HSBC 2011 Annual Report Download - page 153

151
Overview Operating & Financial Review Corporate Governance Financial Statements Shareholder Information
impairment charges in one SPE, Mazarin, exceeded
the carrying value of the capital notes liability and
a charge of US$26m (2010: nil) was borne by
HSBC as shown in the table below. In respect of
the SICs, the capital notes held by third parties are
expected to absorb the cash losses in the vehicles.
Available-for-sale reserve and economic first loss protection in SICs, excluding Solitaire
(Audited)
SICs excluding Solitaire at
31 December
2011 2010
US$m US$m
Available-for-sale reserve .............................................................................................................................. (2,701) (2,666)
– related to ABSs ........................................................................................................................................ (2,061) (2,306)
Economic first loss protection ........................................................................................................................ 2,286 2,246
Carrying amount of capital notes liability ...................................................................................................... 154 254
Impairment charge for the year:
– borne by HSBC ....................................................................................................................................... 26 –
– allocated to capital note holders .............................................................................................................. 313 531
Impairment methodologies
(Audited)
The accounting policy for impairment and
indicators of impairment is set out in Note 2 on the
Financial Statements.
A summary of our impairment
methodologies is provided in the Appendix
to Risk on page 188.
Impairment and cash loss projections
(Unaudited)
At each reporting date, management undertakes a
stress analysis. This exercise comprises a shift of
projections of future loss severities, default rates
and prepayment rates. The results of the analysis at
30 June 2011 indicated that further impairment
charges of US$900m and expected cash losses of
US$400m could arise over the next two to three
years.
This exercise was re-performed at
31 December 2011 and the results remain
consistent with the June 2011 guidance.
For the purposes of identifying impairment at
the reporting date, the future projected cash flows
reflect the effect of loss events that have occurred
at or prior to the reporting date. For the purposes of
performing stress tests to estimate potential future
impairment charges, the projected future cash flows
reflect additional assumptions about future loss
events after the balance sheet date.
This analysis makes assumptions in respect
of the future behaviour of loss severities, default
rates and prepayment rates. Movements in the
parameters are not independent of each other. For
example, increased default rates and increased loss
severities, which would imply greater impairments,
generally arise under economic conditions that give
rise to reduced levels of prepayment, reducing the
potential for impairment charges. Conversely,
economic conditions which increase the rates of
prepayment are generally associated with reduced
default rates and decreased loss severities.
At 31 December 2011, the incurred and
projected impairment charges, measured in
accordance with accounting requirements,
significantly exceeded the expected cash losses on
the securities. Over the lives of the available-for-
sale ABSs the cumulative impairment charges will
converge towards the level of cash losses. In
respect of the SICs, in particular, the capital notes
held by third parties are expected to absorb the cash
losses arising in the vehicles.
Analysis of exposures and significant
movements
(Audited)
Sub-prime residential mortgage-related assets
The assets in the table below included US$2.4bn
(2010: US$3.1bn) relating to US-originated assets
and US$1.0bn (2010: US$1.1bn) relating to UK
non-conforming residential mortgage-related
assets.
At 31 December 2011, 25% (US$0.9bn) of our
sub-prime residential mortgage-related assets were
rated AA or AAA (2010: 38% (US$1.7bn). Of the
non-high grade assets held of US$2.7bn (2010:
US$2.8bn), US$1.2bn (2010: US$1.5bn) related to
US-originated assets.
There was a reduction in market prices for sub-
prime assets during the course of 2011, particularly
in the latter stages of the year; this effect was
coupled with principal paydowns. Further net