HSBC 2011 Annual Report Download - page 100

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
Risk > Risk profile / Managing risk / Top and emerging risks
98
Risk
Risk profile1 .................................................................... 98
Managing risk1 ................................................................ 98
Top and emerging risks1 ................................................. 99
Credit risk3 ...................................................................... 104
Liquidity and funding2 .................................................... 157
Market risk3 .................................................................... 163
Operational risk1 ............................................................. 170
Risk management of insurance operations2 ................... 171
Other material risks1 ....................................................... 183
Appendix to Risk ............................................................ 188
1 Unaudited. 2 Audited. 3 Audited where indicated.
Risk profile
(Unaudited)
Managing our risk profile
• A strong balance sheet is core to our philosophy.
• We ensured that our portfolios remain aligned to
our risk appetite and strategy.
• We actively managed our risks, supported by
strong forward looking risk identification.
Maintaining capital strength and
strong liquidity position
• Our core tier 1 capital ratio remains strong at
10.1%.
• We have sustained our strong liquidity position
throughout 2011.
• The ratio of customer advances to deposits
remains below 90%.
Strong governance
• Robust risk governance and accountability is
embedded across the Group.
• The Board, advised by the Group Risk
Committee, approves our risk appetite.
• A new global operating model has been
implemented across the global Risk function.
Our top and emerging risks
• Macro-economic and geopolitical risk.
• Macro-prudential, regulatory and legal risks to
our business model.
• Risks related to our business operations,
governance and internal control systems.
For details of HSBC’s policies and practices
regarding risk management and governance
see the Appendix to Risk on page 188.
Managing risk
(Unaudited)
The continued growth in our business in 2011 was
achieved while ensuring risks were assumed in a
measured manner and in line with our appetite for
such risks. This approach is encapsulated within our
risk appetite framework.
Report of the Group Risk Committee
Further commentary on risk appetite, risk governance and
stress testing can be found within the Report of the Group Risk
Committee, on page 233 of the Corporate Governance section.
The diversification of our lending portfolio
across the regions, together with our broad range of
global businesses and products, ensured that we were
not overly dependent on a few countries or markets
to generate income and growth in 2011. Our
geographical diversification also supported our
strategies for growth in faster-growing markets and
those with international connectivity.
During 2011 financial markets were dominated
by concerns over sovereign debt default risk within
the peripheral eurozone countries and the potential
for contagion across core European countries.
Middle East turmoil and the perception that the
world economic recovery remained fragile continued
to cause concerns. Within the challenging economic
and financial environment, we maintained our
conservative risk profile by reducing exposure to the
most likely areas of stress. Our top and emerging
risk framework supports our approach to
forward-looking risk identification and assists in
providing focus on appropriate stress tests required
to evaluate the potential impact of emerging
scenarios. Where applicable and necessary, we have
adjusted our risk appetite.
We continued to selectively manage our exposure
to sovereign debt, with the overall quality of the
portfolio remaining strong. We regularly updated our
assessment of higher risk countries and adjusted our
risk appetite and exposures to reflect the updates.
During 2011, credit quality improved in general
terms and loan impairment charges and other credit
risk provisions declined, most notably in the US
reflecting lower lending balances in our consumer
finance portfolios, partly offset by increases in new
collectively assessed loan impairment allowances in
both Latin America and Hong Kong on the back of
strong lending growth. On a constant currency basis,
our loan impairment charges and other credit risk
provisions in 2011 were US$12.1bn, 15% lower than
in 2010.