HSBC 2013 Annual Report Download - page 26

HSBC BANK CANADA
Management’s Discussion and Analysis (continued)
24
that transverse the border. This is unlikely to be affected
by the currency at least in the short-term. The key factor
that will boost exports is increased demand for what
Canada produces. This would be reflected by increased
US domestic demand, suggesting our largest customer
is buying, and higher commodity prices, suggesting that
demand for commodities is on the upswing.
On business investment, we focus much attention
on the business sector. Following a decade focused on
improving its balance sheet health, Canada’s corporate
sector is in tip top financial condition, with debt burdens
at 20-year lows, and measures of liquidity at historically
elevated levels. As well, interest rates remain favourably
low, providing the opportunity to lock in low long-
term borrowing costs. Even so, headwinds to business
investment have included global economic uncertainty,
weak commodity prices, and weak corporate profits.
Looking ahead, after increasing by a very moderate 2.1%
in 2013, we expect the business investment to expand by
6.5% year over year in 2014 as headwinds abate.
With fiscal authorities focused on returning to
surplus in the next two to three fiscal years, we expect
little contribution to GDP growth from government
expenditure. Though the Federal Government reported
a budget deficit of $18.9bn in fiscal year 2012/13, $7bn
lower than projected, returning to surplus in fiscal year
2015/16 still requires a substantial improvement in
the fiscal position in 2014. The Federal Government
currently projects the budget deficit narrowing from
$14.0bn in fiscal 2013/14 to $2.7bn in fiscal year
2014/15. Achieving these goals will require strict
expenditure controls given moderate nominal GDP and
thus tax revenue growth, augmented by revenues from
asset sales.
With regard to monetary policy, we expect the Bank
of Canada to remain on hold until at least mid-2015.
Under Bank of Canada Governor Poloz, there has been
a renewed focus on inflation, which is expected to linger
near 1% in the first half of 2014. This would leave
inflation near the bottom of the Bank of Canada’s target
rate of 1% to 3%, and well below the 2% inflation target.
Given lingering concerns about financial imbalances,
and still very stimulative financial conditions, we think
that the benefit from further monetary stimulus would
be marginal at best, while potentially exacerbating risks
to financial stability.
Critical accounting policies
The results of HSBC are sensitive to the accounting
policies, assumptions and estimates that underlie the
preparation of our consolidated financial statements.
A summary of our significant accounting policies are
provided in note 2.
The accounting policies that are deemed critical
to our results and financial position, in terms of the
materiality of the items to which the policies are applied
and the high degree of judgement involved, including
the use of assumptions and estimation, are discussed
below.
Impairment of loans and advances
Our accounting policy for losses arising from the
impairment of customer loans and advances is described
in note 2(f). Loan impairment allowances represent
management’s best estimate of losses incurred in the
loan portfolios at the balance sheet date.
Management is required to exercise judgement in
making assumptions and estimates when calculating
loan impairment allowances on both individually and
collectively assessed loans and advances.
The methods used to calculate collective impairment
allowances on homogeneous groups of loans and
advances that are not considered individually significant
are disclosed in note 2(f). They are subject to estimation
uncertainty, in part because it is not practicable to
identify losses on an individual loan basis because of
the large number of individually insignificant loans in
the portfolio.
The estimation methods include the use of statistical
analyses of historical information, supplemented with
significant management judgement, to assess whether
current economic and credit conditions are such that
the actual level of inherent losses is likely to be greater
or less than that suggested by historical experience.
Where changes in economic, regulatory or behavioural
conditions result in the most recent trends in portfolio
risk factors being not fully reflected in the statistical
models, risk factors are taken into account by adjusting
the impairment allowances derived solely from historical
loss experience.
Risk factors include loan portfolio growth,
product mix, unemployment rates, bankruptcy trends,
geographical concentrations, loan product features,
economic conditions such as national and local trends
in housing markets, the level of interest rates, portfolio
seasoning, account management policies and practices,
changes in laws and regulations, and other influences on
customer payment patterns. The methodology and the
assumptions used in calculating impairment losses are