Interim Report - 12 of 21

RNS Number : 3115X

HSBC Holdings PLC

14 August 2009

 



Risk management

All HSBC's activities involve, to varying degrees, the analysis, evaluation, acceptance and management of risks or combinations of risks. The most important risk categories that the Group is exposed to are credit risk (including cross-border country risk), market risk, operational risk in various forms, liquidity risk, insurance risk, pension risk, residual value risk, reputational risk and sustainability (environmental and social) risk. Market risk includes foreign exchange, interest rate and equity price risks.

Insurance risk is managed by the Group's insurance businesses together with their own credit, liquidity and market risk functions, distinct from those covering the rest of HSBC due to the different nature of their activities, but under risk oversight at Group level.

HSBC's risk management policies are designed to identify and analyse these risks, to set appropriate risk limits and controls, and to monitor the risks and adherence to limits by means of reliable and up-to-date administrative and information systems. HSBC regularly reviews its risk management policies and systems to reflect changes in law, regulation, markets, products and emerging best practice. Personal accountability, reinforced by the Group's governance structure and instilled by training and experience, helps to foster a disciplined and constructive culture of risk management and control.

An overview of the Group's risk governance structure, including the responsibilities of the senior executive Risk Management Meeting and the Global Risk function, and of the risk appetite framework operated by the Group, is set out on page 191 of the Annual Report and Accounts 2008. The management of all HSBC's significant risks is also discussed there in detail. There have been no changes to the Group's risk management methodology since 31 December 2008 which are material to understanding the current reporting period.

Credit risk

Credit risk is the risk of financial loss if a customer or counterparty fails to meet a payment obligation under a contract. It arises principally from direct lending, trade finance and leasing business, but also from off-balance sheet products such as guarantees and credit derivatives, and from the Group's holdings of debt securities. Among the risks in which the Group engages, credit risk generates the largest regulatory capital requirement.

The objectives of credit risk management, underpinning sustainably profitable business, are principally to maintain a strong culture of responsible lending, supported by a robust risk policy and control framework; to both partner and challenge the business line in defining and implementing risk appetite, with its continuous re-evaluation under actual and scenario conditions; and to ensure independent, expert scrutiny of credit risks, their costs and their mitigation.

The most significant factor affecting HSBC's exposure to credit risk was the continuing deterioration in credit conditions in the global economy, particularly in the US.

HSBC's Credit Risk function is part of Global Risk, reporting to the Group Chief Risk Officer. Its risk management and internal control procedures are designed for all stages of economic and financial cycles, including the current environment, and there were no material changes during the first half of 2009. Progress has continued to be made in refining exposure measurement and monitoring, in the context of the Group's Advanced internal ratings-based ('IRB') approach to Basel II (see 'Capital Management' on page 187) and in enhancing central risk oversight and independent review activities through Group Management Office working closely with regional risk offices under HSBC's target operating model for Global Risk.

Full details of the role and responsibilities of the Credit Risk management function are set out on page 192 of the Annual Report and Accounts 2008.

Credit exposure

HSBC's exposure to credit risk is spread across many asset classes, including derivatives, trading assets, loans and advances to customers, loans and advances to banks and financial investments. The balance of the Group's credit exposures has changed since 31 December 2008 as a significant decline in market volatility has led to a lower exposure to the risk of default in derivative contracts.

The most significant factor affecting HSBC's exposure to credit risk during the first half of 2009 was the continuing deterioration in credit conditions in the global economy, particularly in the US. Loss experience remained concentrated in the personal lending portfolios, primarily in the US with 77 per cent of loan impairment charges and other credit risk provisions arising in Personal Financial Services in the first half of 2009 compared with 93 per cent in the comparable period in 2008. HSBC also experienced deterioration in credit quality in the commercial real estate sector. In the first half of 2009, 11 per cent of loan impairment charges and other credit risk provisions arose in Commercial Banking, compared with 6 per cent in the first half of 2008. In Global Banking and Markets, loan impairment charges on the corporate portfolio totalled US$1.2 billion in the first half of 2009, while other credit risk provisions primarily due to monoline insurer downgrades totalled US$0.6 billion, 8 per cent and 4 per cent respectively of total loan impairment charges and other credit risk provisions. 

The following table presents the maximum exposure to credit risk from balance sheet and off-balance sheet financial instruments, before taking account of any collateral held or other credit enhancements (unless such credit enhancements meet offsetting requirements). For financial assets recognised on the balance sheet, the exposure to credit risk equals their carrying amount. For financial guarantees granted, the maximum exposure to credit risk is the maximum amount that HSBC would have to pay if the guarantees were called upon. For loan commitments and other credit-related commitments that are irrevocable over the life of the respective facilities, the maximum exposure to credit risk is the full amount of the committed facilities.

Maximum exposure to credit risk

	At 30 June 2009						At 30 June 2008						At 31 December 2008
Maximum     exposure			Offset		Exposure     to credit     risk (net)		Maximum     exposure		Offset		Exposure     to credit     risk (net)		Maximum     exposure		Offset		Exposure     to credit     risk (net)
	US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m
Cash and balances at  central banks	56,368		-		56,368		13,473		-		13,473		52,396		-		52,396
Items in the course of collection from other banks	16,613		-		16,613		16,719		-		16,719		6,003		-		6,003
Hong Kong Government certificates of indebtedness	16,156		-		16,156		14,378		-		14,378		15,358		-		15,358
Trading assets	388,874		(15,829)		373,045		430,929		(21,015)		409,914		405,451		(13,227)		392,224
Treasury and other  eligible bills	22,990		-		22,990		7,417		-		7,417		32,458		-		32,458
Debt securities	190,870		-		190,870		191,482		-		191,482		199,619		-		199,619
Loans and advances:
- to banks	73,636		(1)		73,635		95,359		(542)		94,817		73,055		-		73,055
- to customers	101,378		(15,828)		85,550		136,671		(20,473)		116,198		100,319		(13,227)		87,092
Financial assets designated at fair value	21,301		-		21,301		24,018		-		24,018		17,540		-		17,540
Treasury and other  eligible bills	495		-		495		240		-		240		235		-		235
Debt securities	19,825		-		19,825		23,356		-		23,356		16,349		-		16,349
Loans and advances:
- to banks	204		-		204		421		-		421		230		-		230
- to customers	777		-		777		1		-		1		726		-		726
Derivatives	310,796		(237,552)		73,244		260,664		(164,749)		95,915		494,876		(383,308)		111,568
Loans and advances held  at amortised cost:	1,106,949		(94,576)		1,012,373		1,306,181		(105,321)		1,200,860		1,086,634		(83,398)		1,003,236
- to banks	182,266		(124)		182,142		256,981		(277)		256,704		153,766		(126)		153,640
- to customers	924,683		(94,452)		830,231		1,049,200		(105,044)		944,156		932,868		(83,272)		849,596
Financial investments	344,644		-		344,644		265,269		-		265,269		292,984		-		292,984
Treasury and other  similar bills	54,262		-		54,262		27,928		-		27,928		41,027		-		41,027
Debt securities	290,382		-		290,382		237,341		-		237,341		251,957		-		251,957
Other assets	35,191		(4)		35,187		26,468		(273)		26,195		40,859		(5)		40,854
Endorsements and acceptances	9,481		(4)		9,477		13,289		(273)		13,016		10,482		(5)		10,477
Other	25,710		-		25,710		13,179		-		13,179		30,377		-		30,377
Financial guarantees	49,486		-		49,486		59,742		-		59,742		52,318		-		52,318
Loan and other credit- related commitments1	569,012		-		569,012		758,926		-		758,926		604,022		-		604,022
	2,915,390		(347,961)		2,567,429		3,176,767		(291,358)		2,885,409		3,068,441		(479,938)		2,588,503

For footnote, see page 168.

Collateral and other credit enhancements

Collateral held against financial instruments presented in the 'Maximum exposure to credit risk' table above is described in more detail below.

Items in the course of collection from other banks

Settlement risk arises in any situation where a payment in cash, securities or equities is made in the expectation of a corresponding receipt of cash, securities or equities. Daily settlement limits are established for counterparties to cover the aggregate of HSBC's transactions with each one on any single day. Settlement risk on many transactions, particularly those involving securities and equities, is substantially mitigated by settling through assured payment systems or on a delivery-versus-payment basis.

Treasury, other eligible bills and debt securities 

Collateral held as security for financial assets other than loans and advances is determined by the nature of the instrument. Debt securities, treasury and other eligible bills are generally unsecured, except for ABSs and similar instruments, which are secured by pools of financial assets.

Derivatives

The ISDA Master Agreement is HSBC's preferred agreement for documenting derivatives activity. It provides the contractual framework within which dealing activity across a full range of over-the-counter products is conducted, and contractually binds both parties to apply close-out netting across all outstanding transactions covered by an agreement if either party defaults or other pre-agreed termination events occur. It is common, and HSBC's preferred practice, for the parties to execute a Credit Support Annex ('CSA') in conjunction with the ISDA Master Agreement. Under a CSA, collateral is passed between the parties to mitigate the market-contingent counterparty risk inherent in the outstanding positions.

Loans and advances 

It is HSBC's policy, when lending, to do so on the basis of the customer's capacity to repay, rather than rely primarily on the value of security offered. Depending on the customer's standing and the type of product, facilities may be provided unsecured. Whenever available, collateral can be an important mitigant of credit risk.

The guidelines applied by operating companies in respect of the acceptability of specific classes of collateral or credit risk mitigation, and the determination of valuation parameters are subject to regular review to ensure that they are supported by empirical evidence and continue to fulfil their intended purpose. The principal collateral types employed by HSBC are as follows:

• in the personal sector, mortgages over residential properties;

• in the commercial and industrial sector, charges over business assets such as premises, stock and debtors;

• in the commercial real estate sector, charges over the properties being financed; and

• in the financial sector, charges over financial instruments such as cash, debt securities and equities in support of trading facilities.

In addition, credit derivatives, including credit default swaps and structured credit notes, and securitisation structures are used to manage credit risk in the Group's loan portfolio. 

HSBC does not disclose the fair value of collateral held as security or other credit enhancements on loans and advances past due but not impaired, or on individually assessed impaired loans and advances, as it is not practicable to do so.

Concentration of exposure

Concentrations of credit risk exist when a number of counterparties or exposures have comparable economic characteristics, or such counterparties are engaged in similar activities, or operate in the same geographical areas or industry sectors, so that their collective ability to meet contractual obligations is uniformly affected by changes in economic, political or other conditions.

Securities held for trading

Total securities held for trading within trading assets were US$239 billion at 30 June 2009 (31 December 2008: US$254 billion). The largest concentration of these assets was to government and government agency securities, which amounted to US$134 billion, or 56 per cent of overall trading securities (31 December 2008: US$143 billion, 56 per cent). This included US$23 billion (31 December 2008: US$32 billion) of treasury and other eligible bills. Corporate debt and other securities were US$75 billion or 31 per cent of overall trading securities, in line with the level at 31 December 2008 of US$83 billion, or 33 per cent. Included within total securities held for trading were US$42 billion (31 December 2008: US$50 billion) of debt securities issued by banks and other financial institutions.

Debt securities, treasury and other eligible bills

At US$345 billion, total financial investments excluding equity securities were 18 per cent higher at 30 June 2009 than at 31 December 2008. Debt securities, at US$290 billion, represented the largest concentration of financial investments at 84 per cent of the total, compared with US$252 billion (86 per cent) at 31 December 2008. HSBC's holdings of corporate debt, ABSs and other securities were spread across a wide range of issuers and geographical regions, with 49 per cent invested in securities issued by banks and other financial institutions. In total, holdings in ABSs decreased by US$9 billion due to a combination of asset sales, amortisations and write-downs.

Investments in governments and government agencies of US$144 billion were 41 per cent of overall financial investments, 3 percentage points higher than at 31 December 2008. US$54 billion of these investments comprised treasury and other eligible bills.

More detailed analyses of securities held for trading and financial investments are set out in Notes 7 and 10 on the Financial Statements. For an analysis by credit quality, see page 156.

At 30 June 2009, the insurance businesses held diversified portfolios of debt and equity securities designated at fair value of US$22 billion (31 December 2008: US$20 billion). A more detailed analysis of securities held by the insurance businesses is set out on page 185.

Derivatives 

Derivatives exposures at 30 June 2009 were US$311 billion, a decline of 37 per cent from 31 December 2008, with reductions across all asset classes, notably foreign exchange, interest rate and credit derivatives. Lower volatility within the financial markets, steepening yield curves in major currencies and narrowing credit spreads led to a fall in the fair value of outstanding derivative contracts. Derivatives exposure is shown gross under IFRSs. Derivative liabilities fell for the same reasons.

Loans and advances

Loans and advances were well diversified across industry sectors and jurisdictions. At constant exchange rates, corporate and commercial lending increased, partly offset by a decline in personal lending reflecting the run down of the US consumer finance portfolios. On the same basis, gross loans and advances to customers at 30 June 2009 decreased by US$55 billion or 5 per cent from 31 December 2008. 

Personal lending remained the largest single lending category at US$438 billion, 46 per cent of total customer lending. Residential mortgages of US$256 billion represented 27 per cent of total advances to customers, the Group's largest concentration in a single exposure type. During the period, Europe surpassed North America as HSBC's largest mortgage portfolio as the HSBC Finance real estate secured portfolio ran off and mortgage lending expanded in the UK.

Corporate, commercial and financial lending amounted to 53 per cent of gross lending to customers at 30 June 2009. The largest industry concentrations were in non-bank financial institutions and commercial real estate lending at 11 per cent and 7 per cent, respectively, of total gross lending to customers.

Commercial, industrial and international trade lending fell modestly in the period reflecting the decline in economic activity and global trade. Within this category, the largest concentration of lending was to the service sector, which accounted for 6 per cent of total gross lending to customers.

Lending to non-bank financial institutions principally comprised secured lending on trading accounts, primarily repo facilities. 

Loans and advances to banks primarily represent amounts owing on trading account and HSBC's placing of its own liquidity on short-term deposit. Such lending was widely distributed across major institutions.

Further discussion of significant movements in credit quality of the personal lending and wholesale lending portfolios is set out in Areas of Special Interest on pages 145 to 155.

The following tables analyse loans by industry sector and by the location of the principal operations of the lending subsidiary or, in the case of the operations of The Hongkong and Shanghai Banking Corporation Limited, HSBC Bank plc, HSBC Bank Middle East Limited and HSBC Bank USA N.A., by the location of the lending branch.

Gross loans and advances by industry sector

	At      31 December     2008		Constant currency     effect		Movement on     a constant     currency basis		At      30 June     2009
	US$m		US$m		US$m		US$m
Gross loans and advances to customers
Personal	440,227		18,662		(21,041)		437,848
Residential mortgages2	243,337		12,271		(90)		255,518
Other personal3	196,890		6,391		(20,951)		182,330
Corporate and commercial	407,474		27,249		(35,823)		398,900
Commercial, industrial and international trade	209,840		14,805		(29,535)		195,110
Commercial real estate	70,969		3,803		(3,499)		71,273
Other property-related	30,739		1,185		(991)		30,933
Government	6,544		153		(540)		6,157
Other commercial4	89,382		7,303		(1,258)		95,427
Financial	101,085		4,958		1,766		107,809
Non-bank financial institutions	99,536		4,812		725		105,073
Settlement accounts	1,549		146		1,041		2,736
Asset-backed securities reclassified	7,991		-		(164)		7,827
Total gross loans and advances to customers	956,777		50,869		(55,262)		952,384
Gross loans and advances to banks	153,829		4,355		24,160		182,344
Total gross loans and advances	1,110,606		55,224		(31,102)		1,134,728
	At      31 December     2008		Constant currency     effect		Movement on     a constant     currency basis		At      30 June     2009
	US$m		US$m		US$m		US$m
Gross loans and advances to customers
Personal	440,227		18,662		(21,041)		437,848
Residential mortgages2	243,337		12,271		(90)		255,518
Other personal3	196,890		6,391		(20,951)		182,330
Corporate and commercial	407,474		27,249		(35,823)		398,900
Commercial, industrial and international trade	209,840		14,805		(29,535)		195,110
Commercial real estate	70,969		3,803		(3,499)		71,273
Other property-related	30,739		1,185		(991)		30,933
Government	6,544		153		(540)		6,157
Other commercial4	89,382		7,303		(1,258)		95,427
Financial	101,085		4,958		1,766		107,809
Non-bank financial institutions	99,536		4,812		725		105,073
Settlement accounts	1,549		146		1,041		2,736
Asset-backed securities reclassified	7,991		-		(164)		7,827
Total gross loans and advances to customers	956,777		50,869		(55,262)		952,384
Gross loans and advances to banks	153,829		4,355		24,160		182,344
Total gross loans and advances	1,110,606		55,224		(31,102)		1,134,728

For footnotes, see page 168.

Loans and advances to customers by industry sector and by geographical region

	Europe		Hong     Kong		Rest of     Asia-     Pacific8		Middle     East8		North    America		Latin    America	Gross     loans and     advances     to     customers		Gross loans    by industry     sector as a    % of total     gross loans
	US$m		US$m		US$m		US$m		US$m		US$m		US$m		%
At 30 June 2009
Personal	157,383		46,700		29,825		6,951		176,464		20,525		437,848		46.0
Residential mortgages5	104,529		33,808		19,483		1,950		90,903		4,845		255,518		26.8
Other personal	52,854		12,892		10,342		5,001		85,561		15,680		182,330		19.2
Corporate and commercial	219,059		47,408		42,823		17,368		47,536		24,706		398,900		41.9
Commercial, industrial and international trade	113,758		17,217		25,662		9,686		13,831		14,956		195,110		20.5
Commercial real estate	34,221		13,108		6,344		1,586		13,455		2,559		71,273		7.5
Other property-related	7,504		9,412		3,592		1,292		8,645		488		30,933		3.3
Government	1,577		861		514		1,299		257		1,649		6,157		0.6
Other commercial4	61,999		6,810		6,711		3,505		11,348		5,054		95,427		10.0
Financial	79,972		4,225		2,408		1,427		17,821		1,956		107,809		11.3
Non-bank financial institutions	78,650		3,683		2,033		1,376		17,424		1,907		105,073		11.0
Settlement accounts	1,322		542		375		51		397		49		2,736		0.3
Asset-backed securities reclassified	6,253		-		-		-		1,574		-		7,827		0.8
Total gross loans and advances to customers ('TGLAC')6	462,667		98,333		75,056		25,746		243,395		47,187		952,384		100.0
Percentage of TGLAC by  geographical region	48.6%		10.3%		7.9%		2.7%		25.6%		4.9%		100.0%
Impaired loans	10,592		994		1,331		901		15,003		3,005		31,826
- as a percentage of TGLAC	2.3%		1.0%		1.8%		3.5%		6.2%		6.4%		3.3%
Total impairment allowances	5,577		847		994		649		17,137		2,497		27,701
- as a percentage of TGLAC	1.2%		0.9%		1.3%		2.5%		7.0%		5.3%		2.9%

	Europe		Hong     Kong		Rest of     Asia-     Pacific8		Middle     East8		North    America		Latin    America		Gross     loans and     advances     to     customers	Gross loans    by industry     sector as a    % of total     gross loans
	US$m		US$m		US$m		US$m		US$m		US$m		US$m		%
At 30 June 2008
Personal	171,711		46,077		33,727		6,744		214,427		25,379		498,065		46.6
Residential mortgages5	101,620		31,774		20,295		1,491		110,373		5,068		270,621		25.3
Other personal	70,091		14,303		13,432		5,253		104,054		20,311		227,444		21.3
Corporate and commercial	259,547		50,472		51,349		17,334		50,210		28,542		457,454		42.7
Commercial, industrial and international trade	147,452		21,427		31,956		9,260		14,540		16,543		241,178		22.5
Commercial real estate	40,779		13,793		7,126		1,516		15,018		2,486		80,718		7.5
Other property-related	9,542		8,673		4,129		1,630		8,349		425		32,748		3.1
Government	1,797		244		730		1,426		264		3,054		7,515		0.7
Other commercial4	59,977		6,335		7,408		3,502		12,039		6,034		95,295		8.9
Financial	81,441		3,565		4,371		1,197		21,040		2,647		114,261		10.7
Non-bank financial institutions	79,336		2,949		4,207		1,193		20,302		2,486		110,473		10.3
Settlement accounts	2,105		616		164		4		738		161		3,788		0.4
Total gross loans and advances to customers ('TGLAC')6	512,699		100,114		89,447		25,275		285,677		56,568		1,069,780		100.0
Percentage of TGLAC by  geographical region	47.9%		9.4%		8.3%		2.4%		26.7%		5.3%		100.0%
Impaired loans7	5,889		438		845		272		10,585		2,673		20,702
- as a percentage of TGLAC	1.1%		0.4%		0.9%		1.1%		3.7%		4.7%		1.9%
Total impairment allowances	3,739		373		694		271		13,187		2,316		20,580
- as a percentage of TGLAC	0.7%		0.4%		0.8%		1.1%		4.6%		4.1%		1.9%
At 31 December 2008
Personal	141,532		46,087		29,887		7,524		195,534		19,663		440,227		46.0
Residential mortgages5	87,267		33,014		18,244		1,941		98,383		4,488		243,337		25.4
Other personal	54,265		13,073		11,643		5,583		97,151		15,175		196,890		20.6
Corporate and commercial	219,640		52,186		47,394		18,732		47,291		22,231		407,474		42.5
Commercial, industrial and international trade	121,047		20,186		29,294		10,853		15,178		13,282		209,840		21.9
Commercial real estate	32,704		14,233		6,713		1,431		13,504		2,384		70,969		7.4
Other property-related	7,666		10,296		3,541		1,587		7,234		415		30,739		3.2
Government	1,864		951		579		1,181		352		1,617		6,544		0.7
Other commercial4	56,359		6,520		7,267		3,680		11,023		4,533		89,382		9.3
Financial	62,620		2,680		4,193		1,453		27,746		2,393		101,085		10.6
Non-bank financial institutions	61,823		2,402		3,940		1,447		27,560		2,364		99,536		10.4
Settlement accounts	797		278		253		6		186		29		1,549		0.2
Asset-backed securities reclassified	6,258		-		-		-		1,733		-		7,991		0.9
Total gross loans and advances to customers ('TGLAC')6	430,050		100,953		81,474		27,709		272,304		44,287		956,777		100.0
Percentage of TGLAC by  geographical region	44.9%		10.6%		8.5%		2.9%		28.5%		4.6%		100.0%
Impaired loans	6,774		852		835		279		14,285		2,327		25,352
- as a percentage of TGLAC	1.6%		0.8%		1.0%		1.0%		5.2%		5.3%		2.6%
Total impairment allowances	3,859		733		813		414		16,090		2,000		23,909
- as a percentage of TGLAC	0.9%		0.7%		1.0%		1.5%		5.9%		4.5%		2.5%

For footnotes, see page 168.

Loans and advances to banks by geographical region

	Europe		Hong    Kong		Rest of     Asia-     Pacific8		Middle     East8		North      America		Latin      America		Gross     loans and     advances     to banks	Impair-    ment     allowances
	US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m
At 30 June 2009	72,563		41,197		34,278		6,562		10,048		17,696		182,344		(78)
At 30 June 2008	94,802		73,461		40,695		11,044		19,794		17,192		256,988		(7)
At 31 December 2008	62,012		29,646		28,665		7,476		11,458		14,572		153,829		(63)

For footnote, see page 168.

Gross loans and advances to customers by country within Rest of Asia-Pacific, Middle East and Latin America

	Residential     mortgages     US$m		Other     personal     US$m		Property-     related     US$m	Commercial,     international     trade and other     US$m			Total     US$m
At 30 June 2009
Rest of Asia-Pacific8
Australia	4,618		883		1,719		3,433		10,653
India	977		1,168		478		2,902		5,525
Indonesia	47		557		98		1,934		2,636
Japan	80		146		762		1,501		2,489
Mainland China	1,313		22		2,594		6,931		10,860
Malaysia	2,752		1,588		940		3,736		9,016
Singapore	4,587		2,975		2,341		3,087		12,990
South Korea	1,928		497		30		2,004		4,459
Taiwan	2,111		577		3		1,524		4,215
Other	1,070		1,929		971		8,243		12,213
	19,483		10,342		9,936		35,295		75,056
Middle East8 (excluding Saudi Arabia)
Egypt	2		292		136		2,105		2,535
United Arab Emirates	1,720		3,321		1,755		9,464		16,260
Other Middle East	228		1,388		987		4,348		6,951
	1,950		5,001		2,878		15,917		25,746
Latin America
Argentina	34		608		50		1,628		2,320
Brazil	541		9,721		961		10,206		21,429
Mexico	2,251		3,265		1,030		6,132		12,678
Panama	1,156		1,000		553		3,292		6,001
Other	863		1,086		453		2,357		4,759
	4,845		15,680		3,047		23,615		47,187
At 30 June 2008
Rest of Asia-Pacific8
Australia	4,872		1,101		2,294		4,432		12,699
India	1,338		1,765		433		4,184		7,720
Indonesia	29		569		18		1,372		1,988
Japan	33		181		665		3,835		4,714
Mainland China	1,243		6		2,883		8,571		12,703
Malaysia	2,740		1,574		918		4,173		9,405
Singapore	3,971		3,789		2,607		3,386		13,753
South Korea	2,342		883		74		3,304		6,603
Taiwan	2,599		979		87		1,777		5,442
Other	1,128		2,585		1,276		9,431		14,420
	20,295		13,432		11,255		44,465		89,447

At 31 December 2008
Australia	3,598		783		1,621		3,350		9,352
India	1,112		1,482		493		3,332		6,419
Indonesia	27		527		26		1,410		1,990
Japan	57		160		808		4,818		5,843
Mainland China	1,303		12		2,784		7,423		11,522
Malaysia	2,699		1,624		941		4,263		9,527
Singapore	4,209		3,301		2,448		3,521		13,479
South Korea	2,153		682		34		2,497		5,366
Taiwan	2,217		705		14		1,497		4,433
Other	869		2,367		1,085		9,222		13,543
	18,244		11,643		10,254		41,333		81,474
Middle East8 (excluding Saudi Arabia)
	1,941		5,583		3,018		17,167		27,709
Argentina	41		707		60		1,648		2,456
Brazil	376		8,585		694		9,578		19,233
Mexico	2,150		3,665		1,024		6,094		12,933
Panama	1,105		1,076		569		1,877		4,627
Other	816		1,142		452		2,628		5,038
	4,488		15,175		2,799		21,825		44,287
	Residential     mortgages     US$m		Other     personal     US$m		Property-     related     US$m	Commercial,     international     trade and other     US$m			Total     US$m
At 30 June 2008
Middle East8 (excluding Saudi Arabia)
Egypt	-		243		156		1,902		2,301
United Arab Emirates	1,298		3,550		2,278		9,405		16,531
Other Middle East	193		1,460		712		4,078		6,443
	1,491		5,253		3,146		15,385		25,275
Latin America
Argentina	47		792		84		1,878		2,801
Brazil	437		12,295		781		11,362		24,875
Mexico	2,736		5,027		982		10,671		19,416
Panama	1,099		1,039		577		1,665		4,380
Other	749		1,158		487		2,702		5,096
	5,068		20,311		2,911		28,278		56,568
At 31 December 2008
Rest of Asia-Pacific8
Australia	3,598		783		1,621		3,350		9,352
India	1,112		1,482		493		3,332		6,419
Indonesia	27		527		26		1,410		1,990
Japan	57		160		808		4,818		5,843
Mainland China	1,303		12		2,784		7,423		11,522
Malaysia	2,699		1,624		941		4,263		9,527
Singapore	4,209		3,301		2,448		3,521		13,479
South Korea	2,153		682		34		2,497		5,366
Taiwan	2,217		705		14		1,497		4,433
Other	869		2,367		1,085		9,222		13,543
	18,244		11,643		10,254		41,333		81,474
Middle East8 (excluding Saudi Arabia)
Egypt	-		275		125		2,106		2,506
United Arab Emirates	1,693		3,748		2,118		10,214		17,773
Other Middle East	248		1,560		775		4,847		7,430
	1,941		5,583		3,018		17,167		27,709
Latin America
Argentina	41		707		60		1,648		2,456
Brazil	376		8,585		694		9,578		19,233
Mexico	2,150		3,665		1,024		6,094		12,933
Panama	1,105		1,076		569		1,877		4,627
Other	816		1,142		452		2,628		5,038
	4,488		15,175		2,799		21,825		44,287

For footnote, see page 168.

Areas of special interest - credit risk

Wholesale lending

Wholesale lending covers the range of credit facilities granted to sovereign borrowers, banks, non-bank financial institutions and corporate entities. The Group's wholesale portfolios are well diversified across geographical and industry sectors, with exposure subject to portfolio controls. Overall credit quality showed some signs of deterioration during the first half of 2009, as portfolios were affected by the global economic downturn.

The widespread intervention by many governments to stabilise, and in some cases to re-capitalise, banks and other financial intermediaries had a positive effect in minimising the risk and perception of a systemic threat to financial markets. Nonetheless, credit risk levels remained high, with customers and counterparties facing the challenges of a significant reduction in available credit and liquidity and much reduced demand for their products and services. These effects were first seen in the wholesale portfolios in North America and Europe. In the first half of 2009, similar trends became evident within the portfolios in Latin America, the Middle East and Asia-Pacific, but to a lesser degree. 

HSBC has sought to identify problem areas early, if possible before they arise, and thereby minimise the likelihood of adverse situations developing and their effect. During the first half of 2009, the Group has taken steps to improve the structure of exposures, including tenor and collateral, in response to the heightened risks. HSBC also, where possible, played a positive role in maintaining credit supply. 

Insurance sector

The insurance sector continued to experience a number of challenges due to lower global asset valuations, heightened price volatility, low interest rates and strains on capital, liquidity and reserves. In the first half of 2009, HSBC continued to reduce exposure to levels consistent with the Group's overall risk appetite for this sector, concentrating that exposure on the most substantial companies.

Commercial real estate

Commercial real estate lending at 30 June 2009 represented 7 per cent of total loans and advances to customers. The sector experienced deterioration in credit quality, particularly in the UK and North America, due to a decline in valuations, increased rent shortfalls due to vacant properties or non-payment, a decline in demand for new housing, a prospective decline in rental cash flows and significantly reduced refinancing options. Impairment occurred in a limited number of cases. HSBC's exposure to the decline in credit quality was mitigated by long-standing policies on asset origination which focus on relationships with long-term customers and limited initial leverage, as well as guidelines and controls preventing higher risk concentrations. While individual regions differ in their approach, typically, origination loan to value ratios would be less than 65 per cent across the group.

Automotive sector

HSBC did not have significant direct exposure to the major US automotive manufacturers which entered Chapter 11 bankruptcy.

The automotive industry globally has seen a significant deterioration in credit quality over a prolonged period. Reduced sales volumes across most markets in the current economic downturn have increased the incidence of financial stress on for original equipment manufacturers, suppliers and dealers. HSBC has adopted a cautious approach towards this industry for a number of years, prioritising commitments to stronger global manufacturers and actively limiting exposures towards those firms most likely to be affected by an industry downturn. As a consequence of this, at 30 June 2009, HSBC did not have any significant direct exposure to the major US automotive manufacturers, which entered Chapter 11 bankruptcy restructuring in the first half of the year. HSBC had some exposure to North American automotive dealers and suppliers but this was minimal in the context of the Group. Exposure to the industry is controlled by a portfolio cap that is reviewed regularly at the Risk Management Meeting. 

Sovereign counterparties

The overall quality of the Group's sovereign portfolio remained strong during the period 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 composition of the portfolio, though, in certain regions, notably Eastern Europe, credit spreads and external ratings were subject to downgrade and volatility. The Group regularly updates its assessment of higher risk countries and adjusts its risk appetite to reflect such changes. 

Leveraged financing

A feature of the expansion of liquidity and credit in recent years was the increased volume of leveraged financing undertaken by market participants, often using structures that transferred more risk to senior lenders. 

The Group has operated a controlled approach towards leveraged finance origination with caps imposed on underwriting and final hold levels operating across the cycle. As a result, in the first half of 2009, while credit quality deteriorated, exposure to leveraged financing remained restricted and the effect of lower credit quality on impairment provisioning at a Group level was minor.

Personal lending

Rising unemployment has been the major factor in the deterioration in credit quality of personal lending portfolios in 2009. Further weakening in consumer confidence and capacity to service financial commitments may result in deteriorating payment patterns and increased delinquencies, default rates, loan impairment allowances and write-offs. HSBC monitors the effect of these factors on its personal lending portfolios and keeps under review a range of measures designed to limit the Group's exposure to loss and mitigate the effect on customers.

The commentary that follows is on a constant currency basis.

At 30 June 2009, total personal lending was US$438 billion, a decline of 5 per cent from the balance at 31 December 2008. Within personal lending, total loan impairment charges of US$10.7 billion were concentrated in North America (US$7.8 billion), Latin America (US$1.1 billion) and the UK (US$0.8 billion). 

Total US personal lending at 30 June 2009 declined by 12 per cent to US$150 billion from the end of 2008, as a result of HSBC's strategy to run off most of its existing consumer finance portfolios and improve credit quality on remaining originations. 

Other personal lending in the US fell by 13 per cent to US$78 billion, reflecting the decision to cease originations in the unsecured Consumer Lending portfolio. Card balances declined by 12 per cent to US$41 billion as HSBC tightened underwriting criteria, closed inactive accounts, decreased credit lines, tightened cash access, curtailed marketing expenditure and ceased originations for those segments most severely affected by the deterioration in the economy. Together, these steps lowered originations in line with HSBC's reduced appetite for risk in this segment. Card balances in part declined as a result of the decision to cease some private label partner relationships.

Vehicle Finance loans in the US fell by US$3.1 billion, including US$0.8 billion classified as held for sale, to US$8 billion at 30 June 2009, reflecting the decision in the second half of 2008 to cease originations and run off the existing portfolio in HSBC Finance.

In the UK, gross loans and advances to personal customers rose by 4 per cent to US$127 billion, due to growth in residential mortgage lending at HSBC Bank and First Direct as HSBC expanded its presence in the marketplace. UK mortgage lending is discussed in greater detail below. Other personal lending declined by 6 per cent to US$31 billion, driven by further tightening of underwriting criteria, which arose from a continued focus on more capital-efficient lending. Credit quality in the unsecured portfolios of M&S Money and HFC UK showed deterioration in the first half of 2009 due to the weakening economy and higher levels of unemployment. In the Partnership cards and HSBC Bank unsecured portfolios credit quality remained stable despite the deterioration in economic factors. 

Total personal lending declined by 5 per cent in the first half of 2009.

In Latin America, gross loans and advances to personal customers declined by 5 per cent to US$21 billion. Residential mortgage lending rose by 4 per cent from the end of 2008, while other personal lending declined by 8 per cent. In Brazil, other personal lending balances at 30 June 2009 were US$10 billion, a decline of 6 per cent from 31 December 2008 driven by a tightening of credit criteria on originations. In Mexico, other personal lending balances at 30 June 2009 were US$3 billion, 15 per cent lower than at 31 December 2008 as management restricted originations in the credit cards portfolio and the current delinquent portfolio was reduced.

For an analysis of loan impairment allowances and impaired loans, see page 159.

Total personal lending

	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 30 June 2009
Residential mortgages	95,569		8,960		72,559		18,344		60,086		255,518
Other personal lending	31,138		21,716		77,664		7,897		43,915		182,330
- motor vehicle finance	-		65		7,804		112		6,334		14,315
- credit cards	12,349		1,785		41,116		1,375		13,136		69,761
- second lien mortgages	1,199		2		13,602		775		470		16,048
- other	17,590		19,864		15,142		5,635		23,975		82,206
Total personal lending	126,707		30,676		150,223		26,241		104,001		437,848

Total personal lending (continued)

	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 30 June 2008
Residential mortgages	91,522		10,098		90,096		20,277		58,628		270,621
Other personal lending	40,898		29,193		94,115		9,939		53,299		227,444
- motor vehicle finance	59		131		12,777		2,324		8,609		23,900
- credit cards	15,137		1,802		46,718		1,682		14,923		80,262
- second lien mortgages	1,754		-		16,136		1,266		519		19,675
- other	23,948		27,260		18,484		4,667		29,248		103,607
Total personal lending	132,420		39,291		184,211		30,216		111,927		498,065
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

For footnotes, see page 168.

US mortgage lending

US mortgage lending, comprising residential mortgage and second lien lending, made up 20 per cent of the Group's gross loans and advances to personal customers at 30 June 2009.

Balances declined by 10 per cent from 31 December 2008, as the decision in the first quarter of 2009 to cease new originations and run off the portfolio in Consumer Lending was implemented together with the continuing run-off of the Mortgage Services portfolio and portfolio sales of prime mortgage loans by HSBC Bank USA. These reductions were partly offset by a continued slowdown in loan prepayments as there were fewer refinancing opportunities for customers, and the moratorium on foreclosure enacted by several US states.

US mortgage lending fell by 10 per cent in the first half of 2009 as the business was run off and restructured.

In aggregate, HSBC Finance's mortgage balances declined to US$69 billion at 30 June 2009 (31 December 2008: US$74 billion) as set out in the table on page 151. Within this, the portfolio of real estate secured business originated through the Consumer Lending branch network was US$44 billion at 30 June 2009, of which approximately 95 per cent were fixed rate loans and 88 per cent were first lien. At 30 June 2009, the Mortgage Services business had approximately US$25 billion in balances outstanding. Approximately 60 per cent were fixed rate loans and 85 per cent were first lien.

Mortgage lending in HSBC Bank USA declined from US$21.6 billion at 31 December 2008 to US$17.3 billion at 30 June 2009, following a series of management actions to further reduce risk in the portfolio, including selling US$4.0 billion in loans during the first half of 2009 and continuing to sell the majority of newly originated residential mortgages to government-sponsored mortgage agencies and private investors. At 30 June 2009, approximately 33 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 management actions taken to mitigate risk is provided in 'US personal lending - credit quality' on page 151.

UK mortgage lending

Total mortgage lending in the UK rose from US$79.5 billion at 31 December 2008 to US$96.8 billion at 30 June 2009 following HSBC's announcement in December 2008 that it would make available up to £15 billion (US$25 billion) of new residential mortgages during 2009. In addition, in order to support renewed activity in the first time buyer segment of the market, HSBC launched in April 2009 a market leading product for loans not exceeding a 90 per cent loan to value ratio. HSBC expanded its share of the market while staying within its targeted customer segments. 

The credit quality of the UK mortgage portfolio remained resilient despite further deterioration in the housing and employment markets and a rise in loan impairment charges from a low base as HSBC's exposure to this market remained well secured. At HSBC Bank, 30 days or more delinquency rates rose from 1.8 per cent at 31 December 2008 to 1.9 per cent at 30 June 2009. HSBC Bank intentionally reduced its market share in 2006 and 2007 as house prices continued to rise. The average loan to value ratio for new business in the first half of 2009 amounted to 49.9 per cent, a decrease of 8.8 percentage points from 31 December 2008.

The maintenance of good credit quality in difficult market conditions is further attributable to the business model pursued by HSBC in the UK. HSBC Bank originates almost all new business through its own salesforce and does not permit customer self-certification of income, lending predominantly to existing customers holding a current or savings account relationship with the bank, and minimises lending to purchase property for rental for which the bank applies higher collateral requirements.

Interest-only mortgage balances rose from US$33.8 billion at 31 December 2008 to US$42.8 billion at 30 June 2009, driven by an increase in balances at First Direct. The majority of these mortgages are offset mortgages linked to a current account. Within this portfolio, 30 days or more delinquency rates increased, but because of the current account linkage, delinquency remained at very low levels.

HSBC made up to US$25 billion available for new residential mortgages in the UK as its market share grew.

Second lien balances, which were all held by HFC UK, declined moderately on a constant currency basis to US$1.2 billion at 30 June 2009. Two months or more delinquency rates rose from 6.2 per cent at 31 December 2008 to 7.0 per cent at 30 June 2009. In the period, HFC UK announced that it would cease to originate loans in the UK.

The following table shows the levels of mortgage lending products in the various portfolios across the HSBC Group.

Mortgage lending products

	US$m		US$m		US$m		US$m		US$m		US$m
	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 30 June 2009
Residential mortgages	95,569		8,960		72,559		18,344		60,086		255,518
Second lien mortgages	1,199		2		13,602		775		470		16,048
Total mortgage lending	96,768		8,962		86,161		19,119		60,556		271,566
Second lien as a percentage of total mortgage lending	1.2%		-		15.8%		4.1%		0.8%		5.9%
Interest-only (including endowment) mortgages	42,778		31		-		1,190		1,091		45,090
Affordability mortgages, including ARMs	4,199		1,331		23,651		214		5,262		34,657
Other	161		-		-		-		138		299
Total interest-only and affordability mortgages	47,138		1,362		23,651		1,404		6,491		80,046
- as a percentage of total mortgage lending	48.7%		15.2%		27.4%		7.3%		10.7%		29.5%
Negative equity mortgages11	359		-		6,780		190		627		7,956
Other loan to value ratios greater than  90 per cent12	6,264		44		32,124		1,781		1,585		41,798
	6,623		44		38,904		1,971		2,212		49,754
- as a percentage of total mortgage lending	6.8%		0.5%		45.2%		10.3%		3.7%		18.3%

Mortgage lending products (continued)

	US$m		US$m		US$m		US$m		US$m		US$m
	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 30 June 2008
Residential mortgages	91,522		10,098		90,096		20,277		58,628		270,621
Second lien mortgages	1,754		-		16,136		1,266		519		19,675
Total mortgage lending	93,276		10,098		106,232		21,543		59,147		290,296
Second lien as a percentage of total mortgage lending	1.9%		-		15.2%		5.9%		0.9%		6.8%
Interest-only (including endowment) mortgages	37,270		532		-		1,408		1,115		40,325
Affordability mortgages, including ARMs	8,304		820		31,995		-		4,961		46,080
Other	392		-		-		-		287		679
Total interest-only and affordability mortgages	45,966		1,352		31,995		1,408		6,363		87,084
- as a percentage of total mortgage lending	49.3%		13.4%		30.1%		6.5%		10.8%		30.0%
Negative equity mortgages11	913		-		9,673		46		127		10,759
Other loan to value ratios greater than  90 per cent12	10,242		151		39,098		1,726		666		51,883
	11,155		151		48,771		1,772		793		62,642
- as a percentage of total mortgage lending	12.0%		1.5%		45.9%		8.2%		1.3%		21.6%
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 mortgages11	367		-		7,655		86		1,635		9,743
Other loan to value ratios greater than  90 per cent12	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%

For footnotes, see page 168.

HSBC Finance held approximately US$69 billion of residential mortgage and second lien loans and advances to personal customers secured on real estate at 30 June 2009, 16 per cent of the Group's gross loans and advances to personal customers. For a breakdown of these balances by portfolio, see below.

HSBC Finance mortgage lending13

	At 30 June 2009						At 30 June 2008						At 31 December 2008
	US				Other		US				Other		US				Other
	Mortgage		Consumer		mortgage		Mortgage		Consumer		mortgage		Mortgage		Consumer		mortgage
	Services		Lending		lending		Services		Lending		lending		Services		Lending		lending
	US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m
Fixed rate	15,060		41,561		107		18,180		46,320		1,963		16,288		43,873		91
Other	9,959		2,169		7		13,265		2,714		130		11,339		2,324		35
Adjustable-rate	8,603		2,169		7		10,638		2,714		128		9,530		2,324		33
Interest only	1,356		-		-		2,627		-		2		1,809		-		2
	25,019		43,730		114		31,445		49,034		2,093		27,627		46,197		126
First lien	21,256		38,325		84		26,049		42,582		1,048		23,188		40,334		93
Second lien	3,763		5,405		30		5,396		6,452		1,045		4,439		5,863		33
	25,019		43,730		114		31,445		49,034		2,093		27,627		46,197		126
Stated income14	4,875		-		-		6,814		-		-		5,667		-		-

For footnotes, see page 168.

US personal lending - credit quality

Credit quality deterioration continued across the US personal lending portfolios during the first half of 2009 as accounts continued to season and run off. As the economy weakened further, levels of unemployment and personal bankruptcy filings rose and house price depreciation continued, restricting the ability of many customers to refinance and access any equity retained in their homes. 

Residential mortgages

HSBC continued to manage down residential mortgage exposure in the US in line with its exit strategy for non-prime real estate secured exposure in the US, as house prices depreciated in the first half of 2009. 

The two months and over contractual delinquency in the real estate secured portfolios of HSBC Finance and HSBC Bank USA increased both in dollar and percentage terms, excluding Mortgage Services, as credit quality continued to deteriorate and as fewer properties moved through to repossession. Delays in processing repossessions were caused by backlogs in legal proceedings as a result of government restrictions in some states which lengthened the repossession process. Delinquency rates in HSBC Finance remained high due to portfolio seasoning and the reduction in balances as the portfolio run-off continued.

The Consumer Lending business continued to experience rising delinquency levels, driven by deterioration in portions of the first lien portfolio (particularly the 2006 and 2007 vintages), due to the economic factors described above, the higher early stage delinquencies and the delays in repossessions. Two months or more delinquencies rose from 12.1 per cent of loans and advances at 31 December 2008 to 14.9 per cent at 30 June 2009, as the decision in the first quarter of 2009 to cease originations and run off the existing balances in this portfolio took effect. Delinquent balances increased to US$6.5 billion from US$5.6 billion. To date, delinquency levels in the Consumer Lending portfolio, which may have been affected by branch closures, continue to perform within expectations.

HSBC continued to reduce exposure to residential mortgages in the US, particularly in non-prime real estate secured lending.

In Mortgage Services, delinquency rates stopped rising as the portfolio became more fully seasoned, remaining unchanged at 17.0 per cent. In line with the continued run off of the portfolio, in dollar terms, two months or more delinquency in Mortgage Services declined from US$4.7 billion at 31 December 2008 to US$4.3 billion at 30 June 2009.

At HSBC Bank USA, delinquencies rose throughout the first half of 2009 with credit quality deterioration seen in the first lien prime residential mortgage, Home Equity Line of Credit and Home Equity Loan portfolios. Deterioration was particularly acute in business previously sourced through brokers. HSBC Bank USA sold US$4.0 billion of mortgage portfolios to third parties during the first half of 2009 and continued to sell the majority of mortgage loan originations to government-sponsored enterprises and private investors. These loans were of a higher credit quality than the average within the existing portfolio which contributed to the deterioration in credit delinquency statistics described above. The decline in balances also contributed to an increase in delinquency rates. Two months or more delinquencies on HSBC Bank USA mortgage portfolios rose from 3.7 per cent at 31 December 2008 to 5.7 per cent at 30 June 2009 and from US$0.9 billion to US$1.1 billion, respectively. 

Losses on foreclosed properties rose from 31 December 2008 as home values continued to decline (see page 155). The number of properties repossessed declined for two reasons; volumes of foreclosure cases continued to be constrained by regulatory and government action, and HSBC approached customers to provide financial assistance in restructuring their debts to avoid foreclosure. HSBC has taken various measures to assist customers facing difficulties with their payments, restructuring and modifying loans where it appeared likely that the loan could be serviced on revised terms. For further details, see 'HSBC Finance loan modifications and re-ageing' on page 154. 

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 a property. For HSBC Finance Mortgage Services second lien mortgages, the proportion of customers two months or more behind on contractual payments declined from 17.7 per cent at 31 December 2008 to 16.4 per cent at 30 June 2009 as credit quality began to stabilise. In Consumer Lending, two months or more delinquency rates rose to 16.1 per cent from 14.5 per cent over the same period, primarily due to a decline in balances. In HSBC Bank USA, delinquency rates on second liens rose from 3.8 per cent to 4.8 per cent over the same period. Loss on default of second lien loans typically approaches 100 per cent of the amount owed, particularly during periods of house price depreciation when the value of the collateral in the property, which is applied initially to the first lien loan, is eroded leaving no surplus available to support the repayment of second liens.

HSBC Finance's exposure to stated-income mortgages, which represented a small part of the real-estate secured loan book, also continued to decline. These mortgages are of higher than average risk as they were underwritten on the basis of borrowers' representations of annual income and were not verified by receipt of supporting documentation. These loan balances declined from US$5.7 billion at 31 December 2008 to US$4.9 billion at 30 June 2009. Two months or more delinquency rates on stated-income loans declined from 27.7 per cent at the end of 2008 to 26.2 per cent at 30 June 2009. Amounts of two months or more delinquency on stated-income loans declined from US$1.6 billion at 31 December 2008 to US$1.3 billion at 30 June 2009.

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. Affordability mortgage balances in HSBC Finance declined from US$14 billion at 31 December 2008 to US$12 billion at 30 June 2009 as no originations were made and the existing portfolio continued to run off. These mortgages continued to experience heightened levels of delinquency. The aggregate balances of loans which reached their first interest rate reset continued to decline in the first half of 2009.

HSBC Finance: geographical concentration of US lending13,15

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

For footnotes, see page 168. 

Credit cards

In the US credit card portfolio, two months or more delinquencies rose from 6.6 per cent at 31 December 2008 to 7.3 per cent at 30 June 2009, mainly because of reduced loan balances. The same factor produced a decline in delinquent balances from US$2.0 billion to US$1.9 billion over the same period. Two months or more delinquencies in private label cards declined from 4.3 per cent at 31 December 2008 to 4.1 per cent at 30 June 2009 and delinquent balances declined from US$0.7 billion to US$0.6 billion over the same period. Delinquency balances were lower because of an extended seasonal benefit of increased cash available to customers as a result of various government economic stimulus programmes and lower energy costs, actions taken by HSBC in 2008 and 2009 to reflect lower risk appetite and slow growth in originations, lower consumer spending and higher levels of personal bankruptcy filings which accelerated the write-off of some accounts. The credit performance of the card portfolio was affected by the steady decline in employment and housing markets, particularly in those states which had previously experienced the greatest house price appreciation. 

The credit quality of the non-prime portfolio deteriorated, but at a lower rate than prime cards. A substantial majority of non-prime customers are in rental property and have demonstrated a better payment history than customers who are homeowners. In addition, the rise in unemployment has resulted in less credit deterioration in the non-prime portfolios compared with prime portfolios.

Motor vehicle finance

Two months or more delinquencies in vehicle finance declined from 5.0 per cent at 31 December 2008 to 4.0 per cent at 30 June 2009, driven by portfolio seasoning, and the cash flow to consumers from government stimulus programmes.

Other personal lending

HSBC Finance's unsecured lending portfolio, in runߛoff since the first quarter of 2009, experienced broadly stable delinquency rates as an improvement in collection activity in the first half of 2009 was offset by the continued economic deterioration, which particularly affected the 2006 and 2007 vintages. 

US personal lending - loan delinquency

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

Two months and over contractual delinquency16 

	Quarter ended
	30 Jun     2009		31 Mar     2009	31 Dec     2008		30 Sep     2008			30 Jun     2008		31 Mar     2008	31 Dec    2007		30 Sep     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	10,070		9,892		9,236		7,061		5,984		5,757		5,167		4,077
Second lien mortgage lending	1,676		1,772		1,790		1,616		1,585		1,638		1,602		1,249
Vehicle finance	310		269		541		512		445		370		488		451
Credit card	1,864		1,992		2,029		1,871		1,700		1,782		1,830		1,581
Private label	636		659		701		624		590		591		598		536
Personal non-credit card	2,709		2,855		2,998		2,745		2,606		2,650		2,634		2,238
Total	17,265		17,439		17,295		14,429		12,910		12,788		12,319		10,132
	%		%		%		%		%		%		%		%
Residential mortgages	13.89		12.82		11.42		8.23		6.65		5.96		5.23		4.04
Second lien mortgage lending	12.35		12.59		12.26		10.59		9.83		9.76		9.10		6.86
Vehicle finance	3.97		2.79		4.98		4.27		3.48		2.83		3.68		3.40
Credit card	7.25		7.14		6.64		6.07		5.57		5.81		5.68		5.09
Private label	4.08		4.28		4.26		3.97		3.65		3.66		3.43		3.28
Personal non-credit card	18.02		18.30		17.70		15.31		14.00		13.71		13.16		10.88
Total	11.49		10.92		10.16		8.13		7.01		6.64		6.18		5.05

Two months and over contractual delinquency16 (continued)

	Quarter ended
	30 Jun     2009		31 Mar     2009	31 Dec     2008		30 Sep     2008			30 Jun     2008		31 Mar     2008	31 Dec    2007		30 Sep     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	4,257		4,535		4,699		4,227		4,260		4,484		4,298		3,395
- first lien	3,642		3,824		3,912		3,420		3,363		3,456		3,248		2,554
- second lien	615		711		787		807		897		1,028		1,050		841
Consumer Lending	6,514		6,203		5,577		3,866		2,777		2,484		2,100		1,605
- first lien	5,640		5,322		4,724		3,176		2,194		1,954		1,622		1,259
- second lien	874		881		853		690		583		530		478		346
	%		%		%		%		%		%		%		%
Mortgage Services:
- first lien	17.13		17.24		16.87		14.16		12.91		12.41		11.02		8.13
- second lien	16.35		17.44		17.72		16.62		16.63		16.99		15.57		11.28
- total	17.01		17.27		17.01		14.57		13.55		13.22		11.87		8.73
Consumer Lending:
- first lien	14.72		13.52		11.71		7.72		5.15		4.52		3.74		2.92
- second lien	16.17		15.43		14.54		11.27		9.04		7.96		6.97		5.03
- total	14.90		13.76		12.07		8.18		5.66		4.98		4.18		3.21

For footnote, see page 168. 

Renegotiated loans 

Restructuring activity is designed to manage customer relationships, maximise collection opportunities and, if possible, avoid foreclosure or repossession. Such activities include extended payment arrangements, lower interest rates, approved external debt management plans, deferring foreclosure, modification, loan rewrites and/or deferral of payments pending a change in circumstances. Restructuring is most commonly applied to 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 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 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 accounts which have been restructured, the use of roll rate methodology ensures that this factor is taken into account when calculating impairment allowances.

Renegotiated loans that would otherwise be past due or impaired totalled US$40.3 billion at 30 June 2009 (31 December 2008: US$34.9 billion). The largest concentration was in the US and amounted to US$34.7 billion (31 December 2008: US$31.0 billion) or 86 per cent (31 December 2008: 89 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. 

HSBC Finance loan modifications and re-ageing

HSBC Finance continued to refine its customer account management policies and practices, including account modification and re-age programmes. Through the Foreclosure Avoidance and Account Modification programmes, HSBC Finance modified over 69,000 loans in Consumer Lending and Mortgage Services during the six months ended 30 June 2009, with an aggregate balance of US$9.8 billion, including some which may also have been re-aged.

At 30 June 2009 the total balance outstanding on HSBC Finance real estate secured accounts which have been re-aged or modified was US$31.2 billion, compared with US$26.2 billion at the end of 2008. At 30 June 2009, 26 per cent of these balances were two or more months delinquent, broadly consistent with the end of 2008.

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

HSBC Finance foreclosed properties in the US	Half year		Quarter ended
	to 30 June     2009	30 June     2009		31 March     2009		31 December     2008		30 September     2008
Number of foreclosed properties at end of period	7,286		7,286		8,866		9,589		11,182
Number of properties added to foreclosed inventory  in the half year/quarter	7,803		3,550		4,253		3,398		5,562
Average loss on sale of foreclosed properties17	15%		13%		17%		13%		10%
Average total loss on foreclosed properties18	52%		52%		52%		47%		42%
Average time to sell foreclosed properties (days)	197		194		201		180		174

For footnotes, see page 168.

Credit quality of financial instruments 

The four credit quality classifications set out below and defined on page 217 of the Annual Report and Accounts 2008 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      lending19		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

For footnote, see page 168.

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 104 to 110 and 125 to 126, 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

	Neither past due nor impaired						Past due				Impair-
	Strong		Medium24		Sub-    standard		but not     impaired		Impaired	ment     allowances20			Total
	US$m		US$m		US$m		US$m		US$m		US$m		US$m
At 30 June 2009
Cash and balances at central banks	53,720		2,385		263		-		-				56,368
Items in the course of collection from other banks	14,629		1,984		-		-		-				16,613
Hong Kong Government certificates of indebtedness	16,156		-		-		-		-				16,156
Trading assets21	292,227		93,055		3,592								388,874
- treasury and other eligible bills	22,673		153		164								22,990
- debt securities	169,211		20,354		1,305								190,870
- loans and advances to banks	55,632		17,273		731								73,636
- loans and advances to customers	44,711		55,275		1,392								101,378
Financial assets designated at fair value21	9,030		12,233		38								21,301
- treasury and other eligible bills	195		300		-								495
- debt securities	7,854		11,933		38								19,825
- loans and advances to banks	204		-		-								204
- loans and advances to customers	777		-		-								777
Derivatives21	239,506		67,794		3,496								310,796
Loans and advances held at amortised cost	603,762		404,686		48,522		45,692		32,066		(27,779)		1,106,949
- loans and advances to banks	143,077		37,604		1,389		34		240		(78)		182,266
- loans and advances to customers22	460,685		367,082		47,133		45,658		31,826		(27,701)		924,683
Financial investments	304,666		36,466		2,861		23		628				344,644
- treasury and other similar bills	50,617		2,103		1,542		-		-				54,262
- debt securities	254,049		34,363		1,319		23		628				290,382
Other assets	12,782		20,368		921		397		723				35,191
- endorsements and acceptances	1,241		7,826		396		6		12				9,481
- accrued income and other	11,541		12,542		525		391		711				25,710
At 30 June 2008
Cash and balances at central banks	11,266		2,136		71		-		-				13,473
Items in the course of collection from other banks	13,851		2,810		58		-		-				16,719
Hong Kong Government certificates of indebtedness	14,378		-		-		-		-				14,378
Trading assets21	297,058		113,721		20,150								430,929
- treasury and other eligible bills	5,771		405		1,241								7,417
- debt securities	158,827		24,053		8,602								191,482
- loans and advances to banks	95,359		-		-								95,359
- loans and advances to customers	37,101		89,263		10,307								136,671
Financial assets designated at fair value21	5,307		18,668		43								24,018
- treasury and other eligible bills	194		46		-								240
- debt securities	4,706		18,607		43								23,356
- loans and advances to banks	407		14		-								421
- loans and advances to customers	-		1		-								1
Derivatives21	200,040		57,246		3,378								260,664
Loans and advances held at amortised cost	703,377		516,441		36,259		49,973		20,718		(20,587)		1,306,181
- loans and advances to banks	213,386		42,475		999		112		16		(7)		256,981
- loans and advances to customers22,23	489,991		473,966		35,260		49,861		20,702		(20,580)		1,049,200
Financial investments	231,624		31,289		2,167		-		189				265,269
- treasury and other similar bills	25,277		2,577		74		-		-				27,928
- debt securities	206,347		28,712		2,093		-		189				237,341
Other assets	14,888		27,406		1,724		67		400				44,485
- endorsements and acceptances	2,621		10,147		502		5		14				13,289
- accrued income and other	12,267		17,259		1,222		62		386				31,196

	Neither past due nor impaired						Past due				Impair-
	Strong		Medium24		Sub-    standard		but not     impaired		Impaired	ment      allowances20			Total
	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		2,037		289		-		-				52,396
Items in the course of collection from other banks	4,541		1,396		-		66		-				6,003
Hong Kong Government certificates of indebtedness	15,358		-		-		-		-				15,358
Trading assets21	303,307		98,977		3,167								405,451
- treasury and other eligible bills	32,314		92		52								32,458
- debt securities	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 value21	5,288		11,434		818								17,540
- treasury and other eligible bills	204		31		-								235
- debt securities	4,129		11,402		818								16,349
- loans and advances to banks	230		-		-								230
- loans and advances to customers	725		1		-								726
Derivatives21	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 customers22	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

For footnotes, see page 168.

Past due but not impaired gross financial instruments 

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-     Pacific8		Middle     East8		North     America25		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 30 June 2009	3,772		1,416		2,374		2,585		31,515		4,030		45,692
At 30 June 2008	3,167		2,151		3,599		2,322		35,827		2,907		49,973
At 31 December 2008	3,800		1,805		1,863		2,457		35,247		3,250		48,422

For footnotes, see page 168.

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

	At      30 June      2009		At      30 June      2008		At      31 December      2008
	US$m		US$m		US$m
Banks	34		112		41
Customers	45,658		49,861		48,381
Personal25	36,955		38,912		39,592
Corporate and commercial	8,546		10,713		8,603
Financial	157		236		186
	45,692		49,973		48,422

For footnote, see page 168.

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

	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 30 June 2009
Loans and advances held at amortised cost	29,432		10,035		5,478		528		219		45,692
- loans and advances to banks	33		1		-		-		-		34
- loans and advances to customers	29,399		10,034		5,478		528		219		45,658
Financial investments - debt securities	23		-		-		-		-		23
Other assets	325		47		12		4		9		397
- endorsements and acceptances	2		1		3		-		-		6
- other	323		46		9		4		9		391
	29,780		10,082		5,490		532		228		46,112
At 30 June 2008
Loans and advances held at amortised cost	35,646		9,496		3,934		734		163		49,973
- loans and advances to banks	112		-		-		-		-		112
- loans and advances to customers25	35,534		9,496		3,934		734		163		49,861
Other assets	26		32		6		2		1		67
- endorsements and acceptances	4		1		-		-		-		5
- other	22		31		6		2		1		62
	35,672		9,528		3,940		736		164		50,040
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

For footnote, see page 168.

Impaired loans and advances

Impaired loans and advances to customers and banks by industry sector

	Impaired loans and advances at 30 June 2009						Impaired loans and advances at 30 June 2008						Impaired loans and advances  at 31 December 2008
	Individ-    ually    assessed		Collect-    ively    assessed		Total		Individ-    ually    assessed		Collect-    ively    assessed		Total		Individ-    ually    assessed35		Collect-    ively    assessed35		Total
	US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m
Banks	240		-		240		16		-		16		70		-		70
Customers	13,449		18,377		31,826		6,061		14,641		20,702		7,922		17,430		25,352
Personal25	1,957		17,966		19,923		1,417		14,360		15,777		1,538		17,071		18,609
Corporate and commercial	10,820		410		11,230		4,483		280		4,763		6,086		357		6,443
Financial	672		1		673		161		1		162		298		2		300
	13,689		18,377		32,066		6,077		14,641		20,718		7,992		17,430		25,422

For footnotes, see page 168.

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

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

	Europe		Hong      Kong		Rest of     Asia-     Pacific8		Middle      East8		North     America		Latin     America		Total
	US$m		US$m		US$m		US$m		US$m		US$m		US$m
At 30 June 2009
Gross loans and advances
Individually assessed impaired loans26	8,563		960		1,079		615		1,364		868		13,449
Collectively assessed27	454,104		97,373		73,977		25,131		242,031		46,319		938,935
Impaired loans26	2,029		34		252		286		13,639		2,137		18,377
Non-impaired loans28	452,075		97,339		73,725		24,845		228,392		44,182		920,558
Gross loans and advances	462,667		98,333		75,056		25,746		243,395		47,187		952,384
Impairment allowances
Individually assessed	3,268		503		458		265		445		375		5,314
Collectively assessed	2,309		344		536		384		16,692		2,122		22,387
Total impairment allowances	5,577		847		994		649		17,137		2,497		27,701
	%		%		%		%		%		%		%
Individually assessed allowances as a percentage of individually assessed loans and advances	38.2		52.4		42.4		43.1		32.6		43.2		39.5
Collectively assessed allowances as a percentage of collectively assessed loans  and advances	0.5		0.4		0.7		1.5		6.9		4.6		2.4
Total allowances as a percentage of total  gross loans and advances	1.2		0.9		1.3		2.5		7.0		5.3		2.9

Impairment allowances on loans and advances to customers by geographical region (continued)

	Europe		Hong      Kong		Rest of     Asia-     Pacific8		Middle      East8		North     America		Latin     America		Total
	US$m		US$m		US$m		US$m		US$m		US$m		US$m
At 30 June 2008
Gross loans and advances
Individually assessed impaired loans26	4,113		380		487		149		486		446		6,061
Collectively assessed27	508,586		99,734		88,960		25,126		285,191		56,122		1,063,719
Impaired loans26	1,776		58		358		123		10,099		2,227		14,641
Non-impaired loans28,29	506,810		99,676		88,602		25,003		275,092		53,895		1,049,078
Gross loans and advances	512,699		100,114		89,447		25,275		285,677		56,568		1,069,780
Impairment allowances
Individually assessed	1,567		133		207		133		160		204		2,404
Collectively assessed	2,172		240		487		138		13,027		2,112		18,176
Total impairment allowances	3,739		373		694		271		13,187		2,316		20,580
	%		%		%		%		%		%		%
Individually assessed allowances as a percentage of individually assessed loans and advances	38.1		35.0		42.5		89.3		32.9		45.7		39.7
Collectively assessed allowances as a percentage of collectively assessed loans  and advances	0.4		0.2		0.5		0.5		4.6		3.8		1.7
Total allowances as a percentage of total  gross loans and advances	0.7		0.4		0.8		1.1		4.6		4.1		1.9
At 31 December 2008
Gross loans and advances
Individually assessed impaired loans26,35	4,817		813		705		160		832		595		7,922
Collectively assessed27	425,233		100,140		80,769		27,549		271,472		43,692		948,855
Impaired loans26,35	1,957		39		130		119		13,453		1,732		17,430
Non-impaired loans28	423,276		100,101		80,639		27,430		258,019		41,960		931,425
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
	%		%		%		%		%		%		%
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 168.

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

	At 30 June 2009						At 30 June 2008						At 31 December 2008
	Individ-    ually    assessed		Collect-    ively    assessed		Total		Individ-    ually    assessed		Collect-    ively    assessed		Total		Individ-    ually    assessed		Collect-    ively    assessed		Total
	US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m
Banks30	78		-		78		7		-		7		63		-		63
Customers	5,314		22,387		27,701		2,404		18,176		20,580		3,284		20,625		23,909
Personal	384		20,034		20,418		336		16,489		16,825		312		18,657		18,969
Corporate and commercial	4,624		2,138		6,762		2,029		1,619		3,648		2,845		1,795		4,640
Financial	306		215		521		39		68		107		127		173		300
	5,392		22,387		27,779		2,411		18,176		20,587		3,347		20,625		23,972

For footnote, see page 168.

Movement in impairment allowances on loans and advances

	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 off	-		(505)		(9,978)		(10,483)
Recoveries of loans and advances written off in  previous years	-		34		343		377
Charge to income statement	13		2,237		11,083		13,333
Exchange and other movements	2		264		314		580
At 30 June 2009	78		5,314		22,387		27,779
At 1 January 2008	7		2,699		16,506		19,212
Amounts written off	-		(370)		(8,436)		(8,806)
Recoveries of loans and advances written off in  previous years	-		58		421		479
Charge to income statement	-		332		9,625		9,957
Exchange and other movements	-		(315)		60		(255)
At 30 June 2008	7		2,404		18,176		20,587
At 1 July 2008	7		2,404		18,176		20,587
Amounts written off	-		(454)		(8,695)		(9,149)
Recoveries of loans and advances written off in  previous years	-		55		300		355
Charge to income statement	54		1,678		12,442		14,174
Exchange and other movements	2		(399)		(1,598)		(1,995)
At 31 December 2008	63		3,284		20,625		23,972

Net loan impairment charge to the income statement by geographical region

	Europe    US$m		Hong      Kong     US$m		Rest of     Asia-     Pacific8     US$m		Middle     East8     US$m		North     America     US$m		Latin     America     US$m		Total     US$m
Half-year to 30 June 2009
Individually assessed impairment allowances
New allowances	1,492		151		199		154		463		134		2,593
Release of allowances no longer required	(166)		(17)		(37)		(10)		(65)		(14)		(309)
Recoveries of amounts previously written  off	(22)		(4)		(4)		(1)		-		(3)		(34)
	1,304		130		158		143		398		117		2,250
Collectively assessed impairment allowances
New allowances net of allowance releases	1,219		153		415		261		7,991		1,387		11,426
Recoveries of amounts previously written  off	(107)		(12)		(50)		(11)		(43)		(120)		(343)
	1,112		141		365		250		7,948		1,267		11,083
Total charge for impairment losses	2,416		271		523		393		8,346		1,384		13,333
Banks	7		-		-		6		-		-		13
Customers	2,409		271		523		387		8,346		1,384		13,320
	%		%		%		%		%		%		%
Charge for impairment losses as a percentage of closing gross loans and advances (annualised)	0.91		0.39		0.96		2.45		6.64		4.30		2.37
	US$m		US$m		US$m		US$m		US$m		US$m		US$m
At 30 June 2009
Impaired loans	10,740		994		1,331		921		15,075		3,005		32,066
Impairment allowances	5,655		847		994		649		17,137		2,497		27,779
Half-year to 30 June 2008
Individually assessed impairment allowances
New allowances	476		30		52		10		160		22		750
Release of allowances no longer required	(253)		(14)		(23)		(25)		(31)		(14)		(360)
Recoveries of amounts previously written  off	(16)		(6)		(12)		(3)		(17)		(4)		(58)
	207		10		17		(18)		112		4		332
Collectively assessed impairment allowances
New allowances net of allowance releases	1,195		81		350		73		7,017		1,330		10,046
Recoveries of amounts previously written  off	(154)		(14)		(43)		(14)		(32)		(164)		(421)
	1,041		67		307		59		6,985		1,166		9,625
Total charge for impairment losses	1,248		77		324		41		7,097		1,170		9,957
Banks	-		-		-		-		-		-		-
Customers	1,248		77		324		41		7,097		1,170		9,957
	%		%		%		%		%		%		%
Charge for impairment losses as a percentage of closing gross loans and advances (annualised)	0.41		0.09		0.50		0.23		4.67		3.19		1.51
	US$m		US$m		US$m		US$m		US$m		US$m		US$m
At 30 June 2008
Impaired loans23	5,905		438		845		272		10,585		2,673		20,718
Impairment allowances	3,746		373		694		271		13,187		2,316		20,587

	Europe    US$m		Hong      Kong     US$m		Rest of     Asia-     Pacific8     US$m		Middle     East8     US$m		North     America     US$m		Latin     America     US$m		Total     US$m
Half-year to 31 December 2008
Individually assessed impairment allowances
New allowances	1,091		335		171		20		237		138		1,992
Release of allowances no longer required	(87)		(11)		(30)		(11)		(49)		(17)		(205)
Recoveries of amounts previously written  off	(22)		(4)		(5)		-		(23)		(1)		(55)
	982		320		136		9		165		120		1,732
Collectively assessed impairment allowances
New allowances net of allowance releases	1,283		174		402		237		9,355		1,291		12,742
Recoveries of amounts previously written  off	(102)		(15)		(47)		(13)		(28)		(95)		(300)
	1,181		159		355		224		9,327		1,196		12,442
Total charge for impairment losses	2,163		479		491		233		9,492		1,316		14,174
Banks	54		-		-		-		-		-		54
Customers	2,109		479		491		233		9,492		1,316		14,120
	%		%		%		%		%		%		%
Charge for impairment losses as a percentage of closing gross loans and advances (annualised)	0.87		0.73		0.89		1.32		6.65		4.45		2.54
	US$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 168.

Impairment allowances as a percentage of loans and advances31

	At      30 June      2009		At      30 June      2008		At      31 December      2008
	%		%		%
Banks
Individually assessed impairment allowances32	0.06		-		0.06
Customers33	3.13		2.04		2.63
Individually assessed impairment allowances33	0.60		0.24		0.36
Collectively assessed impairment allowances33	2.53		1.80		2.27

For footnotes, see page 168.

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

	Europe		Hong      Kong		Rest of     Asia-     Pacific8		Middle      East8		North     America		Latin     America		Total
	%		%		%		%		%		%		%
Half-year to 30 June 2009
New allowances net of allowance releases	1.39		0.59		1.57		3.05		6.52		6.77		3.17
Recoveries	(0.07)		(0.03)		(0.15)		(0.09)		(0.03)		(0.55)		(0.09)
Total charge for impairment losses	1.32		0.56		1.42		2.96		6.49		6.22		3.08
Amount written off net of recoveries	0.60		0.28		0.94		1.19		5.63		5.05		2.34
Half-year to 30 June 2008
New allowances net of allowance releases	0.66		0.20		0.88		0.48		4.89		5.07		2.14
Recoveries	(0.08)		(0.04)		(0.12)		(0.14)		(0.04)		(0.64)		(0.10)
Total charge for impairment losses	0.58		0.16		0.76		0.34		4.85		4.43		2.04
Amount written off net of recoveries	0.52		0.16		0.60		0.40		3.98		3.74		1.71
Half-year to 31 December 2008
New allowances net of allowance releases	1.03		1.03		1.21		1.81		6.52		5.43		2.94
Recoveries	(0.06)		(0.04)		(0.12)		(0.08)		(0.04)		(0.38)		(0.08)
Total charge for impairment losses	0.97		0.99		1.09		1.73		6.48		5.05		2.86
Amount written off net of recoveries	0.50		0.22		0.68		0.64		4.30		3.64		1.79

For footnote, see page 168.

Impaired loans and net loan impairment allowances

Reported loan impairment charges rose to US$13.3 billion in the first half of 2009, an increase of 34 per cent compared with the first half of 2008 and a decrease of 6 per cent on the second half of 2008. On an underlying basis, loan impairment charges rose by 42 per cent from the first half of 2008, and declined by 3 per cent from the second half of 2008. The following 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 increased by 39 per cent in the first half of 2009 compared with the first half of 2008, to US$14.0 billion. Releases and recoveries of allowances were 3 per cent lower than the first half of 2008 at US$0.7 billion. Total impaired loans to customers amounted to US$32 billion at 30 June 2009, an increase of 26 per cent since the end of 2008. Impaired loans were 3 per cent of gross customer loans and advances at both 30 June 2009 and 31 December 2008.

In Europe, new loan impairment allowances were US$2.7 billion, a rise of 62 per cent compared with the first half of 2008, driven by an increase from individually assessed credit relationships. Impaired loans at US$10.7 billion were 57 per cent higher than at the end of 2008. Higher loan impairment allowances in the UK reflected some large individually assessed impairments against a number of corporate and commercial exposures as well as the effect of some credit quality deterioration across the personal portfolios. In the residential mortgage portfolios, credit quality was only modestly weaker due to higher unemployment and continued house price depreciation; however, HSBC's exposure to this market remained well secured with estimated average loan-to-value ratios of below 60 per cent for the HSBC Bank mortgage portfolio. Credit quality in the unsecured portfolios deteriorated slightly with delinquency rising as some consumers found it more difficult to repay loans in the light of rising unemployment. Loan impairment allowances in the corporate and commercial portfolios rose as continued weakness in the property market led to higher impairment charges against firms in real-estate related sectors. In Turkey, new loan impairment allowances rose in personal portfolios due to recent growth and rising delinquencies in credit cards, in the deteriorating economic environment.

Releases and recoveries in Europe were US$0.3 billion, a decrease of 14 per cent from the first half of 2008, primarily due to the non-recurrence of a portfolio sale.

In Hong Kong, new loan impairment allowances increased to US$0.3 billion from a low base, driven largely by deterioration in credit quality in the commercial portfolios as contraction in global trade severely affected some exporters. Impaired loans rose to US$1.0 billion for the same reasons. Loan impairment allowances in the personal portfolio increased, though still at low levels, reflecting the effect of rising unemployment and bankruptcy on the unsecured lending portfolio. Residential mortgage lending in Hong Kong continued to be well-secured.

Impaired loans in North America rose by 6 per cent to US$15 billion in the first half of 2009.

In the Rest of Asia-Pacific region, new loan impairment allowances rose by 78 per cent to US$0.6 billion, primarily from deterioration in credit quality in credit cards and personal loans within the personal lending portfolio in India, and on a number of commercial exposures. Impaired loans in the region rose by 59 per cent from 31 December 2008 to US$1.3 billion, driven by downgrades in a broad range of commercial exposures particularly in India.

Releases and recoveries in the Rest of Asia-Pacific region rose by 34 per cent compared with the first half of 2008 to US$91 million. 

In the Middle East, new loan impairment allowances rose markedly from the first half of 2008, largely due a small number of large corporate and commercial counterparties affected by the slowdown in economic activity and lower equity market values. This was in addition to rising impairments from higher delinquency rates in credit cards and personal loans as credit quality in the region deteriorated and construction and infrastructure development contracted sharply reducing employment. Impaired loans rose by US$0.6 billion from the end of 2008 to US$0.9 billion for the same reasons.

New loan impairment allowances in North America rose by 18 per cent to US$8.5 billion, driven by continuing weakness across the personal portfolios and, to a lesser extent, in the corporate and commercial portfolios. Impaired loans rose by 6 per cent from 31 December 2008 to US$15 billion. The weakness in US credit quality was due to the steady increase in unemployment, portfolio seasoning, rising levels of personal bankruptcy filings and continued house price depreciation, discussed in more detail on page 151. Partly offsetting these factors was a marked reduction in overall lending as HSBC implemented decisions to cease originations and run-off the existing balances in Mortgage Services, Consumer Lending and vehicle finance within HSBC Finance. Balances in the cards portfolio were also curtailed by a series of decisions to limit originations and, in certain segments, cease writing new business. In addition, HSBC Bank USA sold US$4.0 billion of mortgage portfolios to third parties during the first half of 2009 and continued to sell mortgage loan originations to government-sponsored enterprises and private investors. 

Higher loan impairment allowances in the North America corporate and commercial portfolios reflected weakness in the commercial real estate sector and middle market sectors of the US. The US middle market portfolio experienced a decline in credit quality on a broad basis, with particular weakness seen in the clothing, automotive and construction sectors. HSBC experienced higher loan impairment charges in the manufacturing, commercial real estate and export sectors in Canada due to high input costs and the consequences of continued weakness in the US economy. 

Releases and recoveries in North America rose by 36 per cent to US$0.1 billion due to an increase in payments against impaired Commercial Banking exposures.

In Latin America, new loan impairment allowances increased by 44 per cent to US$1.5 billion. Impaired loans rose by 29 per cent from the end of 2008 to US$3.0 billion. The most significant increase in impairment allowances was in the personal portfolios in Brazil, where delinquencies rose across a range of products as the economic environment deteriorated. In the commercial portfolio, higher loan impairment allowances were driven by exposures to firms in the small and mid-market sectors due to the slowdown in economic activity. In Mexico, new loan impairment allowances rose due to higher delinquency rates across the personal portfolios, most notably in the credit cards business due to portfolio growth in previous years and the effect of the economic downturn, which was further exacerbated by the consequences of the H1N1 flu virus. 

Releases and recoveries in Latin America declined by 4 per cent to US$0.1 billion, with the non-recurrence of a significant recovery in the first half of 2008 following the disposal of an unsecured consumer finance portfolio. 

For analysis of loan impairment charges and other credit risk provisions by customer group, see page 21.

Risk elements in the loan portfolio

The disclosure of credit risk elements under the following headings reflects US accounting practice and classifications:

• 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.

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 presents information on its impaired loans and advances in accordance with the disclosure convention described on page 217 of the Annual Report and Accounts 2008.

Unimpaired loans past due 90 days or more

Unimpaired loans contractually past due 90 days or more decreased by 6 per cent. Included in this reduction is a change in policy for an individually assessed mortgage portfolio within Europe now reported as impaired at 90 days past due, previously reported as impaired at 180 days past due. The amount as at 30 June 2008 has been restated due to the reclassification of an element of the North America credit card portfolio as impaired. There was no effect on impairment allowances.

Troubled debt restructurings

The SEC requires separate disclosure of any loans not included in the previous two categories whose terms have been modified to grant concessions other than are warranted by market conditions because of problems with the borrower. These are classified 

'troubled debt restructurings' ('TDR's). The definition of TDRs differs from the 'Renegotiated loans that would otherwise be past due or impaired' quantified on page 154 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. 

TDRs increased by 9 per cent in the first half of 2009, reflecting the movement in loan balances where long-term modifications were offered to customers experiencing payment difficulties, particularly in the real estate secured portfolios in the US.

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 - credit risk' on page 145. 'Areas of special interest' include further disclosure about certain homogeneous groups of loans which are collectively assessed for impairment and which represent the Group's most significant exposure to potential problem loans, including adjustable-rate mortgages ('ARM's) and stated-income products. Collectively assessed loans and advances, as set out on page 159, 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 of the Annual Report and Accounts 2008.

Analysis of risk elements in the loan portfolio by geographical region

	At 30 June     2009     US$m		At 30 June     2008     US$m		At     31 December     2008     US$m
Impaired loans
Europe	10,740		5,905		6,844
Hong Kong	994		438		852
Rest of Asia-Pacific8	1,331		845		835
Middle East8	921		272		279
North America34	15,075		10,585		14,285
Latin America	3,005		2,673		2,327
	32,066		20,718		25,422
Unimpaired loans contractually past due 90 days or more as to  principal or interest
Europe	135		345		635
Hong Kong	20		38		43
Rest of Asia-Pacific8	118		145		84
Middle East8	215		95		190
North America34	226		49		108
Latin America	33		225		21
	747		897		1,081
Troubled debt restructurings (not included in the classifications above)
Europe	449		602		366
Hong Kong	228		125		165
Rest of Asia-Pacific8	127		16		90
Middle East8	51		19		29
North America	6,227		4,456		5,618
Latin America	943		1,212		1,067
	8,025		6,430		7,335
Trading loans classified as in default
North America	788		897		561
Risk elements on loans
Europe	11,324		6,852		7,845
Hong Kong	1,242		601		1,060
Rest of Asia-Pacific8	1,576		1,006		1,009
Middle East8	1,187		386		498
North America	22,316		15,987		20,572
Latin America	3,981		4,110		3,415
	41,626		28,942		34,399
Assets held for resale
Europe	76		82		81
Hong Kong	24		23		26
Rest of Asia-Pacific8	18		16		11
Middle East8	2		2		2
North America	1,088		1,262		1,758
Latin America	123		120		113
	1,331		1,505		1,991
Total risk elements
Europe	11,400		6,934		7,926
Hong Kong	1,266		624		1,086
Rest of Asia-Pacific8	1,594		1,022		1,020
Middle East8	1,189		388		500
North America	23,404		17,249		22,330
Latin America	4,104		4,230		3,528
	42,957		30,447		36,390
	%		%		%
Loan impairment allowances as a percentage of risk elements on loans, excluding those trading loans classified as in default	68.7		73.4		70.8

For footnotes, see page 168.

Footnotes to Credit Risk

1    The amount of the loan commitments reflects, where relevant, the expected level of take-up of pre-approved loan offers made by mailshots to personal customers. In addition to those amounts, there is a further maximum possible exposure to credit risk of US$36,199 million (30 June 2008: US$318,071 million; 31 December 2008: US$35,849 million), reflecting the full take-up of such irrevocable loan commitments. The take-up of such offers is generally at modest levels.

2    Including Hong Kong Government Home Ownership Scheme loans of US$3,686 million at 30 June 2009.

3    Other personal loans and advances include second lien mortgages and other personal property-related lending.

4    Other commercial loans and advances include advances in respect of agriculture, transport, energy and utilities.

5    Residential mortgages in Hong Kong include Hong Kong Government Home Ownership Scheme loans of US$3,686 million (30 June 2008: US$3,959 million; 31 December 2008: US$3,882 million).

6    Includes credit card lending of US$70,044 million (30 June 2008: US$80,262 million; 31 December 2008: US$75,266 million).

7    The 30 June 2008 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.

8    The Middle East is disclosed as a separate geographical region with effect from 1 January 2009. Previously, it formed part of Rest of Asia-Pacific. Comparative data have been adjusted accordingly.

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

10    Comprising Hong Kong, Rest of Asia-Pacific, Middle East and Latin America.

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

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

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

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

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

16    Percentages are expressed as a function of the relevant gross loans and receivables balance.

17    The average loss on sale of foreclosed properties is calculated as cash proceeds after deducting selling costs, minus the unpaid loan principal balance and any other ancillary amounts owed, such as property tax advances, divided by the unpaid loan principal balance plus any other ancillary amounts owed.

18    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 unpaid loan principal balance plus any other ancillary amounts owed, such as property tax advances.

19    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 157, 'Past due but not impaired gross financial instruments').

20    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. 

21    Impairment is not measured for assets held in trading portfolios, designated at fair value or derivatives 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'. 

22    Includes asset-backed securities that have been externally rated as strong (US$7,827 million), medium (nil) and sub-standard (nil) (30 June 2008: nil, nil and nil; 31 December 2008: US$7,991 million, nil and nil, respectively).

23    The 30 June 2008 comparatives for loans and advances are 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.

24    Includes US$25,228 million (30 June 2008: US$28,334 million; 31 December 2008: US$23,393 million) of treasury and eligible bills and debt securities that have been classified as BBB- to BBB+ using the ratings of Standard & Poor's as detailed on page 155.

25    The 30 June 2008 comparative figure is restated as a result of a reclassification of an element of a credit card portfolio as impaired.

26    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. 

27    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.

28    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.

29    The 30 June 2008 collectively assessed impaired loans and advances for North America have been increased from US$8,426 million to US$10,099 million as the result of the reclassification of an element of a credit card portfolio as impaired. There was no effect on impairment allowances.

30    The impairment allowances on loans and advances to banks relate to the geographical regions, Europe US$72 million and Middle East US$6 million (30 June 2008: Europe US$7 million; 31 December 2008: Europe US$63 million).

31    Net of repo transactions, settlement accounts and stock borrowings.

32    As a percentage of loans and advances to banks.

33    As a percentage of loans and advances to customers.

34    Restated for 30 June 2008 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.

35    The balances reported at 31 December 2008 for individually and collectively assessed impaired loans and advances to customers have been restated by US$1.0 billion as a result of a reclassification, for disclosure purposes, of an element of a mortgage portfolio. There has been no change to total impaired loans or total impairment allowances. 

 

END

 

 

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