Interim Report - 12 of 21

RNS Number : 9200Q

HSBC Holdings PLC

13 August 2010

Current challenges in regulation and supervision

Regulatory and supervisory developments have largely been shaped by the Leaders, Finance Ministers and Central Bank Governors of the Group of Twenty ('the G20'). In looking to address the systemic failures that caused the financial crisis, the G20 has issued several statements highlighting the following priorities:

· a stronger international framework for prudential regulation, ensuring increased liquidity and regulatory capital buffers and enhanced quality of capital;

· an increased role for colleges of supervisors to coordinate oversight of systemically significant institutions such as HSBC, and effective coordination of resolution regimes for failed banks;

· convergence towards a single set of high-quality, global, independent accounting standards on financial instruments, loan loss provisioning, off-balance sheet exposures and the impairment and valuation of financial assets;

· strengthening of the regulation of hedge funds and credit rating agencies, and an improved infrastructure for derivative transactions, including central counterparty clearing of over-the-counter derivatives;

· design and implementation of a system which will allow for the restructuring or resolution of financial institutions, without taxpayers ultimately bearing the burden;

· measures on financial sector compensation arrangements to prevent excessive short-term risk taking and mitigate systematic risk on a globally consistent basis; and

· a fair and substantial contribution by the financial sector towards paying for any burden associated with government interventions, where they occur, to repair and reduce risks from the financial system or fund the resolution of problems.

The Financial Stability Board ('FSB') was established by the G20 to help address these issues, specifically assessing vulnerabilities affecting the financial system, monitoring and advising on market developments and best practice in meeting regulatory standards. The FSB has provided a number of interim and progress reports to the G20, including reports on the reform of compensation structures and on reducing the moral hazard of systemically important financial institutions.

The key steps that have been taken by governments, regulators and accounting standard setters towards meeting the aims set out by the G20 are described below.

Global

Regulation

In December 2009, the Basel Committee on Banking Supervision (the 'Basel Committee') issued its draft proposals, commonly referred to as Basel III, for greater consistency, quality and transparency in regulatory capital requirements, and greater resilience on the part of international banks to liquidity stresses. The proposals aim to exclude lower quality instruments from core capital, significantly reduce banks' structural reliance on short-term funding and reduce banks' leverage by setting a minimum ratio of capital to assets.

In July 2010, the Basel Committee issued a consultation paper as part of the approach to addressing the issue of pro-cyclicality identified in their December 2009 paper. Also in July 2010, the Basel Committee announced that its oversight body, the Group of Governors and Heads of Supervision, had reached broad agreement on the overall design of the capital and liquidity reform package. Calibration and phase-in arrangements are to be finalised towards the end of 2010, and further material is expected on contingent capital and systemically significant banks. It is not possible to assess the financial impact of these reforms on HSBC.

Accounting standards

In June 2010, the International Accounting Standards Board ('IASB') and the Financial Accounting Standards Board in the US ('FASB') renewed their commitment to achieving convergence in the accounting for financial instruments. In particular, the IASB re-prioritised its work programme to focus on its response to the financial crisis. The key steps taken by the Boards to date are:

· In November 2009, the IASB issued IFRS 9 'Financial Instruments', effective for accounting periods beginning on or after 1 January 2013, to address the classification and measurement of financial assets. This is the first phase of its project to replace IAS 39 and simplify the accounting for financial instruments.

· In November 2009, the IASB exposed its proposals for changes to the impairment rules for financial assets measured at amortised cost. The proposals are intended to result in the earlier recognition of impairment losses.

· In May 2010, the IASB exposed its proposals for changes to the classification and measurement of financial liabilities. The proposals are intended to address the volatility in profit and loss caused by changes in an entity's own credit risk.

· In May 2010, the FASB issued an Accounting Standards Update, setting out its proposed comprehensive approach to financial instrument classification and measurement, impairment, and revisions to hedge accounting. To date the proposals of the FASB differ significantly from those of the IASB and it is unclear whether convergence will be achieved.

Compensation

To address concerns around the compensation arrangements of banks, in September 2009, the FSB published its implementation standards on compensation, focusing on areas where rapid progress was deemed necessary, including independent and effective Board oversight of compensation policies and practices, linkages of the total variable compensation pool to the overall performance of the firm and the need to maintain a sound capital base, alignment of compensation structures to risk, limitations on guaranteed bonuses and enhanced disclosure and supervisory oversight.

Europe

Regulation

In Europe, the European Union Council of Ministers (the 'Council') and European Parliament continue to discuss proposals for the establishment of a European Systemic Risk Board for macro-prudential oversight of the financial system, a European Banking Authority, a European Insurance and Occupational Pensions Authority and a European Securities and Markets Authority.

In February 2010, the European Commission issued a public consultation on the third set of proposed amendments to the EU Capital Requirements Directive ('CRD'), CRD 4 to reflect its proposed implementation of Basel III, with certain adjustments. These will supplement (i) CRD 2, covering own funds, large exposures, supervisory arrangements, qualitative standards for liquidity risk management and securitisation which will come into force on 31 December 2010; and (ii) CRD 3, covering disclosure of remuneration policies, effective 1 January 2011, and capital requirements for trading books and re-securitisations and disclosure of securitisation exposures, effective 31 December 2011.

In July 2010, the European Commission proposed further reforms to depositor and investor compensation schemes, including regular contributions by banks into the applicable national deposit guarantee scheme. The European Commission has also announced plans for legislation to promote greater central clearing of derivatives and to strengthen corporate governance.

In the UK, the Financial Services Act 2010, enacted in April 2010, established a requirement for UK banks to prepare recovery and resolution plans.

In June 2010, the UK Government announced that the UK Financial Services Authority ('FSA') will cease to exist in its present form and four new supervisory bodies will be established by the end of 2012:

· the Prudential Regulation Authority, a subsidiary of the Bank of England, will be responsible for the prudential regulation of financial firms;

· the Consumer Protection and Markets Authority ('CPMA') will regulate the conduct of financial firms providing services to consumers;

· the Financial Policy Committee ('FPC'), chaired by the Governor of the Bank of England, will consider macro issues affecting economic and financial stability and take action in response. An interim FPC will be established in the second half of 2010, prior to any legislation; and

· the Economic Crime Agency will take on functions currently fulfilled by a number of UK Government departments and agencies to tackle serious economic crime.

Pending these changes to supervision in the UK, the FSA continues to operate as before and, in June 2010, finalised its proposals for a new liquidity regime, including updated quantitative rules coupled with a narrow definition of liquid assets.

In July 2010, the FSA announced the implementation of its new powers granted by the Financial Services Act 2010, including the power to impose financial penalties on individuals and firms and more intense information-gathering in relation to financial stability to help identify potential threats to the UK financial market. Also in July 2010, the UK government published a consultation paper seeking views on whether it should merge the UK Listing Authority ('UKLA') with the Financial Reporting Council, the UK's independent regulator responsible for promoting high quality corporate governance and reporting, under the Department for Business, Innovation and Skills, or whether the UKLA should remain within the CPMA markets division.

Compensation

In December 2009, the governments of the UK and France introduced one-off taxes in respect of certain bonuses payable by banks and banking groups. In both countries the tax was levied at 50 per cent on bonuses awarded during a certain period and over a threshold amount. The taxes were liabilities of the employer and were payable on awards of both cash and shares. The provision held by HSBC in respect of the relevant tax payable, is US$325 million in the UK. The French liability of US$42 million was paid by the due date of 25 April 2010.

The FSA introduced new rules relating to the remuneration within UK banks and HSBC voluntarily determined to apply them to the Group on a global basis. On 29 July 2010, the FSA announced that it intends to update the rules to incorporate the effects of the EU's CRD 3 proposal and the Financial Services Act 2010.

Financial contribution

A joint statement was made by the UK, French and German governments in June 2010 announcing plans for the introduction of a bank levy in each country. The specific design of each may differ to reflect the different domestic circumstances and tax systems. In the UK, a consultation paper has been published indicating that the levy will be introduced from 1 January 2011. However, detailed legislation has yet to be finalised or enacted in any of the countries and it is therefore not possible to quantify the financial impact on the Group.

Regulation

In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act ('the Act') was signed into law by the US president. The Act creates a number of regulatory agencies and offices with broad responsibilities for improving the safety of the financial system, including the creation of a Financial Stability Oversight Council to identify emerging risks to financial stability and advise the Federal Reserve Board ('FRB'), expanding the powers of the FRB to regulate capital and risk management requirements in systemically important financial institutions and establishing comprehensive regulation of over-the-counter derivatives including credit default swaps. US bank holding companies such as HSBC North America Holdings Inc. and non-bank financial companies deemed systemically significant by the new Council will be subject to enhanced prudential standards with respect to capital, liquidity, leverage and amounts of short-term debt, and subject to periodic stress tests. In addition, US bank holding companies may be required to replace certain securities at the holding company level which today constitute tier 1 capital under Basel I. The new requirements are planned to be phased in over the two years following enactment, and uncertainty remains over the details of the rule making. The implementation of the Act will require significant adjustments to operating regulations in the US and it is therefore not possible to quantify the financial impact on the Group.

Financial contribution

In January 2010, the US President announced his intention to seek Congressional support to enact legislation imposing a Financial Crisis Responsibility Fee for a period of at least ten years to be applied to financial institutions with more than US$50 billion of consolidated assets. There is no proposed or otherwise pending legislation in Congress which seeks to impose such a Financial Crisis Responsibility Fee on financial institutions, and it is therefore not possible to assess the financial impact on HSBC.

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.

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.

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.

An overview of the Group's risk governance structure, including the responsibilities of the senior executive Risk Management Meeting ('RMM') and the Global Risk function, and of the risk appetite framework operated by the Group, is set out on page 199 of the Annual Report and Accounts 2009. The management of all HSBC's significant risks is also discussed there in detail. In February 2010, in response to the recommendations of the Walker Review, a Group Risk Committee of the Board comprising independent non-executive directors was established with responsibility for providing oversight and advice to the Board on all risk matters. There have been no other significant changes to the Group's risk management framework and methodology since 31 December 2009.

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 derivatives, and from the Group's holdings of debt and other securities. Among the risks to which the Group is exposed, credit risk generates the largest regulatory capital requirement.

The objectives of credit risk management, underpinning sustainable 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.

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 significant changes during the first half of 2010. 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 189) and in enhancing central risk oversight and independent review activities through the GMO 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 201 of the Annual Report and Accounts 2009.

Credit exposure

Maximum exposure to credit risk

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.

In the first half of 2010, credit exposure remained diversified across asset classes. However, the balance of exposure changed, reflecting an increase in lending to banks caused by a rise in reverse repo positions as well as increased netting through greater use of exchange counterparties for trading in certain trading assets and derivatives.

Exposure to residential mortgages in the personal lending portfolio remained significant. In the US, the credit quality of the residential mortgage portfolio improved, reflecting the economic recovery, but it continued to be affected by high levels of unemployment and weakened consumer confidence. In the UK, the low interest rate environment, targeted customer acquisition and tighter underwriting criteria ensured the credit quality of the mortgage portfolio remained high. In Hong Kong the residential mortgage portfolio remained well secured. See 'Areas of special interest - personal lending' on page 150.

Loss experience was concentrated as follows:

Percentage of the Group's loan impairment charges and other credit risk provisions

	Half-year to
	30 Jun	30 Jun	31 Dec
	2010	2009	2009
	%	%	%

US Personal Financial Services ...............................................	61	55	52
Other Personal Financial Services	23	22	21
Commercial Banking ..............	9	11	14
Global Banking and Markets ...	7	12	11
Other businesses .....................	-	-	2

	100	100	100

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 issued, 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 2010			At 30 June 2009			At 31 December 2009
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 ...............	71,576	-	71,576	56,368	-	56,368	60,655	-	60,655
Items in the course of collection from other banks	11,195	-	11,195	16,613	-	16,613	6,395	-	6,395
Hong Kong Government certificates of indebtedness	18,364	-	18,364	16,156	-	16,156	17,463	-	17,463

Trading assets .................	376,440	(17,890)	358,550	388,874	(15,829)	373,045	386,070	(8,496)	377,574
Treasury and other eligible bills ................	22,236	-	22,236	22,990	-	22,990	22,346	-	22,346
Debt securities .............	194,390	-	194,390	190,870	-	190,870	201,598	-	201,598
Loans and advances:
- to banks .................	77,434	-	77,434	73,636	(1)	73,635	78,126	-	78,126
- to customers ...........	82,380	(17,890)	64,490	101,378	(15,828)	85,550	84,000	(8,496)	75,504

Financial assets designated at fair value ................	18,350	-	18,350	21,301	-	21,301	22,198	-	22,198
Treasury and other eligible bills ................	249	-	249	495	-	495	223	-	223
Debt securities .............	16,153	-	16,153	19,825	-	19,825	20,718	-	20,718
Loans and advances:
- to banks .................	1,149	-	1,149	204	-	204	354	-	354
- to customers ...........	799	-	799	777	-	777	903	-	903

Derivatives .....................	288,279	(219,180)	69,099	310,796	(237,552)	73,244	250,886	(189,606)	61,280

Loans and advances held at amortised cost: ........	1,089,633	(89,301)	1,000,332	1,106,949	(94,576)	1,012,373	1,076,012	(91,127)	984,885
- to banks .................	196,296	(330)	195,966	182,266	(124)	182,142	179,781	(116)	179,665
- to customers ...........	893,337	(88,971)	804,366	924,683	(94,452)	830,231	896,231	(91,011)	805,220

Financial investments .....	376,642	-	376,642	344,644	-	344,644	360,034	-	360,034
Treasury and other similar bills ................	61,275	-	61,275	54,262	-	54,262	58,434	-	58,434
Debt securities .............	315,367	-	315,367	290,382	-	290,382	301,600	-	301,600

Other assets	30,643	(15)	30,628	35,191	(4)	35,187	36,373	(4)	36,369
Endorsements and acceptances	9,573	(15)	9,558	9,481	(4)	9,477	9,311	(4)	9,307
Other ...........................	21,070	-	21,070	25,710	-	25,710	27,062	-	27,062

Financial guarantees and similar contracts	46,120	-	46,120	49,486	-	49,486	53,251	-	53,251
Loan and other credit- related commitments¹ ..	548,710	-	548,710	569,012	-	569,012	558,050	-	558,050

	2,875,952	(326,386)	2,549,566	2,915,390	(347,961)	2,567,429	2,827,387	(289,233)	2,538,154

For footnote, see page 196.

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 International Swaps and Derivatives Association ('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.

The derivative offset amount in the above table relates to exposures where the counterparty has an offsetting derivative exposure with HSBC, a master netting arrangement is in place and the credit risk exposure is managed on a net basis, or the position is specifically collateralised, normally in the form of cash. These amounts do not qualify for net presentation for accounting purposes, because settlement may not actually be made on a net basis.

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 on an unsecured basis. 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.

The loans and advances offset adjustment in the table above primarily relates to customer loans and deposits, and balances arising from repo and reverse repo transactions. The offset relates to balances where there is a legally enforceable right of offset in the event of counterparty default, and therefore these balances represent a net exposure for credit risk management purposes. However, as there is no intention to settle these balances on a net basis under normal circumstances, they do not qualify for net presentation for accounting purposes.

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.

Wrong-way risk is an aggravated form of concentration risk and arises when there is an adverse correlation between the counterparty's probability of default and the mark-to-market value of the underlying transaction. HSBC uses a range of tools to monitor and control wrong-way risk.

Securities held for trading

Total securities held for trading within trading assets were US$244 billion at 30 June 2010 (31 December 2009: US$259 billion). The largest concentration of these assets was to government and government agency securities, which amounted to US$128 billion, or 53 per cent of overall trading securities (31 December 2009: US$135 billion, 52 per cent). This included US$22 billion (31 December 2009: US$22 billion) of treasury and other eligible bills. Corporate debt and other securities were US$84 billion or 34 per cent of overall trading securities, in line with the level at 31 December 2009 of US$84 billion, or 32 per cent. Included within total securities held for trading were US$35 billion (31 December 2009: US$41 billion) of debt securities issued by banks and other financial institutions.

Derivatives

Derivatives exposures at 30 June 2010 were US$288 billion, a rise of 15 per cent from 31 December 2009, with significant increases in interest rate derivatives reflecting movements in parts of the yield curve against a backdrop of low short-term official rates. Foreign exchange derivative volumes also increased, partly offset by lower credit derivatives as spreads narrowed. Derivatives exposure is shown gross under IFRSs. There was a matching movement in derivative liabilities.

Debt securities, treasury and other eligible bills

At 30 June 2010, total financial investments excluding equity securities of US$377 billion were 5 per cent higher than at 31 December 2009. Debt securities, at US$315 billion, represented the largest concentration of financial investments at 84 per cent of the total, compared with US$302 billion (84 per cent) at 31 December 2009. HSBC's holdings of corporate debt, ABSs and other securities were spread across a wide range of issuers and geographical regions, with 31 per cent invested in securities issued by banks and other financial institutions. In total, holdings in ABSs increased by US$5 billion due to a rise in asset prices as expectations of future losses reduced.

Investments in governments and government agencies of US$208 billion were 54 per cent of overall financial investments, 8 percentage points higher than at 31 December 2009. US$61 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 159.

At 30 June 2010, the insurance businesses held diversified portfolios of debt and equity securities designated at fair value of US$23 billion (31 December 2009: US$25 billion) and debt securities classified as financial investments of US$36 billion (31 December 2009: US$35 billion). A more detailed analysis of securities held by the insurance businesses is set out on page 188.

Loans and advances

Gross loans and advances to customers at 30 June 2010 were US$915 billion, 1 per cent lower on a reported basis and 4 per cent higher on a constant currency basis than at 31 December 2009, and were well diversified across industry sectors and regions. The following commentary is on a constant currency basis. Corporate and commercial lending increased, partly offset by a decline in personal lending reflecting the run-off of the US consumer finance portfolios.

Personal lending was the largest single lending category at US$410 billion, 45 per cent of total customer lending. Residential mortgages of US$253 billion represented 28 per cent of total advances to customers, the Group's largest concentration in a single exposure type (31 December 2009: 29 per cent).

The corporate, commercial and financial lending categories amounted to 55 per cent of gross lending to customers at 30 June 2010. 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 increased by 8 per cent in the period, reflecting the ongoing trade-led recovery. 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 accounts 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 148 to 159.

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 Hongkong and Shanghai Banking Corporation, HSBC Bank, HSBC Bank Middle East and HSBC Bank USA, by the location of the lending branch.

Gross loans and advances by industry sector

	At 31 December 2009	Constant currency effect	Movement on a constant currency basis	At 30 June 2010
	US$m	US$m	US$m	US$m
Gross loans and advances to customers
Personal² ........................................................................	434,206	(13,758)	(10,396)	410,052
Residential mortgages^2,3 ..............................................	260,669	(9,297)	1,476	252,848
Other personal^2,4 ........................................................	173,537	(4,461)	(11,872)	157,204

Corporate and commercial .............................................	383,090	(19,724)	25,224	388,590
Commercial, industrial and international trade ............	196,128	(10,218)	13,948	199,858
Commercial real estate ...............................................	69,389	(3,444)	1,028	66,973
Other property-related ...............................................	30,520	(619)	3,584	33,485
Government ...............................................................	6,689	(224)	(71)	6,394
Other commercial⁵ .....................................................	80,364	(5,219)	6,735	81,880

Financial ........................................................................	96,650	(7,501)	21,407	110,556
Non-bank financial institutions ...................................	95,237	(7,464)	20,629	108,402
Settlement accounts ....................................................	1,413	(37)	778	2,154

Asset-backed securities reclassified ..................................	7,827	-	(1,655)	6,172

Total gross loans and advances to customers⁶ .................	921,773	(40,983)	34,580	915,370

Gross loans and advances to banks ...........................	179,888	(7,625)	24,198	196,461

Total gross loans and advances .......................................	1,101,661	(48,608)	58,778	1,111,831

For footnotes, see page 196.

Gross loans and advances to customers by industry sector and by geographical region

	Europe	Hong Kong	Rest of Asia- Pacific	Middle East	North America	Latin America	Total	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 2010
Personal ........................................	150,801	50,734	33,637	5,763	148,869	20,248	410,052		44.8
Residential mortgages³ ................	103,485	37,394	23,289	1,789	81,811	5,080	252,848		27.6
Other personal⁴ ..........................	47,316	13,340	10,348	3,974	67,058	15,168	157,204		17.2

Corporate and commercial ............	186,547	60,728	56,394	17,670	39,021	28,230	388,590		42.4
Commercial, industrial and international trade ....................	100,043	23,363	35,051	9,952	13,406	18,043	199,858		21.8
Commercial real estate ...............	29,723	16,722	7,153	1,044	9,874	2,457	66,973		7.3
Other property-related ...............	5,571	12,179	4,186	1,751	9,220	578	33,485		3.7
Government ...............................	1,664	357	660	1,533	406	1,774	6,394		0.7
Other commercial⁵ .....................	49,546	8,107	9,344	3,390	6,115	5,378	81,880		8.9

Financial .......................................	70,520	3,344	2,497	1,548	30,179	2,468	110,556		12.1
Non-bank financial institutions ...	69,909	2,523	2,196	1,539	29,845	2,390	108,402		11.9
Settlement accounts ....................	611	821	301	9	334	78	2,154		0.2

Asset-backed securities reclassified .	5,193	-	-	-	979	-	6,172		0.7

Total gross loans and advances to customers ('TGLAC')⁶ ...............	413,061	114,806	92,528	24,981	219,048	50,946	915,370		100.0

Gross loans and advances to customers by industry sector and by geographical region (continued)

	Europe	Hong Kong	Rest of Asia- Pacific	Middle East	North America	Latin America	Total	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 2010
Percentage of TGLAC by geographical region .....................	45.1%	12.6%	10.1%	2.7%	23.9%	5.6%	100.0%

Impaired loans ...............................	10,257	814	1,146	1,978	11,119	2,573	27,887
- as a percentage of TGLAC .......	2.5%	0.7%	1.2%	7.9%	5.1%	5.1%	3.0%
-....
Total impairment allowances ........	5,835	731	856	1,587	10,907	2,117	22,033
- as a percentage of TGLAC .......	1.4%	0.6%	0.9%	6.4%	5.0%	4.2%	2.4%

At 30 June 2009
Personal² .......................................	157,383	46,700	29,825	6,951	176,464	20,525	437,848		46.0
Residential mortgages^2,3 .............	104,529	33,808	19,483	1,950	90,903	4,845	255,518		26.8
Other personal^2,4 .......................	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 commercial⁵ ....................	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

TGLAC⁶ ........................................	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%

At 31 December 2009
Personal² .......................................	162,562	47,946	32,514	6,405	163,934	20,845	434,206		47.2
Residential mortgages^2,3 .............	109,872	35,292	21,983	1,898	86,591	5,033	260,669		28.3
Other personal^2,4 .......................	52,690	12,654	10,531	4,507	77,343	15,812	173,537		18.9

Corporate and commercial ............	202,919	49,340	46,175	16,604	40,902	27,150	383,090		41.5
Commercial, industrial and international trade .................	112,374	17,728	28,228	9,336	11,528	16,934	196,128		21.3
Commercial real estate ..............	33,853	13,782	6,475	1,309	11,527	2,443	69,389		7.5
Other property-related ..............	6,231	10,062	3,863	1,357	8,452	555	30,520		3.3
Government ..............................	2,216	441	595	1,356	208	1,873	6,689		0.7
Other commercial⁵ ....................	48,245	7,327	7,014	3,246	9,187	5,345	80,364		8.7

Financial .......................................	73,851	2,899	2,350	1,213	14,150	2,187	96,650		10.5
Non-bank financial institutions ..	73,225	2,462	2,246	1,206	13,963	2,135	95,237		10.3
Settlement accounts ...................	626	437	104	7	187	52	1,413		0.2

Asset-backed securities reclassified .	6,284	-	-	-	1,543	-	7,827		0.8

TGLAC⁶ ........................................	445,616	100,185	81,039	24,222	220,529	50,182	921,773		100.0

Percentage of TGLAC by geographical region ....................	48.3%	10.9%	8.8%	2.6%	23.9%	5.5%	100.0%

Impaired loans ...............................	10,722	841	1,200	1,646	13,246	2,951	30,606
- as a percentage of TGLAC .....	2.4%	0.8%	1.5%	6.8%	6.0%	5.9%	3.3%

Total impairment allowances ........	6,135	804	996	1,378	13,676	2,553	25,542
- as a percentage of TGLAC .....	1.4%	0.8%	1.2%	5.7%	6.2%	5.1%	2.8%

For footnotes, see page 196.

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 2010
Rest of Asia-Pacific
Australia .............................................	6,176	966	1,942		3,734	12,818
India ...................................................	855	635	564		4,160	6,214
Indonesia ............................................	67	549	104		2,563	3,283
Japan ..................................................	163	156	820		2,193	3,332
Mainland China ..................................	1,770	307	3,068		10,218	15,363
Malaysia .............................................	3,374	1,839	1,064		4,489	10,766
Singapore ...........................................	5,380	3,204	2,676		6,379	17,639
South Korea .......................................	2,063	299	29		2,539	4,930
Taiwan ...............................................	2,315	473	78		2,565	5,431
Other .................................................	1,126	1,920	994		8,712	12,752

	23,289	10,348	11,339		47,552	92,528

Middle East (excluding Saudi Arabia)
Egypt .................................................	4	360	95		2,314	2,773
Qatar ..................................................	9	541	510		779	1,839
UAE ...................................................	1,531	2,436	1,359		9,933	15,259
Other .................................................	245	637	831		3,397	5,110

	1,789	3,974	2,795		16,423	24,981

Latin America
Argentina ...........................................	29	743	56		2,034	2,862
Brazil .................................................	806	9,998	1,164		12,853	24,821
Mexico ...............................................	2,217	2,423	995		6,767	12,402
Panama ..............................................	1,150	963	474		3,445	6,032
Other .................................................	878	1,041	346		2,564	4,829

	5,080	15,168	3,035		27,663	50,946

At 30 June 2009
Rest of Asia-Pacific
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 East (excluding Saudi Arabia)
Egypt .................................................	2	292	136		2,105	2,535
Qatar ..................................................	10	681	261		911	1,863
UAE ...................................................	1,720	3,321	1,755		9,464	16,260
Other .................................................	218	707	726		3,437	5,088

	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

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

	Residential mortgages US$m	Other personal US$m	Property- related US$m	Commercial, international trade and other US$m		Total US$m
At 31 December 2009
Rest of Asia-Pacific
Australia .............................................	5,919	993	1,785		3,496	12,193
India ...................................................	883	864	458		3,002	5,207
Indonesia ............................................	59	571	71		2,114	2,815
Japan ..................................................	109	149	796		1,444	2,498
Mainland China ..................................	1,503	319	2,633		8,915	13,370
Malaysia .............................................	2,925	1,717	1,085		3,548	9,275
Singapore ...........................................	5,149	3,041	2,407		4,251	14,848
South Korea .......................................	2,093	407	30		1,932	4,462
Taiwan ...............................................	2,205	503	53		1,578	4,339
Other .................................................	1,138	1,967	1,020		7,907	12,032

	21,983	10,531	10,338		38,187	81,039

Middle East (excluding Saudi Arabia)
Egypt .................................................	4	326	126		2,132	2,588
Qatar ..................................................	9	624	416		841	1,890
UAE ...................................................	1,650	2,881	1,395		8,848	14,774
Other .................................................	235	676	729		3,330	4,970

	1,898	4,507	2,666		15,151	24,222

Latin America
Argentina ...........................................	31	628	49		1,689	2,397
Brazil .................................................	717	10,494	1,076		12,111	24,398
Mexico ...............................................	2,259	2,702	995		6,762	12,718
Panama ..............................................	1,151	973	475		3,464	6,063
Other .................................................	875	1,015	403		2,313	4,606

	5,033	15,812	2,998		26,339	50,182

Gross loans and advances to banks by geographical region

	Europe	Hong Kong	Rest of Asia- Pacific	Middle East	North America	Latin America	Total	Impair- ment allowances
	US$m	US$m	US$m	US$m	US$m	US$m	US$m		US$m

At 30 June 2010 ..........................	82,119	31,633	35,338	8,644	17,132	21,595	196,461		(165)
At 30 June 2009 ............................	72,563	41,197	34,278	6,562	10,048	17,696	182,344		(78)
At 31 December 2009 ...................	65,614	36,197	35,648	8,435	15,386	18,608	179,888		(107)

Areas of special interest

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 certain exposures subject to specific portfolio controls. Overall credit quality improved during the first half of 2010, as economies generally demonstrated signs of recovery.

Sovereign risk

The widespread intervention by governments to stabilise and re-capitalise banks and other financial intermediaries helped to reduce the possibility of a systemic threat to financial markets by transferring risk from the private sector to sovereign bodies. However, this increased the large fiscal imbalances in some industrialised economies. As a result, market concerns about sovereign credit risk among these economies intensified during the first half of 2010, particularly in the second quarter, and credit spreads in the affected sovereign and bank credit markets widened. Risk aversion resurfaced, and the assumption of higher sovereign credit risk premia in private securities prices triggered portfolio reallocation to safer assets and a tightening of market liquidity. Initial concerns over liquidity and funding spread to doubts about solvency in a number of cases.

Eurozone sovereign debt

As government deficits rose, financial markets became increasingly concerned about the level of sovereign indebtedness, and the credit rating of certain European government debt issues was downgraded in the first quarter of 2010. Initially, the debt crisis centred on events in Greece. In order to stabilise market conditions, in April 2010, the European Central Bank ('ECB') and the International Monetary Fund agreed US$145 billion of loan guarantees and a bilateral loan for Greece, conditional on the implementation of domestic austerity measures. However, this failed to calm fears of contagion in other vulnerable European economies, and debt issued by Spain, Portugal and Ireland was downgraded in April and May 2010. To mitigate fears of further market turmoil and prevent potential contagion to other European countries, on 9 May 2010 Europe's finance ministers approved a comprehensive rescue package worth almost US$1 trillion called the 'European Financial Stability Facility'.

However, concerns remain that fiscal consolidation measures adopted across Europe could trigger a return to recession in some countries and slow the pace of recovery elsewhere.

HSBC managed its exposure to the affected countries closely during the period. The Group's total exposure to the sovereign debt of Greece, Ireland, Portugal and Spain was US$4 billion at 30 June 2010. The overall quality of HSBC's sovereign portfolio remained strong with most in-country and cross-border limits extended to countries with high-grade internal credit risk ratings. The Group regularly updates its assessment of higher risk countries and adjusts its risk appetite to reflect such changes.

Exposure to European sovereign credit risk arising in specific countries

	At 30 June 2010
	Greece	Ireland	Portugal	Spain	Total
	US$bn	US$bn	US$bn	US$bn	US$bn

Balances not held for trading
Cash and balances at central banks .........................	0.2	-	-	0.1	0.3
Financial investments ............................................	-	-	0.1	-	0.1

Total balances not held for trading ........................	0.2	-	0.1	0.1	0.4

Balances held for trading
Net securities position ...........................................	0.9	0.3	0.3	0.8	2.3
Derivatives ............................................................	0.1	-	0.4	-	0.5

Total balances held for trading ..............................	1.0	0.3	0.7	0.8	2.8

Balances held by insurance companies and in funds where policyholders hold the risk .......................	-	0.2	0.1	0.5	0.8

	1.2	0.5	0.9	1.4	4.0

European banks

A recent ECB financial stability review indicated that European banks would have to charge additional impairments of up to US$260 billion by 2011. Following publication of this report, bond spreads on both European and US banks widened in May. The size of the financial sector's exposure to sovereign debt and doubts about economic conditions in the eurozone raised fresh concerns about banks' credit ratings. In addition, uncertainty over liquidity, solvency, funding, changing regulation, capital requirements and taxation, and speculation over the stability of the euro, continued to cloud the future for European banking.

Nonetheless, the first quarter results for many European banks in 2010 improved, though this was overshadowed by the rating downgrades of a number of Greek, Irish and Spanish banks. Problems remained most pronounced for smaller, less well-capitalised financial institutions which were unable to access markets for capital or external funding.

The Group was recently subject to the CEBS coordinated stress test of 91 EU financial institutions. The objective of the stress test was to assess the overall resilience of the EU banking sector and the banks' ability to absorb further possible shocks on credit and market risks, including sovereign risks. Banks were required to meet a 6 per cent minimum tier 1 target under stress. HSBC passed the test satisfactorily, with a post stress tier 1 ratio of 10.2 per cent placing it in the top quartile of post stress tier 1 ratios of the institutions tested.

The Group continues to closely monitor and manage its eurozone bank exposures, and is cautious in lending to segments of this sector. HSBC regularly updates its assessment of higher-risk eurozone banks and adjusts its risk appetite accordingly. HSBC also, where possible, seeks to play a positive role in maintaining credit and liquidity supply.

Dubai and the UAE

In November 2009, Dubai World announced its intention to seek a standstill with its lenders in respect of the indebtedness of certain Dubai World group companies.

Subsequently, Dubai World has been involved in a restructuring process working with its advisors and a Coordinating Committee of seven lenders. HSBC has been working as a member of the Coordinating Committee towards a restructuring solution.

As one of the long-term bankers to Dubai World and the various entities related to the Government of Dubai, HSBC will continue to work constructively to address the prevailing issues. HSBC'sown exposure in Dubai is acceptably spread and is primarily to operating companies within the emirate.

In the UAE, gross customer loans and advances increased moderately to US$15.3 billion at 30 June 2010 from US$14.8 billion at 31 December 2009. At 30 June 2010, HSBC's total assets in the Middle East represented 2 per cent of the Group's balance sheet. In the first half of 2010, loan impairment charges in the region totalled US$438 million. The medium and long-term outlook for the UAE and the rest of the region remains positive with strong growth potential. The Middle East is an important part of HSBC's international business mix and a region that HSBC remains strongly committed to.

Commercial real estate

The aggregate of commercial real estate and other property-related lending of US$100 billion at 30 June 2010 was 5 per cent higher than at 31 December 2009 on a constant currency basis, and represented 11 per cent of total loans and advances to customers. In the first half of 2010, credit quality in this sector showed signs of stabilising but remained under stress in certain markets.

HSBC's exposure to this sector is concentrated in the UK, North America and Hong Kong. In Hong Kong, the market is characterised by strong liquidity and continuing credit appetite. While there are some positive signs of economic recovery in the UK and the US, the slow nature of the recovery ensures that financing and re-financing activity in the sector remains subdued.

Across HSBC's commercial real estate portfolios, credit risk is mitigated by long-standing and conservative policies on asset origination which focus on relationships with long-term customers and limited initial leverage. HSBC also operates sector risk appetite limits to guide and prevent 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.

Personal lending

In the first half of 2010, credit quality in the personal lending portfolios improved as economic conditions began to recover. Unemployment remained at high levels, however, particularly in developed economies. In many countries, governments continued to take measures to support economic growth, employment and their housing markets. These measures helped to improve levels of consumer confidence which contributed to a decline in delinquency and loan impairment charges. At this stage, it remains uncertain to what extent the improvement in credit quality would be sustainable in the absence of these government measures.

The commentary that follows is on a constant currency basis.

At 30 June 2010, total personal lending was US$410 billion, a reduction of 2 per cent from 31 December 2009. Loan impairment charges and other credit risk provisions in respect of personal lending were concentrated in North America (US$4.6 billion), the UK (US$625 million) and Latin America (US$661 million).

At 30 June 2010, total US personal lending of US$120 billion was US$15 billion or 11 per cent lower than at the end of 2009, as a result of the continued reduction of HSBC's consumer finance run-off portfolios and lower balances in the cards business. As part of the reduction in balances, US$1.0 billion of vehicle finance loans were sold to Santander Consumer USA, Inc. in the first half of 2010. In July 2010 HSBC reached agreement in principle with an unaffiliated third party to sell the residual vehicle finance loans (US$4.3 billion), with the sale expected to close in the second half of 2010.

US residential mortgage balances declined by 7 per cent from 31 December 2009 to US$61 billion following the decision taken in March 2009 to close the Consumer Lending branches and run off the existing consumer finance balances. US mortgages are discussed in greater detail on page 152.

Other personal lending in the US fell by 15 per cent to US$59 billion, partly because of lower balances in the unsecured Consumer Lending portfolio. In the US cards business, which comprises both general credit card and private label portfolios, balances declined by 14 per cent to US$34 billion, mainly due to a reduction in consumer spending, seasonal repayments and customers paying down their credit card debt.

Total personal lending in the UKrose by 1 per cent to US$121 billion, with an increase in residential mortgage balances partly offset by a decline in other, mostly unsecured, personal lending. UK mortgage lending is discussed in greater detail on page 152. Other personal lending fell by 5 per cent to US$26 billion, as the reduction in all unsecured lending products reflected tighter lending criteria.

In Latin America, total personal lending of US$20 billion was 2 per cent lower than at 31 December 2009. Residential mortgage lending was broadly unchanged, while other personal lending declined by 2 per cent to US$15 billion. The reduction was mainly in Mexico, where other personal lending balances fell by 12 per cent to US$2.4 billion as a result of initiatives taken in previous periods to reduce risk in the credit card portfolio and tighten origination criteria.

For an analysis of new loan impairment allowances and impaired loans, see page 164.

Total personal lending

	UK	Rest of Europe	US⁷	Rest of North America	Other Regions⁸	Total
	US$m	US$m	US$m	US$m	US$m	US$m
At 30 June 2010
Residential mortgages³ .................................	95,525	7,960	61,339	20,472	67,552	252,848

Other personal lending ................................	25,568	21,748	58,731	8,327	42,830	157,204
- vehicle finance .....................................	-	52	4,232	71	5,796	10,151
- credit cards ...........................................	11,066	1,777	33,844	1,304	12,442	60,433
- second lien mortgages ...........................	895	1	10,373	594	467	12,330
- other ....................................................	13,607	19,918	10,282	6,358	24,125	74,290


Total personal lending .................................	121,093	29,708	120,070	28,799	110,382	410,052

Impairment allowances
Residential mortgages³ .............................	(226)	(47)	(3,695)	(25)	(242)	(4,235)

Other personal lending ................................	(1,241)	(538)	(5,970)	(175)	(1,850)	(9,774)
- vehicle finance .....................................	-	(6)	(174)	(1)	(302)	(483)
- credit cards ...........................................	(492)	(250)	(2,948)	(56)	(618)	(4,364)
- second lien mortgages ...........................	(68)	-	(1,212)	(25)	-	(1,305)
- other ....................................................	(681)	(282)	(1,636)	(93)	(930)	(3,622)

Total impairment allowances on personal lending .......................................	(1,467)	(585)	(9,665)	(200)	(2,092)	(14,009)

- as a percentage of total personal lending ..	1.2%	2.0%	8.0%	0.7%	1.9%	3.4%

At 30 June 2009
Residential mortgages^2,3 ...............................	95,569	8,960	72,559	18,344	60,086	255,518

Other personal lending² ...............................	31,138	21,716	77,664	7,897	43,915	182,330
- 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 lending² ................................	126,707	30,676	150,223	26,241	104,001	437,848

Impairment allowances²
Residential mortgages³ .............................	(90)	(31)	(6,130)	(4)	(214)	(6,469)

Other personal lending² ...............................	(1,399)	(536)	(9,488)	(225)	(2,301)	(13,949)
- vehicle finance .....................................	-	(6)	(330)	(1)	(317)	(654)
- credit cards ...........................................	(489)	(224)	(4,199)	(60)	(889)	(5,861)
- second lien mortgages ...........................	(69)	-	(2,127)	(58)	-	(2,254)
- other ....................................................	(841)	(306)	(2,832)	(106)	(1,095)	(5,180)

Total impairment allowances on personal lending² .....................................	(1,489)	(567)	(15,618)	(229)	(2,515)	(20,418)

- as a percentage of total personal lending ..	1.2%	1.8%	10.4%	0.9%	2.4%	4.7%

Total personal lending (continued)

	UK	Rest of Europe	US⁷	Rest of North America	Other Regions⁸	Total
	US$m	US$m	US$m	US$m	US$m	US$m
At 31 December 2009
Residential mortgages²^,3 ...............................	100,667	9,205	65,784	20,807	64,206	260,669

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


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

Impairment allowances
Residential mortgages²^,3 ...........................	(151)	(41)	(4,416)	(7)	(233)	(4,848)

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

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

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

For footnotes, see page 196.

Mortgage lending

US mortgage lending

US mortgage lending, comprising residential mortgage and second lien lending, made up 17 per cent of the Group's gross loans and advances to personal customers at 30 June 2010. This compared with 18 per cent at 31 December 2009.

US mortgage balances fell by 8 per cent from 31 December 2009 to US$72 billion reflecting the continued run-off of the Consumer Lending and Mortgage Services portfolios in HSBC Finance.

HSBC Finance's mortgage balances fell by 9 per cent to US$56 billion at 30 June 2010 (31 December 2009: US$61 billion), with the reduction mainly due to portfolio run-off. The rate of decline in balances moderated as loan prepayments slowed and, given its continued weakness, the US mortgage industry offered fewer refinancing options to customers. At 30 June 2010, outstanding balances in the Consumer Lending business were US$36 billion, of which approximately 95 per cent were fixed rate loans and 89 per cent were first lien. The Mortgage Services business had approximately US$20 billion in outstanding balances at 30 June 2010, of which about 64 per cent were fixed rate loans and 87 per cent were first lien. See table on page 155.

In HSBC Bank USA, mortgage lending declined slightly from US$16.2 billion at 31 December 2009 to US$15.9 billion at 30 June 2010 due to management actions taken to reduce risk. These included the continued sale of the majority of new residential mortgage loan originations to third parties, though certain mortgage loan originations for Premier customers are retained. At 30 June 2010, approximately 32 per cent of the HSBC Bank USA mortgage portfolio were fixed rate loans and 76 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 155.

UK mortgage lending

On a constant currency basis, total mortgage lending in the UK rose by 3 per cent from 31 December 2009 to US$96 billion in response to targeted customer acquisition. Growth was constrained by a reduction in re-mortgage activity as many homeowners with low standard variable rate mortgages have strong incentives to remain with their existing mortgage providers.

The UK mortgage portfolio primarily consists of lending to owner-occupiers, as HSBC restricts lending to purchase residential property for the purpose of rental. Almost all new business is originated through HSBC's own sales force and the self-certification of income is not permitted. The majority of mortgage lending is to existing customers holding current or savings accounts with HSBC, which facilitates and strengthens the underwriting process.

Loan impairment charges and delinquencies in the UK mortgage book declined in the first half of 2010, despite unemployment remaining at high levels. This was helped by the low level of interest rates being charged to mortgage customers, the resilience of house prices and the underlying quality of the portfolio. In the HSBC Bank mortgage portfolio, excluding First Direct, two months or more delinquency rates fell from 1.4 per cent at 31 December 2009 to 1.3 per cent at 30 June 2010. In the first half of 2010, the average loan to value ratio for new business in the UK was 53 per cent, a decrease of 5 percentage points from the end of 2009.

Interest-only mortgage balances increased by 2 per cent to US$43 billion at 30 June 2010, driven by growth in First Direct. The majority of these mortgages are offset mortgages linked to a current account for which delinquency rates remained at low levels.

Second lien mortgage balances declined by 9 per cent to US$895 million at 30 June 2010. All second lien balances in the UK were held by HFC Bank Limited ('HFC') and were placed in run‑off in 2009. Within this portfolio, two months or more delinquency rates declined from 6.6 per cent at 31 December 2009 to 5.7 per cent at 30 June 2010 driven by improvements in the UK economy which helped customers to stay current with their repayments.

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

Mortgage lending products

	UK	Rest of Europe	US⁷	Rest of North America	Other regions⁸	Total
	US$m	US$m	US$m	US$m	US$m	US$m
At 30 June 2010
Residential mortgages ..................................	95,525	7,960	61,339	20,472	67,552	252,848
Second lien mortgages .................................	895	1	10,373	594	467	12,330

Total mortgage lending ...............................	96,420	7,961	71,712	21,066	68,019	265,178

Second lien as a percentage of total mortgage lending .....................................................	0.9%	-	14.5%	2.8%	0.7%	4.6%

Impairment allowances
Residential mortgages ..............................	(226)	(47)	(3,695)	(25)	(242)	(4,235)
Second lien mortgages ..............................	(68)	-	(1,212)	(25)	-	(1,305)

Total impairment allowances on mortgage lending .....................................................	(294)	(47)	(4,907)	(50)	(242)	(5,540)

Interest-only (including endowment) mortgages ................................................	43,001	42	-	1,028	1,090	45,161
Affordability mortgages, including ARMs ....	1,666	1,139	19,556	243	5,943	28,547
Other ..........................................................	125	-	-	-	143	268

Total interest-only and affordability mortgages ................................................	44,792	1,181	19,556	1,271	7,176	73,976

- as a percentage of total mortgage lending .	46.5%	14.8%	27.3%	6.0%	10.5%	27.9%

Negative equity mortgages⁹ .........................	3,263	-	17,783	127	496	21,669
Other loan to value ratios greater than 90 per cent¹⁰ ...........................................	6,618	-	11,418	1,785	1,367	21,188

Total negative equity and other mortgages ..	9,881	-	29,201	1,912	1,863	42,857

- as a percentage of total mortgage lending .	10.2%	-	40.7%	9.1%	2.7%	16.2%

Mortgage lending products (continued)

	UK	Rest of Europe	US⁷	Rest of North America	Other regions⁸	Total
	US$m	US$m	US$m	US$m	US$m	US$m
At 30 June 2009
Residential mortgages^2,3 ...............................	95,569	8,960	72,559	18,344	60,086	255,518
Second lien mortgages² ................................	1,199	2	13,602	775	470	16,048

Total mortgage lending² ..............................	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%

Impairment allowances
Residential mortgages² .............................	(90)	(31)	(6,130)	(4)	(214)	(6,469)
Second lien mortgages² ............................	(68)	-	(2,127)	(58)	(1)	(2,254)

Total impairment allowances on mortgage lending .....................................................	(158)	(31)	(8,257)	(62)	(215)	(8,723)

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 mortgages⁹ .........................	8,851	-	22,701	190	627	32,369
Other loan to value ratios greater than 90 per cent¹⁰ ...........................................	12,761	44	18,336	1,781	1,585	34,507

Total negative equity and other mortgages ..	21,612	44	41,037	1,971	2,212	66,876

- as a percentage of total mortgage lending .	22.3%	0.5%	47.6%	10.3%	3.7%	24.6%

	US$m	US$m	US$m	US$m	US$m	US$m
At 31 December 2009
Residential mortgages^2,3 ...............................	100,667	9,205	65,784	20,807	64,206	260,669
Second lien mortgages² ................................	1,068	2	11,786	695	472	14,023

Total mortgage lending² ..............................	101,735	9,207	77,570	21,502	64,678	274,692

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

Impairment allowances
Residential mortgages² .............................	(151)	(41)	(4,416)	(7)	(233)	(4,848)
Second lien mortgages² ............................	(79)	-	(1,608)	(56)	-	(1,743)

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

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

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

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

Negative equity mortgages⁹ .........................	6,412	-	20,229	163	488	27,292
Other loan to value ratios greater than 90 per cent¹⁰ ...........................................	10,522	-	13,695	1,887	1,451	27,555

	16,934	-	33,924	2,050	1,939	54,847

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

For footnotes, see page 196.

HSBC Finance held approximately US$56 billion of residential mortgage and second lien loans and advances to personal customers secured on real estate at 30 June 2010, 14 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 US mortgage lending¹¹

	At 30 June 2010			At 30 June 2009			At 31 December 2009
			Other			Other			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 rate¹² ....................	12,436	34,523	97	15,060	41,561	107	13,596	37,639	98

Other¹² ...........................	7,084	1,653	5	9,959	2,169	7	8,168	1,867	6
Adjustable-rate.............	5,799	1,653	5	8,603	2,169	7	7,070	1,867	-
Interest-only (affordability mortgages)	1,285	-	-	1,356	-	-	1,098	-	6


	19,520	36,176	102	25,019	43,730	114	21,764	39,506	104

First lien¹² ......................	16,898	32,296	77	21,256	38,325	84	18,710	34,913	77
Second lien¹² ..................	2,622	3,880	25	3,763	5,405	30	3,054	4,593	27

	19,520	36,176	102	25,019	43,730	114	21,764	39,506	104

Stated income¹³ ..............	3,360	-	-	4,875	-	-	3,905	-	-

Impairment allowances ...	1,931	2,695	1	3,508	4,315	1	2,419	3,167	1
- as a percentage of total mortgage lending	9.9%	7.4%	1.0%	14.0%	9.9%	1.0%	11.1%	8.0%	1.0%

Interest-only (affordability mortgages) are loans which are classified as 'interest-only' for an initial period before reverting to repayment. As a consequence, in the table 'Mortgage lending products' on page 153 these balances are included in the category 'Affordability mortgages, including ARMs' (adjustable-rate mortgages).

For footnotes, see page 196.

US personal lending - credit quality

In the first half of 2010, credit quality in the US personal lending portfolios improved as the economic recovery continued. Delinquency declined from the levels seen in recent periods but remained high compared with pre-crisis levels.

House prices stabilised in most markets, particularly in the medium and low price segments, in part due to the effects of the government's various stimulus packages and low interest rates attributable to monetary policy initiatives. How sustainable these improvements will be in the absence of government involvement remains to be seen.

The job market continued to improve in the first half of 2010. However, US unemployment, which was a major factor in the deterioration in credit quality, remained high at 9.5 per cent, a decrease of 50 basis points since December 2009. Unemployment rates in 6 states were at or above 11 per cent, including California and Florida, where, in each state, HSBC Finance had more than 5 per cent of its total lending balances.

Continued improvement in unemployment and a sustained recovery in the housing markets remain critical components of a broader US economic recovery. Further weakening of these components may affect consumer confidence and may result in deterioration in consumer payment patterns and credit quality.

Mortgage lending

Residential mortgage exposure in the US declined by 7 per cent to US$61 billion, consistent with HSBC's strategy to run-off the existing balances in the Consumer Lending and Mortgage Services portfolios to reduce non-prime real estate exposure.

In the Consumer Lending business, two months or more delinquency rates on first lien loans declined from 15.4 per cent at 31 December 2009 to 14.9 per cent at 30 June 2010. In Mortgage Services, two months or more delinquency rates were stable at 16.5 per cent. The overall decline in delinquency reflected the improved economic conditions and the normal seasonal upturn in collection activities, as some customers use tax refunds to service outstanding debt. In line with the continued run-off of the portfolios, first lien two months or more delinquent balances in Consumer Lending declined from US$5.4 billion at 31 December 2009 to US$4.8 billion at 30 June 2010 and, in Mortgage Services, from US$3.1 billion at 31 December 2009 to US$2.8 billion at 30 June 2010. This was partly due to risk mitigation action taken since 2007 to tighten underwriting and reduce the risk profile of these portfolios.

In the HSBC Bank USA residential mortgage portfolio, two months or more delinquency rates on first lien loans declined from 8.6 per cent at 31 December 2009 to 8.1 per cent at 30 June 2010. Delinquent balances steadied as the economy improved and real estate markets and loss severities stabilised. However, both remained high due to continued levels of unemployment.

Average losses on foreclosed properties in HSBC Finance improved from 31 December 2009, reflecting the stabilisation of house prices in most markets (see page 159). The inventory of repossessed properties increased as delays in processing foreclosures, which had begun when interventions by certain states and local governments had lengthened the procedure and added to backlogs, were eased. It is expected that the inventory of repossessed properties will rise in future periods if backlogs in foreclosure proceedings continue to be reduced. HSBC took various measures to assist customers facing difficulties with their payments, restructuring and modifying loans where it appeared likely that they could be serviced on revised terms. For further details, see 'HSBC Finance loan modifications and re-ageing' on page 159.

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. Loss experience on default of second lien loans has typically approached 100 per cent of the amount owed, as any equity in the property is initially applied to the first lien loan. In the Mortgage Services business, the proportion of second lien mortgage customers two months or more delinquent declined from 12.6 per cent at 31 December 2009 to 10.6 per cent at 30 June 2010 while, in Consumer Lending, it fell from 14.0 per cent to 12.4 per cent. The reduction in these portfolios was due to balances proceeding to write-off and lower levels of balances becoming delinquent as economic conditions improved. In HSBC Bank USA, two months or more delinquency rates on second lien mortgage loans rose from 4.0 per cent at 31 December 2009 to 4.4 per cent at 30 June 2010, as balances in the portfolio declined while delinquency remained unchanged.

Stated-income mortgages are of higher than average risk as they were underwritten on the basis of borrowers' representations of annual income and were not fully verified by receipt of supporting documentation. In HSBC Finance, stated-income balances continued to run off, declining from US$3.9 billion at 31 December 2009 to US$3.4 billion at 30 June 2010. Two months or more delinquency rates in this portfolio remained stable at 22.7 per cent. In HSBC Bank USA, stated-income balances were broadly unchanged at US$2.1 billion while two months or more delinquency rates declined from 11.1 per cent at 31 December 2009 to 10.7 per cent at 30 June 2010.

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. At 30 June 2010, affordability mortgage balances in HSBC Finance were US$9 billion, compared with US$10 billion at 31 December 2009, as the existing portfolio continued to run off. In HSBC Bank USA, affordability mortgage balances declined from US$11.0 billion at 31 December 2009 to US$10.9 billion at 30 June 2010.

HSBC Finance: geographical concentration of US lending^11,14

	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	10	5	11	11
New York ....................................................................	4	7	3	7	7
Florida .........................................................................	4	6	3	6	6
Texas ..........................................................................	2	4	4	8	6
Pennsylvania................................................................	3	6	2	5	5
Ohio.............................................................................	3	5	2	5	5

For footnotes, see page 196.

Credit cards

In the US credit cards business, which comprises both general and private label cards, lending balances were US$34 billion at 30 June 2010 compared with US$39 billion at 31 December 2009. Two months or more delinquent balances in the portfolios declined from US$2.4 billion at 31 December 2009 to US$1.7 billion at 30 June 2010 reflecting lower balances which resulted from fewer active accounts, an increased focus by customers on reducing credit card debt and better early stage delinquency roll rates as economic conditions improved. The reduction was also due to seasonal collection activities, while tighter underwriting criteria reduced the risk profile of the portfolio. In the credit card portfolio, two months or more delinquency rates declined from 7.4 per cent at 31 December 2009 to 5.7 per cent at 30 June 2010, while in the private label portfolio they declined from 4.1 per cent at 31 December 2009 to 3.8 per cent at 30 June 2010.

Vehicle finance

In the vehicle finance portfolio, which is largely in run-off, two months or more delinquency rates fell from 4.6 per cent at 31 December 2009 to 3.6 per cent at 30 June 2010, driven by seasonal improvements in repayment and the improvement in economic conditions. As noted above, US$1.0 billion of vehicle finance loans were sold to Santander Consumer USA, Inc. in the first half of 2010. In July 2010 HSBC reached agreement in principle with an unaffiliated third party to sell the residual vehicle finance loans with the sale expected to close in the second half of 2010.

Other personal lending

In the US unsecured lending portfolio, which is also in run-off, two months or more delinquency rates declined in the improved economic conditions, helped by a seasonal improvement in collections and the result of actions taken previously to tighten underwriting and reduce risk in this portfolio.

US personal lending - loan delinquency

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

Two months and over contractual delinquency¹⁵

	Quarter ended
	30 Jun 2010	31 Mar 2010	As reported² 31 Dec 2009	Ex. period change² 31 Dec 2009	30 Sep 2009	30 Jun 2009	31 Mar 2009	31 Dec 2008	30 Sep 2008
	US$m	US$m	US$m	US$m	US$m	US$m	US$m	US$m	US$m
In Personal Financial Services in the US
Residential mortgages ....	8,591	8,960	9,551	11,519	10,834	10,070	9,892	9,236	7,061
Second lien mortgage lending ......................	930	1,011	1,194	1,628	1,631	1,676	1,772	1,790	1,616
Vehicle finance .............	152	194	267	267	295	310	269	541	512
Credit card ....................	1,201	1,511	1,798	1,798	1,834	1,864	1,992	2,029	1,871
Private label ..................	478	510	622	622	639	636	659	679	606
Personal non-credit card ..................................	987	1,194	1,548	2,619	2,680	2,709	2,855	3,020	2,763

Total ............................	12,339	13,380	14,980	18,453	17,913	17,265	17,439	17,295	14,429

	%	%	%	%	%	%	%	%	%

Residential mortgages ....	14.02	14.12	14.54	17.03	15.39	13.89	12.82	11.42	8.23
Second lien mortgage lending ......................	8.98	9.17	10.14	13.35	12.71	12.35	12.59	12.26	10.59
Vehicle finance .............	3.59	3.96	4.63	4.63	4.61	3.97	2.79	4.98	4.27
Credit card ....................	5.65	6.84	7.38	7.38	7.28	7.25	7.14	6.76	6.18
Private label ..................	3.80	3.78	4.12	4.12	4.38	4.08	4.28	3.99	3.72
Personal non-credit card ..................................	9.60	10.75	12.55	19.77	18.73	18.02	18.30	17.83	15.41

Total ............................	10.28	10.61	11.09	13.34	12.47	11.49	10.92	10.16	8.13

Two months and over contractual delinquency¹⁵ (continued)

	Quarter ended
	30 Jun 2010	31 Mar 2010	As reported² 31 Dec 2009	Ex. period change² 31 Dec 2009	30 Sep 2009	30 Jun 2009	31 Mar 2009	31 Dec 2008	30 Sep 2008
	US$m	US$m	US$m	US$m	US$m	US$m	US$m	US$m	US$m
In Mortgage Services and Consumer Lending
Mortgage Services: ......	3,067	3,236	3,477	4,456	4,250	4,257	4,535	4,699	4,227
- first lien ...............	2,788	2,928	3,093	3,900	3,688	3,642	3,824	3,912	3,420
- second lien ...........	279	308	384	556	562	615	711	787	807

Consumer Lending: .....	5,278	5,493	6,022	7,445	7,131	6,514	6,203	5,577	3,866
- first lien ...............	4,795	4,970	5,380	6,541	6,241	5,640	5,322	4,724	3,176
- second lien ...........	483	523	642	904	890	874	881	853	690

	%	%	%	%	%	%	%	%	%
Mortgage Services:
- first lien ...............	16.50	16.38	16.53	20.00	18.09	17.13	17.24	16.87	14.16
- second lien ...........	10.63	10.87	12.57	17.25	16.36	16.35	17.44	17.72	16.62
- total .....................	15.71	15.62	15.98	19.61	17.84	17.01	17.27	17.01	14.57

Consumer Lending:
- first lien ...............	14.85	14.79	15.41	18.15	16.75	14.72	13.52	11.71	7.72
- second lien ...........	12.44	12.25	13.98	18.64	17.49	16.17	15.43	14.54	11.27
- total .....................	14.59	14.51	15.24	18.21	16.84	14.90	13.76	12.07	8.18

For footnote, see page 196.

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.

HSBC's credit risk management policy on restructured loans sets out restrictions on the number and frequency of restructures, the minimum period an account must have been opened before any restructure can be considered and the number of qualifying payments that must be received before the account may be considered restructured and up to date. The application of this policy varies according to the nature of the market, the product, and the availability of empirical data.

These restructuring policies and practices are based on criteria which, in the judgement of local management, indicate that repayment is likely to continue, and are kept under continual review.

Loans that are subject to restructuring may only be classified as restructured and up to date once a specified number and/or amount of qualifying

payments have been received. These qualifying payments are set at a level appropriate to the nature of the loan and the customer's circumstances to provide evidence that repayment is likely to continue. Typically the receipt of two or more qualifying payments is required within a certain period, generally 60 days (in the case of HSBC Finance, under certain circumstances, fewer payments may be required).

Renegotiated loans are segregated from other parts of the loan portfolio for collective impairment assessment, to reflect their risk profile. When empirical evidence indicates an increased propensity to default on accounts which have been restructured, the use of roll rate methodology ensures that this factor is taken into account when calculating impairment allowances. Interest is recorded on renegotiated loans taking into account the new contractual terms following renegotiation.

Renegotiated loans that would otherwise be past due or impaired totalled US$36 billion at 30 June 2010 (31 December 2009: US$39 billion). The largest concentration was in the US and amounted to US$31 billion (31 December 2009: US$33 billion) or 85 per cent (31 December 2009: 86 per cent) of the Group's total renegotiated loans. The decline was primarily due to run-off of the US consumer finance real estate book and improved delinquency.

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. In the first half of 2010, HSBC Finance modified 26,500 loans in Consumer Lending and Mortgage Services through the foreclosure avoidance and account modification programmes, with an aggregate balance of US$3.9 billion.

At 30 June 2010, the total balance outstanding on HSBC Finance real estate secured accounts which have been re-aged or modified was US$28.4 billion, compared with US$30.2 billion at the end of 2009. At 30 June 2010, 25 per cent of these balances were two or more months delinquent, compared with 26 per cent at the end of 2009.

HSBC Finance foreclosed properties in the US

	Half year		Quarter ended
	to 30 June 2010	30 June 2010		31 March 2010		31 December 2009		30 September 2009

Number of foreclosed properties at end of period .........	8,394		8,394		6,961		6,188		6,428
Number of properties added to foreclosed inventory in the half year/quarter .............................................	9,313		5,096		4,217		3,496		3,546
Average loss on sale of foreclosed properties (US$000)¹⁶ .................................................................................	4		4		4		5		8
Average total loss on foreclosed properties¹⁷ ...............	49%		49%		49%		50%		52%
Average time to sell foreclosed properties (days) .........	163		156		170		172		184

For footnotes, see page 196.

Credit quality of financial instruments

The five credit quality classifications set out below and defined on page 225 of the Annual Report and Accounts 2009 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

	Debt securities and other bills	Wholesale lending and derivatives		Retail lending
	External credit rating	Internal credit rating	Probability of default %	Internal credit rating¹⁸	Expected loss %

Quality classification
Strong ...............	A- and above	CRR1 to CRR2	0 - 0.169	EL1 to EL2	0 - 0.999
Good .................	BBB+ to BBB-	CRR3	0.170 - 0.740	EL3	1.000 - 4.999
Satisfactory .......	BB+ to B+ and unrated	CRR4 to CRR5	0.741 - 4.914	EL4 to EL5	5.000- 19.999
Sub-standard ......	B and below	CRR6 to CRR8	4.915 - 99.999	EL6 to EL8	20.000 - 99.999
Impaired ...........	Impaired	CRR9 to CRR10	100	EL9 to EL10	100+ or defaulted¹⁹

For footnotes, see page 196.

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 107 to 109 and 126 to 127, 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-
			Satisfac-	Sub-	but not			ment
	Strong	Good	tory	standard	impaired	Impaired	allowances²⁰		Total
	US$m	US$m	US$m	US$m	US$m	US$m		US$m	US$m

At 30 June 2010
Cash and balances at central banks ..................................	67,466	1,899	1,910	301					71,576
Items in the course of collection from other banks ...........................................	10,200	554	441	-					11,195
Hong Kong Government certificates of indebtedness .	18,364	-	-	-					18,364

Trading assets²¹ ......................	278,887	52,634	43,105	1,814					376,440
- treasury and other eligible bills ..................................	20,524	1,054	473	185					22,236
- debt securities ..................	173,483	7,709	12,539	659					194,390
- loans and advances to banks ...............................	50,641	21,567	4,960	266					77,434
- loans and advances to customers ........................	34,239	22,304	25,133	704					82,380

Financial assets designated at fair value²¹ .........................	7,722	3,600	6,988	40					18,350
- treasury and other eligible bills ..................................	215	-	34	-					249
- debt securities ..................	6,114	3,600	6,399	40					16,153
- loans and advances to banks ...............................	594	-	555	-					1,149
- loans and advances to customers ........................	799	-	-	-					799

Derivatives²¹ ..........................	196,558	70,831	18,587	2,303					288,279

Loans and advances held at amortised cost ....................	585,784	234,005	188,792	40,386	34,749	28,115		(22,198)	1,089,633
- loans and advances to banks ...............................	142,135	40,911	12,064	983	140	228		(165)	196,296
- loans and advances to customers²² ......................	443,649	193,094	176,728	39,403	34,609	27,887		(22,033)	893,337

Financial investments ............	333,892	20,963	15,298	4,072	-	2,417			376,642
- treasury and other similar bills ..................................	56,193	2,289	2,353	439	-	1			61,275
- debt securities ..................	277,699	18,674	12,945	3,633	-	2,416			315,367

Other assets ...........................	9,797	5,880	12,264	1,583	660	459			30,643
- endorsements and acceptances .....................	1,506	2,896	4,508	639	14	10			9,573
- accrued income and other	8,291	2,984	7,756	944	646	449			21,070

	Neither past due nor impaired				Past due			Impair-
			Satisfac-	Sub-	but not			ment
	Strong	Good	tory	standard	impaired	Impaired	allowances²⁰		Total
	US$m	US$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	97	2,288	263					56,368
Items in the course of collection from other banks ...........................................	14,629	1,337	647	-					16,613
Hong Kong Government certificates of indebtedness .	16,156	-	-	-					16,156

Trading assets²¹ ......................	292,227	42,859	50,196	3,592					388,874
- treasury and other eligible bills ..................................	22,673	99	54	164					22,990
- debt securities ..................	169,211	4,945	15,409	1,305					190,870
- loans and advances to banks ...............................	55,632	13,946	3,327	731					73,636
- loans and advances to customers ........................	44,711	23,869	31,406	1,392					101,378

Financial assets designated at fair value²¹ .........................	9,030	2,713	9,520	38					21,301
- treasury and other eligible bills ..................................	195	300	-	-					495
- debt securities ..................	7,854	2,413	9,520	38					19,825
- loans and advances to banks ...............................	204	-	-	-					204
- loans and advances to customers ........................	777	-	-	-					777

Derivatives²¹ ..........................	239,506	52,446	15,348	3,496					310,796

Loans and advances held at amortised cost ....................	603,762	211,875	192,811	48,522	45,692	32,066		(27,779)	1,106,949
- loans and advances to banks ...............................	143,077	25,958	11,646	1,389	34	240		(78)	182,266
- loans and advances to customers²² ......................	460,685	185,917	181,165	47,133	45,658	31,826		(27,701)	924,683

Financial investments ............	304,666	17,655	18,811	2,861	23	628			344,644
- treasury and other similar bills ..................................	50,617	627	1,476	1,542	-	-			54,262
- debt securities ..................	254,049	17,028	17,335	1,319	23	628			290,382

Other assets ...........................	12,782	7,163	13,205	921	397	723			35,191
- endorsements and acceptances .....................	1,241	3,337	4,489	396	6	12			9,481
- accrued income and other	11,541	3,826	8,716	525	391	711			25,710

Distribution of financial instruments by credit quality (continued)

	Neither past due nor impaired				Past due			Impair-
			Satisfac-	Sub-	but not			ment
	Strong	Good	tory	standard	impaired	Impaired	allowances²⁰		Total
	US$m	US$m	US$m	US$m	US$m	US$m		US$m	US$m

At 31 December 2009
Cash and balances at central banks ..................................	55,355	3,414	1,589	297					60,655
Items in the course of collection from other banks ...........................................	5,922	20	453	-					6,395
Hong Kong Government certificates of indebtedness .	17,463	-	-	-					17,463

Trading assets²¹ ......................	306,481	37,911	39,457	2,221					386,070
- treasury and other eligible bills ..................................	21,747	315	169	115					22,346
- debt securities ..................	180,876	7,499	12,360	863					201,598
- loans and advances to banks ...............................	59,152	14,213	4,572	189					78,126
- loans and advances to customers ........................	44,706	15,884	22,356	1,054					84,000

Financial assets designated at fair value²¹ .........................	11,163	3,834	7,122	79					22,198
- treasury and other eligible bills ..................................	223	-	-	-					223
- debt securities ..................	9,701	3,834	7,104	79					20,718
- loans and advances to banks ...............................	336	-	18	-					354
- loans and advances to customers ........................	903	-	-	-					903

Derivatives²¹ ..........................	169,430	60,759	15,688	5,009					250,886

Loans and advances held at amortised cost ....................	570,357	231,394	185,167	43,820	40,078	30,845		(25,649)	1,076,012
- loans and advances to banks ...............................	130,403	34,646	13,154	1,434	12	239		(107)	179,781
- loans and advances to customers²² ......................	439,954	196,748	172,013	42,386	40,066	30,606		(25,542)	896,231

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

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

For footnotes, see page 196.

Financial instruments on which credit quality has been assessed increased by 3 per cent to US$2,281 billion in the first half of 2010, of which US$1,509 billion or 66 per cent was classified as 'strong'. This percentage was in line with 31 December 2009 due to management actions to mitigate the Group's exposure to credit risk. The proportion of financial instruments classified as 'good' rose to 17 per cent, while the proportion of 'satisfactory' was broadly unchanged. The proportion of 'sub-standard' declined to 2 per cent.

Derivative assets on which credit quality has been assessed grew by 15 per cent to US$288 billion from 31 December 2009, with most of the growth in balances being classified as 'strong'. The increase was due to a rise in the proportion of derivatives traded with central counterparties.

Financial investments on which credit quality has been assessed increased by 5 per cent to US$377 billion, reflecting a rise in the proportion of assets rated as 'strong' due to increased investment in government guaranteed and government agency bonds. Balances classified as strong increased by 5 per cent.

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 gross loans and advances to customers and banks by geographical region

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

At 30 June 2010 ...........................	2,717	1,230	2,019	1,372	23,483	3,928	34,749
At 30 June 2009 .............................	3,772	1,416	2,374	2,585	31,515	4,030	45,692
At 31 December 2009 .....................	3,759	1,165	1,996	1,661	27,989	3,508	40,078

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

	At 30 June 2010	At 30 June 2009	At 31 December 2009
	US$m	US$m	US$m

Banks ................................................................................................................	140	34	12

Customers .........................................................................................................	34,609	45,658	40,066
Personal ........................................................................................................	28,995	36,955	34,306
Corporate and commercial .............................................................................	5,451	8,546	5,522
Financial ........................................................................................................	163	157	238


	34,749	45,692	40,078

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

	Up to 29 days	30-59 days	60-89 days	90-179 days	180 days and over	Total
	US$m	US$m	US$m	US$m	US$m	US$m
At 30 June 2010
Loans and advances held at amortised cost ..	22,627	8,058	3,682	238	144	34,749
- loans and advances to banks ..................	140	-	-	-	-	140
- loans and advances to customers ...........	22,487	8,058	3,682	238	144	34,609

Other assets .................................................	348	164	85	24	39	660
- endorsements and acceptances ..............	8	3	1	1	1	14
- other ....................................................	340	161	84	23	38	646


	22,975	8,222	3,767	262	183	35,409

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 31 December 2009
Loans and advances held at amortised cost ..	24,330	9,920	5,259	355	214	40,078
- loans and advances to banks ..................	12	-	-	-	-	12
- loans and advances to customers ...........	24,318	9,920	5,259	355	214	40,066

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


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

Impaired loans and advances

Impaired loans and advances to customers and banks by industry sector

	Impaired loans and advances at 30 June 2010			Impaired loans and advances at 30 June 2009			Impaired loans and advances at 31 December 2009
	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

Banks ............................	228	-	228	240	-	240	239	-	239

Customers ......................	14,462	13,425	27,887	13,449	18,377	31,826	14,767	15,839	30,606
Personal .....................	1,877	13,119	14,996	1,957	17,966	19,923	1,977	15,451	17,428
Corporate and commercial ................	11,663	305	11,968	10,820	410	11,230	11,839	387	12,226
Financial ....................	922	1	923	672	1	673	951	1	952


	14,690	13,425	28,115	13,689	18,377	32,066	15,006	15,839	30,845

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 gross loans and advances to customers by geographical region

	Europe	Hong Kong	Rest of Asia- Pacific	Middle East	North America	Latin America	Total
	US$m	US$m	US$m	US$m	US$m	US$m	US$m
At 30 June 2010
Gross loans and advances
Individually assessed impaired loans²³ ....................................	8,420	782	989	1,718	1,699	854	14,462

Collectively assessed²⁴ ................	404,641	114,024	91,539	23,263	217,349	50,092	900,908
Impaired loans²³ .....................	1,837	32	157	260	9,420	1,719	13,425
Non-impaired loans²⁵ ..............	402,804	113,992	91,382	23,003	207,929	48,373	887,483


Total gross loans and advances ...	413,061	114,806	92,528	24,981	219,048	50,946	915,370

Impairment allowances
Individually assessed ................	3,647	444	474	1,032	434	371	6,402
Collectively assessed ...............	2,188	287	382	555	10,473	1,746	15,631

Total impairment allowances .....	5,835	731	856	1,587	10,907	2,117	22,033


Net loans and advances ...............	407,226	114,075	91,672	23,394	208,141	48,829	893,337

	%	%	%	%	%	%	%
Individually assessed allowances as a percentage of individually assessed loans and advances .....	43.3	56.8	47.9	60.1	25.5	43.4	44.3
Collectively assessed allowances as a percentage of collectively assessed loans and advances ...........................	0.5	0.3	0.4	2.4	4.8	3.5	1.7
Total allowances as a percentage of total gross loans and advances .........	1.4	0.6	0.9	6.4	5.0	4.2	2.4

	Europe	Hong Kong	Rest of Asia- Pacific	Middle East	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 loans²³ ......................................	8,563	960	1,079	615	1,364	868	13,449

Collectively assessed²⁴ ..................	454,104	97,373	73,977	25,131	242,031	46,319	938,935
Impaired loans²³ .......................	2,029	34	252	286	13,639	2,137	18,377
Non-impaired loans²⁵ ................	452,075	97,339	73,725	24,845	228,392	44,182	920,558


Total 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

Net loans and advances .................	457,090	97,486	74,062	25,097	226,258	44,690	924,683

	%	%	%	%	%	%	%
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

	US$m	US$m	US$m	US$m	US$m	US$m	US$m
At 31 December 2009
Gross loans and advances
Individually assessed impaired loans²³ ......................................	8,800	823	1,006	1,310	1,990	838	14,767

Collectively assessed²⁴ ..................	436,816	99,362	80,033	22,912	218,539	49,344	907,006
Impaired loans²³ .......................	1,922	18	194	336	11,256	2,113	15,839
Non-impaired loans²⁵ ................	434,894	99,344	79,839	22,576	207,283	47,231	891,167


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

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

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

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

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

For footnotes, see page 196.

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

	At 30 June 2010			At 30 June 2009			At 31 December 2009
	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

Banks²⁶ ..........................	165	-	165	78	-	78	107	-	107

Customers ......................	6,402	15,631	22,033	5,314	22,387	27,701	6,494	19,048	25,542
Personal ....................	544	13,465	14,009	384	20,034	20,418	572	16,517	17,089
Corporate and commercial ................	5,471	2,050	7,521	4,624	2,138	6,762	5,528	2,354	7,882
Financial ....................	387	116	503	306	215	521	394	177	571


	6,567	15,631	22,198	5,392	22,387	27,779	6,601	19,048	25,649

For footnote, see page 196.

Impairment allowances as a percentage of loans and advances^27,28

	At 30 June 2010	At 30 June 2009	At 31 December 2009
	%	%	%
Banks
Individually assessed impairment allowances ..................................................	0.13	0.06	0.09

Customers .........................................................................................................	2.62	3.13	2.96
Individually assessed impairment allowances ..................................................	0.76	0.60	0.75
Collectively assessed impairment allowances ..................................................	1.86	2.53	2.21

For footnotes, see page 196.

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 2010 ...............................................	107	6,494	19,048	25,649
Amounts written off ............................................	(8)	(675)	(9,678)	(10,361)
Recoveries of loans and advances written off in previous years ..................................................	2	58	393	453
Charge to income statement ................................	12	1,057	6,165	7,234
Exchange and other movements ..........................	52	(532)	(297)	(777)

At 30 June 2010 ................................................	165	6,402	15,631	22,198

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 July 2009 .....................................................	78	5,314	22,387	27,779
Amounts written off ............................................	(35)	(1,058)	(13,264)	(14,357)
Recoveries of loans and advances written off in previous years ..................................................	6	94	413	513
Charge to income statement ................................	57	2,151	9,401	11,609
Exchange and other movements ..........................	1	(7)	111	105

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

Net loan impairment charge to the income statement by geographical region

	Europe US$m	Hong Kong US$m	Rest of Asia- Pacific US$m	Middle East US$m	North America US$m	Latin America US$m	Total US$m
Half-year to 30 June 2010
Individually assessed impairment allowances
New allowances ....................................	782	60	72	388	240	64	1,606
Release of allowances no longer required ..........................................................	(230)	(29)	(52)	(33)	(107)	(26)	(477)
Recoveries of amounts previously written off .....................................................	(11)	(7)	(8)	(5)	(21)	(8)	(60)

	541	24	12	350	112	30	1,069

Collectively assessed impairment allowances
New allowances net of allowance releases ..............................................	777	52	212	111	4,537	869	6,558
Recoveries of amounts previously written off .....................................................	(104)	(13)	(77)	(24)	(73)	(102)	(393)

	673	39	135	87	4,464	767	6,165

Total charge for impairment losses ........	1,214	63	147	437	4,576	797	7,234
Banks ..................................................	2	-	-	2	8	-	12
Customers ............................................	1,212	63	147	435	4,568	797	7,222


	%	%	%	%	%	%	%
Charge for impairment losses as a percentage of closing gross loans and advances (annualised) ...........................	0.49	0.09	0.23	2.62	3.91	2.22	1.31

	US$m	US$m	US$m	US$m	US$m	US$m	US$m
At 30 June 2010
Impaired loans ........................................	10,398	818	1,147	1,998	11,181	2,573	28,115
Impairment allowances ...........................	5,919	731	856	1,605	10,970	2,117	22,198

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

Net loan impairment charge to the income statement by geographical region (continued)

	Europe US$m	Hong Kong US$m	Rest of Asia- Pacific US$m	Middle East US$m	North America US$m	Latin America US$m	Total US$m
Half-year to 31 December 2009
Individually assessed impairment allowances
New allowances ....................................	1,081	164	142	444	589	160	2,580
Release of allowances no longer required ...........................................................	(89)	(47)	(45)	(6)	(47)	(38)	(272)
Recoveries of amounts previously written off .....................................................	(48)	(5)	(11)	(1)	(24)	(11)	(100)

	944	112	86	437	518	111	2,208

Collectively assessed impairment allowances
New allowances net of allowance releases ..............................................	1,137	80	332	517	6,534	1,214	9,814
Recoveries of amounts previously written off .....................................................	(88)	(13)	(67)	(14)	(26)	(205)	(413)

	1,049	67	265	503	6,508	1,009	9,401

Total charge for impairment losses .........	1,993	179	351	940	7,026	1,120	11,609
Banks .................................................	48	-	-	9	-	-	57
Customers ..........................................	1,945	179	351	931	7,026	1,120	11,552


	%	%	%	%	%	%	%
Charge for impairment losses as a percentage of closing gross loans and advances (annualised) ...........................	0.77	0.26	0.60	5.71	5.91	3.23	2.09

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

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

	Europe	Hong Kong	Rest of Asia- Pacific	Middle East	North America	Latin America	Total
	%	%	%	%	%	%	%
Half-year to 30 June 2010
New allowances net of allowance releases .................................	0.71	0.17	0.51	3.85	4.34	3.64	1.81
Recoveries .................................	(0.06)	(0.04)	(0.19)	(0.24)	(0.09)	(0.44)	(0.11)

Total charge for impairment losses ....................................	0.65	0.13	0.32	3.61	4.25	3.20	1.70

Amount written off net of recoveries .............................	0.49	0.26	0.59	1.84	6.69	4.72	2.32

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 31 December 2009
New allowances net of allowance releases .................................	1.02	0.40	1.08	7.59	5.97	5.54	2.69
Recoveries .................................	(0.06)	(0.04)	(0.20)	(0.12)	(0.04)	(0.90)	(0.11)

Total charge for impairment losses ....................................	0.96	0.36	0.88	7.47	5.93	4.64	2.58

Amount written off net of recoveries .............................	0.66	0.38	0.94	1.62	8.83	5.04	3.08

Impaired loans by geographical region

	31 Dec 09 as reported	Constant currency effect	31 Dec 09 at 30 Jun 10 exchange rates	Movement on a constant currency basis	30 Jun 10 as reported	Reported change	Movement on a constant currency basis
	US$m	US$m	US$m	US$m	US$m	%	%

Europe ..............................	10,873	(990)	9,883	515	10,398	(4)	5
Hong Kong .......................	846	(3)	843	(25)	818	(3)	(3)
Rest of Asia-Pacific ..........	1,201	1	1,202	(55)	1,147	(4)	(5)
Middle East .......................	1,666	(1)	1,665	333	1,998	20	20
North America ..................	13,308	(5)	13,303	(2,122)	11,181	(16)	(16)
Latin America ...................	2,951	(45)	2,906	(333)	2,573	(13)	(11)

Total ................................	30,845	(1,043)	29,802	(1,687)	28,115	(9)	(6)

Impaired loans and net loan impairment allowances

Reported loan impairment charges declined by 46 per cent against the first half of 2009 to US$7.2 billion in the first half of 2010 and by 47 per cent on an underlying basis. Reported impaired loans were US$28 billion at 30 June 2010, a decrease of 9 per cent since the end of 2009 and 6 per cent on an underlying basis. The following commentary is on a constant currency basis.

New allowances for loan impairment charges decreased by 43 per cent compared with the first half of 2009, to US$8 billion. Releases and recoveries were 29 per cent higher than in the first half of 2009 at US$930 million.

Impaired loans were 3 per cent of total gross loans and advances at 30 June 2010, compared with 3 per cent at 31 December 2009.

In Europe, new loan impairment allowances were US$1.6 billion, 43 per cent lower than in the first half of 2009, driven by an improvement in the credit environment across the region. Impaired loans of US$10 billion were 5 per cent higher than at the end of 2009 due to an impairment of a specific financial transaction, and increased impaired loans in the hotel and restaurant sector in the UK. Individually assessed new loan impairment allowances were lower due to the non-recurrence of a small number of specific impairment charges in the property and retail distribution sectors and reflected a stabilisation of economic conditions. Collectively assessed new loan impairment allowances declined in the personal and commercial lending portfolios, despite unemployment remaining at high levels. In the UK residential mortgage portfolio, new loan impairment allowances declined as delinquency reduced and house prices rose. Credit quality in the growing UK mortgage portfolio remained strong, assisted by HSBC's robust credit underwriting policy, and exposure to this market remained well secured with typical loan to value ratios of below 60 per cent.

In Europe, releases and recoveries were US$345 million, an increase of 15 per cent from the first half of 2009.

In Hong Kong, new loan impairment allowances declined from historically low levels in the first half of 2009 to US$112 million and impaired loans fell by 3 per cent from the end of 2009 to US$818 million. Loan impairment allowances in both the personal lending and commercial portfolios fell due to the improvement in economic conditions and a reduction in bankruptcy levels.

New loan impairment allowances in Rest of Asia-Pacific fell by 58 per cent from the first half of 2009 to US$284 million. The decline was mainly in India where lower loan impairment allowances were attributable to a planned reduction in credit cards and other unsecured personal lending balances as underwriting standards were tightened, while large individually assessed impairments on certain technology-related exposures did not recur. Impaired loans in the region declined by 5 per cent at the end of 2009 to US$1 billion.

Releases and recoveries in the Rest of Asia-Pacific region rose by 38 per cent compared with the first half of 2009.

In the Middle East, new loan impairment allowances rose by 20 per cent from the first half of 2009 to US$499 million. The increase was due to significant new individual impairment allowances recorded against a small number of large corporate exposures. Collective loan impairment allowances against the personal lending portfolios declined due to a better outlook for future loss estimates as delinquency rates improved. This followed steps taken to improve portfolio quality and increase collection activity. Impaired loans rose by 20 per cent from 31 December 2009 to US$2 billion due to credit deterioration in a small number of specific exposures.

Releases and recoveries in the Middle East more than doubled from the first half of 2009 to US$62 million due to more benign credit conditions.

In North America, new loan impairment allowances declined by 44per cent from the first half of 2009 to US$5 billion. This marked decline was across all portfolios, driven by lower new collectively assessed loan impairment allowances in HSBC Finance's portfolios which were due to lower delinquency rates as economic conditions and credit quality improved.

In Card and Retail Services, new loan impairment allowances declined due to a reduction in lending balances and an improvement in delinquencies. In the Consumer Lending and Mortgage Services portfolios, new loan impairment allowances also fell as the portfolio continued to run-off.

In the corporate and commercial portfolios, new loan impairment allowances declined, particularly in the commercial real estate and construction sectors in the US and in the manufacturing, trade and services sectors in Canada.

In North America, impaired loans decreased by 16 per cent from the end of 2009 to US$11 billion. Releases and recoveries rose by 83 per cent from the first half of 2009 to US$201 million.

In Latin America, new loan impairment allowances fell by 47 per cent from the first half of 2009 to US$933 million, and impaired loans declined by 11 per cent from the end of 2009 to US$3 billion. The reduction in new loan impairment allowances reflected the improvement in credit conditions across the region and the positive effects of management actions taken to run down the higher risk lending portfolios. In Mexico, there was a significant reduction in collectively assessed new loan impairment allowances on the personal lending portfolios, notably in credit cards, following steps taken in previous periods which led to lower balances. Lower loan impairment allowances in the commercial portfolio were seen in Brazil as economic conditions improved.

Releases and recoveries in Latin America declined by 14 per cent from the first half of 2009 to US$136 million.

For an analysis of loan impairment charges and other credit risk provisions by customer group, see pages 21 to 23.

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 225 of the Annual Report and Accounts 2009.

Unimpaired loans past due 90 days or more as to principal or interest

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

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 as '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 158 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, where a restructure is on market terms, 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 4 per cent in the first half of 2010, 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' on page 148. 'Areas of special interest' includes 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 ARMs and stated-income products. Collectively assessed loans and advances, as set out on page 164, 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 204 of the Annual Report and Accounts 2009.

Analysis of risk elements in the loan portfolio by geographical region

	At 30 June 2010 US$m	At 30 June 2009 US$m	At 31 December 2009 US$m
Impaired loans
Europe .........................................................................................	10,398	10,740	10,873
Hong Kong ...................................................................................	818	994	846
Rest of Asia-Pacific ......................................................................	1,147	1,331	1,201
Middle East ..................................................................................	1,998	921	1,666
North America .............................................................................	11,181	15,075	13,308
Latin America ..............................................................................	2,573	3,005	2,951

	28,115	32,066	30,845

Unimpaired loans contractually past due 90 days or more as to principal or interest
Europe .........................................................................................	60	135	57
Hong Kong ...................................................................................	4	20	4
Rest of Asia-Pacific ......................................................................	15	118	36
Middle East ..................................................................................	194	215	215
North America .............................................................................	94	226	217
Latin America ..............................................................................	15	33	40

	382	747	569

Troubled debt restructurings (not included in the classifications above)
Europe .........................................................................................	342	449	436
Hong Kong ...................................................................................	235	228	236
Rest of Asia-Pacific ......................................................................	173	127	135
Middle East ..................................................................................	94	51	103
North America .............................................................................	10,290	6,227	9,613
Latin America ..............................................................................	1,378	943	1,518

	12,512	8,025	12,041

Trading loans classified as in default
North America .............................................................................	512	788	798

Risk elements on loans
Europe .........................................................................................	10,800	11,324	11,366
Hong Kong ...................................................................................	1,057	1,242	1,086
Rest of Asia-Pacific ......................................................................	1,335	1,576	1,372
Middle East ..................................................................................	2,286	1,187	1,984
North America .............................................................................	22,077	22,316	23,936
Latin America ..............................................................................	3,966	3,981	4,509

	41,521	41,626	44,253

Assets held for resale
Europe .........................................................................................	42	76	52
Hong Kong ...................................................................................	6	24	10
Rest of Asia-Pacific ......................................................................	6	18	8
Middle East ..................................................................................	2	2	2
North America .............................................................................	961	1,088	707
Latin America ..............................................................................	130	123	153

	1,147	1,331	932

Analysis of risk elements in the loan portfolio by geographical region (continued)

	At 30 June 2010 US$m	At 30 June 2009 US$m	At 31 December 2009 US$m
Total risk elements
Europe .........................................................................................	10,842	11,400	11,418
Hong Kong ...................................................................................	1,063	1,266	1,096
Rest of Asia-Pacific ......................................................................	1,341	1,594	1,380
Middle East ..................................................................................	2,288	1,189	1,986
North America .............................................................................	23,038	23,404	24,643
Latin America ..............................................................................	4,096	4,104	4,662

	42,668	42,957	45,185

	%	%	%
Loan impairment allowances as a percentage of risk elements on loans²⁹ ......................................................................................	54.1	68.7	59.0

For footnote, see page 196.

Liquidity and funding

HSBC expects its operating entities to manage liquidity and funding risk on a stand‑alone basis employing a centrally imposed framework and limit structure which is adapted to changes in business mix and underlying markets. The Group emphasises the importance of customer deposits as a source of stable funding, using funding from professional markets only in selected circumstances and for non-banking subsidiaries such as HSBC Finance.

The objectives, policies and procedures for the management of liquidity and funding risks are described in the Annual Report and Accounts 2009, the key features of which are repeated below.

HSBC adapts its liquidity and funding risk management framework in response to changes in the mix of business that it undertakes, and to changes in the nature of the markets in which it operates. The Group also seeks to continuously evolve and strengthen its liquidity and funding risk management framework. As part of this on-going process, the Group has refined the way in which it characterises core deposits. The characterisation takes into account the activities and operating environment of the Group entity originating the deposit, the nature of the customer and the size and pricing of the deposit. This exercise has resulted in a revised internal calculation of advances to core funding ratios (discussed more fully below), and comparatives have been restated accordingly. While total core deposits at the Group consolidated level have not changed materially, there have been some revisions to individual Group entities.

The Group employs a number of measures to monitor liquidity risk. The emphasis on the ratio of net liquid assets to customer deposits, as reported in the Annual Report and Accounts 2009, has been reduced and a 'stressed one month coverage' ratio, an extension of the Group's projected cash flow scenario analysis, is now used by the RMM as a simple and more useful metric to express liquidity risk.

The management of liquidity and funding is primarily undertaken locally in HSBC's operating entities in compliance with practices and limits set by the RMM. These limits vary according to the depth and the liquidity of the markets in which the entities operate. HSBC's general policy is that each banking entity should be self-sufficient in funding its own operations.

Current accounts and savings deposits payable on demand or at short notice form a significant part of HSBC's funding, and the Group places considerable importance on maintaining their stability. For deposits, stability depends upon preserving depositor confidence in HSBC's capital strength and liquidity, and on competitive and transparent pricing.

HSBC also accesses professional markets in order to obtain funding for non-banking subsidiaries that do not accept deposits, to maintain a presence in local money markets and to optimise the funding of asset maturities not naturally matched by core deposit funding. In aggregate, HSBC's banking entities are liquidity providers to the interbank market, placing significantly more funds with other banks than they borrow.

The main operating subsidiary that does not accept deposits is HSBC Finance, which is funded principally by taking term funding in the professional

This information is provided by RNS

The company news service from the London Stock Exchange

END

IR KKDDNBBKDBFD

Companies

HSBC Holdings (HSBA)

Thursday, 9th May 2024

COMPANIES COVERED:

RBN AAF HBR

Airtel Africa left investors underwhelmed despite customer growth, Robinson’s share price jumps on profit upgrade and Harbour Energy nudges higher on trading update.

Full Archive

UK 100

Latest directors dealings

3 hours ago SSP Group
3 hours ago Real Estate Investors
4 hours ago WPP
4 hours ago Spectris
4 hours ago Clarkson

All directors dealings today

Interim Report - 12 of 21

Gross loans and advances to customers by industry sector and by geographical region

Gross loans and advances to customers by industry sector and by geographical region (continued)

Areas of special interest

For footnotes, see page 196.

Impaired loans and advances to customers and banks by industry sector

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

Impairment allowances on gross loans and advances to customers by geographical region

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

For footnote, see page 196.

Impairment allowances as a percentage of loans and advances27,28

Movement in impairment allowances on loans and advances

Net loan impairment charge to the income statement by geographical region

Net loan impairment charge to the income statement by geographical region (continued)

Risk elements in the loan portfolio

Impaired loans

Unimpaired loans past due 90 days or more as to principal or interest

Troubled debt restructurings

Potential problem loans

Companies

UK 100

Latest directors dealings

Impairment allowances as a percentage of loans and advances^27,28