HSBC 2012 Annual Report Download - page 162

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
Risk > Credit risk > Credit quality of financial instruments
160
The volume of loans that qualify for modification
has reduced significantly in recent years. We expect
this trend to continue as HSBC Finance believes the
percentage of its customers with unmodified loans
who would benefit from loan modification in a way
that would avoid non-payment of future cash flows
is decreasing. In addition, volumes of new loan
modifications are expected to decrease due to gradual
improvements in economic conditions, the cessation
of new real estate secured and personal non-credit
card receivables originations and the continued run-
off of the CML portfolio.
Types of loan renegotiation programme in HSBC Finance
• A temporary modification is a change to the contractual
terms of a loan that results in the giving up of a right to
contractual cash flows over a pre-defined period. With a
temporary modification the loan is expected to revert back
to the original contractual terms, including the interest rate
charged, after the modification period. An example is
reduced interest payments.
A substantial number of HSBC Finance modifications
involve interest rate reductions. These modifications
lower the amount of interest income HSBC Finance is
contractually entitled to receive in future periods.
Historically, modifications have generally been for six
months, although extended modification periods are
now more common.
Loans that have been re-aged are classified as impaired with
the exception of first-time loan re-ages that were less than
60 days past due at the time of re-age. These remain
classified as impaired until they have demonstrated a history
of payment performance against their original contracted
terms for at least 12 months.
• A permanent modification is a change to the contractual
terms of a loan that results in giving up a right to contractual
cash flows over the life of the loan. An example is a
permanent reduction in the interest rate charged.
Permanent or long-term modifications which are due to an
underlying hardship event remain classified as impaired for
their full life.
• The term ‘re-age’ describes a renegotiation by which the
contractual delinquency status of a loan is reset to current
after demonstrating payment performance. The overdue
principal and/or interest is deferred and paid at a later date.
Loan re-ageing enables customers who have been unable
to make a small number of payments to have their loan
delinquency status reset to current so that their credit score
is not affected by the overdue balances.
Loans that have been re-aged remain classified as impaired
until they have demonstrated a history of payment
performance against the original contractual terms for at
least 12 months.
A temporary or permanent modification may also lead to a
re-ageing of a loan although a loan may be re-aged without
any modification to its original terms and conditions.
Where loans have been granted multiple concessions,
subject to the qualifying criteria discussed below, the
concession is deemed to have been made due to concern
regarding the borrower’s ability to pay, and the loan is
disclosed as impaired. The loan remains disclosed as
impaired from that date forward until the borrower has
demonstrated a history of repayment performance for the
period of time required for either modifications or re-ages,
as described above.
Qualifying criteria
For an account to qualify for renegotiation it must
meet certain criteria. However, HSBC Finance
retains the right to decline a renegotiation. The
extent to which HSBC Finance renegotiates
accounts that are eligible under its existing policies
will vary depending upon its view of prevailing
economic conditions and other factors which may
change from year to year. In addition, exceptions
to policies and practices may be made in specific
situations in response to legal or regulatory
agreements or orders.
Renegotiated real estate secured and personal
lending receivables are not eligible for a subsequent
renegotiation for twelve or six months, respectively,
with a maximum of five renegotiations permitted
within a five-year period. Borrowers must be
approved for a modification and generally make
two minimum qualifying monthly payments within
60 days to activate a modification.
In certain circumstances where the debt has
been restructured in bankruptcy proceedings, fewer
or no payments may be required. Accounts whose
borrowers are subject to a Chapter 13 plan filed
with a bankruptcy court generally may be re-aged
upon receipt of one qualifying payment, whereas
accounts whose borrowers have filed for Chapter 7
bankruptcy protection may be re-aged upon receipt
of a signed reaffirmation agreement. In addition, for
some products, accounts may be re-aged without
receipt of a payment in certain special circumstances
(e.g. in the event of a natural disaster or a hardship
programme).
2012 compared with 2011
At 31 December 2012, renegotiated real estate secured
accounts in HSBC Finance represented 86% (2011:
86%) of North America’s total renegotiated loans;
US$14bn (2011: US$16bn) of these renegotiated real
estate secured loans were classified as impaired. This
decline was mainly due to lower lending balances as
we continued to run-off the CML portfolio. A
significant portion of HSBC Finance’s renegotiated
portfolio has received multiple renegotiations.
Consequently, a significant proportion of loans
included in the table below have undergone multiple
re-ages or modifications. In this regard, multiple
modifications have remained consistent at 75% to
80% of total modifications. Further details of HSBC
Finance’s real estate secured accounts and
renegotiation programmes are provided below.