis in two
circumstances:
• to cover losses that have been incurred but have
not yet been identified on loans subject to
individual assessment; and
• for homogeneous groups of loans that are not
considered individually significant.
Incurred but not yet identified impairment
Individually assessed loans for which no evidence of
impairment has been specifically identified on an
individual basis are grouped together according to
their credit risk characteristics. A collective
impairment allowance is calculated to reflect
impairment losses incurred at the balance sheet date
which will only be individually identified in the
future.
The collective impairment allowance is
determined having taken into account:
• historical loss experience in portfolios of similar
credit risk characteristics (for example, by
industry sector, risk rating or product segment);
• the estimated period between impairment
occurring and the loss being identified and
evidenced by the establishment of an
appropriate allowance against the individual
loan; and
• management’s experienced judgement as to
whether current economic and credit conditions
are such that the actual level of inherent losses is
likely to be greater or less than that suggested by
historical experience.
The period between a loss occurring and its
identification is estimated by local management for
each identified portfolio. In general, the periods used
vary between four and twelve months although, in
exceptional cases, longer periods are warranted.
The basis on which impairment allowances for
incurred but not yet identified losses is established in
each reporting entity is documented and reviewed by
senior Finance and Credit Risk management to
ensure conformity with Group policy.
Homogeneous groups of loans
Two methodologies are used to calculate impairment
allowances where large numbers of relatively low-
value assets are managed using a portfolio approach,
typically:
• low-value, homogeneous small business
accounts in certain countries or territories;
• residential mortgages that have not been
individually assessed;
• credit cards and other unsecured consumer
lending products; and
• motor vehicle financing.
When appropriate empirical information is
available, the Group uses roll rate methodology. This
employs a statistical analysis of historical trends of
default and the amount of consequential loss, based
on the delinquency of accounts within a portfolio of
homogeneous accounts. Other historical data and
current economic conditions are also evaluated when
calculating the appropriate level of impairment
allowance required to cover inherent loss. In certain
highly developed markets, models also take into
account behavioural and account management trends
revealed in, for example, bankruptcy and
rescheduling statistics.
When the portfolio size is small, or when
information is insufficient or not reliable enough to
adopt a roll rate methodology, a formulaic approach
is used that allocates progressively higher percentage
loss rates the longer a customer’s loan is overdue.
Loss rates reflect the discounted expected future
cash flows for a portfolio.
Generally, historical experience is the most
objective and relevant information from which to
begin to assess inherent loss within each portfolio. In
circumstances where historical loss experience
provides less relevant information about the inherent
loss in a given portfolio at the balance sheet date –
for example, where there have been changes in
economic conditions or regulations – management
considers the more recent trends in the portfolio risk