Annual Financial Report - 18

RNS Number : 4084J

HSBC Holdings PLC

30 March 2010

Dubai and the UAE

In November 2009, Dubai World, a Dubai government-owned firm, requested a creditor standstill on its debt repayments and those of some of its subsidiaries. The announcement prompted a significant sell-off in markets across the world. Abu Dhabi announced that it would offer additional assistance to Dubai, providing liquidity and a platform for the debt restructuring process to continue.

HSBC, as the longest-established bank in the region, has a longstanding relationship with the government of Dubai and its related entities. HSBC has contributed from the earliest days to the development of Dubai as an emerging economy and continues to maintain supportive relationships with all parts of the UAE. HSBC will continue to offer its support to the government of Dubai in achieving a workable resolution of its current liquidity problems.

HSBC's exposure within Dubai is acceptably spread and is primarily to operating companies within the emirate. HSBC is playing a prominent role in restructuring indebtedness in order to help restore confidence in the region.

In the UAE, gross customer loans and advances fell from US$18 billion at 31 December 2008 to US$15 billion at 31 December 2009. Although the Middle East represents 2 per cent of the Group's balance sheet, it remains a region to which HSBC is strongly committed.

Sovereign counterparties

The overall quality of the Group's sovereign risk exposure remained satisfactory during 2009, with the large majority of both in-country and cross-border limits extended to countries with strong internal credit risk ratings. There was no significant downward shift in the quality of the exposure although, given the higher debt and weaker fiscal positions of many Western governments, there is increased potential for deterioration in sovereign risk profiles before budgetary re-balancing is achieved. In order to manage this, the Group regularly updates its assessments of higher-risk countries and adjusts its risk appetite to reflect such changes.

Leveraged financing

The Group operates a controlled approach towards leveraged finance origination with caps on underwriting and final hold levels in place. This puts a premium on successfully distributing risk in order to create capacity under the caps. Group exposure to leveraged finance transactions remained modest in relation to overall exposure.

Personal lending

(Unaudited)

HSBC provides a broad range of secured and unsecured personal lending products to meet customer needs. Given the diverse nature of the markets in which HSBC operates, the range is not standardised across all countries but is tailored to meet the demands of individual markets while using appropriate distribution channels and, wherever possible, standard global IT platforms.

Personal lending includes advances to customers for asset purchase, such as residential property and motor vehicles, where the loans are typically secured on the assets being acquired. HSBC also offers loans secured on existing assets, such as first and second liens on residential property; unsecured lending products such as overdrafts, credit cards and payroll loans; and debt consolidation loans which may be secured or unsecured.

In 2009, credit exposure in the personal lending portfolios continued to be affected by adverse global economic conditions, particularly increased unemployment levels and the restricted availability of refinancing which limited the ability of many customers to service financial obligations in line with contractual commitments. This led to delinquency levels and loan impairment charges remaining high, although management action in recent years to run off the US consumer finance exit portfolios and curtail originator activity helped reduce the overall impairment charge.

The commentary that follows is on an underlying basis.

At 31 December 2009, total personal lending was US$434 billion, a decline of 6 per cent from 31 December 2008, driven by run-off in the US consumer finance exit portfolios. Within Personal Financial Services total loan impairment charges and other credit risk provisions of US$19.9 billion were 3 per cent lower than in 2008 and were concentrated in North America (US$14.4 billion) and, to a lesser extent, Europe (US$2.0 billion) and Latin America (US$2.0 billion).

In early March 2009, HSBC Finance announced the discontinuation of new customer account originations for all products offered by its Consumer Lending business and closed approximately 800 Consumer Lending branch offices. In November 2009, it entered into an agreement to sell its vehicle loan servicing operations to Santander Consumer USA Inc. ('SC USA') as well as an aggregate US$1.0 billion of vehicle finance loans, both delinquent and non-delinquent. Under a separate agreement, SC USA will service the remainder of HSBC's US vehicle finance portfolio. The transaction is currently expected to close in the first quarter of 2010.

The Consumer Lending business historically provided real estate secured, vehicle finance and personal non-credit card loans. Loans were offered with both revolving and closed-end terms and with fixed or variable interest rates, and were originated through branches, direct mail and the internet. Prior to the first quarter of 2007, HSBC Finance's Mortgage Services business acquired loans from correspondent lenders and, before September 2007, also originated loans sourced through mortgage brokers. The vehicle finance business originated vehicle loans through its dealer and direct-to-consumer origination channels and through its 'autos-in-branches' programme in the Consumer Lending branch offices, until these originations were discontinued.

In December 2009, HSBC Finance revised the write-off period for its real estate secured and Consumer Lending unsecured portfolios in order to reflect changed customer behaviour. As a consequence of this, real estate secured balances are now written down to net realisable value generally no later than the end of the month in which the account becomes 180 days delinquent. Similarly, for Consumer Lending unsecured products, balances are now written off no later than the end of the month in which the account becomes 180 days delinquent. This change in write-off period was reflected in lower recoverable balances and lower impairment reserves at 31 December 2009.

Total US personal lending at 31 December 2009 stood at US$135 billion, a decline of 21 per cent compared with the end of 2008, as HSBC ran off certain portfolios in the consumer finance business and improved the credit quality of the Card and Retail Services portfolio through tightening underwriting criteria.

Residential mortgage lending balances in the US declined by 19 per cent to US$66 billion, driven by the decision to close all Consumer Lending branches and run off the legacy consumer finance portfolios. The decrease in balances included a US$2.0 billion reduction relating to the revised write-off period referred to above and the sale of US$4.5 billion of prime mortgage loans in HSBC Bank USA. US mortgage lending is discussed in greater detail on page 218.

Total personal lending fell by 6 per cent in 2009. In the US, personal lending was reduced by 21 per cent.

Other personal lending in the US fell by 23 per cent to US$69 billion, partly due to the run-off in the unsecured Consumer Lending portfolio. Credit card balances also declined, by 16 per cent to US$39 billion, due to lower consumer spending and steps taken by the Group to mitigate risk, including tightening initial credit lines and sales authorisation criteria, closing inactive accounts, decreasing credit lines, restricting underwriting criteria, limiting cash access, reducing marketing expenditure and, in the private label portfolio, ending certain third-party relationships. HSBC ceased originations in those segments of the cards portfolio most affected by the current housing and economic downturn. The decline in balances included US$1.3 billion relating to the revised write-off period for second lien mortgages and other unsecured personal lending.

The Cards business remains a continuing business in the US for HSBC, comprising both general and private label portfolios. The general Cards portfolio has approximately US$23 billion in loans. According to The Nilson Report, HSBC is the sixth largest issuer of MasterCard and Visa credit cards in the US, based on loan balances.

The Private Label Credit Card ('PLCC') business, with balances of US$15.6 billion, has approximately 14 million active customer accounts and 32 active merchant relationships. The Nilson Report lists HSBC's private label servicing portfolio as the third largest portfolio in the US. At 31 December 2009, PLCC loans were sourced from the following business lines: approximately 45 per cent in consumer electronics, 24 per cent in power sport vehicles, 16 per cent in department stores, and 7 per cent of loans in furniture stores. The private label financing products are generated through merchant retail locations, merchant catalogue and telephone sales, and direct mail and internet applications.

Motor vehicle finance balances in the US declined by 47 per cent to US$5.8 billion, reflecting the 2008 decision to run off the portfolio in HSBC Finance. As noted above, in November 2009, HSBC agreed to sell the vehicle finance loan servicing operation and US$1.0 billion of associated loans.

Total personal lending

(Unaudited)

	UK	Rest of Europe	US⁹	Rest of North America	Other regions¹⁰	Total
	US$m	US$m	US$m	US$m	US$m	US$m
At 31 December 2009
Residential mortgages² .................................	100,667	9,205	65,784	20,807	64,206	260,669

Other personal lending² ...............................	29,018	23,672	69,275	8,068	43,504	173,537
- motor vehicle finance ...........................	-	65	5,771	99	6,378	12,313
- credit cards ...........................................	12,427	1,820	39,374	1,118	13,319	68,058
- second lien mortgages ...........................	1,068	2	11,786	695	472	14,023
- other ....................................................	15,523	21,785	12,344	6,156	23,335	79,143


Total personal lending² ................................	129,685	32,877	135,059	28,875	107,710	434,206

Impairment allowances
Residential mortgages² .............................	(151)	(41)	(4,416)	(7)	(233)	(4,848)

Other personal lending² ...........................	(1,443)	(552)	(7,691)	(206)	(2,349)	(12,241)
- motor vehicle finance .......................	-	(7)	(211)	(1)	(351)	(570)
- credit cards .......................................	(524)	(233)	(3,895)	(42)	(854)	(5,548)
- second lien mortgages .......................	(79)	-	(1,608)	(56)	-	(1,743)
- other ................................................	(840)	(312)	(1,977)	(107)	(1,144)	(4,380)

Total impairment allowances on personal lending² ...................................................	(1,594)	(593)	(12,107)	(213)	(2,582)	(17,089)

- as a percentage of total personal lending	1.2%	1.8%	9.0%	0.7%	2.4%	3.9%

At 31 December 2008
Residential mortgages ..................................	78,346	8,921	80,946	17,437	57,687	243,337

Other personal lending ................................	29,274	24,991	89,562	7,589	45,474	196,890
- motor vehicle finance ...........................	-	99	10,864	137	6,201	17,301
- credit cards ...........................................	11,215	1,695	46,972	1,469	13,426	74,777
- second lien mortgages ...........................	1,160	2	14,614	803	503	17,082
- other ....................................................	16,899	23,195	17,112	5,180	25,344	87,730


Total personal lending .................................	107,620	33,912	170,508	25,026	103,161	440,227

Impairment allowances
Residential mortgages ..............................	(10)	(22)	(5,109)	(4)	(174)	(5,319)

Other personal lending .............................	(1,197)	(441)	(9,911)	(192)	(1,909)	(13,650)
- motor vehicle finance .......................	-	(5)	(426)	(1)	(175)	(607)
- credit cards .......................................	(385)	(165)	(4,255)	(51)	(805)	(5,661)
- second lien mortgages .......................	(50)	-	(2,397)	(41)	-	(2,488)
- other ................................................	(762)	(271)	(2,833)	(99)	(929)	(4,894)

Total impairment allowances on personal lending .....................................................	(1,207)	(463)	(15,020)	(196)	(2,083)	(18,969)

- as a percentage of total personal lending	1.1%	1.4%	8.8%	0.8%	2.0%	4.3%

For footnotes, see page 291.

Total personal lending in the UK increased by 8 per cent to US$130 billion, driven by growth in residential mortgage lending at HSBC Bank and First Direct as HSBC grew market share in UK mortgage lending (discussed in greater detail below). Other personal lending in the UK declined by 11 per cent to US$29 billion, primarily due to reduced customer demand for credit.

In Latin America, gross loans and advances to personal customers declined by 9 per cent to US$21 billion. Residential mortgage lending increased by 6 per cent, while other personal lending fell by 13 per cent. The reduction in other personal lending was largely in Mexico, where balances decreased by 30 per cent to US$2.7 billion following management action to mitigate risk and restrict originations in the credit cards portfolio to address the adverse credit experience which developed in 2008. Similarly, in Brazil, personal lending declined by 6 per cent to US$11 billion at 31 December 2009 as steps were taken to improve credit quality by tightening underwriting criteria.

For an analysis of loan impairment allowances and impaired loans, see page 230.

Mortgage lending

The Group offers a wide range of mortgage products designed to meet customer needs, including capital repayment mortgages subject to fixed or variable interest rates and products designed to meet demand for housing loans with more flexible payment structures. HSBC underwrites both first lien residential mortgages and loans secured on second lien mortgages.

Interest-only mortgages are those for which customers make regular payments of interest during the life of the loan and repay the principal from the sale of their home or alternative sources of funds. Introductory interest-only mortgages are typically where the interest-only element is for a fixed term at the start of the loan, after which principal repayments commence.

Affordability mortgages include all products where the customers' monthly payments are set at a low initial rate, either variable or fixed, before resetting to a higher rate once the introductory period is over. These include adjustable-rate mortgages ('ARM's) and loans on which the interest rate is periodically changed based on a reference price.

Offset mortgages are products linked to a current or savings account, where interest earned is used to repay mortgage debt.

US mortgage lending

US mortgage lending, comprising residential mortgage and second lien lending, made up 18 per cent of the Group's gross loans and advances to personal customers at 31 December 2009.

Balances declined by 19 per cent compared with 2008 to US$78 billion, including a reduction of US$2.3 billion attributed to the revision of the write-off period referred to above. The decrease was driven by the continued run-off of the Mortgage Services portfolio and actions taken since mid-2007 to reduce risk and discontinue, from the first quarter of 2009, new originations in the Consumer Lending business. In addition, HSBC Bank USA sold US$4.5 billion of prime mortgage loans in 2009 on top of normal sale activity. The overall rate of decline in real-estate secured balances continued to slow due to a reduction in loan prepayments, as the continuing weakness in the US economy limited the number of refinancing options available to customers.

Including the US$2.3 billion decline in balances due to the acceleration of write-offs, mortgage lending in HSBC Finance fell from US$74 billion at 31 December 2008 to US$61 billion at 31 December 2009 as set out in the table on page 221. Balances outstanding in the Consumer Lending business were US$40 billion at 31 December 2009, of which approximately 95 per cent were fixed rate loans and 88 per cent were first lien. The Mortgage Services business had US$22 billion in outstanding balances at 31 December 2009, of which approximately 62 per cent were fixed rate loans and 86 per cent were first lien.

Mortgage lending in the US fell by 19 per cent to US$78 billion and rose in the UK by 15 per cent to US$102 billion.

As a consequence of the turmoil in mortgage lending markets in the US, there was a significant amount of federal and state legislative and regulatory focus on this activity in 2009. Increased regulatory oversight over residential mortgage lenders occurred at both state and federal level. Several regulators, legislators and other governmental bodies promoted particular views of appropriate or 'model' loan modification programmes, loan products, and foreclosure and loss-mitigation practices. HSBC Finance has developed a modification programme that employs procedures which are believed to be responsive to customers' needs, and continues to enhance and refine these practices as other programmes are announced and the results of customer assistance efforts are evaluated. It continues to be active in various initiatives to help people keep their homes, and participates in local events sponsored by industry participants, regulators and consumer advocates.

The mortgage portfolios in both Consumer Lending and Mortgage Services are now expected to remain on the balance sheet for a longer period than was assumed when they were originated. Reduced mortgage prepayment rates and higher levels of loan modifications have had the effect of extending the projected average life of these loan portfolios. As a result, both net interest income and asset valuations have increasingly become exposed to rising interest rates as the average life of funding has declined while the average life of mortgage asset portfolios has grown.

In HSBC Bank USA, mortgage lending declined from US$22 billion at 31 December 2008 to US$16 billion at 31 December 2009 following initiatives taken to reduce risk. This included the ongoing sale of the majority of new residential loan originations to government-sponsored enterprises and private investors and, in 2009, additional sales of US$4.5 billion of prime adjustable and fixed rate residential mortgage loans. At the end of 2009, approximately 32 per cent of the HSBC Bank USA mortgage portfolio were fixed rate loans and 75 per cent were first lien.

Further discussion of credit trends in the US mortgage lending portfolio and the steps taken to mitigate risk is provided in 'US personal lending - credit quality' on page 221.

UK mortgage lending

Total mortgage lending in the UK increased by 15 per cent on a constant currency basis to US$102 billion at 31 December 2009, with HSBC increasing its market share of UK mortgage lending through the success of the RateMatcher promotion and other campaigns within the UK secured lending growth strategy.

HSBC was able both to grow market share and maintain high credit quality despite adverse UK market conditions because of the consistent application of conservative underwriting standards and constraints on some competitors in growing their lending exposure. Almost all new business originations are made through HSBC's own salesforce and mainly to existing customers holding a current or savings account relationship with the Group. HSBC does not accept self-certification of income and restricts lending to purchase residential property for rental.

UK mortgage impairments and delinquency balances deteriorated slightly but remained at relatively low levels despite higher unemployment. House prices recovered, and the portfolio remained well secured, reflecting the continuing benefit from management decisions taken in 2007 and 2008 to reduce market share when property prices were rising to unsustainably high levels. In the HSBC Bank Mortgage Portfolio, excluding First Direct, the percentage of loans that were 30 days or more delinquent declined from 1.8 per cent at 31 December 2008 to 1.6 per cent in 2009. The average loan-to-value ratio for new business in this portfolio in 2009 was 54.6 per cent, a decrease of 4.2 percentage points on the previous year.

Interest-only mortgage balances increased by 21 per cent to US$45 billion compared with 2008, driven by an increase in balances at First Direct following marketing initiatives, and competitive pricing. The majority of these mortgages were offset mortgages linked to a current account for which delinquency rates remained at very low levels.

Second lien balances, which were all held by HFC Bank Ltd ('HFC') in the UK, declined by 17 per cent to US$1.1 billion at 31 December 2009 as the portfolio was placed in run-off during the year. Within this portfolio, two months or more delinquency rates increased from 6 per cent at 31 December 2008 to 6.6 per cent at 31 December 2009, despite a decline in delinquencies in dollar terms as balances declined at a faster pace.

The following table shows the levels of mortgage lending products in the various portfolios in the US, the UK and the rest of the HSBC Group.

Mortgage lending products (Unaudited)
	UK	Rest of Europe	US⁹	Rest of North America	Other regions¹⁰		Total
	US$m	US$m	US$m	US$m		US$m	US$m
At 31 December 2009
Residential mortgages¹¹ .......................................	100,667	9,205	65,784	20,807		64,206	260,669
Second lien mortgages¹¹ ......................................	1,068	2	11,786	695		472	14,023

Total mortgage lending¹¹ ....................................	101,735	9,207	77,570	21,502		64,678	274,692

Second lien as a percentage of total mortgage lending ............................................................	1.0%	-	15.2%	3.2%		0.7%	5.1%

Impairment allowances
Residential mortgages¹¹ ...................................	(151)	(41)	(4,416)	(7)		(233)	(4,848)
Second lien mortgages¹¹ ...................................	(79)	-	(1,608)	(56)		-	(1,743)

Total impairment allowances on mortgage lending ........................................................	(230)	(41)	(6,024)	(63)		(233)	(6,591)

Interest-only (including endowment) mortgages ..	45,471	-	-	1,154		1,127	47,752
Affordability mortgages, including ARMs ............	2,681	1,084	21,024	232		5,921	30,942
Other ..................................................................	144	-	-	-		147	291

Total interest-only and affordability mortgages ..	48,296	1,084	21,024	1,386		7,195	78,985

- as a percentage of total mortgage lending .....	47.5%	11.8%	27.1%	6.4%		11.1%	28.8%

Negative equity mortgages¹² ................................	6,412	-	20,229	163		488	27,292
Other loan-to-value ratios greater than 90 per cent¹³ ..............................................................	10,522	-	13,695	1,887		1,451	27,555

Total negative equity and other mortgages ..........	16,934	-	33,924	2,050		1,939	54,847

- as a percentage of total mortgage lending .....	16.6%	-	43.7%	9.5%		3.0%	20.0%

At 31 December 2008
Residential mortgages ..........................................	78,346	8,921	80,946	17,437		57,687	243,337
Second lien mortgages .........................................	1,160	2	14,614	803		503	17,082

Total mortgage lending .......................................	79,506	8,923	95,560	18,240		58,190	260,419

Second lien as a percentage of total mortgage lending ............................................................	1.5%	-	15.3%	4.4%		0.9%	6.6%

Impairment allowances
Residential mortgages ......................................	(10)	(22)	(5,109)	(4)		(174)	(5,319)
Second lien mortgages .....................................	(50)	-	(2,397)	(41)		-	(2,488)

Total impairment allowances on mortgage lending ........................................................	(60)	(22)	(7,506)	(45)		(174)	(7,807)

Interest-only (including endowment) mortgages ..	33,782	553	-	1,427		993	36,755
Affordability mortgages, including ARMs ............	4,740	824	28,571	311		4,166	38,612
Other ..................................................................	153	-	-	-		82	235

Total interest-only and affordability mortgages ..	38,675	1,377	28,571	1,738		5,241	75,602

- as a percentage of total mortgage lending .....	48.6%	15.4%	29.9%	9.5%		9.0%	29.0%

Negative equity mortgages¹² ................................	3,268	-	21,904	86		1,635	26,893
Other loan-to-value ratios greater than 90 per cent¹³ ..............................................................	8,978	107	19,009	1,737		2,122	31,953

Total negative equity and other mortgages ..........	12,246	107	40,913	1,823		3,757	58,846

- as a percentage of total mortgage lending .....	15.4%	1.2%	42.8%	10.0%		6.5%	22.6%

For footnotes, see page 291.

HSBC Finance held approximately US$61 billion of residential mortgage and second lien loans and advances to personal customers secured on real estate at 31 December 2009, 14 per cent of the Group's gross loans and advances to personal customers. A breakdown of these balances by portfolio was as follows:

HSBC Finance US mortgage lending¹⁴ (Unaudited)
	At 31 December 2009				At 31 December 2008
	Mortgage Services	Consumer Lending	Other mortgage lending	Total	Mortgage Services	Consumer Lending	Other mortgage lending	Total
	US$m	US$m	US$m	US$m	US$m	US$m	US$m	US$m

Fixed-rate¹⁵ ..............	13,596	37,639	98	51,333	16,288	43,873	91	60,252
Other¹⁵ .....................	8,168	1,867	6	10,041	11,339	2,324	35	13,698
Adjustable-rate ......	7,070	1,867	-	8,937	9,530	2,324	33	11,887
Interest-only .........	1,098	-	6	1,104	1,809	-	2	1,811

	21,764	39,506	104	61,374	27,627	46,197	126	73,950

First lien¹⁵ ................	18,710	34,913	77	53,700	23,188	40,334	93	63,615
Second lien¹⁵ .............	3,054	4,593	27	7,674	4,439	5,863	33	10,335

	21,764	39,506	104	61,374	27,627	46,197	126	73,950

Stated income¹⁶ ........	3,905	-	-	3,905	5,667	-	-	5,667

Impairment allowances .............	2,419	3,167	1	5,587	3,819	3,403	1	7,223
- as a percentage of total mortgage lending ..................	11.1%	8.0%	1.0%	9.1%	13.8%	7.4%	0.8%	9.8%

For footnotes, see page 291.

US personal lending - credit quality

(Unaudited)

During 2009, challenging economic conditions in the US continued, marked by further declines in the housing market, rising unemployment, tight credit conditions and reduced economic growth. Although the economic recession continued to deepen into the first half of 2009, signs of stabilisation and improvement began to appear in the second half of the year. While the ongoing financial market disruption continued to affect credit and liquidity throughout the year, an improvement in conditions which began in the second quarter and continued through the rest of the year, strengthened liquidity and narrowed credit spreads. The recovery in market confidence stemmed largely from various government actions taken to restore faith in the capital markets and stimulate consumer spending, and success in these initiatives is bolstering consumer and business sentiment. The pace of job losses eased in the second half of 2009, and this helped the housing market, though the first-time homebuyer tax credit and the low interest rates were the main forces driving up home sales and shrinking inventories of unsold properties. This resulted in some house price stabilisation in the latter half of 2009, particularly in the middle and lower price sector.

US unemployment rates, which have been a major factor in the deterioration of credit quality in the country, were 10 per cent in December 2009, an increase of 260 basis points since December 2008. Unemployment rates in 16 states were greater than the US national average and unemployment rates in 10 states were at or above 11 per cent, including California and Florida, with more than 5 per cent of HSBC Finance's total loan balances.

HSBC Finance: geographical concentration of US lending^14,17

(Unaudited)

	Mortgage lending as a percentage of:		Other personal lending as a percentage of:
	total lending	total mortgage lending	total lending	total other personal lending	percentage of total lending
	%	%	%	%	%

California .................................................................	6	11	5	11	11
New York ...................................................................	3	7	3	7	7
Florida .......................................................................	3	7	3	6	6
Texas ..........................................................................	2	4	4	8	6
Pennsylvania ............................................................	3	6	2	5	5
Ohio ...........................................................................	3	5	2	5	5

For footnotes, see page 291.

Mortgage lending

In line with its exit strategy for non-prime real estate secured mortgage lending, HSBC continued to reduce mortgage lending exposure in the US and balances declined from US$96 billion to US$78 billion as the portfolios ran off.

Although delinquency increased during 2009, credit quality deteriorated at a slower rate than in previous years as the effect of higher unemployment was not as severe as expected due to actions previously taken by HSBC to reduce risk in the loan portfolio.

Following the revision of the write-off period described on page 205, two months and over delinquent balances in the real estate secured portfolios of HSBC Finance decreased in dollar terms but, excluding the effects of the change, they rose. Delinquent balances also increased in HSBC Bank USA. Increased delinquency reflected portfolio seasoning in an environment of continuing weakness in the housing market and diminished availability of refinancing opportunities. In addition, delays to foreclosure caused by changes in some state government practices and backlogs in court proceedings resulted in balances that would otherwise have proceeded to foreclosure remaining reported as contractually delinquent.

Excluding the effects of revising the write-off period:

· delinquency in the Consumer Lending business increased, primarily in the 2006, 2007 and 2008 vintages of the first lien real estate secured portfolio. Two months or more delinquent balances rose from US$5.6 billion in 2008 to US$7.4 billion at 31 December 2009, and two months or more delinquency rates grew from 12.1 per cent to 18.2 per cent;

· two months or more delinquent balances in the Mortgage Services portfolio declined from US$4.7 billion in 2008 to US$4.5 billion at 31 December 2009 as the portfolio continued to season, and two months or more delinquency rates increased from 17 per cent in 2008 to 19.6 per cent at 31 December 2009 as balances declined at a faster pace than delinquencies.

At HSBC Bank USA, the level of dollar delinquency increased within the first lien prime residential mortgage and Home Equity mortgage loan portfolios, reflecting the weakened US economy, high unemployment and continued deterioration of the US housing market. Delinquency rates also rose, in part due to lower balances as mortgage portfolios were sold to third parties. In 2009, HSBC Bank USA sold US$4.5 billion of mortgage portfolios to third parties and it continued to sell the majority of new mortgage loan originations to government-sponsored enterprises and private investors. Two months or more delinquencies increased from 3.4 per cent to 7.5 per cent at 31 December 2009, as delinquency balances increased from US$0.7 billion to US$1.2 billion, while balances declined.

In HSBC Finance, loss rates on the sale of foreclosed properties were broadly stable throughout 2009 but were higher than those incurred in 2008 as house prices continued to fall. The number of properties foreclosed decreased, in part due to delays in foreclosure proceedings and the lengthening by certain states of the foreclosure process. HSBC continued to assist customers in restructuring their debts to avoid foreclosure, including by modifying their loans when it was decided that they could be serviced on revised terms. For further details, see 'HSBC Finance loan modifications and re-ageing' on page 224.

Second lien mortgage loans have a risk profile characterised by higher loan-to-value ratios because, in the majority of cases, the loans were taken out to complete the refinancing or purchase of properties. HSBC Finance has typically experienced loss on default for second lien loans approaching 100 per cent of the amount owing, as any equity in the property is initially applied to the first lien loan. Excluding the effects of the change to the write-off period, in the HSBC Finance Mortgage Services second lien portfolio, two months or more delinquency rates decreased to 17.3 per cent at 31 December 2009 as the portfolio continued to run off. In the Consumer Lending second lien portfolio, two months or more delinquency rates increased to 18.6 per cent at 31 December 2009. In HSBC Bank USA, second lien two months or more delinquency rates increased from 3.5 per cent at 31 December 2008 to 4 per cent at 31 December 2009.

Stated-income mortgage balances in HSBC Finance declined from US$5.7 billion to US$3.9 billion as the portfolio continued to run off. The decline included US$0.2 million as a result of the revised write-off period referred to on page 205. These mortgages were underwritten on the basis of borrowers' representations of annual income and were not verified by supporting documents and, as a result, represent a higher than average level of risk. Two months or more delinquency rates decreased to 22.7 per cent at 31 December 2009. In HSBC Bank USA, stated-income balances decreased from US$2.2 billion to US$2.1 billion and delinquency rates increased from 8.7 per cent at 31 December 2008 to 11.1 per cent at 31 December 2009.

Affordability mortgages are those in which the customer's monthly payments are set at a low initial rate, either fixed or variable, before resetting to a higher rate once the initial introductory period is over. At 31 December 2009, HSBC Finance had US$10 billion of affordability mortgages, compared with US$14 billion at 31 December 2008, as the portfolio continued to run off. Excluding the effects of revising the write-off period, in dollar terms, delinquencies in this portfolio declined during 2009 but, as balances declined at a faster rate, delinquency rates increased. At HSBC Bank USA, affordability mortgage balances of US$11 billion at 31 December 2009 compared with US$15 billion at 31 December 2008.

Credit cards

In the US credit card portfolio, two months or more delinquent balances declined from US$2.0 billion to US$1.8 billion, while in percentage terms they rose from 6.8 per cent at 31 December 2008 to 7.4 per cent at 31 December 2009 as loan balances declined at a faster pace than delinquencies. In the private label cards portfolio, two months and over delinquent balances declined from US$0.7 billion to US$0.6 billion while contractual delinquency increased from 4 per cent at 31 December 2008 to 4.1 per cent at 31 December 2009. The decline of balances in both portfolios was a result of actions taken to tighten underwriting criteria in order to reduce the risk profile of the portfolio, lower customer spending and, in the private label business, terminate certain unprofitable partner relationships. The decrease in delinquency balances in both portfolios also reflected higher levels of personal bankruptcy filings.

Motor vehicle finance

In the vehicle finance portfolio, two months or more delinquencies declined from 5.0 per cent at 31 December 2008 to 4.6 per cent at 31 December 2009, despite the reduction in loan balances, as delinquencies fell at a faster pace.

Other personal lending

In dollar terms, delinquencies in the Consumer Lending unsecured portfolio remained lower, despite the weakened economic conditions, due to a higher number of personal bankruptcy filings which resulted in accounts moving to write-off more quickly, portfolio seasoning as the portfolio ran off, and the actions taken previously to tighten underwriting criteria in order to reduce the risk profile of the portfolio.

US personal lending - loan delinquency

The table below sets out the trends in two months and over contractual delinquencies in the US:

Two months and over contractual delinquency

(Unaudited)

	Quarter ended
	As reported 31 Dec 2009	Ex. period change 31 Dec 2009		30 Sep 2009	30 Jun 2009	31 Mar 2009	31 Dec 2008	30 Sep 2008	30 Jun 2008	31 Mar 2008
	US$m		US$m	US$m	US$m	US$m	US$m	US$m	US$m	US$m
In Personal Financial Services in the US
Residential mortgages	9,551		11,519	10,834	10,070	9,892	9,236	7,061	5,984	5,757
Second lien mortgage lending ................	1,194		1,628	1,631	1,676	1,772	1,790	1,616	1,585	1,638
Vehicle finance .......	267		267	295	310	269	541	512	445	370
Credit card ..............	1,798		1,798	1,834	1,864	1,992	2,029	1,871	1,700	1,782
Private label ...........	622		622	639	636	659	679	606	590	591
Personal non-credit card .....................	1,548		2,619	2,680	2,709	2,855	3,020	2,763	2,606	2,650

Total ......................	14,980		18,453	17,913	17,265	17,439	17,295	14,429	12,910	12,788

	%¹⁸		%¹⁸	%¹⁸	%¹⁸	%¹⁸	%¹⁸	%¹⁸	%¹⁸	%¹⁸

Residential mortgages	14.54		17.03	15.39	13.89	12.82	11.42	8.23	6.65	5.96
Second lien mortgage lending ................	10.14		13.35	12.71	12.35	12.59	12.26	10.59	9.83	9.76
Vehicle finance .......	4.63		4.63	4.61	3.97	2.79	4.98	4.27	3.48	2.83
Credit card ..............	7.38		7.38	7.28	7.25	7.14	6.76	6.18	5.57	5.81
Private label ...........	4.12		4.12	4.38	4.08	4.28	3.99	3.72	3.65	3.66
Personal non-credit card .....................	12.55		19.77	18.73	18.02	18.30	17.83	15.41	14.00	13.71

Total ......................	11.09		13.34	12.47	11.49	10.92	10.16	8.13	7.01	6.64

	Quarter ended
	As reported 31 Dec 2009	Ex. period change 31 Dec 2009		30 Sep 2009	30 Jun 2009	31 Mar 2009	31 Dec 2008	30 Sep 2008	30 Jun 2008	31 Mar 2008
	US$m		US$m	US$m	US$m	US$m	US$m	US$m	US$m	US$m
In Mortgage Services and Consumer Lending
Mortgage Services: ..	3,477		4,456	4,250	4,257	4,535	4,699	4,227	4,260	4,484
- first lien ...........	3,093		3,900	3,688	3,642	3,824	3,912	3,420	3,363	3,456
- second lien .......	384		556	562	615	711	787	807	897	1,028

Consumer Lending: .	6,022		7,445	7,131	6,514	6,203	5,577	3,866	2,777	2,484
- first lien ...........	5,380		6,541	6,241	5,640	5,322	4,724	3,176	2,194	1,954
- second lien .......	642		904	890	874	881	853	690	583	530

	%¹⁸		%¹⁸	%¹⁸	%¹⁸	%¹⁸	%¹⁸	%¹⁸	%¹⁸	%¹⁸
Mortgage Services:
- first lien ...........	16.53		20.00	18.09	17.13	17.24	16.87	14.16	12.91	12.41
- second lien .......	12.57		17.25	16.36	16.35	17.44	17.72	16.62	16.63	16.99
- total .................	15.98		19.61	17.84	17.01	17.27	17.01	14.57	13.55	13.22

Consumer Lending:
- first lien ...........	15.41		18.15	16.75	14.72	13.52	11.71	7.72	5.15	4.52
- second lien .......	13.98		18.64	17.49	16.17	15.43	14.54	11.27	9.04	7.96
- total .................	15.24		18.21	16.84	14.90	13.76	12.07	8.18	5.66	4.98

For footnote, see page 291.

Renegotiated loans

(Audited)

Restructuring activity is designed to manage customer relationships, maximise collection opportunities and, wherever possible, avoid foreclosure or repossession. Such activities include re-ageing, extended payment arrangements, approved external debt management plans, deferred foreclosure, modification, loan rewrites and/or deferral of payments in the event of a change in circumstances. Restructuring is most commonly applied to real estate loans within consumer finance portfolios. Following restructuring, an overdue consumer account is normally reset from delinquent to current status. Restructuring policies and practices are based on indicators or criteria which, in the judgement of local management, indicate that repayment is likely to continue. These policies are kept under continual review and their application varies according to the nature of the market, the product, and the availability of empirical data. Criteria vary between products, but typically include receipt of two or more qualifying payments within a certain period (or, in the case of HSBC Finance, one or more), a minimum lapse of time from origination before restructuring may occur, and restrictions on the number and/or frequency of successive restructurings. Renegotiated loans are segregated from other parts of the loan portfolio for collective impairment assessment, to reflect their risk profile. When empirical evidence indicates an increased propensity to default on restructured accounts, the use of roll rate methodology ensures this factor is taken into account when calculating impairment allowances. Interest is recorded on renegotiated loans taking into account the new contractual terms following renegotiation.

Renegotiated loans that would otherwise have been past due or impaired totalled US$39 billion at 31 December 2009 (2008: US$35 billion). The largest concentration was in the US and amounted to US$33 billion (2008: US$31 billion) or 86 per cent (2008: 89 per cent) of the Group's total renegotiated loans. The increase was attributable to the deterioration in credit quality highlighted above.

HSBC Finance loan modifications and re-ageing

(Unaudited)

HSBC Finance continued to offer a variety of account management policies and practices. Modification occurs when the terms of a loan are modified, either temporarily or permanently, including changes to the rate and/or the payment. Modification may also lead to a re-ageing of the account. In 2009, HSBC Finance modified over 104,000 loans in Consumer Lending and Mortgage Services through the Foreclosure Avoidance and Account Modification programmes, with an aggregate balance of US$14.6 billion.

The total outstanding balances of real estate secured accounts which have been either re-aged or modified was US$30.2 billion, compared with US$26.2 billion at the end of 2008. Two months and over contractual delinquencies on re-aged or modified loans was 26 per cent, broadly consistent with the end of 2008.

HSBC Finance also supports a variety of initiatives to help preserve home ownership and avoid foreclosure. A quarterly breakdown of foreclosure data is provided below:

HSBC Finance foreclosed properties in the US (Unaudited)
			Quarter ended
	2009	2008	31 Dec 2009	30 Sep 2009	30 Jun 2009	31 Mar 2009

Number of foreclosed properties at end of period .........	6,188	9,589	6,188	6,428	7,286	8,866
Number of properties added to foreclosed inventory in the year/quarter ....................................................	14,845	20,051	3,496	3,546	3,550	4,253
Average loss on sale of foreclosed properties (US$000)¹⁹...............................................................	12	14	5	8	13	18
Average total loss on foreclosed properties²⁰ ...............	51%	42%	50%	52%	53%	52%
Average time to sell foreclosed properties (days) .........	193	177	172	184	194	201

For footnotes, see page 291.

Credit quality of financial instruments

(Audited)

The five credit quality classifications set out and defined below describe the credit quality of HSBC's lending, debt securities portfolios and derivatives. Since 2008, the medium classification has been subdivided into 'medium-good' and 'medium-satisfactory' to provide further granularity. These five classifications each encompass a range of more granular, internal credit rating grades assigned to wholesale and retail lending business, as well as the external ratings attributed by external agencies to debt securities.

There is no direct correlation between the internal and external ratings at granular level, except to the extent each falls within a single quality classification.

Credit quality of HSBC's debt securities and other bills	External credit rating

Quality classification
Strong ...................................................................................................................................................	A- and above
Medium-good ........................................................................................................................................	BBB+ to BBB-
Medium-satisfactory .............................................................................................................................	BB+ to B+ and unrated
Sub-standard ..........................................................................................................................................	B and below
Impaired ...............................................................................................................................................	Impaired

Credit quality of HSBC's wholesale lending and derivatives	Internal credit rating	Probability of default %

Quality classification
Strong ..........................................................................................................................	CRR1 to CRR2	0 - 0.169
Medium-good ...............................................................................................................	CRR3	0.170 - 0.740
Medium-satisfactory ....................................................................................................	CRR4 to CRR5	0.741 - 4.914
Sub-standard .................................................................................................................	CRR6 to CRR8	4.915 - 99.999
Impaired ......................................................................................................................	CRR9 to CRR10	100

Credit quality of HSBC's retail lending	Internal credit rating²¹	Expected loss %

Quality classification
Strong ..........................................................................................................................	EL1 to EL2	0 - 0.999
Medium-good................................................................................................................	EL3	1.000 - 4.999
Medium-satisfactory.....................................................................................................	EL4 to EL5	5.000- 19.999
Sub-standard..................................................................................................................	EL6 to EL8	20.000 - 99.999
Impaired ......................................................................................................................	EL9 to EL10	100+ or defaulted²²

For footnotes, see page 291.

Quality classification definitions

· 'Strong': exposures demonstrate a strong capacity to meet financial commitments, with negligible or low probability of default and/or low levels of expected loss. Retail accounts operate within product parameters and only exceptionally show any period of delinquency.

· 'Medium-good': exposures require closer monitoring and demonstrate a good capacity to meet financial commitments, with low default risk. Retail accounts typically show only short periods of delinquency, with any losses expected to be minimal following the adoption of recovery processes.

· 'Medium-satisfactory': exposures require closer monitoring and demonstrate an average to fair capacity to meet financial commitments, with moderate default risk. Retail accounts typically show only short periods of delinquency, with any losses expected to be minor following the adoption of recovery processes.

· 'Sub-standard': exposures require varying degrees of special attention and default risk is of greater concern. Retail portfolio segments show longer delinquency periods of generally up to 90 days past due and/or expected losses are higher due to a reduced ability to mitigate these through security realisation or other recovery processes.

· 'Impaired': exposures have been assessed, individually or collectively, as impaired.

Risk rating scales

The Customer Risk Rating ('CRR') 10-grade scale above summarises a more granular underlying 22‑grade scale of obligor probability of default ('PD'). All distinct HSBC customers are rated using one of these two PD scales, depending on the degree of sophistication of the Basel II approach adopted for the exposure.

The Expected Loss ('EL') 10-grade scale for retail business summarises a more granular underlying EL scale for these customer segments; this combines obligor and facility/product risk factors in a composite measure.

For debt securities and certain other financial instruments, external ratings have been aligned to the five quality classifications. The ratings of Standard and Poor's are cited, with those of other agencies being treated equivalently. Debt securities with short-term issue ratings are reported against the long-term rating of the issuer of those securities. If major rating agencies have different ratings for the same debt securities, a prudent rating selection is made in line with regulatory requirements.

Additional credit quality information in respect of HSBC's consolidated holdings of ABSs and assets held in consolidated SIVs and conduits is provided on pages 160 to 161 and 182 to 183, respectively.

For the purpose of the following disclosure, retail loans which are past due up to 89 days and are not otherwise classified as EL9 or EL10, are separately classified as past due but not impaired.

The following tables set out the Group's distribution of financial instruments by measures of credit quality:

Distribution of financial instruments by credit quality

(Audited)

	Neither past due nor impaired					Past due but not impaired			Impair-
		Medium			Sub standard		Impaired	ment allowances²³		Total
	Strong	Good	Satisfactory		Sub standard		Impaired	ment allowances²³		Total
	US$m	US$m		US$m	US$m	US$m	US$m		US$m	US$m
At 31 December 2009
Cash and balances at central banks ......	55,355	3,414		1,589	297	-	-			60,655
Items in the course of collection from other banks .........	5,922	20		453	-	-	-			6,395
Hong Kong Government certificates of deposit ................	17,463	-		-	-	-	-			17,463

Trading assets²⁴ ......	306,481	37,911		39,457	2,221					386,070
- treasury and other eligible bills ..................	21,747	315		169	115					22,346
- debt securities ..	180,876	7,499		12,360	863					201,598
- loans and advances to banks ...............	59,152	14,213		4,572	189					78,126
- loans and advances to customers .........	44,706	15,884		22,356	1,054					84,000

Financial assets designated at fair value²⁴ ................	11,163	3,834		7,122	79					22,198
- treasury and other eligible bills ..................	223	-		-	-					223
- debt securities ..	9,701	3,834		7,104	79					20,718
- loans and advances to banks ...............	336	-		18	-					354
- loans and advances to customers .........	903	-		-	-					903

Derivatives²⁴ ..........	169,430	60,759		15,688	5,009					250,886

Loans and advances held at amortised cost ....................	570,357	231,394		185,167	43,820	40,078	30,845		(25,649)	1,076,012
- loans and advances to banks ...............	130,403	34,646		13,154	1,434	12	239		(107)	179,781
- loans and advances to customers^8,25 ....	439,954	196,748		172,013	42,386	40,066	30,606		(25,542)	896,231

Financial investments ............	316,604	20,080		15,359	5,602	-	2,389			360,034
- treasury and other similar bills ..................	54,158	1,458		2,315	498	-	5			58,434
- debt securities ..	262,446	18,622		13,044	5,104	-	2,384			301,600

Other assets ............	13,454	6,968		12,477	1,718	908	848			36,373
- endorsements and acceptances	1,349	3,200		4,161	512	12	77			9,311
- accrued income and other ............	12,105	3,768		8,316	1,206	896	771			27,062

Distribution of financial instruments by credit quality (continued)

	Neither past due nor impaired					Past due but not impaired			Impair-
		Medium			Sub standard		Impaired	ment allowances²³		Total
	Strong	Good	Satisfactory		Sub standard		Impaired	ment allowances²³		Total
	US$m	US$m		US$m	US$m	US$m	US$m		US$m	US$m
At 31 December 2008
Cash and balances at central banks .........	50,070	206		1,831	289	-	-			52,396
Items in the course of collection from other banks ...........	4,541	4		1,392	-	66	-			6,003
Hong Kong Government certificates of indebtedness ..........	15,358	-		-	-	-	-			15,358

Trading assets²⁴ .........	303,307	37,349		61,628	3,167					405,451
- treasury and other eligible bills .........	32,314	75		17	52					32,458
- debt securities .....	175,681	5,294		17,547	1,097					199,619
- loans and advances to banks ...........................	60,400	7,501		5,013	141					73,055
- loans and advances to customers ...........	34,912	24,479		39,051	1,877					100,319

Financial assets designated at fair value²⁴ ...................	5,288	4,141		7,293	818					17,540
- treasury and other eligible bills .........	204	-		31	-					235
- debt securities .....	4,129	4,140		7,262	818					16,349
- loans and advances to banks ...........................	230	-		-	-					230
- loans and advances to customers ...........	725	1		-	-					726

Derivatives²⁴ .............	383,393	79,243		27,105	5,135					494,876

Loans and advances held at amortised cost .......................	565,542	231,966		195,822	43,432	48,422	25,422		(23,972)	1,086,634
- loans and advances to banks ...........................	118,684	23,753		10,013	1,268	41	70		(63)	153,766
- loans and advances to customers²⁵ ........	446,858	208,213		185,809	42,164	48,381	25,352		(23,909)	932,868

Financial investments	257,435	16,170		16,719	1,382	32	1,246			292,984
- treasury and other similar bills .........	37,932	1,904		1,023	168	-	-			41,027
- debt securities .....	219,503	14,266		15,696	1,214	32	1,246			251,957

Other assets ..............	11,959	9,491		17,026	1,747	219	417			40,859
- endorsements and acceptances ........	1,851	4,333		3,460	805	30	3			10,482
- accrued income and other ..............	10,108	5,158		13,566	942	189	414			30,377

For footnotes, see page 291.

2009 compared with 2008

Financial instruments on which credit quality has been assessed declined by 8 per cent to US$2,216 billion at 31 December 2009, of which US$1,466 billion was classified as 'strong', representing 66 per cent (2008: 66 per cent) of the total of such financial instruments. This percentage held constant in 2009 as management actions to mitigate the Group's exposure to credit risk offset the effects on credit quality of the global economic slowdown. The proportion of financial instruments classified as 'medium-good' increased by nearly one percentage point to 16.4 per cent. The proportion of 'medium-satisfactory' declined by one percentage point to 12.5 per cent. The proportion of 'sub-standard' rose marginally.

Factors contributing to the relative improvement in credit quality included the run-off of the consumer finance exit portfolios in the US, while factors contributing to relative deterioration in credit quality included higher delinquency levels in personal and commercial lending.

Derivative assets on which credit quality has been assessed decreased to US$251 billion at the end of 2009 and led to a reduction in balances in each of the credit risk categories. The decline in the overall balance was driven mainly by a reduction in foreign exchange, interest rate and credit derivatives as lower levels of volatility within the financial markets, steepening yield curves and narrowing credit spreads led to a fall in the fair value of outstanding derivative contracts.

Financial investments on which credit quality has been assessed increased by 23 per cent to US$360 billion, with a significant increase in the balance classified as 'strong'. This reflected the investment of surplus funds in government-guaranteed, agency, supranational and government debt securities in line with the bank's risk appetite.

Past due but not impaired gross financial instruments

(Audited)

Examples of exposures past due but not impaired include overdue loans fully secured by cash collateral; mortgages that are individually assessed for impairment, and that are in arrears more than 90 days, but where the value of collateral is sufficient to repay both the principal debt and all potential interest for at least one year; and short-term trade facilities past due more than 90 days for technical reasons such as delays in documentation, but where there is no concern over the creditworthiness of the counterparty.

Past due but not impaired loans and advances to customers and banks by geographical region

(Audited)

	Europe	Hong Kong	Rest of Asia- Pacific⁷	Middle East⁷	North America	Latin America	Gross loans and advances past due not impaired
	US$m	US$m	US$m	US$m	US$m	US$m	US$m

At 31 December 2009 ...............................	3,759	1,165	1,996	1,661	27,989	3,508	40,078
At 31 December 2008 .................................	3,800	1,805	1,863	2,457	35,247	3,250	48,422

For footnote, see page 291.

Past due but not impaired loans and advances to customers and banks by industry sector

(Audited)

	At 31 December
	2009	2008
	US$m	US$m

Banks ....................................................................................................................................	12	41

Customers ..............................................................................................................................	40,066	48,381
Personal .............................................................................................................................	34,306	39,592
Corporate and commercial .................................................................................................	5,522	8,603
Financial ............................................................................................................................	238	186


	40,078	48,422

Ageing analysis of days past due but not impaired gross financial instruments

(Audited)

	Up to 29 days	30-59 days	60-89 days	90-179 days	180 days and over	Total
	US$m	US$m	US$m	US$m	US$m	US$m
At 31 December 2009
Loans and advances held at amortised cost .................	24,330	9,920	5,259	355	214	40,078
- loans and advances to banks .................................	12	-	-	-	-	12
- loans and advances to customers ..........................	24,318	9,920	5,259	355	214	40,066

Other assets ................................................................	609	130	63	24	82	908
- endorsements and acceptances .............................	9	1	-	1	1	12
- other ...................................................................	600	129	63	23	81	896


	24,939	10,050	5,322	379	296	40,986

	Up to 29 days	30-59 days	60-89 days	90-179 days	180 days and over	Total
	US$m	US$m	US$m	US$m	US$m	US$m
At 31 December 2008
Items in the course of collection from other banks .....	66	-	-	-	-	66

Loans and advances held at amortised cost .................	31,034	10,814	5,493	621	460	48,422
- loans and advances to banks .................................	41	-	-	-	-	41
- loans and advances to customers ..........................	30,993	10,814	5,493	621	460	48,381

Financial investments
- debt securities ......................................................	32	-	-	-	-	32

Other assets ................................................................	45	22	118	7	27	219
- endorsements and acceptances .............................	21	6	1	2	-	30
- other ...................................................................	24	16	117	5	27	189


	31,177	10,836	5,611	628	487	48,739

Impaired loans and advances

Impaired loans and advances to customers and banks by industry sector

(Audited)

	Impaired loans and advances at 31 December 2009			Impaired loans and advances at 31 December 2008
	Individually assessed	Collectively assessed	Total	Individually assessed²⁶	Collectively assessed²⁶	Total
	US$m	US$m	US$m	US$m	US$m	US$m

Banks ..................................................	239	-	239	70	-	70

Customers ............................................	14,767	15,839	30,606	7,922	17,430	25,352
Personal⁸ .........................................	1,977	15,451	17,428	1,538	17,071	18,609
Corporate and commercial ...............	11,839	387	12,226	6,086	357	6,443
Financial ..........................................	951	1	952	298	2	300


	15,006	15,839	30,845	7,992	17,430	25,422

For footnote, see page 291.

Collateral and other credit enhancements obtained

(Audited)

HSBC obtained assets by taking possession of collateral held as security, or calling upon other credit enhancements, as follows:

	Carrying amount obtained in:
	2009	2008
	US$m	US$m
Nature of assets
Residential property ................	1,587	2,562
Commercial and industrial property ..............................	93	21
Other ......................................	355	382

	2,035	2,965

Repossessed properties are made available for sale in an orderly fashion, with the proceeds used to reduce or repay the outstanding indebtedness. If excess funds arise after the debt has been repaid, they are made available either to repay other secured lenders with lower priority or are returned to the customer. HSBC does not generally occupy repossessed properties for its business use.

Impairment allowances and charges on loans and advances to customers and banks

(Audited)

The tables below analyse by geographical region the impairment allowances recognised for impaired loans and advances that are either individually assessed or collectively assessed, and collective impairment allowances on loans and advances classified as not impaired.

Impairment allowances on loans and advances to customers by geographical region

(Audited)

	Europe	Hong Kong	Rest of Asia- Pacific⁷	Middle East⁷	North America	Latin America	Total
	US$m	US$m	US$m	US$m	US$m	US$m	US$m
At 31 December 2009
Gross loans and advances
Individually assessed impaired loans²⁷ ................	8,800	823	1,006	1,310	1,990	838	14,767

Collectively assessed²⁸ ......................................	436,816	99,362	80,033	22,912	218,539	49,344	907,006
Impaired loans^8,27 .........................................	1,922	18	194	336	11,256	2,113	15,839
Non-impaired loans²⁹ ....................................	434,894	99,344	79,839	22,576	207,283	47,231	891,167


Total gross loans and advances⁸ ........................	445,616	100,185	81,039	24,222	220,529	50,182	921,773

Impairment allowances
Individually assessed ......................................	3,742	490	508	688	650	416	6,494
Collectively assessed⁸ ....................................	2,393	314	488	690	13,026	2,137	19,048

Total impairment allowances⁸ ..........................	6,135	804	996	1,378	13,676	2,553	25,542

Net loans and advances .....................................	439,481	99,381	80,043	22,844	206,853	47,629	896,231

	%	%	%	%	%	%	%
Individually assessed allowances as a percentage of individually assessed loans and advances .................................................	42.5	59.5	50.5	52.5	32.7	49.7	44.0
Collectively assessed allowances as a percentage of collectively assessed loans and advances .................................................	0.5	0.3	0.6	3.0	6.0	4.3	2.1
Total allowances as a percentage of total gross loans and advances ...............................	1.4	0.8	1.2	5.7	6.2	5.1	2.8

	US$m	US$m	US$m	US$m	US$m	US$m	US$m
At 31 December 2008
Gross loans and advances
Individually assessed impaired loans^26,27 ............	4,817	813	705	160	832	595	7,922

Collectively assessed²⁸ ......................................	425,233	100,140	80,769	27,549	271,472	43,692	948,855
Impaired loans^26,27 ........................................	1,957	39	130	119	13,453	1,732	17,430
Non-impaired loans²⁹ ....................................	423,276	100,101	80,639	27,430	258,019	41,960	931,425


Total gross loans and advances .........................	430,050	100,953	81,474	27,709	272,304	44,287	956,777

Impairment allowances
Individually assessed ......................................	2,005	411	316	132	192	228	3,284
Collectively assessed .....................................	1,854	322	497	282	15,898	1,772	20,625

Total impairment allowances ...........................	3,859	733	813	414	16,090	2,000	23,909

Net loans and advances .....................................	426,191	100,220	80,661	27,295	256,214	42,287	932,868

	%	%	%	%	%	%	%
Individually assessed allowances as a percentage of individually assessed loans and advances .................................................	41.6	50.6	44.8	82.5	23.1	38.3	41.5
Collectively assessed allowances as a percentage of collectively assessed loans and advances .................................................	0.4	0.3	0.6	1.0	5.9	4.1	2.2
Total allowances as a percentage of total gross loans and advances ...............................	0.9	0.7	1.0	1.5	5.9	4.5	2.5

For footnotes, see page 291.

Impairment allowances on loans and advances to customers and banks by industry sector

(Audited)

	At 31 December 2009			At 31 December 2008
	Individually assessed allowances	Collectively assessed allowances	Total allowances	Individually assessed allowances	Collectively assessed allowances	Total allowances
	US$m	US$m	US$m	US$m	US$m	US$m

Banks³⁰ ................................................	107	-	107	63	-	63

Customers ............................................	6,494	19,048	25,542	3,284	20,625	23,909
Personal⁸ .........................................	572	16,517	17,089	312	18,657	18,969
Corporate and commercial ...............	5,528	2,354	7,882	2,845	1,795	4,640
Financial ..........................................	394	177	571	127	173	300


	6,601	19,048	25,649	3,347	20,625	23,972

For footnotes, see page 291.

Impairment allowances as a percentage of loans and advances³¹

(Unaudited)

	At 31 December
	2009	2008
	%	%
Banks
Individually assessed impairment allowances³² ....................................................................	0.09	0.06

Customers³² ...........................................................................................................................	2.96	2.63
Individually assessed impairment allowances³² ....................................................................	0.75	0.36
Collectively assessed impairment allowances³² ...................................................................	2.21	2.27

For footnotes, see page 291.

Movement in impairment allowances on loans and advances

(Audited)

	Banks	Customers
	individually assessed	Individually assessed	Collectively assessed	Total
	US$m	US$m	US$m	US$m

At 1 January 2009 ..........................................................	63	3,284	20,625	23,972
Amounts written off⁸ .....................................................	(35)	(1,563)	(23,242)	(24,840)
Recoveries of loans and advances written off in previous years ...........................................................	6	128	756	890
Charge to income statement ...........................................	70	4,388	20,484	24,942
Exchange and other movements .....................................	3	257	425	685

At 31 December 2009 ..................................................	107	6,494	19,048	25,649

At 1 January 2008 ..........................................................	7	2,699	16,506	19,212
Amounts written off .......................................................	-	(824)	(17,131)	(17,955)
Recoveries of loans and advances written off in previous years ...........................................................	-	113	721	834
Charge to income statement ...........................................	54	2,010	22,067	24,131
Exchange and other movements .....................................	2	(714)	(1,538)	(2,250)

At 31 December 2008 ....................................................	63	3,284	20,625	23,972

For footnote, see page 291.

Movement in impairment allowances by industry sector

(Audited)

	2009	2008	2007	2006	2005
	US$m	US$m	US$m	US$m	US$m

Impairment allowances at 1 January .................................	23,972	19,212	13,585	11,366	12,559

Amounts written off .........................................................	(24,840)	(17,955)	(12,844)	(9,473)	(9,043)
Personal² ......................................................................	(22,703)	(16,625)	(11,670)	(8,281)	(8,046)
- residential mortgages² ............................................	(4,704)	(2,110)	(930)	(628)	(508)
- other personal² ......................................................	(17,999)	(14,515)	(10,740)	(7,653)	(7,538)

Corporate and commercial ............................................	(1,984)	(1,294)	(1,163)	(1,153)	(984)
- commercial, industrial and international trade ........	(1,093)	(789)	(897)	(782)	(673)
- commercial real estate and other property-related .	(327)	(115)	(98)	(111)	(117)
- other commercial ...................................................	(564)	(390)	(168)	(260)	(194)

Financial³³ ....................................................................	(153)	(36)	(11)	(39)	(13)

Recoveries of amounts written off in previous years..........	890	834	1,005	779	494
Personal ........................................................................	712	686	837	605	320
- residential mortgages ..............................................	61	19	19	19	18
- other personal ........................................................	651	667	818	586	302

Corporate and commercial ............................................	170	142	157	163	174
- commercial, industrial and international trade ........	123	76	74	88	76
- commercial real estate and other property-related .	9	6	29	21	9
- other commercial ...................................................	38	60	54	54	89

Financial³³ ....................................................................	8	6	11	11	-

Charge to income statement³⁴ ...........................................	24,942	24,131	17,177	10,547	7,860
Personal ........................................................................	19,781	20,950	15,968	9,929	7,249
- residential mortgages ..............................................	4,185	5,000	1,840	1,096	605
- other personal ........................................................	15,596	15,950	14,128	8,833	6,644

Corporate and commercial ............................................	4,711	2,879	1,176	664	618
- commercial, industrial and international trade ........	2,392	1,573	897	503	588
- commercial real estate and other property-related .	1,492	755	152	75	56
- other commercial ...................................................	827	551	127	86	(26)

Financial³³ ....................................................................	450	302	36	(9)	(13)
Governments ................................................................	-	-	(3)	(37)	6

Exchange and other movements .......................................	685	(2,250)	289	366	(504)

Impairment allowances at 31 December⁸ ...................	25,649	23,972	19,212	13,585	11,366

Impairment allowances against banks:
- individually assessed ...................................................	107	63	7	7	9
Impairment allowances against customers:
- individually assessed ...................................................	6,494	3,284	2,699	2,565	2,683
- collectively assessed⁸ ..................................................	19,048	20,625	16,506	11,013	8,674

Impairment allowances at 31 December⁸ ..........................	25,649	23,972	19,212	13,585	11,366

	%	%	%	%	%
Impairment allowances against customers as a percentage of loans and advances to customers:
- individually assessed ...................................................	0.70	0.34	0.27	0.29	0.36
- collectively assessed ...................................................	2.07	2.16	1.65	1.25	1.16
²
At 31 December ...............................................................	2.77	2.50	1.92	1.54	1.52

For footnotes, see page 291.

Movement in impairment allowances by industry sector and by geographical region

(Audited)

	2009
	Europe	Hong Kong	Rest of Asia- Pacific⁷	Middle East⁷	North America	Latin America	Total
	US$m	US$m	US$m	US$m	US$m	US$m	US$m

Impairment allowances at 1 January ..............	3,922	733	813	414	16,090	2,000	23,972

Amounts written off .....................................	(2,781)	(357)	(850)	(384)	(17,792)	(2,676)	(24,840)
Personal² ....................................................	(1,876)	(240)	(787)	(376)	(17,204)	(2,220)	(22,703)
- residential mortgages² ...........................	(41)	(1)	(9)	-	(4,610)	(43)	(4,704)
- other personal² .....................................	(1,835)	(239)	(778)	(376)	(12,594)	(2,177)	(17,999)

Corporate and commercial .........................	(810)	(117)	(63)	(8)	(534)	(452)	(1,984)
- commercial, industrial and international trade .....................................................	(438)	(114)	(50)	(8)	(228)	(255)	(1,093)
- commercial real estate and other property-related ....................................	(148)	(1)	(3)	-	(163)	(12)	(327)
- other commercial .................................	(224)	(2)	(10)	-	(143)	(185)	(564)

Financial³³ ..................................................	(95)	-	-	-	(54)	(4)	(153)

Recoveries of amounts written off in previous years ..........................................................	265	34	132	27	93	339	890
Personal .....................................................	200	32	123	25	60	272	712
- residential mortgages ............................	28	6	1	-	7	19	61
- other personal ......................................	172	26	122	25	53	253	651

Corporate and commercial .........................	57	2	9	2	33	67	170
- commercial, industrial and international trade .....................................................	52	2	7	2	16	44	123
- commercial real estate and other property-related ....................................	5	-	1	-	2	1	9
- other commercial .................................	-	-	1	-	15	22	38

Financial³³ ..................................................	8	-	-	-	-	-	8

Charge to income statement³⁴ .......................	4,409	450	874	1,333	15,372	2,504	24,942
Personal .....................................................	1,995	206	654	593	14,390	1,943	19,781
- residential mortgages ............................	158	(16)	14	20	3,955	54	4,185
- other personal ......................................	1,837	222	640	573	10,435	1,889	15,596

Corporate and commercial .........................	2,163	244	220	706	818	560	4,711
- commercial, industrial and international trade .....................................................	963	164	154	413	309	389	2,392
- commercial real estate and other property-related ....................................	958	70	29	106	288	41	1,492
- other commercial .................................	242	10	37	187	221	130	827

Financial³³ ..................................................	251	-	-	34	164	1	450

Exchange and other movements ...................	412	(56)	27	3	(87)	386	685

Impairment allowances at 31 December⁸	6,227	804	996	1,393	13,676	2,553	25,649

Impairment allowances against banks:
- individually assessed ................................	92	-	-	15	-	-	107
Impairment allowances against customers:
- individually assessed ................................	3,742	490	508	688	650	416	6,494
- collectively assessed^8,35 ...........................	2,393	314	488	690	13,026	2,137	19,048

Impairment allowances at 31 December⁸ .......	6,227	804	996	1,393	13,676	2,553	25,649

	%	%	%	%	%	%	%
Impairment allowances against customers as a percentage of loans and advances to customers:
- individually assessed ................................	0.84	0.49	0.63	2.84	0.29	0.83	0.70
- collectively assessed³⁵ .............................	0.54	0.31	0.60	2.85	5.91	4.26	2.07
²
At 31 December ............................................ ..................................................................	1.38	0.80	1.23	5.69	6.20	5.09	2.77

	2008
	Europe	Hong Kong	Rest of Asia- Pacific⁷	Middle East⁷	North America	Latin America	Total
	US$m	US$m	US$m	US$m	US$m	US$m	US$m

Impairment allowances at 1 January .................	3,938	376	650	276	11,980	1,992	19,212

Amounts written off .........................................	(2,483)	(219)	(674)	(164)	(12,215)	(2,200)	(17,955)
Personal ........................................................	(1,947)	(179)	(646)	(153)	(11,989)	(1,711)	(16,625)
- residential mortgages ................................	(3)	(1)	(6)	-	(2,030)	(70)	(2,110)
- other personal ..........................................	(1,944)	(178)	(640)	(153)	(9,959)	(1,641)	(14,515)

Corporate and commercial .............................	(515)	(38)	(28)	(11)	(214)	(488)	(1,294)
- commercial, industrial and international trade .........................................................	(367)	(33)	(16)	(6)	(153)	(214)	(789)
- commercial real estate and other property-related ......................................................	(77)	(2)	(1)	(3)	(12)	(20)	(115)
- other commercial .....................................	(71)	(3)	(11)	(2)	(49)	(254)	(390)

Financial³³ .....................................................	(21)	(2)	-	-	(12)	(1)	(36)

Recoveries of amounts written off in previous years ..............................................................	294	39	107	30	100	264	834
Personal ........................................................	275	36	97	27	54	197	686
- residential mortgages ................................	-	7	1	-	-	11	19
- other personal ..........................................	275	29	96	27	54	186	667

Corporate and commercial .............................	19	3	6	2	45	67	142
- commercial, industrial and international trade .........................................................	19	1	5	1	27	23	76
- commercial real estate and other property-related ......................................................	-	-	1	-	5	-	6
- other commercial .....................................	-	2	-	1	13	44	60

Financial³³ .....................................................	-	-	4	1	1	-	6

Charge to income statement³⁴ ..........................	3,411	556	815	274	16,589	2,486	24,131
Personal ........................................................	1,961	160	641	219	16,006	1,963	20,950
- residential mortgages ................................	18	-	9	20	4,943	10	5,000
- other personal ..........................................	1,943	160	632	199	11,063	1,953	15,950

Corporate and commercial .............................	1,304	363	173	47	472	520	2,879
- commercial, industrial and international trade .........................................................	537	316	132	39	213	336	1,573
- commercial real estate and other property-related ......................................................	540	28	17	4	132	34	755
- other commercial .....................................	227	19	24	4	127	150	551

Financial³³ .....................................................	146	33	1	8	111	3	302

Exchange and other movements .......................	(1,238)	(19)	(80)	(7)	(364)	(542)	(2,250)

Impairment allowances at 31 December ...........	3,922	733	813	414	16,090	2,000	23,972

Impairment allowances against banks:
- individually assessed ...................................	63	-	-	-	-	-	63
Impairment allowances against customers:
- individually assessed ...................................	2,005	411	316	132	192	228	3,284
- collectively assessed³⁵ ................................	1,854	322	497	282	15,898	1,772	20,625

Impairment allowances at 31 December ...........	3,922	733	813	414	16,090	2,000	23,972

	%	%	%	%	%	%	%
Impairment allowances against customers as a percentage of loans and advances to customers:
- individually assessed ...................................	0.47	0.41	0.39	0.48	0.07	0.51	0.34
- collectively assessed³⁵ ................................	0.43	0.32	0.61	1.02	5.84	4.00	2.16
²
At 31 December ...............................................	0.90	0.73	1.00	1.50	5.91	4.51	2.50

For footnotes, see page 291.

Individually and collectively assessed impairment charge to income statement by industry segment

(Unaudited)

	2009			2008
	Individually assessed US$m	Collectively assessed US$m	Total US$m	Individually assessed US$m	Collectively assessed US$m	Total US$m

Banks ..........................................................	70	-	70	54	-	54
Personal ......................................................	316	19,465	19,781	110	20,840	20,950
Residential mortgages ..............................	171	4,014	4,185	26	4,974	5,000
Other personal .........................................	145	15,451	15,596	84	15,866	15,950

Corporate and commercial ..........................	3,699	1,012	4,711	1,782	1,097	2,879
Commercial, industrial and international trade ....................................................	1,681	711	2,392	912	661	1,573
Commercial real estate and other property-related ..................................	1,330	162	1,492	613	142	755
Other commercial ....................................	688	139	827	257	294	551

Financial .....................................................	373	7	380	118	130	248

Total charge to income statement ...............	4,458	20,484	24,942	2,064	22,067	24,131

Net loan impairment charge to the income statement

(Unaudited)

	2009	2008	2007	2006	2005
	US$m	US$m	US$m	US$m	US$m
Individually assessed impairment allowances
New allowances .............................................................	5,173	2,742	1,533	1,297	1,715
Release of allowances no longer required .......................	(581)	(565)	(608)	(711)	(998)
Recoveries of amounts previously written off ...............	(134)	(113)	(129)	(128)	(199)

	4,458	2,064	796	458	518

Collectively assessed impairment allowances
New allowances net of allowance releases ......................	21,240	22,788	17,257	10,740	8,425
Release of allowances no longer required .......................	-	-	-	-	(788)
Recoveries of amounts previously written off ...............	(756)	(721)	(876)	(651)	(295)

	20,484	22,067	16,381	10,089	7,342

Total charge for impairment losses ...................................	24,942	24,131	17,177	10,547	7,860
Banks ...........................................................................	70	54	-	(3)	(7)
Customers ....................................................................	24,872	24,077	17,177	10,550	7,867


	%	%	%	%	%
Charge for impairment losses as a percentage of closing gross loans and advances ...............................................	2.26	2.17	1.39	0.99	0.90

	US$m	US$m	US$m	US$m	US$m
At 31 December
Impaired loans⁸ .................................................................	30,845	25,422	19,594	15,086	12,360
Impairment allowances⁸ ....................................................	25,649	23,972	19,212	13,585	11,366

For footnote, see page 291.

Net loan impairment charge to the income statement by geographical region

(Unaudited)

	Europe	Hong Kong	Rest of Asia- Pacific⁷	Middle East⁷	North America	Latin America	Total
	US$m	US$m	US$m	US$m	US$m	US$m	US$m
2009
Individually assessed impairment allowances
New allowances .............................................	2,573	315	341	598	1,052	294	5,173
Release of allowances no longer required .......	(255)	(64)	(82)	(16)	(112)	(52)	(581)
Recoveries of amounts previously written off	(70)	(9)	(15)	(2)	(24)	(14)	(134)

	2,248	242	244	580	916	228	4,458

Collectively assessed impairment allowances
New allowances net of allowance releases ......	2,356	233	747	778	14,525	2,601	21,240
Recoveries of amounts previously written off	(195)	(25)	(117)	(25)	(69)	(325)	(756)

	2,161	208	630	753	14,456	2,276	20,484

Total charge for impairment losses ..................	4,409	450	874	1,333	15,372	2,504	24,942
Banks ...........................................................	55	-	-	15	-	-	70
Customers ....................................................	4,354	450	874	1,318	15,372	2,504	24,872


	%	%	%	%	%	%	%
Charge for impairment losses as a percentage of closing gross loans and advances ..............	0.86	0.33	0.75	4.08	6.52	3.64	2.26

	US$m	US$m	US$m	US$m	US$m	US$m	US$m
At 31 December 2009
Impaired loans⁸ ................................................	10,873	846	1,201	1,666	13,308	2,951	30,845
Impairment allowances⁸ ...................................	6,227	804	996	1,393	13,676	2,553	25,649

2008
Individually assessed impairment allowances
New allowances .............................................	1,567	365	223	30	397	160	2,742
Release of allowances no longer required .......	(340)	(25)	(53)	(36)	(80)	(31)	(565)
Recoveries of amounts previously written off	(38)	(10)	(17)	(3)	(40)	(5)	(113)

	1,189	330	153	(9)	277	124	2,064

Collectively assessed impairment allowances
New allowances net of allowance releases ......	2,478	255	752	310	16,372	2,621	22,788
Recoveries of amounts previously written off	(256)	(29)	(90)	(27)	(60)	(259)	(721)

	2,222	226	662	283	16,312	2,362	22,067

Total charge for impairment losses ..................	3,411	556	815	274	16,589	2,486	24,131
Banks ...........................................................	54	-	-	-	-	-	54
Customers ....................................................	3,357	556	815	274	16,589	2,486	24,077


	%	%	%	%	%	%	%
Charge for impairment losses as a percentage of closing gross loans and advances ..............	0.68	0.43	0.74	0.78	5.85	4.22	2.17

	US$m	US$m	US$m	US$m	US$m	US$m	US$m
At 31 December 2008
Impaired loans ..................................................	6,844	852	835	279	14,285	2,327	25,422
Impairment allowances .....................................	3,922	733	813	414	16,090	2,000	23,972

For footnotes, see page 291.

Charge for impairment losses as a percentage of average gross loans and advances to customers⁸

(Unaudited)

	2009	2008	2007	2006	2005
	%	%	%	%	%

New allowances net of allowance releases ..........................	2.92	2.54	2.09	1.49	1.25
Recoveries ........................................................................	(0.10)	(0.09)	(0.12)	(0.10)	(0.09)

Total charge for impairment losses ...................................	2.82	2.45	1.97	1.39	1.16

Amount written off net of recoveries ...............................	2.71	1.75	1.36	1.15	1.26

For footnote, see page 291.

Charge for impairment losses as a percentage of average gross loans and advances to customers by geographical region⁸

(Unaudited)

	Europe	Hong Kong	Rest of Asia- Pacific⁷	Middle East⁷	North America	Latin America	Total
	%	%	%	%	%	%	%
2009
New allowances net of allowance releases .........	1.19	0.49	1.31	5.25	6.24	6.11	2.92
Recoveries ........................................................	(0.07)	(0.03)	(0.17)	(0.11)	(0.04)	(0.73)	(0.10)

Total charge for impairment losses ..................	1.12	0.46	1.14	5.14	6.20	5.38	2.82

Amount written off net of recoveries ...............	0.63	0.33	0.94	1.40	7.14	5.03	2.71

2008
New allowances net of allowance releases .........	0.86	0.63	1.04	1.12	5.73	5.32	2.54
Recoveries ........................................................	(0.07)	(0.04)	(0.12)	(0.11)	(0.03)	(0.51)	(0.09)

Total charge for impairment losses ..................	0.79	0.59	0.92	1.01	5.70	4.81	2.45

Amount written off net of recoveries ...............	0.52	0.19	0.64	0.50	4.16	3.73	1.75

For footnotes, see page 291.

Impaired loans and new loan impairment allowances

2009 compared with 2008

(Unaudited)

Loan impairment charges increased by 3 per cent to US$24.9 billion from US$24.1 billion in 2008. The commentary on net loan impairment allowances is on a constant currency basis while the commentary on impaired loans is on a reported basis.

New allowances for loan impairment charges rose by 7 per cent compared with 2008 to US$26.4 billion. Releases and recoveries of allowances increased by 17 per cent to US$1.5 billion. Total impaired loans to customers at 31 December 2009 were US$31 billion, an increase of 21 per cent compared with the end of 2008. Impaired loans remained at 3 per cent of customer loans and advances at 31 December 2009.

In Europe, new loan impairment allowances increased by 37 per cent to US$4.9 billion in 2009, driven by credit quality deterioration in individually impaired loans. Impaired loans increased by 59 per cent to US$10.9 billion at 31 December 2009.

In the UK, higher new loan impairment allowances reflected a small number of large individually assessed impairments against corporate and commercial exposures, together with the effects of credit quality deterioration in the personal lending portfolio. In the unsecured portfolios, credit quality declined in the cards and personal loans portfolios reflecting the deterioration in the economic environment. In the residential mortgage portfolios, credit quality remained strong despite higher unemployment in the UK. HSBC's exposure to this market remained well secured with typical loan-to-value ratios of below 60 per cent.

In Europe, releases and recoveries were US$520 million, a decrease of 5 per cent compared with 31 December 2008.

In Hong Kong, new loan impairment allowances were US$548 million, a decline of 12 per cent compared with 2008. Credit quality within the commercial lending portfolios improved compared with 2008, when significant impairments were taken on some exporters due to the contraction in global trade. New loan impairment allowances increased in the unsecured personal portfolios, reflecting the rise in unemployment and bankruptcy filings. Impaired loans were broadly stable at US$846 million.

In Rest of Asia-Pacific, new loan impairment allowances rose by 18 per cent to US$1.1 billion, mainly due to increased delinquencies on unsecured lending, particularly in the credit card and personal lending portfolios in India and, to a lesser extent, in Indonesia. In the corporate and commercial portfolios, new loan impairment allowances increased, reflecting a deterioration in India's economic conditions. Impaired loans increased by 44 per cent to US$1.2 billion.

Releases and recoveries in the Rest of Asia‑Pacific region rose by 42 per cent to US$214 million at 31 December 2009.

New loan impairment allowances in the Middle East increased significantly from a low base, to US$1.4 billion. The increase reflected higher charges in the UAE, largely in Dubai, due to a marked deterioration in credit quality which particularly affected the real estate and construction industries. Infrastructure projects were delayed or cancelled and unemployment levels increased. Delinquency rates rose as a result, particularly in the credit card and personal loan portfolios. Impaired loans increased by US$1.4 billion to US$1.7 billion.

New loan impairment allowances rose by 7 per cent to US$26.4 billion despite falls of 12 per cent in Hong Kong and 7 per cent in North America.

In North America, new loan impairment allowances declined by 7 per cent to US$15.6 billion against the backdrop of a widespread rise in unemployment, continued weakness in the US economy and housing markets, higher levels of personal bankruptcy filings and portfolio seasoning. This decline was the result of lower loan impairment charges in the Mortgage Services real estate secured, credit card and vehicle finance portfolios, partially offset by higher loan impairment charges in the branch-based Consumer Lending business. Apart from the changes made to the write-off period, the main contributing factors were as follows:

· new loan impairment allowances in the Mortgage Services business decreased in 2009 as the portfolio continued to run off. While loss severities increased compared with 2008, a higher percentage of impairment was in respect of first lien loans which have less severity than second lien loans;

· new loan impairment allowances in the vehicle finance loan portfolio decreased as a result of lower loan levels reflecting the discontinuance of vehicle finance originations in July 2008. In addition, loss severities decreased as prices on repossessed vehicles improved; and

· new loan impairment allowances in the branch-based Consumer Lending business increased in 2009, primarily in the unsecured portfolio due to the deterioration in the 2006 and 2007 vintages which were more pronounced in certain geographic regions and, to a lesser extent, first lien real estate secured loans. These increases were partially offset by lower new loan impairment allowances for second lien real estate secured loans.

New loan impairment allowances in the Cards and Retail Services portfolios declined due to lower outstanding balances and management action taken in the past two years to constrain origination activities in riskier segments. In addition, impairment provisioning reflects an improved outlook on future loss estimates as the impact of higher unemployment rates on losses has not been as severe as initially expected due, in part, to lower fuel prices and the boost to cash flow provided by government stimulus programmes that meaningfully benefit non-prime customers. In HSBC Bank USA personal lending portfolios, new loan impairment allowances increased, mainly in prime residential mortgage lending.

New loan impairment allowances in the corporate and commercial lending portfolios increased as the weaker economy affected firms in the commercial real estate and construction sectors in the US. In Canada, higher new loan impairment allowances were primarily against exposures in the commercial real estate, manufacturing and trade sectors.

In North America, releases and recoveries increased by 14 per cent to US$205 million at 31 December 2009 due to an increase in the repayment of loans previously impaired in the corporate, commercial and financial portfolios.

Impaired loans decreased by 7 per cent to US$13.3 billion at 31 December 2009.

New loan impairment allowances in Latin America increased by 18 per cent to US$2.9 billion, while impaired loans rose by 27 per cent to US$3.0 billion. The increase in new loan impairment allowances in Brazil was driven by higher delinquencies, mainly in credit cards, overdrafts and payroll loans, due to higher unemployment. In the commercial portfolio, higher new loan impairment allowances reflected the challenging economic environment which particularly affected the business banking and mid‑market business segments.

Releases and recoveries in Latin America increased by 56 per cent to US$391 million at 31 December 2009.

For an analysis of loan impairment charges and other credit risk provisions by customer group, see page 35.

2008 compared with 2007

(Unaudited)

Loan impairment charges increased by 40 per cent to US$24.1 billion from US$17.2 billion in 2007. The commentary that follows is on a constant currency basis.

New allowances for loan impairment charges rose by 37 per cent compared with 2007. Releases and recoveries of allowances declined by 10 per cent to US$1.4 billion. Impaired loans were 3 per cent of customer loans and advances at 31 December 2008, compared with 2 per cent at 31 December 2007.

In Europe, new loan impairment charges were US$4.0 billion, a rise of 24 per cent compared with 2007. Impaired loans increased by 32 per cent to US$6.8 billion at 31 December 2008.

Loan impairment charges increased in Global Banking and Markets following a significant charge against a single European commercial real estate corporate customer. Impairment charges against banks rose in the UK due to exposure to the Icelandic banks in 2008. New loan impairment charges rose in Turkey as delinquency rates increased across credit cards, personal loans and corporate lending in light of the deteriorating economic environment. Elsewhere, impairment charges on the commercial portfolio rose in the UK, particularly in the final quarter of 2008 as the weakening property market led to higher impairment charges against construction companies and businesses dependent upon the real estate sector. In France, the impact of declining commercial credit quality more than offset lower balances. Impairment allowances against firms in the financial sector rose due to exposure to a single asset management firm in the UK. Credit quality in the UK personal lending portfolio remained broadly stable, reflecting the strength of HSBC's loan book in a period of significant economic uncertainty. Mortgage lending in the UK remained well secured as actions taken since 2006 reduced risk exposure. Credit quality in the unsecured portfolios of M&S Money, HSBC Bank and Partnership Cards deteriorated slightly in 2008, particularly in the second half of the year, due to the weakening UK economy.

Releases and recoveries in Europe declined by 27 per cent, driven by the deterioration in economic conditions.

In Hong Kong, new loan impairment charges more than doubled from a low base, driven by deterioration in credit quality in the commercial portfolio in the second half of the year as the economy and trade flows weakened. Residential mortgage lending continued to be well secured, as regulatory restrictions constrained origination loan-to-value ratios to below 70 per cent. Impaired loans increased from a low base to US$852 million at 31 December 2008.

In Rest of Asia-Pacific, new loan impairment charges rose to US$975 million, primarily in India due to a combination of rising delinquency rates in consumer lending as credit conditions deteriorated, and increased lending.

In the Middle East, new loan impairment charges rose from a low base to US$340 million, due to rising delinquencies as growth rates declined and the property market slowed as economic conditions weakened because of lower oil and gas prices.

New loan impairment charges in North America rose by 37 per cent to US$16.8 billion, driven by the continued deterioration in credit quality in the HSBC Finance loan portfolio and, to a lesser extent, in HSBC USA. Impaired loans increased by 49 per cent to US$14.3 billion at 31 December 2008.

US credit quality showed significant deterioration across the portfolio, driven by the continued weakness of the US economy. The reasons behind the deterioration in US credit quality, the effects on the US personal lending portfolio and actions taken as a result are discussed in more detail on page 221. Partly offsetting the effect of the deterioration was a reduction in overall lending as HSBC continued to reduce its exposure in the US.

In Commercial Banking, impairment charges rose from a low base driven by deterioration in the commercial real estate loan book in the US, and higher impairment charges against firms in the manufacturing, export and commercial real estate sectors in Canada. Higher impairment charges in Global Banking and Markets reflected weaker credit fundamentals in the US in 2008. Impairment allowances against firms in the financial sector rose due to rising delinquencies, despite government intervention.

Releases and recoveries in North America rose by 55 per cent to US$180 million.

In Latin America, new loan impairment charges rose by 37 per cent to US$2.8 billion. Impaired loans increased by 37 per cent to US$2.3 billion at 31 December 2008.

The most significant increase was in Mexico, reflecting higher impairment charges in the credit card portfolio due to a combination of higher average balances from organic expansion and growing delinquency rates driven by a deterioration in credit quality as the 2006 and 2007 vintages continued to season and move into later stages of delinquency. Management action to improve the quality of new business included tightened underwriting, enhanced collection strategies and better managed customer acquisition channels. The commercial portfolio in Mexico also experienced higher impairment charges due to credit quality deterioration among small and medium sized enterprises as the economy weakened. In Brazil, higher impairment charges were driven by a combination of balance growth and credit quality deterioration in the vehicle finance and payroll loan portfolios.

HSBC Holdings

(Audited)

Credit risk primarily arises in HSBC Holdings from transactions with Group subsidiaries and from guarantees issued in support of obligations assumed by certain Group operations in the normal conduct of their business.

These risks are reviewed and managed within regulatory and internal limits for exposures by the HSBC Global Risk function, which provides high-level centralised oversight and management of HSBC's credit risks worldwide.

No collateral or other credit enhancements were held by HSBC Holdings in respect of its transactions with subsidiaries.

HSBC Holdings' maximum exposure to credit risk at 31 December 2009 is shown below. Its financial assets principally represent claims on Group subsidiaries in Europe and North America.

HSBC Holdings - maximum exposure to credit risk

(Audited)

	Maximum exposure
	2009	2008
	US$m	US$m

Derivatives .........................................................................................................................	2,981	3,682
Loans and advances to HSBC undertakings ..........................................................................	23,212	11,804
Financial investments .........................................................................................................	2,455	2,629
Financial guarantees and similar contracts ...........................................................................	35,073	47,341
Loan and other credit-related commitments ........................................................................	3,240	3,241

	66,961	68,697

All of the derivative transactions are with HSBC undertakings which are banking counterparties (2008: 100 per cent).

The credit quality of the loans and advances to HSBC undertakings is assessed as satisfactory risk, with 100 per cent of the exposure being neither past due nor impaired (2008: 100 per cent).

The long-term debt ratings of the HSBC Group issuers of the financial investments are within the Standard & Poor's ratings range of A+ to A- (2008: AA- to A).

Risk elements in the loan portfolio

(Unaudited)

The disclosure of credit risk elements in this section reflects US accounting practice and classifications. The purpose of the disclosure is to present within the US disclosure framework those elements of the loan portfolios with a greater risk of loss. The three main classifications of credit risk elements presented are:

·
impaired loans;

· unimpaired loans contractually past due 90 days or more as to interest or principal; and

· troubled debt restructurings not included in the above.

In the following tables, HSBC presents information on its impaired loans and advances in accordance with the classification approach described on page 225.

Impaired loans

Loans are classified as impaired when there is objective evidence that not all contractual cash flows will be received. In accordance with IFRSs, HSBC recognises interest income on assets after they have been written down as a result of an impairment loss.

Unimpaired loans past due 90 days or more

Loans that are subject to individual impairment assessment and are over 90 days past due as regards principal and/or interest are classified as unimpaired loans when the Group expects to recover the contractual cash flows in full.

Troubled debt restructurings

The SEC requires separate disclosure of any loans whose terms have been modified by the lender because of the borrower's financial difficulties, as a concession that the lender would not otherwise consider. These are classified as troubled debt restructurings ('TDR's). The definition of TDRs differs from the definition of renegotiated loans as disclosed under IFRSs, see page 224, as follows. After restructuring, TDRs may continue to be classified as impaired, as past due but not impaired or, where appropriate, as neither past due nor impaired. Under IFRSs, disclosure is required of loans that would otherwise have been classified as past due or impaired whose terms have been renegotiated.

Furthermore, a loan is no longer classified as a TDR after the end of the first year following the restructuring if the loan performs in accordance with the new terms, and the interest rate at the time of restructuring was a market rate for a loan with comparable risk.

Potential problem loans

Credit risk elements also cover potential problem loans. These are loans where information on possible credit problems among borrowers causes management to seriously doubt their ability to comply with the loan repayment terms. There are no potential problem loans other than those identified in the table of risk elements set out below, and as discussed in 'Areas of special interest' on page 214. 'Areas of special interest' includes further disclosure about certain homogeneous groups of loans which are collectively assessed for impairment, and represent the Group's most significant exposures to potential problem loans, including ARMs and stated-income products. Collectively assessed loans and advances, as set out on page 231, although not classified as impaired until more than 90 days, are assessed collectively for losses that have been incurred but have not yet been individually identified. This policy is further described on page 203.

Analysis of risk elements in the loan portfolio by geographical region

(Unaudited)

	At 31 December
	2009 US$m	2008 US$m	2007 US$m	2006 US$m	2005 US$m
Impaired loans
Europe .................................................	10,873	6,844	6,266	5,858	5,081
Hong Kong ..........................................	846	852	433	454	506
Rest of Asia-Pacific⁷ ............................	1,201	835	779	807	596
Middle East⁷ ........................................	1,666	279	309	381	349
North America⁸ ...................................	13,308	14,285	9,662	6,108	4,602
Latin America .....................................	2,951	2,327	2,145	1,478	1,226

	30,845	25,422	19,594	15,086	12,360

Unimpaired loans contractually past due 90 days or more as to principal or interest
Europe .................................................	57	635	202	237	592
Hong Kong ..........................................	4	43	49	79	74
Rest of Asia-Pacific⁷ ............................	36	84	94	75	40
Middle East⁷ ........................................	215	190	62	3	-
North America ....................................	217	108	24	78	32
Latin America .....................................	40	21	421	165	4

	569	1,081	852	637	742

Troubled debt restructurings (not included in the classifications above)
Europe .................................................	436	366	648	360	239
Hong Kong ..........................................	236	165	146	189	198
Rest of Asia-Pacific⁷ ............................	135	90	23	56	96
Middle East⁷ ........................................	103	29	11	17	25
North America ....................................	9,613	5,618	3,322	1,712	1,417
Latin America .....................................	1,518	1,067	848	915	878

	12,041	7,335	4,998	3,249	2,853

Trading loans classified as in default
North America ....................................	798	561	675	127	11

Risk elements on loans
Europe .................................................	11,366	7,845	7,116	6,455	5,912
Hong Kong ..........................................	1,086	1,060	628	722	778
Rest of Asia-Pacific⁷ ............................	1,372	1,009	896	938	732
Middle East⁷ ........................................	1,984	498	382	401	374
North America ....................................	23,936	20,572	13,683	8,025	6,062
Latin America .....................................	4,509	3,415	3,414	2,558	2,108

	44,253	34,399	26,119	19,099	15,966

Assets held for resale
Europe .................................................	52	81	59	30	205
Hong Kong ..........................................	10	26	29	42	49
Rest of Asia-Pacific⁷ ............................	8	11	5	15	29
Middle East⁷ ........................................	2	2	2	2	2
North America ....................................	707	1,758	1,172	999	582
Latin America .....................................	153	113	101	91	103

	932	1,991	1,368	1,179	970

Total risk elements
Europe .................................................	11,418	7,926	7,175	6,485	6,117
Hong Kong ..........................................	1,096	1,086	657	764	827
Rest of Asia-Pacific⁷ ............................	1,380	1,020	901	953	761
Middle East⁷ ........................................	1,986	500	384	403	376
North America ....................................	24,643	22,330	14,855	9,024	6,644
Latin America .....................................	4,662	3,528	3,515	2,649	2,211

	45,185	36,390	27,487	20,278	16,936

	%	%	%	%	%
Loan impairment allowances as a percentage of risk elements on loans³⁶	58.8	70.8	75.5	71.6	71.2

For footnotes, see page 291.

This information is provided by RNS

The company news service from the London Stock Exchange

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Annual Financial Report - 18

Personal lending

US personal lending - credit quality

(Audited)

For footnotes, see page 291.

Probability of default %

Impaired loans and advances to customers and banks by industry sector

Collateral and other credit enhancements obtained

Impairment allowances and charges on loans and advances to customers and banks

Impairment allowances on loans and advances to customers by geographical region

Impairment allowances on loans and advances to customers and banks by industry sector

For footnotes, see page 291.

Impairment allowances as a percentage of loans and advances31

Movement in impairment allowances on loans and advances

Individually and collectively assessed impairment charge to income statement by industry segment

Net loan impairment charge to the income statement

Net loan impairment charge to the income statement by geographical region

For footnotes, see page 291.

(Audited)

Credit risk primarily arises in HSBC Holdings from transactions with Group subsidiaries and from guarantees issued in support of obligations assumed by certain Group operations in the normal conduct of their business.

These risks are reviewed and managed within regulatory and internal limits for exposures by the HSBC Global Risk function, which provides high-level centralised oversight and management of HSBC's credit risks worldwide.

No collateral or other credit enhancements were held by HSBC Holdings in respect of its transactions with subsidiaries.

HSBC Holdings' maximum exposure to credit risk at 31 December 2009 is shown below. Its financial assets principally represent claims on Group subsidiaries in Europe and North America.

All of the derivative transactions are with HSBC undertakings which are banking counterparties (2008: 100 per cent).

Risk elements in the loan portfolio

Impaired loans

Loans are classified as impaired when there is objective evidence that not all contractual cash flows will be received. In accordance with IFRSs, HSBC recognises interest income on assets after they have been written down as a result of an impairment loss.

Unimpaired loans past due 90 days or more

Loans that are subject to individual impairment assessment and are over 90 days past due as regards principal and/or interest are classified as unimpaired loans when the Group expects to recover the contractual cash flows in full.

Troubled debt restructurings

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Impairment allowances as a percentage of loans and advances³¹