HSBC 2015 Annual Report Download - page 394

Notes on the Financial Statements (continued)
14 – Fair values of financial instruments not carried at fair value / 15 – Financial assets designated at fair value
HSBC HOLDINGS PLC
392
Loans are grouped, as far as possible, into homogeneous groups and stratified by loans with similar characteristics to improve
the accuracy of estimated valuation outputs. The stratification of a loan book considers all material factors including vintage,
origination period, estimates of future interest rates, prepayment speeds, delinquency rates, loan-to-value ratios, the quality
of collateral, default probability, and internal credit risk ratings.
The fair value of a loan reflects both loan impairments at the balance sheet date and estimates of market participants’
expectations of credit losses over the life of the loans, and the fair value effect of re-pricing between origination and the
balance sheet date.
The fair value of loans and advances to customers in North America was lower than the carrying amount, primarily in the US,
reflecting the market conditions at the balance sheet date. This was due to the challenging economic conditions during the past
number of years, including house price depreciation, rising unemployment, changes in consumer behaviour, changes in
discount rates and the lack of financing options available to support the purchase of loans and advances. The relative fair
values increased during 2015, largely due to improved conditions in the housing industry driven by increased property values
and, to a lesser extent, lower required market yields and increased investor demand for these types of loans and advances.
The fair value of loans and advances to customers in Europe is now broadly in line with carrying value, as new business from
both new and existing customers reflects the current low interest rate environment.
Financial investments
The fair values of listed financial investments are determined using bid market prices. The fair values of unlisted financial
investments are determined using valuation techniques that take into consideration the prices and future earnings streams of
equivalent quoted securities.
Deposits by banks and customer accounts
Fair values are estimated using discounted cash flows, applying current rates offered for deposits of similar remaining
maturities. The fair value of a deposit repayable on demand is approximated by its carrying value.
Debt securities in issue and subordinated liabilities
Fair values are determined using quoted market prices at the balance sheet date where available, or by reference to quoted
market prices for similar instruments.
Repurchase and reverse repurchase agreements – non-trading
Fair values are estimated by using discounted cash flows, applying current rates. Fair values approximate carrying amounts as
their balances are generally short dated.
HSBC Holdings
The methods used by HSBC Holdings to determine fair values of financial instruments for the purpose of measurement and
disclosure are described above.
Fair values of HSBC Holdings’ financial instruments not carried at fair value on the balance sheet
2015 2014
Carrying
amount
Fair
value1
Carrying
amount
Fair
value1
$m $m $m $m
Assets at 31 December
Loans and advances to HSBC undertakings 44,350 45,180 43,910 45,091
Liabilities at 31 December
Amounts owed to HSBC undertakings 2,152 2,152 2,892 2,906
Debt securities in issue 960 1,224 1,009 1,357
Subordinated liabilities 15,895 18,297 17,255 20,501
1 Fair values were determined using valuation techniques with observable inputs (Level 2).