HSBC 2012 Annual Report Download - page 393

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Overview Operating & Financial Review Corporate Governance Financial Statements Shareholder Information
Incurred but not yet identified impairment
Individually assessed loans for which no evidence of impairment has been specifically identified on an
individual basis are grouped together according to their credit risk characteristics for the purpose of calculating
an estimated collective impairment. These credit risk characteristics may include country of origination, type of
business involved, type of products offered, security obtained or other relevant factors. This reflects impairment
losses that HSBC has incurred as a result of events occurring before the balance sheet date, which HSBC is not
able to identify on an individual loan basis, and that can be reliably estimated. These losses will only be
individually identified in the future. As soon as information becomes available which identifies losses on
individual loans within the group, those loans are removed from the group and assessed on an individual basis
for impairment.
The collective impairment allowance is determined after taking into account:
– historical loss experience in portfolios of similar credit risk characteristics (for example, by industry sector,
loan grade or product);
– the estimated period between impairment occurring and the loss being identified and evidenced by the
establishment of an appropriate allowance against the individual loan; and
– management’s experienced judgement as to whether current economic and credit conditions are such that
the actual level of inherent losses at the balance sheet date is likely to be greater or less than that suggested
by historical experience.
The period between a loss occurring and its identification is estimated by local management for each identified
portfolio. The factors that may influence this estimation include economic and market conditions, customer
behaviour, portfolio management information, credit management techniques and collection and recovery
experiences in the market. As it is assessed empirically on a periodic basis the estimated period between a loss
occurring and its identification may vary over time as these factors change.
Homogeneous groups of loans and advances
Statistical methods are used to determine impairment losses on a collective basis for homogeneous groups of
loans that are not considered individually significant, because individual loan assessment is impracticable.
Losses in these groups of loans are recorded on an individual basis when individual loans are written off, at
which point they are removed from the group. Two alternative methods are used to calculate allowances on a
collective basis:
− When appropriate empirical information is available, HSBC utilises roll rate methodology. This
methodology employs statistical analyses of historical data and experience of delinquency and default to
estimate the amount of loans that will eventually be written off as a result of the events occurring before the
balance sheet date which HSBC is not able to identify on an individual loan basis, and that can be reliably
estimated. Under this methodology, loans are grouped into ranges according to the number of days past due
and statistical analysis is used to estimate the likelihood that loans in each range will progress through the
various stages of delinquency, and ultimately prove irrecoverable. In addition to the delinquency groupings,
loans are segmented according to their credit characteristics as described above. Current economic
conditions are also evaluated when calculating the appropriate level of allowance required to cover
inherent loss. The estimated loss is the difference between the present value of expected future cash flows,
discounted at the original effective interest rate of the portfolio, and the carrying amount of the portfolio.
In certain highly developed markets, sophisticated models also take into account behavioural and account
management trends as revealed in, for example, bankruptcy and rescheduling statistics.
− When the portfolio size is small or when information is insufficient or not reliable enough to adopt a roll
rate methodology, HSBC adopts a basic formulaic approach based on historical loss rate experience. The
period between a loss occurring and its identification is explicitly estimated by local management, and is
typically between six and twelve months.
The inherent loss within each portfolio is assessed on the basis of statistical models using historical data
observations, which are updated periodically to reflect recent portfolio and economic trends. When the most
recent trends arising from changes in economic, regulatory or behavioural conditions are not fully reflected in