HSBC 2011 Annual Report Download - page 195

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Overview Operating & Financial Review Corporate Governance Financial Statements Shareholder Information
performance over a period of time or have been assessed based on all available evidence as having no remaining
indicators of impairment.
Loans that have been identified as renegotiated retain this designation until maturity or derecognition. When a loan is
restructured as part of a forbearance strategy and the restructuring results in derecognition of the existing loan, such
as in some debt consolidations, the new loan is disclosed as renegotiated. Interest is recorded on renegotiated loans
on the basis of new contractual terms following renegotiation.
Renegotiated loans and recognition of impairment allowances
(Audited)
For retail lending, renegotiated loans are segregated from other parts of the loan portfolio for collective impairment
assessment to reflect the higher rates of losses often encountered in these segments. When empirical evidence
indicates an increased propensity to default and higher losses on such accounts, such as for re-aged loans in the US,
the use of roll-rate methodology ensures these factors are taken into account when calculating impairment allowances
by applying roll rates specifically calculated on the pool of loans subject to forbearance. When the portfolio size is
small or when information is insufficient or not reliable enough to adopt a roll-rate methodology, a basic formulaic
approach based on historical loss rate experience is used. As a result of our roll-rate methodology, we recognise
collective impairment allowances on homogeneous groups of loans, including renegotiated loans, where there is
historical evidence that there is a likelihood that loans in these groups will progress through the various stages of
delinquency, and ultimately prove irrecoverable as a result of events occurring before the balance sheet date. This
treatment applies irrespective of whether or not those loans are presented as impaired in accordance with our
impaired loans disclosure convention. When we consider that there are additional risk factors inherent in the
portfolios that may not be fully reflected in the statistical roll rates or historical experience, these risk factors are
taken into account by adjusting the impairment allowances derived solely from statistical or historical experience.
For further details and examples of the risk factor adjustments see ‘Critical accounting policies’ on page 38.
In the corporate and commercial sectors, renegotiated loans are typically assessed individually. Credit risk ratings are
intrinsic to the impairment assessment. A distressed restructuring is classified as an impaired loan. The individual
impairment assessment takes into account the higher risk of the non-payment of future cash flows inherent in
renegotiated loans.
Corporate and commercial forbearance
(Unaudited)
In the corporate and commercial sectors, forbearance activity is undertaken selectively where it has been identified
that repayment difficulties against the original terms already have, or are very likely to, materialise. These cases are
treated as impaired loans where:
a) the customer is experiencing, or is very likely to experience, difficulty in meeting a payment obligation to the
bank (i.e. due to current credit distress); and
b) the bank is offering to the customer revised payment arrangements which constitute a concession (i.e. it is
offering terms it would not normally be prepared to offer).
These cases are described as distressed restructurings. The agreement of a restructuring which meets the criteria
above requires all loans, advances and counterparty exposures to the customer to be treated as impaired. Against the
background of this requirement, as a customer approaches the point that it becomes clear that a restructuring of this
kind may be necessary, the exposures will typically be regarded as sub-standard to reflect the deteriorating credit risk
profile, and will be graded as impaired when the restructure is proposed for approval.
For the purposes of determining whether changes to a customer’s agreement should be treated as a distressed
restructuring the following types of modification are regarded as concessionary:
a) transfers from the customer to the bank of receivables from third parties, real estate, or other assets to satisfy
fully or partially a debt;
b) issuance or other granting of an equity interest to the bank to satisfy fully or partially a debt unless the equity
interest is granted pursuant to existing terms for converting the debt into an equity interest; and
c) modification of terms of a debt, such as one or a combination of any of the following:
– reduction (absolute or contingent) of the stated interest rate for the remaining original life of the debt;