HSBC 2014 Annual Report Download - page 120

HSBC BANK PLC
Notes on the Financial Statements (continued)
118
Loans considered as individually significant are typically to corporate and commercial customers, are for larger
amounts and are managed on an individual basis. For these loans, the group considers on a case-by-case basis at
each balance sheet date whether there is any objective evidence that a loan is impaired. The criteria used to make
this assessment include:
– known cash flow difficulties experienced by the borrower;
– contractual payments of either principal or interest being past due for more than 90 days;
– the probability that the borrower will enter bankruptcy or other financial realisation;
– a concession granted to the borrower for economic or legal reasons relating to the borrower’s financial difficulty
that results in forgiveness or postponement of principal, interest or fees, where the concession is not insignificant;
and
– there has been deterioration in the financial condition or outlook of the borrower such that its ability to repay is
considered doubtful.
For loans where objective evidence of impairment exists, impairment losses are determined considering the following
factors:
– the group’s aggregate exposure to the customer;
– the viability of the customer’s business model and their capacity to trade successfully out of financial difficulties
and generate sufficient cash flow to service debt obligations;
– the amount and timing of expected receipts and recoveries;
– the likely dividend available on liquidation or bankruptcy;
– the extent of other creditors’ commitments ranking ahead of, or pari passu with, the group and the likelihood of
other creditors continuing to support the company;
– the complexity of determining the aggregate amount and ranking of all creditor claims and the extent to which
legal and insurance uncertainties are evident;
– the realisable value of security (or other credit mitigants) and likelihood of successful repossession;
– the likely costs of obtaining and selling collateral as part of foreclosure;
– the ability of the borrower to obtain, and make payments in, the currency of the loan if not denominated in local
currency; and
– when available, the secondary market price of the debt.
The determination of the realisable value of security is based on the market value at the time the impairment
assessment is performed. The value is not adjusted for expected future changes in market prices, though
adjustments are made to reflect local conditions such as forced sale discounts.
Impairment losses are calculated by discounting the expected future cash flows of a loan, which includes expected
future receipts of contractual interest, at the loan’s original effective interest rate and comparing the resultant
present value with the loan’s current carrying amount. The impairment allowances on individually significant
accounts are reviewed at least quarterly and more regularly when circumstances require.
Collectively assessed loans and advances
Impairment is assessed collectively to cover losses which have been incurred but have not yet been identified on
loans subject to individual assessment or for homogeneous groups of loans that are not considered individually
significant.
Retail lending portfolios are generally assessed for impairment collectively as the portfolio are generally large
homogeneous loan pools.
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 a collective impairment assessment. These
credit risk characteristics may include country of origination, type of business involved, type of products offered,
security obtained or other relevant factors. This assessment captures impairment losses that the group has incurred
as a result of events occurring before the balance sheet date, which the group is not able to identify on an individual
loan basis, and that can be reliably estimated. When information becomes available which identifies losses on
individual loans within the group, those loans are removed from the group and assessed individually.
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