Annual Report and Accounts -

RNS Number : 7255P

HSBC Holdings PLC

31 March 2009

Total personal lending

(Unaudited)

	UK	Rest of Europe	US1	Rest of North America	Hong Kong, Rest of Asia-Pacific and Latin America	Total
	US$m	US$m	US$m	US$m	US$m	US$m
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

At 31 December 2007
Residential mortgages	85,356	10,309	98,928	20,065	54,410	269,068

Other personal lending	43,044	29,840	100,408	11,161	47,313	231,766
- motor vehicle finance	71	156	13,266	1,865	7,563	22,921
- credit cards	15,018	2,009	49,634	1,728	13,574	81,963
- second lien mortgages	1,930	-	17,590	1,256	748	21,524
- other	26,025	27,675	19,918	6,312	25,428	105,358


Total personal lending	128,400	40,149	199,336	31,226	101,723	500,834

1 Includes residential mortgages of HSBC Bank USA and HSBC Finance.

The commentary that follows is on a constant currency basis.

At 31 December 2008, total personal lending was US$440 billion, a decline of 3 per cent from the balance at 31 December 2007. In 2008, personal lending accounted for 85 per cent of the Group's loan impairment charges and other credit risk provisions. Within personal lending, total loan impairment charges and other credit risk provisions of US$21.2 billion were concentrated in North America (US$16.1 billion) and, to a lesser extent, in Latin America (US$2.1 billion) and Europe (US$2.0 billion). These loan impairment charges represented, respectively, 39 per cent, 5 per cent and 5 per cent of each region's total Personal Financial Services' net operating income before loan impairment charges and other credit risk provisions.

Total US personal lending at 31 December 2008 was 15 per cent less than at the end of 2007, at US$171 billion, as HSBC's strategy to run off its existing portfolio and improve credit quality on new originations took effect. Residential mortgage balances fell by 18 per cent to US$81 billion, driven by decisions taken in 2007 to end new correspondent channel originations in Mortgage Services and limit new originations in the consumer lending business through tighter underwriting standards. Portfolio run-off, charge-off of impaired loans and the sale of US$8.2 billion of loans during 2008 from the US real estate secured portfolios contributed to these lower balances.

Other personal lending in the US fell by 11 per cent to US$90 billion as a result of actions taken by HSBC since 2007 to reduce risk in the portfolio, including the elimination of guaranteed direct mail loans to new customers, the discontinuance of personal homeowner loans and a general tightening of underwriting criteria. Card balances declined by 5 per cent to US$47 billion as HSBC reduced credit lines, closed dormant accounts and curtailed marketing expenditure, which together lowered originations in line with HSBC's reduced appetite for risk in this segment at this time.

Motor vehicle finance loans in the US fell by 18 per cent to US$11 billion, again reflecting reduced risk appetite and lower origination. In July, the decision was taken to discontinue all new motor vehicle loan originations from the dealer and direct-to-consumer channels within the North America vehicle finance business of HSBC Finance as management determined that the business was sub-scale and did not have sufficient market strength to provide an acceptable level of risk-adjusted returns.

In the UK, gross loans and advances to personal customers rose by 14 per cent to US$108 billion, due to strong growth in residential mortgage lending following successful campaigns during 2008 at HSBC Bank and First Direct. Other personal lending declined by 11 per cent to US$29 billion, driven by lower originations, reduced marketing activities and lower customer appetite for unsecured borrowing. Credit quality in the unsecured portfolios of M&S Money, HSBC Bank and Partnership Cards in the UK showed a slight deterioration in 2008, particularly in the second half of the year, due to the weakening UK economy.

In Latin America, in response to rising impairment charges and the weaker economic conditions, HSBC moderated loan growth from that achieved in the previous year, with gross loans and advances to personal customers rising by 11 per cent to US$20 billion compared with 31 per cent in 2007. Loan impairment charges were 20 per cent higher in Brazil but 57 per cent higher in Mexico following strong growth in recent years in lending portfolio seasoning and credit deterioration. As a consequence of this experience, in Mexico, HSBC's other personal lending balances at 31 December 2008 were US$3.7 billion, 1 per cent lower than at 31 December 2007 as management realigned the business towards customers of higher credit quality.

Mortgage lending products

(Unaudited)

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 by 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 customer's 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), loans on which the interest rate is periodically changed based on a reference price. HSBC Finance no longer originates or acquires interest-only loans or ARMs.

Affordability mortgages are primarily offered in the US and the UK. Under the HFC and Beneficial brands, HSBC Finance and HFC Bank Ltd ('HFC UK') offer a range of products predominantly designed for the needs of customers with non-standard or less favourable credit profiles. Offset mortgages are products linked to a current or savings account, where the interest earned is used to repay mortgage debt.

US mortgage lending

US mortgage lending, comprising residential mortgage and second lien lending, made up 22 per cent of the Group's gross loans and advances to personal customers at 31 December 2008.

Balances declined by 18 per cent from 31 December 2007, as the Mortgage Services portfolio continued to run-off and tighter underwriting standards were applied to originations for the consumer lending portfolio. As the bulk of the mortgage lending products sold in the US consumer lending branch network are for refinancing and debt consolidation, rather than for house purchase, the limited availability of home equity severely restricts the number of eligible customers. As a consequence, HSBC began the process of repositioning its consumer lending business in 2008, reducing exposure to lower tiers of sub-prime credit and expanding its range of lending for real estate loans to include both government-sponsored entity and conforming loan products. At the end of February 2009, HSBC authorised the discontinuation as soon as practicable of all new receivable originations of all products by the branch-based consumer lending business of HSBC Finance in North America (see page 70).

Mortgage lending in HSBC USA also declined, following a series of management actions to reduce risk in the portfolio. These included closing the prime wholesale and third-party correspondent mortgage business in November 2008, selling US$7.0 billion in loans during 2008, and continuing to sell newly originated residential mortgages to the US government-sponsored mortgage agencies.

Affordability mortgage balances in HSBC Finance declined from US$19 billion at 31 December 2007 to US$14 billion at 31 December 2008. These mortgages continued to experience the heightened levels of delinquency that began to emerge in late 2006. They are no longer originated through the consumer lending branch network. In aggregate, HSBC Finance's mortgage balances declined to US$74 billion at 31 December 2008 (31 December 2007: US$87 billion) as set out in the table on page 211. Within this, the portfolio of real estate secured business originated through the branch network was US$46 billion at 31 December 2008, of which approximately 95 per cent were fixed rate loans and 87 per cent were first lien. At 31 December 2008, the Mortgage Services business had approximately 250,000 accounts and US$28 billion in balances outstanding. Approximately 59 per cent were fixed rate loans and 84 per cent were first lien.

Further discussion of credit trends in the US mortgage lending portfolio and management actions taken to mitigate risk is provided in 'US personal lending - credit quality' on page 212.

HSBC Finance US mortgage lending1 (Unaudited)
	At 31 December 2008				At 31 December 2007
	Mortgage services	Consumer lending	Other mortgage lending	Total	Mortgage services	Consumer lending	Other mortgage lending2	Total
	US$m	US$m	US$m	US$m	US$m	US$m	US$m	US$m

Fixed-rate	16,288	43,873	91	60,252	20,146	47,254	106	67,506
Other	11,339	2,324	35	13,698	16,070	2,970	39	19,079
Adjustable-rate	9,530	2,324	33	11,887	12,361	2,970	37	15,368
Interest-only	1,809	-	2	1,811	3,709	-	2	3,711

	27,627	46,197	126	73,950	36,216	50,224	145	86,585

First lien	23,188	40,334	93	63,615	29,475	43,366	108	72,949
Second lien	4,439	5,863	33	10,335	6,741	6,858	37	13,636

	27,627	46,197	126	73,950	36,216	50,224	145	86,585

Stated income3	5,667	-	-	5,667	8,292	-	-	8,292

1 HSBC Finance mortgage lending is shown on a management basis and includes loans transferred to HSBC USA Inc. which are managed by HSBC Finance.

2 Restated to show HSBC Finance management basis, consistent with the current year, and US balances only.

3 Stated income lending forms a subset of total Mortgage Services lending across all categories.

UK mortgage lending

Mortgage lending in the UK rose significantly in 2008 and overall credit quality was maintained despite a significant deterioration in the housing market. The withdrawal of many competitors from the market and the consequent repricing of mortgage products allowed HSBC Bank to expand its share of the new lending market while staying within its targeted customer segments. In December 2008, HSBC announced that it will make available up to US$22 billion of new UK residential mortgages in 2009.

Total mortgage lending in the UK rose from US$64 billion at 31 December 2007 to US$80 billion at 31 December 2008. This was driven by the success of the RateMatcher mortgage campaign in the first half of 2008 in generating new business, and an increase at First Direct due to growth in offset mortgage lending following a similarly successful campaign.

The maintenance of good credit quality in difficult market conditions is attributable to the business model pursued by HSBC in the UK. HSBC Bank originates virtually all new business through its own salesforce and does not rely on business introduced through third parties. Also, HSBC does not allow customer self-certification of income. The majority of lending is to existing customers holding a current or savings account relationship with the bank. At 31 December 2008, less than 2 per cent of the bank's book consisted of lending to purchase property for rent to third parties, for which the bank applies higher collateral requirements.

In the UK, affordability mortgages have experienced relatively low levels of delinquency, reflecting the different credit profiles of the customers, compared with those in the US, and the tighter underwriting criteria.

Interest-only mortgage balances rose from US$22 billion at 31 December 2007 to US$32 billion at 31 December 2008, driven by an increase in balances at First Direct. The majority of these mortgages were offset mortgages linked to a current account and are classified as interest-only.

Second lien balances, which were all held by HFC UK, declined by US$770 million to US$1.2 billion at 31 December 2008 due to run-off and severely tighter underwriting criteria. In the first half of 2008, HFC UK ceased originating loans through brokers.

The credit quality of the UK mortgage portfolio remained broadly stable as a consequence of the business model and underwriting criteria described above. Additionally, HSBC Bank is now benefiting from having intentionally reduced its market share in 2006 and 2007 as property prices continued to rise. The portion of mortgages with a loan to value ratio greater than 90 per cent declined as virtually no new loans were originated at this level. The average loan to value ratio for new business in 2008 was 58.7 per cent, the lowest for 5 years.

At HSBC Bank, 30 days or more delinquency rates were unchanged from 31 December 2007 to 31 December 2008 at 1.8 per cent.

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


	US$m	US$m	US$m	US$m		US$m	US$m
Mortgage lending products (Unaudited)
	UK	Rest of Europe	US	Rest of North America	Hong Kong, Rest of Asia-Pacific and Latin America		Total
	US$m	US$m	US$m	US$m		US$m	US$m
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%

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 mortgages1	367	-	7,655	86		1,635	9,743
Other loan to value ratios greater than 90 per cent2	6,178	107	35,296	1,737		2,122	45,440

	6,545	107	42,951	1,823		3,757	55,183

- as a percentage of total mortgage lending	8.2%	1.2%	44.9%	10.0%		6.5%	21.2%

At 31 December 2007
Residential mortgages	85,356	10,309	98,928	20,065		54,410	269,068
Second lien mortgages	1,930	-	17,590	1,256		748	21,524

Total mortgage lending	87,286	10,309	116,518	21,321		55,158	290,592

Second lien as a percentage of total mortgage lending	2.2%	-	15.1%	5.9%		1.4%	7.4%

Interest-only (including endowment) mortgages	32,314	602	-	174		1,335	34,425
Affordability mortgages, including ARMs	8,695	685	40,201	219		4,993	54,793
Other3	241	27	-	274		621	1,163

Total interest-only and affordability mortgages	41,250	1,314	40,201	667		6,949	90,381

- as a percentage of total mortgage lending	47.3%	12.7%	34.5%	3.1%		12.6%	31.1%

Negative equity mortgages1	646	-	11,079	107		525	12,357
Other loan to value ratios greater than 90 per cent2	10,969	211	42,246	679		1,333	55,438

	11,615	211	53,325	786		1,858	67,795

- as a percentage of total mortgage lending	13.3%	2.0%	45.8%	3.7%		3.4%	23.3%

1 Negative equity arises when the value of the loan exceeds the value of available equity, generally based on values at origination date.

2 Loan to value ratios are generally based on values at origination date.

3 Balances at 31 December 2007 have been restated to exclude mortgages in the UK that are fixed for a period of time before reverting to a standard variable rate.

US personal lending - credit quality

(Unaudited)

The deterioration in credit quality which began in the sub-prime mortgage portfolio in 2006 accelerated in 2008 and spread across the remainder of the US personal lending portfolio as the economy weakened, levels of unemployment and personal bankruptcy filings rose, and house price depreciation became more pronounced (the S&P/Case-Shiller 10ߛCity Composite Index of house prices showed a decline of 19 per cent in 2008). These factors restricted the ability of many customers to refinance and access equity retained in their homes.

Two months or more delinquencies in mortgages originated through the HSBC Finance branch network rose most rapidly in those states most severely affected by continued house price depreciation and rising unemployment, particularly in California, Florida, New York, Virginia, Maryland, New Jersey, Illinois, Pennsylvania, Massachusetts and Ohio.

HSBC Finance: geographical concentration of US lending1,2

(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	6	12	12
Florida	4	7	3	7	7
New York	3	6	3	6	6
Texas	2	3	4	8	6
Ohio	3	5	2	5	5
Pennsylvania	3	5	2	5	5

1 By states which individually account for 5 per cent or more of HSBC Finance's US customer loan portfolio.

2 HSBC Finance lending is shown on a management basis and includes loans transferred to HSBC USA Inc, which are managed by HSBC Finance.

In the US real estate secured portfolios, two months and over contractual delinquency ratios at the end of 2008 were higher across the portfolio than during 2007 and the first half of 2008, for the reasons described above. There was also a significant effect on delinquency ratios from declining balances. As the portfolios aged, outstanding balances fell as new lending in certain portfolios ceased, risk mitigation efforts and changes to product offerings which began in 2007 and continued in 2008 resulted in lower originations and US$8.2 billion in mortgage portfolios were sold during the year.

Both dollar and percentage two months and over contractual delinquency in the real estate secured portfolios of HSBC Finance and HSBC USA increased following a voluntary one month suspension of final court proceedings in foreclosure cases relating to owner-occupied properties, implemented in December 2008, which was in addition to actions taken by a number of states to slow foreclosure proceedings. Within these portfolios, dollar delinquencies rose sharply in 2008 as credit quality in the consumer lending portfolio, most notably for first lien products, and in Mortgage Services, continued to deteriorate, particularly in the second half of the year. In Mortgage Services, the rise in the fourth quarter of 2008 was despite lower balances following portfolio run-off and the sale of portfolios during the year, and was partly caused by the above-mentioned action on foreclosure.

Residential mortgages

The unprecedented turmoil in the mortgage lending market continued in 2008. Investors remained unwilling to purchase securitised credit, and this resulted in a sharp contraction in the supply of liquidity to the mortgage market. Progressively fewer refinancing options were available for customers as house prices fell and housing equity declined, a number of market participants exited the sub-prime mortgage industry, and the remaining providers tightened their underwriting criteria.

Equity withdrawal had been the principal source of credit available to sub-prime borrowers dealing with unforeseen financial needs. With this source of funds heavily restricted, consumers faced increasing difficulty in maintaining their contractual payment schedules as they confronted the challenges of rising unemployment and increases in the costs of living, particularly in the first half of the year. Compounding the situation, mortgage interest rates remained high for much of 2008 as credit spreads on interbank lending widened due to the turmoil in the global financial system.

The increase in delinquency rates was accompanied by a rise in loss severities as falling house prices led to a reduction in the amounts recoverable from foreclosure and repossession. These factors were partly offset by a decline in lending balances as HSBC continued to manage down exposure in the US.

Second lien loans have a risk profile characterised by higher loan-to-value ratios because, in many cases, the second lien loan was taken out to complete the refinancing or purchase of the property. For HSBC Finance second lien mortgages, the proportion of customers two months or more behind on contractual payments rose from 11.2 per cent at 31 December 2007 to 15.9 per cent at 31 December 2008. Loss on default of second lien loans typically approaches 100 per cent of the amount owed as any equity in the property is applied initially to the first lien loan, particularly during periods of house price depreciation when its value is eroded to the point where there is no surplus available to support the repayment of second liens.

Stated-income mortgages, which represented a small part of the HSBC Finance loan book, also continued to decline. These mortgages are of higher than average risk as they are underwritten on the basis of borrowers' representations of annual income and are not verified by receipt of supporting documentation. These loan balances declined from US$8.3 billion at 31 December 2007 to US$5.7 billion at 31 December 2008. Two months or more delinquency rates on stated-income loans rose from 19.0 per cent at 31 December 2007 to 27.7 per cent at 31 December 2008. The percentage rise was primarily attributable to lower balances and portfolio ageing as the portfolio continued to run off.

In the Mortgage Services business, credit quality continued to deteriorate as 2005 and 2006 vintages continued to season and move into later stages of delinquency as economic conditions worsened. Amounts of two months or more delinquency in Mortgage Services rose by 9 per cent during the year to US$4.7 billion at 31 December 2008. These represented an increased proportion of a reducing portfolio, rising from 11.9 per cent to 17.0 per cent. An increase in foreclosures in process during the fourth quarter, arising from a voluntary one month suspension of final court proceedings in foreclosure cases relating to owner occupied properties, implemented in December 2008 and the actions taken by a number of states to slow foreclosure proceedings, affected total lending in Mortgage Services at 31 December 2008.

HSBC undertook several actions during 2008 to reposition HSBC Finance, including closure of more than 200 consumer lending branches, reducing the network to approximately 800 branches, and tightening credit criteria for originations. These actions followed the decisions taken in 2007 to cease purchasing mortgages from third-party correspondents and to close the wholesale business, Decision One, in September 2007, thereby ending new originations for the Mortgage Services business.

The branch-based consumer lending business continued to experience rising delinquency levels, particularly on first lien loans in the states most exposed to falling house prices and rising unemployment; 63 per cent of the increase in amounts of two months or more contractual delinquency was concentrated in the ten states noted above. Delinquencies rose across all vintages, with the most pronounced increase for first lien loans extended in 2006 and 2007. This trend was experienced across the rest of the industry in the US. Two months or more delinquencies rose from 4.2 per cent of loans and advances at 31 December 2007 to 12.1 per cent at 31 December 2008 and delinquent balances increased to US$5.6 billion. In this environment, HSBC took additional measures to tighten underwriting standards, including reducing the loan to value ratio for residential mortgages, ceasing to underwrite certain products and raising the credit requirements for certain risk factors. As a result, originations declined to 38 per cent of the levels recorded in 2007.

At HSBC USA, delinquencies rose as credit quality deterioration was experienced across the real estate secured portfolio, driven by house price depreciation and the US economic weakness. Delinquency rates of prime first lien mortgages were also affected by the sale of US$7.0 billion of mortgage portfolios during the year. Originations declined as HSBC's risk appetite in the US reduced. Two months or more delinquencies in prime first lien mortgages rose from 1.1 per cent at 31 December 2007 to 3.4 per cent at 31 December 2008, and in second lien mortgages from 1.8 per cent to 3.5 per cent over the same period, on a management basis. The rise in delinquency was appreciably worse in third-party originations and, in response, HSBC USA closed its wholesale and third-party correspondent mortgage business in November 2008, curtailed certain stated-income mortgage products, tightened underwriting criteria and sold US$7.0 billion of mortgage portfolios during 2008. As a result, stated-income mortgage balances declined from US$2.4 billion at 31 December 2007 to US$2.2 billion at 31 December 2008.

HSBC has been proactive in approaching customers to provide financial assistance in restructuring their debts to avoid foreclosure and, as a result, HSBC has restructured and modified loans that it believes could be serviced on revised terms. For further details, see 'US loan modifications' on page 216.

The aggregate balances of loans which reached their first interest rate reset continued to decline in 2008. As interest rates fall, the effect of the reset on affordability becomes less pronounced.

Credit cards

US credit card portfolio two or more months delinquencies rose from 5.7 per cent at 31 December 2007 to 6.6 per cent at 31 December 2008. In the private label cards portfolio, two or more months delinquencies rose from 3.4 per cent at 31 December 2007 to 4.3 per cent at 31 December 2008. Higher delinquency rates in both portfolios were driven by continued deterioration in the US economy, significantly higher unemployment rates, portfolio seasoning and higher levels of personal bankruptcy filings.

Motor vehicle finance

Two months or more delinquencies in vehicle finance rose from 3.7 per cent at 31 December 2007 to 5.0 per cent at 31 December 2008, in part due to portfolio ageing following the decision in July 2008 to cease new originations in HSBC Finance

from the dealer and direct-to-consumer channels, having earlier terminated a number of dealer relationships, particularly in the Northeast of the US.

Other personal lending

Higher delinquency rates were experienced in the HSBC Finance unsecured lending portfolio, excluding credit cards. The increase was driven by a deterioration in credit quality due to the weakness in the US economy, combined with portfolio seasoning as the lending book aged. Balances declined due to tightened credit criteria which resulted in lower originations. Management actions were taken in 2007 and continued in 2008 to reduce risk in the portfolio including the tightening of underwriting criteria.

The following tables provide a detailed analysis of loan delinquency in the US.

Two months and over contractual delinquency1

(Unaudited)

	Quarter ended
	31 December 2008	30 September 2008	30 June 2008	31 March 2008	31 December 2007	30 September 2007	30 June 2007	31 March 2007
	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	9,236	7,061	5,9842	5,7572	5,1672	4,077	3,183	2,871
Second lien mortgage lending	1,790	1,616	1,585	1,638	1,602	1,249	945	872
Vehicle finance	541	512	445	370	488	451	384	302
Credit card	2,029	1,871	1,700	1,782	1,830	1,581	1,314	1,274
Private label	701	624	590	591	598	536	434	429
Personal non-credit card	2,998	2,745	2,606	2,650	2,634	2,238	2,000	1,881

Total	17,295	14,429	12,910	12,788	12,319	10,132	8,260	7,629

	%3	%3	%3	%3	%3	%3	%3	%3

Residential mortgages	11.42	8.23	6.652	5.962	5.232	4.04	3.10	2.70
Second lien mortgage lending	12.26	10.59	9.83	9.76	9.10	6.86	5.07	4.44
Vehicle finance	4.98	4.27	3.48	2.83	3.68	3.40	2.91	2.30
Credit card	6.64	6.07	5.57	5.81	5.68	5.09	4.32	4.43
Private label	4.26	3.97	3.65	3.66	3.43	3.28	2.72	2.65
Personal non-credit card	17.70	15.31	14.00	13.71	13.16	10.88	9.69	9.33

Total	10.16	8.13	7.01	6.64	6.18	5.05	4.10	3.74

Two months and over contractual delinquency1 (continued)

(Unaudited)

	Quarter ended
	31 December 2008	30 September 2008	30 June 2008	31 March 2008	31 December 2007	30 September 2007	30 June 2007	31 March 2007
	US$m	US$m	US$m	US$m	US$m	US$m	US$m	US$m
In Mortgage Services and consumer lending
Mortgage Services:
- first lien	3,912	3,420	3,363	3,456	3,248	2,554	2,099	1,863
- second lien	787	807	897	1,028	1,050	841	663	613

Total	4,699	4,227	4,260	4,484	4,298	3,395	2,762	2,476

Consumer lending:
- first lien	4,724	3,176	2,194	1,954	1,622	1,259	907	832
- second lien	853	690	583	530	478	346	236	220

Total	5,577	3,866	2,777	2,484	2,100	1,605	1,143	1,052

	%3	%3	%3	%3	%3	%3	%3	%3
Mortgage Services:
- first lien	16.87	14.16	12.91	12.41	11.02	8.13	6.33	4.98
- second lien	17.72	16.62	16.63	16.99	15.57	11.28	7.91	6.59
Total	17.01	14.57	13.55	13.22	11.87	8.73	6.65	5.30

Consumer lending:
- first lien	11.71	7.72	5.15	4.52	3.74	2.92	2.15	2.03
- second lien	14.54	11.27	9.04	7.96	6.97	5.03	3.60	3.34
Total	12.07	8.18	5.66	4.98	4.18	3.21	2.34	2.21

1 Delinquency data for the period from 31 March 2007 to 30 June 2008 has been restated to include certain delinquent mortgage loans that were previously excluded due to system coding within the Mortgage Services loan servicing platform which had the effect of excluding certain delinquent mortgage loans from the calculation of delinquency ratios. This change affected Mortgage Services' first and second lien delinquency percentages above. The effect on previously reported amounts was not material.

2 Delinquency data for the periods ending 31 December 2007 to 30 June 2008 has been restated to exclude certain delinquency balances of HSBC USA which related to residential mortgages classified as held for sale.

3 Expressed as a percentage of the relevant balance.

Renegotiated loans

(Audited)

Restructuring activity is designed to manage customer relationships, maximise collection opportunities and, if possible, avoid foreclosure or repossession. Such activities include extended payment arrangements, approved external debt management plans, deferring foreclosure, modification, loan rewrites and/or deferral of payments pending a change in circumstances. 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 will probably continue. These policies are required to be 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 one or more or, in the case of HSBC Finance, two or more, qualifying payments within a certain period, a minimum lapse of time from origination before restructuring may occur, and restrictions on the number and/or frequency of successive restructurings. 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.

Renegotiated loans that would otherwise be past due or impaired totalled US$35 billion at 31 December 2008 (2007: US$28 billion). Restructuring is most commonly applied to consumer finance portfolios. The largest concentration was in the US and amounted to US$31 billion (2007: US$24 billion) or 89 per cent (2007: 86 per cent) of the Group's total renegotiated loans. The increase was due to a significant deterioration in credit quality in the US, where most restructurings related to loans secured on real estate.

US loan modifications

(Unaudited)

In 2008, HSBC Finance continued to refine and expand its customer account management policies and practices. Through its ARM Reset Modification Programme, established in October 2006, HSBC Finance proactively contacts customers who have ARM loans nearing their first reset that HSBC Finance expects will be the most affected by a rate adjustment. By a variety of means, HSBC Finance assesses the customer's ability to make the adjusted payment and, as appropriate and in accordance with defined policies, HSBC Finance modifies the loans, allowing time for the customer to seek alternative financing or improve their individual situation. These loan modifications primarily provide for temporary interest rate relief for up to 12 months by either maintaining the current interest rate for that period or resetting the interest rate to one lower than that originally required at the reset date. At the end of the relief period, the interest rate on the loan will reset in accordance with the original loan terms, unless the borrower qualifies for, and is granted, a further modification. These loans are not included in the renegotiated loans figures quoted above, because they were not contractually delinquent at the time of the modification.

HSBC Finance also significantly expanded its Foreclosure Avoidance and Account Modification Programmes designed to provide relief to qualifying home owners by either loan restructuring or modification. Following a strategic review, in the first quarter of 2008 these programmes were expanded in the consumer lending business, to help those customers who did not qualify for assistance under previous programmes, and to help customers who required greater assistance than that available under previous programmes. Innovations included lowering the interest rate for qualifying customers on fixed rate loans as well as ARMs, and implementing longer term modifications, providing assistance generally for two to five years. Under these expanded programmes, HSBC Finance modified over 92,000 loans in 2008 with an aggregate balance of US$13.5 billion. The ARM Reset Modification Programme covered some 13,000 loans, with an aggregate value of US$2.1 billion.

HSBC Finance also supports a variety of national and local efforts in home ownership preservation and foreclosure avoidance.

Credit quality of financial instruments

(Audited)

The four credit quality classifications set out and defined below describe the credit quality of HSBC's lending, debt securities portfolios and derivatives. These 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 lending, debt securities and other bills
	Wholesale lending and derivatives	Retail lending1	Debt securities /other

Quality classification
Strong	CRR1 to CRR2	EL1 to EL2	A- and above
Medium	CRR3 to CRR5	EL3 to EL5	B+ to BBB+, and unrated
Sub-standard	CRR6 to CRR8	EL6 to EL8	B and below
Impaired	CRR9 to CRR10	EL9 to EL10	Impaired

1 HSBC observes the disclosure convention that, in addition to those classified as EL9 to EL10, retail accounts classified EL1 to EL8 that are delinquent by 90 days or more are considered impaired, unless individually they have been assessed as not impaired (see page 219, 'Past due but not impaired financial instruments').

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': exposures require closer monitoring, with low to moderate default risk. Retail accounts typically show only short periods of delinquency, with any losses expected to be minimal 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

Compared with previous years, the basis of reporting has been changed to replace the former uniform seven-grade portfolio quality scale, in order both to extend the range of financial instruments covered in the presentation of portfolio quality and to reflect the more risk-sensitive rating systems introduced under the Group's Basel II programme.

The Customer Risk Rating ('CRR') 10-grade scale above summarises a more granular underlying 22ߛgrade scale of obligor probability of default ('PD'). All distinct customers Group-wide 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 four quality classifications. The ratings of Standard & 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 153 to 158 and 175 to 176, 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			Impair-
	Strong	Medium	Sub- standard	but not impaired4	Impaired4	ment allowances3		Total
	US$m	US$m	US$m	US$m	US$m		US$m	US$m
At 31 December 2008
Items in the course of collection from other banks	4,541	1,396	-	66	-			6,003

Trading assets	303,307	98,977	3,167					405,451
- treasury and other eligible bills1	32,314	92	52					32,458
- debt securities1	175,681	22,841	1,097					199,619
- loans and advances to banks	60,400	12,514	141					73,055
- loans and advances to customers	34,912	63,530	1,877					100,319

Financial assets designated at fair value	5,288	11,434	818					17,540
- treasury and other eligible bills1	204	31	-					235
- debt securities1	4,129	11,402	818					16,349
- loans and advances to banks	230	-	-					230
- loans and advances to customers	725	1	-					726

Derivatives	383,393	106,348	5,135					494,876

Loans and advances held at amortised cost	565,542	427,788	43,432	48,422	25,422		(23,972)	1,086,634
- loans and advances to banks	118,684	33,766	1,268	41	70		(63)	153,766
- loans and advances to customers2	446,858	394,022	42,164	48,381	25,352		(23,909)	932,868

Financial investments	257,435	32,889	1,382	32	1,246			292,984
- treasury and other similar bills	37,932	2,927	168	-	-			41,027
- debt securities	219,503	29,962	1,214	32	1,246			251,957

Other assets	11,959	26,517	1,747	219	417			40,859
- endorsements and acceptances	1,851	7,793	805	30	3			10,482
- accrued income and other	10,108	18,724	942	189	414			30,377

	Neither past due nor impaired			Past due			Impair-
	Strong	Medium	Sub- standard	but not impaired4	Impaired4	ment allowances3		Total
	US$m	US$m	US$m	US$m	US$m		US$m	US$m
At 31 December 2007
Items in the course of collection from other banks	7,599	2,178	-	-	-			9,777

Trading assets	277,437	115,091	1,964					394,492
- treasury and other eligible bills1	15,766	670	3					16,439
- debt securities1	150,893	27,636	305					178,834
- loans and advances to banks	82,678	17,757	5					100,440
- loans and advances to customers	28,100	69,028	1,651					98,779

Financial assets designated at fair value	5,266	16,126	125					21,517
- treasury and other eligible bills1	36	145	-					181
- debt securities1	5,052	15,973	125					21,150
- loans and advances to banks	178	-	-					178
- loans and advances to customers	-	8	-					8

Derivatives	150,141	36,745	968					187,854

Loans and advances held at amortised cost	662,415	476,554	30,242	49,321	19,594		(19,212)	1,218,914
- loans and advances to banks	189,446	45,358	2,535	22	12		(7)	237,366
- loans and advances to customers	472,969	431,196	27,707	49,299	19,582		(19,205)	981,548

Financial investments	236,901	33,117	388	-	-			270,406
- treasury and other similar bills	26,776	3,188	140	-	-			30,104
- debt securities	210,125	29,929	248	-	-			240,302

Other assets	10,775	31,097	1,144	92	137			43,245
- endorsements and acceptances	2,612	9,122	477	27	10			12,248
- accrued income and other	8,163	21,975	667	65	127			30,997

1 Impairment is not measured for assets held in trading portfolios or designated at fair value as assets in such portfolios are managed according to movements in fair value, and the fair value movement is taken directly to the income statement. Consequently, all such balances are reported under 'Neither past due nor impaired'.

2 Includes asset-backed securities that have been externally rated as strong (US$7,991 million), medium (nil) and sub-standard (nil).

3 Impairment allowances are not reported for financial instruments whereby the carrying amount is reduced directly for impairment and not through the use of an allowance account.

4 The amounts for loans and advances for 2007 have been restated, as a result of a reclassification from 'Past due but not impaired' to 'Impaired' of an element of a credit card portfolio. There has been no effect on impairment allowances.

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

	Europe	Hong Kong	Rest of Asia- Pacific	North America	Latin America	Gross loans and advances past due not impaired1
	US$m	US$m	US$m	US$m	US$m	US$m

At 31 December 2008	3,800	1,805	4,320	35,247	3,250	48,422
At 31 December 2007	3,143	2,031	4,951	36,604	2,592	49,321

1 Restated for 2007 as a result of a reclassification of an element of a credit card portfolio as impaired. There has been no effect on impairment allowances.

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

	At 31 December
	2008	2007
	US$m	US$m

Banks	41	22

Customers	48,381	49,299
Personal1	39,592	42,091
Corporate and commercial	8,603	6,938
Financial	186	270


	48,422	49,321

1 Restated for 2007 as a result of a reclassification of an element of a credit card portfolio as impaired. There has been no effect on impairment allowances.

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

(Audited)

	Up to 29 days	30-59 days	60-89 days	90-180 days	Over 180 days	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

At 31 December 2007
Loans and advances held at amortised cost	33,931	10,546	3,992	489	363	49,321
- loans and advances to banks	22	-	-	-	-	22
- loans and advances to customers1	33,909	10,546	3,992	489	363	49,299

Other assets	57	16	8	6	5	92
- endorsements and acceptances	21	3	-	2	1	27
- other	36	13	8	4	4	65


	33,988	10,562	4,000	495	368	49,413

1 Restated for 2007 as a result of a reclassification of an element of a credit card portfolio as impaired. There has been no effect on impairment allowances.

Impaired loans and advances

Impaired loans and advances to customers and banks by industry sector

(Audited)

	Impaired loans and advances at 31 December 2008			Impaired loans and advances at 31 December 20071
	Individually assessed	Collectively assessed	Total	Individually assessed	Collectively assessed	Total
	US$m	US$m	US$m	US$m	US$m	US$m

Banks	70	-	70	12	-	12

Customers	6,922	18,430	25,352	6,477	13,105	19,582
Personal	538	18,071	18,609	1,548	12,850	14,398
Corporate and commercial	6,086	357	6,443	4,799	254	5,053
Financial	298	2	300	130	1	131


	6,992	18,430	25,422	6,489	13,105	19,594

1 Impaired loans for 2007 have been restated as a result of the reclassification of an element of a credit card portfolio as impaired. There has been no effect on impairment allowances.

2008 compared with 2007

(Unaudited)

Total impaired loans to customers were US$25.4 billion at 31 December 2008, an increase of 29 per cent since the end of 2007 (42 per cent at constant currency). Impaired loans were 3 per cent of gross customer loans and advances, a rise from 2 per cent at 31 December 2007.

The commentary that follows compares balances at 31 December 2008 with those at 31 December 2007, at constant exchange rates.

In Europe, impaired loans at US$6.8 billion were 32 per cent higher than at the end of 2007. The increase was driven by the UK where credit quality in the UK commercial portfolio deteriorated sharply in the final quarter of the year. A small number of exposures in the commercial real estate sector were particularly affected by a sharp deterioration in market conditions in the fourth quarter. UK mortgage impairments remained broadly stable despite the substantial increase in balances in the second half of the year and delinquency levels increased modestly from a low base. Unsecured personal lending in the UK also saw a slight increase in the levels of impaired loans, particularly in the second half of the year, as the economy weakened. A single financial sector loan in Europe also affected results. Impairment levels in France remained low in the personal sector. However, Commercial Banking experienced a rising number of small impairments during the second half of the year and a small number of larger impairments in the last quarter. In Turkey, impaired loans rose by 81 per cent due to increased delinquency in the personal lending portfolio and, particularly, in credit cards.

In Hong Kong, impaired loans increased from a previously low level to US$852 million. The deterioration was concentrated in the commercial lending portfolio and was attributable to a number of factors including exporters in Hong Kong being affected by reduced demand from the US and other developed countries. The sharp fall in the value of currencies and commodities left some customers' balance sheets weakened, coupled with rising fraud encountered with certain counterparties.

In the Rest of Asia-Pacific impaired loans increased by 8 per cent to US$1.1 billion, primarily due to the deterioration in the commercial lending portfolio. In the last quarter of 2008 the number of export orders suffered a sharp fall and, together with a deterioration in credit quality around the region, caused a rise in impaired loans. Noticeable increases were recognised in Taiwan, Indonesia and India. In Taiwan the commercial loan portfolio started to deteriorate in the second half of the year as the fall in exports started to affect local businesses. In Indonesia and India, the increase in impaired loans was a result of the downgrade of a few individual customers as economic conditions worsened. Impaired personal loans rose as increased unemployment and bankruptcy rates affected the ability of customers to repay. India continued to show significant impaired loans as the economic conditions deteriorated and credit quality weakened. Active measures are being taken to reduce exposure in India and manage the personal lending portfolio.

In North America, impaired loans rose significantly, increasing by 49 per cent to US$14.3 billion at 31 December 2008. The US consumer finance business experienced a broad based deterioration in credit quality due to higher unemployment as the economy slowed. A full discussion of these developments and their effect on credit quality is provided in the 'Areas of special interest' commentary on page 208. In Canada, impaired loans rose from a low base as credit conditions weakened, with the loss concentrated in a single exposure in the commercial real estate portfolio. In the US, commercial and corporate credit quality declined due to downgrades as the economic environment deteriorated.

In Latin America, impaired loans increased by 37 per cent to US$2.3 billion. Impaired loans in Mexico rose by 32 per cent, largely in credit cards driven by portfolio growth in personal lending, seasoning and higher delinquency rates. In Brazil, impaired loans rose by 34 per cent due to growth in personal lending due to deterioration in payroll and vehicle finance loan portfolios, and weakness in a number of real estate portfolios and corporates exposed to the sharp rise in the value of the US dollar in the second half of the year.

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:

(Audited)

	Carrying amount obtained in:
	2008	2007
	US$m	US$m
Nature of assets
Residential property	2,562	2,509
Commercial and industrial property	21	18
Other	382	373

	2,965	2,900

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. The majority of repossessed properties arose in HSBC Finance in the US, which, compared with 2007 experienced higher levels of foreclosure and higher losses on sale due to declining house prices. The average time taken to sell a repossessed property during 2008 was 177 days and the average loss upon sale of foreclosed properties was 13 per cent. The December 2008 balance of repossessed property was lower than otherwise would have been the case due to several factors that occurred during the month: HSBC Finance implemented a voluntary one month suspension of final court proceedings in foreclosure cases relating to owner occupied properties in December 2008, some states suspended foreclosure activity, and there was a backlog in moving foreclosure proceedings through the courts. HSBC expects, subject to further state actions, that repossessed property levels will increase in the first quarter of 2009 as foreclosure proceedings normalise. A quarterly breakdown of foreclosure data is provided below:

HSBC Finance foreclosed properties in the US (Unaudited)			Quarter ended
	2008	31 December 2008		30 September 2008		30 June 2008		31 March 2008

Number of foreclosed properties at end of period	9,589		9,589		11,182		10,870		10,203
Number of properties added to foreclosed inventory in the year/quarter	20,051		3,398		5,562		5,773		5,318
Average loss on sale of foreclosed properties1	13%		13%		10%		11%		16%
Average total loss on foreclosed properties2	42%		47%		42%		40%		39%
Average time to sell foreclosed properties (days)	177		180		174		171		181

1 The average loss on sale of foreclosed properties is calculated as cash proceeds after deducting selling costs and commissions, minus the book value of the property when it was moved to 'Real estate owned', divided by the book value of the property when it was moved to 'Real estate owned'.

2 The average total loss on foreclosed properties sold during each quarter includes both the loss on sale and the cumulative write-downs recognised on the loans up to and upon classification as 'Real estate owned'. This average total loss on foreclosed properties is expressed as a percentage of the book value of the property prior to its transfer to 'Real estate owners'.

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-Pacific	North America	Latin America	Total
	US$m	US$m	US$m	US$m	US$m	US$m
At 31 December 2008
Gross loans and advances
Individually assessed impaired loans1	3,817	813	865	832	595	6,922

Collectively assessed2	426,233	100,140	108,318	271,472	43,692	949,855
Impaired loans1	2,957	39	249	13,453	1,732	18,430
Non-impaired loans3	423,276	100,101	108,069	258,019	41,960	931,425


Gross loans and advances	430,050	100,953	109,183	272,304	44,287	956,777

Impairment allowances
Individually assessed	2,005	411	448	192	228	3,284
Collectively assessed	1,854	322	779	15,898	1,772	20,625

Total impairment allowances	3,859	733	1,227	16,090	2,000	23,909

	%	%	%	%	%	%
Individually assessed allowances as a percentage of individually assessed loans and advances	52.5	50.6	51.8	23.1	38.3	47.4
Collectively assessed allowances as a percentage of collectively assessed loans and advances	0.4	0.3	0.7	5.9	4.1	2.2
Total allowances as a percentage of total loans and advances	0.9	0.7	1.1	5.9	4.5	2.5

	US$m	US$m	US$m	US$m	US$m	US$m
At 31 December 2007
Gross loans and advances
Individually assessed impaired loans1	4,558	378	678	421	442	6,477

Collectively assessed2	451,648	89,636	102,100	301,419	49,473	994,276
Impaired loans1,4	1,696	55	410	9,241	1,703	13,105
Non-impaired loans3,4	449,952	89,581	101,690	292,178	47,770	981,171


Gross loans and advances	456,206	90,014	102,778	301,840	49,915	1,000,753

Impairment allowances
Individually assessed	1,846	132	349	119	253	2,699
Collectively assessed	2,085	244	577	11,861	1,739	16,506

Total impairment allowances	3,931	376	926	11,980	1,992	19,205

	%	%	%	%	%	%
Individually assessed allowances as a percentage of individually assessed loans and advances	40.5	34.9	51.5	28.3	57.2	41.7
Collectively assessed allowances as a percentage of collectively assessed loans and advances	0.5	0.3	0.6	3.9	3.5	1.7
Total allowances as a percentage of total loans and advances	0.9	0.4	0.9	4.0	4.0	1.9

1 Impaired loans and advances are those classified as CRR 9, CRR 10, EL 9 or EL 10 and all retail loans 90 days or more past due.

2 Collectively assessed loans and advances comprise homogeneous groups of loans that are not considered individually significant, and loans subject to individual assessment where no impairment has been identified on an individual basis, but on which a collective impairment allowance has been calculated to reflect losses which have been incurred but not yet identified.

3 Collectively assessed loans and advances not impaired are those classified as CRR1 to CRR8 and EL1 to EL8 but excluding retail loans 90 days past due.

4 The 2007 collectively assessed impaired loans and advances for North America have been increased from US$7,963 million to US$9,241 million as a result of the reclassification of an element of a credit card portfolio as impaired. There has been no effect on impairment allowances.

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

(Audited)

	At 31 December 2008			At 31 December 2007
	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

Banks1	63	-	63	7	-	7

Customers	3,284	20,625	23,909	2,699	16,506	19,205
Personal	312	18,657	18,969	379	14,983	15,362
Corporate and commercial	2,845	1,795	4,640	2,275	1,472	3,747
Financial	127	173	300	45	51	96


	3,347	20,625	23,972	2,706	16,506	19,212

1 The impairment allowances on loans and advances to banks relates to the geographical region, Europe.

Impairment allowances as a percentage of loans and advances1

(Unaudited)

	At 31 December
	2008	2007
	%	%
Banks
Individually assessed impairment allowances2	0.06	0.0

Customers3	2.63	2.01
Individually assessed impairment allowances3	0.36	0.28
Collectively assessed impairment allowances3	2.27	1.73

1 Net of reverse repo transactions, settlement accounts and stock borrowings.

2 As a percentage of loans and advances to banks.

3 As a percentage of loans and advances to customers.

Movement in impairment allowances

The tables below describe details of the movements in HSBC's loan impairment allowances (i) for loans and advances, (ii) by industry segment for each of the past 5 years and (iii) by industry segment and geographical region for 2008 and 2007.

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 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

At 1 January 2007	7	2,565	11,013	13,585
Amounts written off	-	(897)	(11,947)	(12,844)
Recoveries of loans and advances written off in previous years	-	129	876	1,005
Charge to income statement	-	796	16,381	17,177
Exchange and other movements	-	106	183	289

At 31 December 2007	7	2,699	16,506	19,212

Movement in impairment allowances by industry sector

(Audited: 2008 to 2005; Unaudited: 2004)

	2008	2007	2006	2005	2004
	US$m	US$m	US$m	US$m	US$m

Impairment allowances at 1 January	19,212	13,585	11,366	12,559	13,715
IFRS transition adjustment at 1 January 2004	-	-	-	-	(58)

Amounts written off	(17,955)	(12,844)	(9,473)	(9,043)	(8,844)
Personal	(16,625)	(11,670)	(8,281)	(8,046)	(7,597)
- residential mortgages	(2,110)	(930)	(628)	(508)	(561)
- other personal	(14,515)	(10,740)	(7,653)	(7,538)	(7,036)

Corporate and commercial	(1,294)	(1,163)	(1,153)	(984)	(1,227)
- commercial, industrial and international trade	(789)	(897)	(782)	(673)	(623)
- commercial real estate and other property-related	(115)	(98)	(111)	(117)	(106)
- other commercial	(390)	(168)	(260)	(194)	(498)

Financial4	(36)	(11)	(39)	(13)	(20)

Recoveries of amounts written off in previous years	834	1,005	779	494	913
Personal	686	837	605	320	690
- residential mortgages	19	19	19	18	31
- other personal	667	818	586	302	659

Corporate and commercial	142	157	163	174	220
- commercial, industrial and international trade	76	74	88	76	118
- commercial real estate and other property-related	6	29	21	9	17
- other commercial	60	54	54	89	85

Financial4	6	11	11	-	3

Charge to income statement1,2	24,131	17,177	10,547	7,860	6,195
Personal	20,950	15,968	9,929	7,249	6,698
- residential mortgages	5,000	1,840	1,096	605	482
- other personal	15,950	14,128	8,833	6,644	6,216

Corporate and commercial	2,879	1,176	664	618	(11)
- commercial, industrial and international trade	1,573	897	503	588	179
- commercial real estate and other property-related	755	152	75	56	(22)
- other commercial	551	127	86	(26)	(168)

Financial4	302	36	(9)	(13)	5
Governments	-	(3)	(37)	6	1
General provisions	-	-	-	-	(498)

Exchange and other movements	(2,250)	289	366	(504)	638

Impairment allowances at 31 December2	23,972	19,212	13,585	11,366	12,559

Impairment allowances against banks2:
- individually assessed2	63	7	7	9	17
Impairment allowances against customers2:
- individually assessed2	3,284	2,699	2,565	2,683	10,017
- collectively assessed2,3	20,625	16,506	11,013	8,674	2,525

Impairment allowances at 31 December2	23,972	19,212	13,585	11,366	12,559

	%	%	%	%	%
Impairment allowances against customers as a percentage of loans and advances to customers2:
- individually assessed2	0.34	0.27	0.29	0.36	1.46
- collectively assessed2	2.16	1.65	1.25	1.16	0.37
2
At 31 December	2.50	1.92	1.54	1.52	1.83

For footnotes, see page 227.

Movement in impairment allowances by industry sector and by geographical region

(Audited)

	2008
	Europe	Hong Kong	Rest of Asia- Pacific	North America	Latin America	Total
	US$m	US$m	US$m	US$m	US$m	US$m

Impairment allowances at 1 January	3,938	376	926	11,980	1,992	19,212

Amounts written off	(2,483)	(219)	(838)	(12,215)	(2,200)	(17,955)
Personal	(1,947)	(179)	(799)	(11,989)	(1,711)	(16,625)
- residential mortgages	(3)	(1)	(6)	(2,030)	(70)	(2,110)
- other personal	(1,944)	(178)	(793)	(9,959)	(1,641)	(14,515)

Corporate and commercial	(515)	(38)	(39)	(214)	(488)	(1,294)
- commercial, industrial and international trade	(367)	(33)	(22)	(153)	(214)	(789)
- commercial real estate and other property-related	(77)	(2)	(4)	(12)	(20)	(115)
- other commercial	(71)	(3)	(13)	(49)	(254)	(390)

Financial4	(21)	(2)	-	(12)	(1)	(36)

Recoveries of amounts written off in previous years	294	39	137	100	264	834
Personal	275	36	124	54	197	686
- residential mortgages	-	7	1	-	11	19
- other personal	275	29	123	54	186	667

Corporate and commercial	19	3	8	45	67	142
- commercial, industrial and international trade	19	1	6	27	23	76
- commercial real estate and other property-related	-	-	1	5	-	6
- other commercial	-	2	1	13	44	60

Financial4	-	-	5	1	-	6

Charge to income statement1	3,411	556	1,089	16,589	2,486	24,131
Personal	1,961	160	860	16,006	1,963	20,950
- residential mortgages	18	-	29	4,943	10	5,000
- other personal	1,943	160	831	11,063	1,953	15,950

Corporate and commercial	1,304	363	220	472	520	2,879
- commercial, industrial and international trade	537	316	171	213	336	1,573
- commercial real estate and other property-related	540	28	21	132	34	755
- other commercial	227	19	28	127	150	551

Financial4	146	33	9	111	3	302

Exchange and other movements	(1,238)	(19)	(87)	(364)	(542)	(2,250)

Impairment allowances at 31 December	3,922	733	1,227	16,090	2,000	23,972

Impairment allowances against banks:
- individually assessed	63	-	-	-	-	63
Impairment allowances against customers:
- individually assessed	2,005	411	448	192	228	3,284
- collectively assessed3	1,854	322	779	15,898	1,772	20,625

Impairment allowances at 31 December	3,922	733	1,227	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	0.41	0.07	0.51	0.34
- collectively assessed	0.43	0.32	0.71	5.84	4.00	2.16
2
At 31 December	0.90	0.73	1.12	5.91	4.51	2.50

	2007
	Europe	Hong Kong	Rest of Asia- Pacific	North America	Latin America	Total
	US$m	US$m	US$m	US$m	US$m	US$m

Impairment allowances at 1 January	3,683	365	901	7,247	1,389	13,585

Amounts written off	(2,940)	(251)	(724)	(7,444)	(1,485)	(12,844)
Personal	(2,402)	(180)	(615)	(7,273)	(1,200)	(11,670)
- residential mortgages	(7)	(8)	(16)	(878)	(21)	(930)
- other personal	(2,395)	(172)	(599)	(6,395)	(1,179)	(10,740)

Corporate and commercial	(533)	(71)	(109)	(166)	(284)	(1,163)
- commercial, industrial and international trade	(371)	(57)	(94)	(122)	(253)	(897)
- commercial real estate and other property-related	(72)	(4)	(5)	(14)	(3)	(98)
- other commercial	(90)	(10)	(10)	(30)	(28)	(168)

Financial4	(5)	-	-	(5)	(1)	(11)

Recoveries of amounts written off in previous years	542	43	124	62	234	1,005
Personal	468	36	100	29	204	837
- residential mortgages	-	6	3	1	9	19
- other personal	468	30	97	28	195	818

Corporate and commercial	66	7	23	31	30	157
- commercial, industrial and international trade	14	5	10	21	24	74
- commercial real estate and other property-related	19	1	7	1	1	29
- other commercial	33	1	6	9	5	54

Financial4	8	-	1	2	-	11

Charge to income statement1	2,543	212	614	12,111	1,697	17,177
Personal	2,035	157	550	11,854	1,372	15,968
- residential mortgages	7	(14)	16	1,784	47	1,840
- other personal	2,028	171	534	10,070	1,325	14,128

Corporate and commercial	499	53	63	236	325	1,176
- commercial, industrial and international trade	353	57	82	125	280	897
- commercial real estate and other property-related	119	(4)	(21)	52	6	152
- other commercial	27	-	2	59	39	127

Financial4	12	2	1	21	-	36
Governments	(3)	-	-	-	-	(3)

Exchange and other movements	110	7	11	4	157	289

Impairment allowances at 31 December	3,938	376	926	11,980	1,992	19,212

Impairment allowances against banks:
- individually assessed	7	-	-	-	-	7
Impairment allowances against customers:
- individually assessed	1,846	132	349	119	253	2,699
- collectively assessed3	2,085	244	577	11,861	1,739	16,506

Impairment allowances at 31 December	3,938	376	926	11,980	1,992	19,212

	%	%	%	%	%	%
Impairment allowances against customers as a percentage of loans and advances to customers:
- individually assessed	0.40	0.15	0.34	0.04	0.51	0.27
- collectively assessed	0.46	0.27	0.56	3.93	3.48	1.65
2
At 31 December	0.86	0.42	0.90	3.97	3.99	1.92

1 See table below 'Net loan impairment charge to the income statement by geographical region'.

2 In 2004, 'Charge to income statement' was 'Net charge to profit and loss account'; 'Impairment allowances' were 'Provisions'; 'Individually assessed impairment allowances' were 'Specific provisions'; and 'Collectively assessed impairment allowances' were 'General provisions'.

3 Collectively assessed impairment allowances (2004: 'General provisions') are allocated to geographical segments based on the location of the office booking the allowances or provisions. Consequently, the collectively assessed impairment allowances booked in Hong Kong may cover assets booked in branches located outside Hong Kong, principally in Rest of Asia-Pacific, as well as those booked in Hong Kong.

4 Includes movement in impairment allowances against banks.

Individually and collectively assessed charge to impairment allowances by industry segment

(Unaudited)

	2008			2007
	Individually assessed US$m	Collectively assessed US$m	Total US$m	Individually assessed US$m	Collectively assessed US$m	Total US$m

Banks	54	-	54	-	-	-
Personal	110	20,840	20,950	54	15,914	15,968
Residential mortgages	26	4,974	5,000	13	1,827	1,840
Other personal	84	15,866	15,950	41	14,087	14,128

Corporate and commercial	1,782	1,097	2,879	722	451	1,173
Commercial, industrial and international trade	912	661	1,573	584	313	897
Commercial real estate and other property-related	613	142	755	84	67	151
Other commercial	257	294	551	54	71	125

Financial	118	130	248	20	16	36

Total charge to income statement	2,064	22,067	24,131	796	16,381	17,177

Charge for impairment losses

The following tables analysing the net loan impairment charge to the income statement are followed by a discussion of the material movements in loan impairment charges by region.

Net loan impairment charge to the income statement

(Unaudited)

	2008	2007	2006	2005	2004
	US$m	US$m	US$m	US$m	US$m
Individually assessed impairment allowances1
New allowances	2,742	1,533	1,297	1,715	8,872
Release of allowances no longer required	(565)	(608)	(711)	(998)	(1,266)
Recoveries of amounts previously written off	(113)	(129)	(128)	(199)	(913)

	2,064	796	458	518	6,693

Collectively assessed impairment allowances1
New allowances net of allowance releases	22,788	17,257	10,740	8,425	-
Release of allowances no longer required	-	-	-	(788)	-
Recoveries of amounts previously written off	(721)	(876)	(651)	(295)	-
General provisions	-	-	-	-	(498)

	22,067	16,381	10,089	7,342	(498)

Total charge for impairment losses1	24,131	17,177	10,547	7,860	6,195
Banks	54	-	(3)	(7)	(10)
Customers	24,077	17,177	10,550	7,867	6,205


	%	%	%	%	%
Charge for impairment losses as a percentage of closing gross loans and advances1	2.17	1.39	0.99	0.90	0.91

	US$m	US$m	US$m	US$m	US$m
At 31 December
Impaired loans1,2	25,422	19,594	15,086	12,360	13,057
Impairment allowances1	23,972	19,212	13,585	11,366	12,542

1 In 2004, 'Individually assessed impairment allowances' were 'Specific provisions'; 'Collectively assessed impairment allowances' were 'General provisions'; 'Total charge for impairment losses' was 'Bad and doubtful debt charge'; 'Impaired loans' were 'Non-performing loans' and 'Impairment allowances' were 'Provisions'.

2 Impaired loans for 2007 have been restated as a result of the reclassification of an element of a credit card portfolio as impaired. There has been no effect on impairment allowances.

Net loan impairment charge to the income statement by geographical region

(Unaudited)

	Europe US$m	Hong Kong US$m	Rest of Asia- Pacific US$m	North America US$m	Latin America US$m	Total US$m
2008
Individually assessed impairment allowances
New allowances	1,567	365	253	397	160	2,742
Release of allowances no longer required	(340)	(25)	(89)	(80)	(31)	(565)
Recoveries of amounts previously written off	(38)	(10)	(20)	(40)	(5)	(113)

	1,189	330	144	277	124	2,064

Collectively assessed impairment allowances
New allowances net of allowance releases	2,478	255	1,062	16,372	2,621	22,788
Recoveries of amounts previously written off	(256)	(29)	(117)	(60)	(259)	(721)

	2,222	226	945	16,312	2,362	22,067

Total charge for impairment losses	3,411	556	1,089	16,589	2,486	24,131
Banks	54	-	-	-	-	54
Customers	3,357	556	1,089	16,589	2,486	24,077


	%	%	%	%	%	%
Charge for impairment losses as a percentage of closing gross loans and advances	0.68	0.43	0.75	5.85	4.22	2.17

	US$m	US$m	US$m	US$m	US$m	US$m
At 31 December 2008
Impaired loans	6,844	852	1,114	14,285	2,327	25,422
Impairment allowances	3,922	733	1,227	16,090	2,000	23,972

2007
Individually assessed impairment allowances
New allowances	781	103	211	228	210	1,533
Release of allowances no longer required	(388)	(32)	(96)	(54)	(38)	(608)
Recoveries of amounts previously written off	(38)	(14)	(32)	(26)	(19)	(129)

	355	57	83	148	153	796

Collectively assessed impairment allowances
New allowances net of allowance releases	2,692	184	623	11,999	1,759	17,257
Recoveries of amounts previously written off	(504)	(29)	(92)	(36)	(215)	(876)

	2,188	155	531	11,963	1,544	16,381

Total charge for impairment losses	2,543	212	614	12,111	1,697	17,177
Customers	2,543	212	614	12,111	1,697	17,177


	%	%	%	%	%	%
Charge for impairment losses as a percentage of closing gross loans and advances	0.45	0.14	0.43	3.80	2.71	1.39

	US$m	US$m	US$m	US$m	US$m	US$m
At 31 December 2007
Impaired loans1	6,266	433	1,088	9,662	2,145	19,594
Impairment allowances	3,938	376	926	11,980	1,992	19,212

1 The 2007 impaired loans for North America have been restated as a result of the reclassification of an element of a credit card portfolio as impaired. There has been no effect on impairment allowances.

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.

In Europe, new loan impairment charges were US$4.0 billion, a rise of 24 per cent compared with 2007. This primarily reflected higher impairment charges 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 exposures to the Icelandic banks in 2008. New loan impairment charges rose in Turkey as delinquency rates rose 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 risk mitigation actions taken since 2006 reduced risk exposure to some of the problems now being uncovered in the UK residential property market. 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.

In Rest of Asia-Pacific, new loan impairment charges rose by 59 per cent to US$1.3 billion, primarily in India and the Middle East. Higher impairment charges in India were driven by a combination of rising delinquency rates in consumer lending, as credit conditions deteriorated, and increased lending. Increased charges in the Middle East were due to rising delinquencies as growth rates declined and the property market retreated as economic conditions deteriorated on the back 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.

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 210. Partly offsetting the effect of the deterioration was a reduction in overall lending as HSBC continued to reduce its exposure in the US.

In US card and retail services, impairment charges rose, driven by portfolio seasoning, higher levels of personal bankruptcy filings and continued weakness in the US economy. Delinquency increased in the geographical regions most affected by house price falls and rising unemployment.

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. 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.

2007 compared with 2006

(Unaudited)

Loan impairment charges rose by 63 per cent to US$17.2 billion from US$10.5 billion in 2006. The commentary that follows is on a constant currency basis:

New allowances for loan impairment charges rose by 52 per cent, compared with 2006. Releases and recoveries of allowances increased by 1 per cent to US$1.6 billion.

In Europe, new loan impairment charges were US$3.5 billion, a rise of 8 per cent compared with 2006. This partly reflected growth in commercial lending, where charges remained low compared with historical amounts but rose from the exceptionally low levels experienced in 2005 and 2006. Increased charges also reflected growth in credit card lending in Turkey. In the UK, refinements to the methodology used to calculate roll rate percentages resulted in a higher charge in the consumer finance operations in the first half of the year. Excluding this, loan impairment charges were marginally lower than in 2006.

Releases and recoveries in Europe were broadly in line with 2006.

In Hong Kong, new loan impairment charges of US$287 million were recorded, an increase of 19 per cent, due to the growth in credit card balances and new corporate loan charges.

Releases and recoveries in Hong Kong decreased to US$75 million, primarily in the corporate sector. This reflected the low level of allowances added in recent years.

In Rest of Asia-Pacific, new loan impairment charges rose by 10 per cent to US$834 million, with higher loan impairment charges arising in the commercial loan books in Thailand and Malaysia. This was offset by a decline in loan impairment charges for personal lending, particularly in Taiwan and Indonesia, where charges returned to more regular levels after an upsurge in 2006 due to regulatory changes which affected collection activity and minimum payments.

With corporate and commercial loan impairment charges low in recent years, releases and recoveries decreased by 6 per cent to US$220 million.

New loan impairment charges in North America rose by 76 per cent to US$12.2 billion, driven by the continued deterioration in credit quality in the US consumer finance loan portfolio.

US credit quality deteriorated as mortgage delinquencies rose, house prices declined, refinancing credit became less available in the market and the macroeconomic outlook worsened.

Other factors affecting the rise in US loan impairment charges included normal seasoning of the portfolio, a higher proportion of unsecured personal lending and a return to historical norms from the unusually low levels of bankruptcy filings experienced in 2006, following changes enacted to US bankruptcy law in 2005.

Delinquency rates rose across all parts of the HSBC Finance personal lending portfolio, with Mortgage Services and consumer lending experiencing significant rises in delinquency which flowed through subsequent stages through to foreclosure. As the housing downturn began to have more effect on the broader economy, delinquency rates in credit cards and vehicle finance rose in the final quarter of 2007. A change in product mix in the cards portfolio towards higher yielding products also contributed to higher impairment charges as this segment of the portfolio seasoned.

Releases and recoveries in North America decreased to US$116 million. In the US consumer finance business, collection staff increased in all lending portfolios as part of the response to the deteriorating credit environment.

In Latin America, new loan impairment charges rose by 63 per cent to US$2.0 billion. The most significant increase was registered in Mexico, reflecting strong growth in balances, normal portfolio seasoning and a rise in delinquency rates in credit cards. Charges for commercial lending in Mexico fell as increased delinquency rates in the small and medium-sized business portfolios were offset by impairment allowance releases. Products with high credit losses were discontinued or restructured. Loan impairment charges in Brazil rose marginally, due to growth in store loans and credit cards.

Releases and recoveries in Latin America increased to US$272 million. In Brazil, credit models were changed during 2007 to align with credit behaviour in underlying portfolios.

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

(Unaudited)

	2008	2007	2006	2005	2004
	%	%	%	%	%

New allowances net of allowance releases1	2.54	2.09	1.49	1.25	1.41
Recoveries1	(0.09)	(0.12)	(0.10)	(0.09)	(0.35)

Total charge for impairment losses1	2.45	1.97	1.39	1.16	1.06

Amount written off net of recoveries	1.75	1.36	1.15	1.26	1.26

1 In 2004, 'New allowances' were 'New provisions'; 'Recoveries' were 'Releases and recoveries'; and 'Total charge for impairment losses' was 'Total provisions charged'.

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

(Unaudited)

	Europe	Hong Kong	Rest of Asia- Pacific	North America	Latin America	Total
	%	%	%	%	%	%
2008
New allowances net of allowance releases	0.86	0.63	1.06	5.73	5.32	2.54
Recoveries	(0.07)	(0.04)	(0.12)	(0.03)	(0.51)	(0.09)

Total charge for impairment losses	0.79	0.59	0.94	5.70	4.81	2.45

Amount written off net of recoveries	0.52	0.19	0.61	4.16	3.73	1.75

2007
New allowances net of allowance releases	0.86	0.29	0.83	4.20	4.55	2.09
Recoveries	(0.15)	(0.05)	(0.14)	(0.02)	(0.55)	(0.12)

Total charge for impairment losses	0.71	0.24	0.69	4.18	4.00	1.97

Amount written off net of recoveries	0.67	0.23	0.67	2.55	2.95	1.36

HSBC Holdings

(Audited)

Credit risk arises in HSBC Holdings primarily 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 world-wide.

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

HSBC Holdings' maximum exposure to credit risk at 31 December 2008 is shown below. HSBC Holdings' financial assets principally represent claims on Group subsidiaries in Europe and North America.

HSBC Holdings - maximum exposure to credit risk

	Maximum exposure
	2008	2007
	US$m	US$m

Derivatives	3,682	2,660
Loans and advances to HSBC undertakings	11,804	17,242
Financial investments	2,629	3,022
Financial guarantees	47,341	38,457
Loan commitments and other credit-related commitments	3,241	3,638

	68,697	65,019

All of the derivative transactions are with HSBC undertakings which are banking counterparties (2007: 100 per cent).

The credit quality of loans and advances to HSBC undertakings is assessed as satisfactory risk, with 100 per cent of the exposure being neither past due nor impaired (2007: 100 per cent).

The long-term debt ratings of HSBC Group issuers of financial investments are within the Standard & Poor's ratings range of AA- to AA+ (2007: AA- to AA+).

Risk elements in the loan portfolio

(Unaudited)

The disclosure of credit risk elements under the following headings reflects US accounting practice and classifications for publicly traded bank holding companies:

loans accounted for on a non-accrual basis;
accruing loans contractually past due 90 days or more as to interest or principal; and
troubled debt restructurings not included in the above.

Interest forgone on impaired loans

(Audited)

Interest income that would have been recognised under the original terms of impaired and restructured loans amounted to approximately US$1.9 billion in 2008 (2007: US$1.1 billion). Interest income from such loans of approximately US$702 million (2007: US$374 million) was recorded in 2008.

Troubled debt restructurings

The SEC requires separate disclosure of any loans whose terms have been modified because of problems with the borrower to grant concessions other than are warranted by market conditions. These are classified as 'troubled debt restructurings' (TDRs). The definition of TDRs differs from the 'Renegotiated loans that would otherwise be past due or impaired' quantified on page 216 insofar as for TDRs the delinquency status of the loan following restructuring may continue to be past due not impaired or, where appropriate, impaired. In addition, the classification of a loan as a TDR may be discontinued after the first year if the debt performs in accordance with the new terms.

Troubled debt restructurings increased by 47 per cent in 2008, reflecting measures taken to mitigate risk in the US consumer finance business in response to the deterioration in mortgage loans.

Unimpaired loans past due 90 days or more

Unimpaired loans contractually past due 90 days or more increased. Figures for 2004 to 2007 have been restated due to the reclassification of an element of the North America credit card portfolio as impaired. There has been no effect on impairment allowances.

Impaired loans

In accordance with IFRSs, HSBC recognises interest income on assets after they have been written down as a result of an impairment loss. In the following tables, HSBC represents information on its impaired loans and advances in accordance with the disclosure convention described on page 217.

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 210. '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 223, 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 196.

Risk elements

The following table provides an analysis of risk elements in the loan portfolios at 31 December for the past five years.

Analysis of risk elements

(Unaudited)

	At 31 December
	2008 US$m	2007 US$m	2006 US$m	2005 US$m	2004 US$m
Impaired loans
Europe	6,844	6,266	5,858	5,081	6,053
Hong Kong	852	433	454	506	696
Rest of Asia-Pacific	1,114	1,088	1,188	945	1,172
North America1	14,285	9,662	6,108	4,602	4,204
Latin America	2,327	2,145	1,478	1,226	932

	25,422	19,594	15,086	12,360	13,057

Troubled debt restructurings
Europe	366	648	360	239	213
Hong Kong	165	146	189	198	436
Rest of Asia-Pacific	119	34	73	121	56
North America	5,618	3,322	1,712	1,417	1,600
Latin America	1,067	848	915	878	830

	7,335	4,998	3,249	2,853	3,135

Unimpaired loans contractually past due 90 days or more as to principal or interest
Europe	635	202	237	592	68
Hong Kong	43	49	79	74	67
Rest of Asia-Pacific	274	156	78	40	56
North America1	108	24	78	32	567
Latin America	21	421	165	4	-

	1,081	852	637	742	758

Trading loans classified as in default2
North America	561	675	127	11	-

Risk elements on loans
Europe	7,845	7,116	6,455	5,912	6,334
Hong Kong	1,060	628	722	778	1,199
Rest of Asia-Pacific	1,507	1,278	1,339	1,106	1,284
North America	20,572	13,683	8,025	6,062	6,371
Latin America	3,415	3,414	2,558	2,108	1,762

	34,399	26,119	19,099	15,966	16,950

Assets held for resale
Europe	81	59	30	205	27
Hong Kong	26	29	42	49	75
Rest of Asia-Pacific	13	7	17	31	21
North America	1,758	1,172	999	582	664
Latin America	113	101	91	103	44

	1,991	1,368	1,179	970	831

Total risk elements
Europe	7,926	7,175	6,485	6,117	6,361
Hong Kong	1,086	657	764	827	1,274
Rest of Asia-Pacific	1,520	1,285	1,356	1,137	1,305
North America	22,330	14,855	9,024	6,644	7,035
Latin America	3,528	3,515	2,649	2,211	1,806

	36,390	27,487	20,278	16,936	17,781

	%	%	%	%	%
Loan impairment allowances as a percentage of risk elements on loans3	70.8	75.5	71.6	71.2	74.1

1 Restated for 2004 to 2007 as a result of a reclassification from 'Unimpaired loans contractually past due 90 days or more as to principal or interest' to 'Impaired', in respect of an element of a credit card portfolio.

2 Classified as grades 6 and 7 in 2004 to 2007.

3 Ratio excludes trading loans classified as in default.

This information is provided by RNS

The company news service from the London Stock Exchange

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