HSBC 2008 Annual Report Download - page 219

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ARM loans nearing their first reset that HSBC
Finance expects will be the most affected by a rate
adjustment. By a variety of means, HSBC Finance
assesses the customer’s ability to make the adjusted
payment and, as appropriate and in accordance with
defined policies, HSBC Finance modifies the loans,
allowing time for the customer to seek alternative
financing or improve their individual situation.
These loan modifications primarily provide for
temporary interest rate relief for up to 12 months by
either maintaining the current interest rate for that
period or resetting the interest rate to one lower than
that originally required at the reset date. At the end
of the relief period, the interest rate on the loan will
reset in accordance with the original loan terms,
unless the borrower qualifies for, and is granted, a
further modification. These loans are not included in
the renegotiated loans figures quoted above, because
they were not contractually delinquent at the time of
the modification.
HSBC Finance also significantly expanded its
Foreclosure Avoidance and Account Modification
Programmes designed to provide relief to qualifying
home owners by either loan restructuring or
modification. Following a strategic review, in the
first quarter of 2008 these programmes were
expanded in the consumer lending business, to help
those customers who did not qualify for assistance
under previous programmes, and to help customers
who required greater assistance than that available
under previous programmes. Innovations included
lowering the interest rate for qualifying customers on
fixed rate loans as well as ARMs, and implementing
longer term modifications, providing assistance
generally for two to five years. Under these
expanded programmes, HSBC Finance modified
over 92,000 loans in 2008 with an aggregate balance
of US$13.5 billion. The ARM Reset Modification
Programme covered some 13,000 loans, with an
aggregate value of US$2.1 billion.
HSBC Finance also supports a variety of
national and local efforts in home ownership
preservation and foreclosure avoidance.
Credit quality of financial instruments
(Audited)
The four credit quality classifications set out and
defined below describe the credit quality of HSBC’s
lending, debt securities portfolios and derivatives.
These classifications each encompass a range of
more granular, internal credit rating grades assigned
to wholesale and retail lending business, as well as
the external ratings attributed by external agencies to
debt securities.
There is no direct correlation between the
internal and external ratings at granular level, except
to the extent each falls within a single quality
classification.
Credit quality of HSBC’s lending, debt securities and other bills
Wholesale
lending and
derivatives
Retail
lending1
Debt
securities
/other
Quality classification
Strong ............................................................................................................... CRR1 to CRR2 EL1 to EL2 A- and above
Medium ............................................................................................................ CRR3 to CRR5 EL3 to EL5 B+ to BBB+,
and unrated
Sub-standard ..................................................................................................... CRR6 to CRR8 EL6 to EL8 B and below
Impaired ........................................................................................................... CRR9 to CRR10 EL9 to EL10 Impaired
1 HSBC observes the disclosure convention that, in addition to those classified as EL9 to EL10, retail accounts classified EL1 to EL8 that
are delinquent by 90 days or more are considered impaired, unless individually they have been assessed as not impaired (see page 219,
‘Past due but not impaired financial instruments’).
Quality classification definitions
• ‘Strong’: exposures demonstrate a strong
capacity to meet financial commitments, with
negligible or low probability of default and/or
low levels of expected loss. Retail accounts
operate within product parameters and only
exceptionally show any period of delinquency.
• ‘Medium’: exposures require closer monitoring,
with low to moderate default risk. Retail
accounts typically show only short periods of
delinquency, with any losses expected to be
minimal following the adoption of recovery
processes.
• ‘Sub-standard’: exposures require varying
degrees of special attention and default risk is of
greater concern. Retail portfolio segments show
longer delinquency periods of generally up to
90 days past due and/or expected losses are
higher due to a reduced ability to mitigate these
through security realisation or other recovery
processes.