Interim Report - 15 of 25

RNS Number : 7151J

HSBC Holdings PLC

10 August 2012

 



Areas of special interest

Eurozone exposures

Eurozone countries are members of the EU and part of the euro single currency bloc. The peripheral eurozone countries are those that exhibited levels of market volatility that exceeded other eurozone countries, demonstrating fiscal or political uncertainty which may persist through the second half of 2012. In the first half of 2012, the peripheral eurozone countries of Greece, Ireland, Italy, Portugal, Spain and Cyprus continued to exhibit a high ratio of sovereign debt to GDP or short to medium-term maturity concentration of their liabilities, with Greece, Spain and Cyprus seeking assistance to meet sovereign liabilities or direct support for banking sector recapitalisations.

The 'selected other eurozone' countries analysed in the table on page 128 are those that HSBC has a net on-balance sheet exposure to exceeding 5% of the Group's total equity at 30 June 2012.

Risk reduction in the first half of 2012

At 30 June 2012, our net exposure to the peripheral eurozone countries was US$37bn including a net exposure to sovereign, agencies and banks of US$12bn. During the period we continued to reduce our overall net exposure to sovereign, agencies and banks of peripheral eurozone countries. In addition, we continued to actively reduce exposures to counterparties domiciled in other eurozone countries that had exposures to sovereigns and/or banks in peripheral eurozone countries of sufficient size to threaten their on-going viability in the event of an unfavourable conclusion to the current crisis.

This was undertaken through an analysis of publicly available information, reviews of external analyst reports, and meetings with the counterparties' officials. Vulnerable counterparties were identified and subjected to enhanced monitoring, and our exposure was managed in a similar manner to the monitoring and management of direct exposures to the peripheral eurozone countries. One of the primary issues underpinning this process was the management of our surplus liquidity resulting in the placement of funds directly with central banks in the most highly-rated countries.

Our businesses in peripheral eurozone countries are funded from a mix of local deposits, local wholesale funding and intra-Group loans extended from HSBC operations with surplus funds. Intra-Group funding carries the risk that a member country might exit the eurozone and redenominate its national currency, which could result in a significant currency devaluation. A description of risks relating to currency redenomination in the event of the exit of a eurozone member is provided on page 129.

Exposures to countries in the eurozone

The tables in this section summarise our exposures to selected eurozone countries, including:

·     governments and central banks along with quasi government agencies;

·     banks;

·     other financial institutions and corporates; and

·     personal lending.

Exposures to banks, other financial institutions, other corporates and personal lending are based upon the counterparty's country of domicile.

Basis of preparation

The gross balance sheet exposure before risk mitigation represents the on-balance sheet carrying amounts recorded in accordance with IFRSs.

The net on-balance sheet exposure is stated after taking into account mitigating offsets that are incorporated into the risk management view of the exposure but do not meet accounting offset requirements. These risk mitigating offsets include:

·     short positions managed together with trading assets;

·     derivative liabilities for which a legally enforceable right of offset with derivative assets exists; and

·     collateral received on derivative assets.

Short positions managed together with trading assets mitigate risk to which HSBC is exposed at the balance sheet date where, in the event of default, the trading asset and related short position crystallise gains and losses simultaneously. Where such relationships exist, an element of the risk will remain where the short and long positions do not match exactly, for example, where the maturity of the short position is less than the trading asset or where it does not represent an identical security. The remaining risk is reflected in the gross balance sheet exposure shown before risk mitigation. However, as the net position best reflects the effects of a credit event should it occur at the balance sheet date we consider that this measure is a key view of risk at that date.

Credit risk mitigation includes derivative liabilities with the same counterparty, where 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 as settlement may not actually be made on a net basis, though we consider the net presentation more accurately reflects the risk exposure.

The effect of the transfer of risk to policyholders under unit linked insurance contracts, as well as trading assets which represent collateral to support associated liabilities, are separately disclosed in the detailed peripheral country exposures, but are not deducted from the total net exposure.

Credit default swaps ('CDS's) reported in the detailed peripheral eurozone country tables are not included in the derivative exposure line as they are typically transacted with counterparties incorporated or domiciled outside of the country whose exposure they reference.

Credit default swaps and off-balance sheet exposures

The CDSs were transacted with banks with investment grade credit ratings, and would pay out in the event of the default of the referenced security and certain other credit events. CDS contracts disclosed in the tables below were principally entered into for customer facilitation with banks and financial institutions where their terms are typically drawn up in accordance with the guidance set out in the 2003 ISDA Credit Derivatives Definitions and the 2009 Supplement. The credit events that trigger the payout of CDSs may differ as they are based on the terms of each agreement between the counterparties. Such credit events normally include bankruptcy, payment default on a reference asset or assets, restructuring and repudiation or moratoria.

Off-balance sheet exposures mainly relate to commitments to lend and the amounts shown in the tables represent the amounts that could be drawn down by the counterparties. In some instances, limitations are imposed on a counterparty's ability to draw down on a facility. These limitations are governed by the documentation, which differs from counterparty to counterparty. In the majority of cases, we are bound to fulfil commitments made to third parties.

Summary of net exposures to peripheral eurozone countries

	At 30 June 2012
	Sovereign and agencies		Banks		Other         financial    institutions and corporates		Personal		Total
	US$bn		US$bn		US$bn		US$bn		US$bn
Gross balance sheet exposure before risk mitigation ............................................	9.8		21.8		18.3		1.2		51.1
Risk mitigation ........................................	6.4		15.4		1.4		-		23.2
Net on-balance sheet exposure .................	3.4		6.4		16.9		1.2		27.9
Off-balance sheet exposures .....................	1.0		0.8		7.4		-		9.2
Total net exposure ................................	4.4		7.2		24.3		1.2		37.1
Total net exposure by country
Spain (page 123) ......................................	1.3		2.7		8.4		-		12.4
Ireland (page 124) ...................................	0.2		2.0		6.0		0.1		8.3
Italy (page 125) .......................................	2.1		1.6		4.3		0.1		8.1
Greece (page 126) ....................................	0.1		0.2		4.0		0.9		5.2
Portugal (page 127) .................................	0.7		0.7		1.2		-		2.6
Cyprus (page 128) ...................................	-		-		0.4		0.1		0.5
	4.4		7.2		24.3		1.2		37.1

Exposures to peripheral eurozone countries

Exposures to Spain

	At 30 June 2012
	Sovereign and agencies		Banks		Other         financial    institutions and corporates		Personal		Total
	US$bn		US$bn		US$bn		US$bn		US$bn
Cash and balances at central banks ...	-		-		-		-		-
Loans and advances .........................	-		0.1		5.2		-		5.3
- gross .........................................	-		0.1		5.2		-		5.3
- impairment allowances .............	-		-		-		-		-
Financial investments held to maturity ..........................................	-		-		-		-		-
- fair value ..................................	-		-		-		-		-
Financial investments available for sale9 ................................................	0.4		0.4		0.1		-		0.9
- cumulative impairment .............	-		-		-		-		-
- amortised cost ..........................	0.4		0.4		0.1		-		0.9
- available-for-sale reserve ..........	-		-		-		-		-
Financial assets designated at fair value ...............................................	-		-		-		-		-
Trading assets ..................................	1.5		1.9		0.2		-		3.6
Derivative assets .............................	0.2		4.1		0.7		-		5.0
Gross balance sheet exposure before risk mitigation .............	2.1		6.5		6.2		-		14.8
Risk mitigation ................................	1.8		4.2		0.5		-		6.5
- short trading positions ..............	1.7		0.2		0.1		-		2.0
- collateral and derivative liabilities..........................................	0.1		4.0		0.4		-		4.5
Net on-balance sheet exposure ........	0.3		2.3		5.7		-		8.3
Off-balance sheet exposures ............	1.0		0.4		2.7		-		4.1
- commitments ...........................	1.0		-		2.0		-		3.0
- guarantees and others ...............	-		0.4		0.7		-		1.1
Total net exposure .......................	1.3		2.7		8.4		-		12.4
Of which:
- net trading assets representing cash collateral posted ............	0.1		1.1		-		-		1.2
- on-balance sheet exposures held to meet DPF insurance liabilities	0.2		0.3		-		-		0.5
									-
Total credit default swaps
- CDS asset positions ...................	0.7		0.2		0.1		-		1.0
- CDS liability positions ..............	(0.7)		(0.1)		(0.1)		-		(0.9)
- CDS asset notionals ..................	4.8		2.1		1.2		-		8.1
- CDS liability notionals ..............	4.8		2.0		1.1		-		7.9

For footnote, see page 180.

At 30 June 2012, our total net exposure to Spain was US$12.4bn, similar to the amount of our exposure at the end of 2011.

At 30 June 2012, our total net exposure to Spanish sovereign and agencies was US$1.3bn, US$0.9bn lower than at the end of 2011. The reduction was primarily due to higher amounts of short trading positions.

At 30 June 2012, our total net exposure to Spanish banks was US$2.7bn, US$0.8bn lower than at the end of 2011. The reduction was primarily due to increased risk mitigation from higher collateral and derivative liabilities in respect of derivative assets.

At 30 June 2012, our total net exposure to Spanish other financial institutions and corporates was US$8.4bn, an increase of US$1.8bn primarily due to higher off-balance sheet commitments. Our exposure to Spanish other financial institutions and corporates mainly comprised large multinational companies and other financial institutions with significant operations outside Spain, which mitigates the risk. Exposure to the commercial real estate sector in Spain remained insignificant.

Exposures to Ireland

	At 30 June 2012
	Sovereign and agencies		Banks		Other         financial    institutions and corporates		Personal		Total
	US$bn		US$bn		US$bn		US$bn		US$bn
Cash and balances at central banks	-		-		-		-		-
Loans and advances ......................	-		0.1		2.3		0.1		2.5
- gross ......................................	-		0.1		2.3		0.2		2.6
- impairment allowances ...........	-		-		-		0.1		0.1
Financial investments held to maturity .......................................	-		0.2		-		-		0.2
- fair value ................................	-		0.2		-		-		0.2
Financial investments available for sale ...............................................	0.1		-		0.7		-		0.8
- cumulative impairment ..........	-		-		-		-		-
- amortised cost ........................	0.1		-		0.8		-		0.9
- available-for-sale reserve ........	-		-		(0.1)		-		(0.1)
Financial assets designated at fair value .............................................	-		-		0.1		-		0.1
Trading assets ...............................	0.2		1.6		1.0		-		2.8
Derivative assets ...........................	0.5		8.3		1.0		-		9.8
Gross balance sheet exposure before risk mitigation ...........	0.8		10.2		5.1		0.1		16.2
Risk mitigation .............................	0.6		8.2		0.3		-		9.1
- short trading positions ...........	0.1		-		-		-		0.1
- collateral and derivative liabilities........................................	0.5		8.2		0.3		-		9.0
Net on-balance sheet exposure ......	0.2		2.0		4.8		0.1		7.1
Off-balance sheet exposures ..........	-		-		1.2		-		1.2
- commitments .........................	-		-		1.0		-		1.0
- guarantees and others .............	-		-		0.2		-		0.2
Total net exposure .....................	0.2		2.0		6.0		0.1		8.3
Of which:
- net trading assets representing cash collateral posted ..........	0.1		1.6		0.3		-		2.0
- on-balance sheet exposures held to meet DPF insurance liabilities .............................	0.1		0.3		-		-		0.4
									-
Total credit default swaps
- CDS asset positions ................	0.2		-		0.1		-		0.3
- CDS liability positions ............	(0.2)		-		-		-		(0.2)
- CDS asset notionals ................	1.3		0.3		0.3		-		1.9
- CDS liability notionals ...........	1.3		-		0.3		-		1.6

At 30 June 2012, our total net exposure to Ireland was US$8.3bn, US$2.6bn higher than at the end of 2011. The majority of the increase was in respect of exposures to other financial institutions and corporates.

At 30 June 2012, our total net exposure to Irish other financial institutions and corporates was US$6.0bn, US$2.5bn higher than at the end of 2011. The increase was primarily due to higher amounts of trading assets and off-balance sheet commitments. A significant portion of our exposure relates to foreign owned entities incorporated in Ireland.

Exposures to Italy

	At 30 June 2012
	Sovereign and agencies		Banks		Other         financial    institutions and corporates		Personal		Total
	US$bn		US$bn		US$bn		US$bn		US$bn
Cash and balances at central banks	-		-		-		-		-
Loans and advances .......................	-		0.2		1.3		0.1		1.6
- gross ......................................	-		0.2		1.3		0.1		1.6
- impairment allowances ...........	-		-		-		-		-
Financial investments held to maturity ........................................	0.1		0.2		-		-		0.3
- fair value ................................	0.1		0.2		-		-		0.3
Financial investments available for sale9 ..............................................	0.3		0.3		0.3		-		0.9
- cumulative impairment ..........	-		-		-		-		-
- amortised cost ........................	0.3		0.3		0.2		-		0.8
- available-for-sale reserve ........	-		-		-		-		-
Financial assets designated at fair value .............................................	-		-		0.1		-		0.1
Trading assets ...............................	5.0		0.6		0.3		-		5.9
Derivative assets ...........................	0.3		2.2		1.1		-		3.6
Gross balance sheet exposure before risk mitigation ...........	5.7		3.5		3.1		0.1		12.4
Risk mitigation .............................	3.6		2.1		0.6		-		6.3
- short trading positions ...........	3.6		-		0.1		-		3.7
- collateral and derivative liabilities........................................	-		2.1		0.5		-		2.6
Net on-balance sheet exposure ......	2.1		1.4		2.5		0.1		6.1
Off-balance sheet exposures ..........	-		0.2		1.8		-		2.0
- commitments .........................	-		-		1.0		-		1.0
- guarantees and others .............	-		0.2		0.8		-		1.0
Total net exposure .....................	2.1		1.6		4.3		0.1		8.1
Of which:
- net trading assets representing cash collateral posted ..........	-		0.5		-		-		0.5
- on-balance sheet exposures held to meet DPF insurance liabilities .............................	0.3		0.4		0.2		-		0.9
									-
Total credit default swaps
- CDS asset positions ................	0.7		0.5		0.3		-		1.5
- CDS liability positions ............	(0.7)		(0.5)		(0.2)		-		(1.4)
- CDS asset notionals ................	5.0		5.4		3.8		-		14.2
- CDS liability notionals ............	5.2		5.3		3.7		-		14.2

For footnote, see page 180.

At 30 June 2012, our total net exposure to Italy was US$8.1bn, similar to the amount of our exposure at the end of 2011.

At 30 June 2012, our total net exposure to Italian banks was US$1.6bn, US$0.5bn lower than at the end of 2011. The reduced exposure was primarily due to lower amounts of loans and advances and increased risk mitigation from higher
collateral and derivative liabilities in respect of derivative assets.

Our total net exposure to other financial institutions and corporates at 30 June 2012 of US$4.3bn mainly comprised large multinational companies and other financial institutions with significant operations outside Italy, which mitigates the risk.

Exposures to Greece

	At 30 June 2012
	Sovereign and agencies		Banks		Other         financial    institutions and corporates		Personal		Total
	US$bn		US$bn		US$bn		US$bn		US$bn
Cash and balances at central banks	0.1		-		-		-		0.1
Loans and advances .......................	-		0.1		3.5		0.9		4.5
- gross .......................................	-		0.1		3.7		0.9		4.7
- impairment allowances ...........	-		-		0.2		-		0.2
Financial investments held to maturity ........................................	-		-		-		-		-
- fair value ................................	-		-		-		-		-
Financial investments available for sale ...............................................	-		-		-		-		-
- cumulative impairment ...........	-		-		-		-		-
- amortised cost ........................	-		-		-		-		-
- available-for-sale reserve ........	-		-		-		-		-
Financial assets designated at fair value .............................................	-		-		-		-		-
Trading assets ...............................	-		-		-		-		-
Derivative assets ...........................	-		0.7		-		-		0.7
Gross balance sheet exposure before risk mitigation ...........	0.1		0.8		3.5		0.9		5.3
Risk mitigation .............................	-		0.7		-		-		0.7
- short trading positions ............	-		-		-		-		-
- collateral and derivative liabilities........................................	-		0.7		-		-		0.7
Net on-balance sheet exposure ......	0.1		0.1		3.5		0.9		4.6
Off-balance sheet exposures ..........	-		0.1		0.5		-		0.6
- commitments .........................	-		-		0.1		-		0.1
- guarantees and others .............	-		0.1		0.4		-		0.5
Total net exposure .....................	0.1		0.2		4.0		0.9		5.2
Of which:
- net trading assets representing cash collateral posted ..........	-		-		-		-		-
- on-balance sheet exposures held to meet DPF insurance liabilities .............................	-		-		-		-		-
									-
Total credit default swaps
- CDS asset positions ................	-		-		0.1		-		0.1
- CDS liability positions ............	-		-		(0.1)		-		(0.1)
- CDS asset notionals ................	-		-		0.2		-		0.2
- CDS liability notionals ............	-		-		0.2		-		0.2

At 30 June 2012, our total net exposure to Greece was US$5.2bn, US$2.4bn lower than at the end of 2011. Although there was a reduction in exposure levels to all Greek counterparties in the first half of 2012, the majority of the reduction was in respect of exposures to banks and other financial institutions and corporates.

At 30 June 2012, our total net exposure to Greek sovereign and agencies was US$0.1bn, US$0.3bn lower than at the end of 2011. Our Greek sovereign exposure decreased significantly as a result of the debt restructuring in March 2012 and the associated settlement of CDS contracts.

At 30 June 2012, our total net exposure to Greek banks was US$0.2bn, US$0.7bn lower than at the end of 2011. The decrease was primarily due to the maturity of trading balances in the first half of 2012.

At 30 June 2012, our total net exposure to Greek other financial institutions and corporates was US$4.0bn, US$1.3bn lower than at the end of 2011. The reduction was primarily due to lower level of off-balance sheet exposures, including commitments and guarantees. At 30 June 2012, our exposure to Greek shipping companies amounted to US$2.0bn. We believe the industry is less sensitive to the Greek economy as it is mainly dependent on international trade.

Exposures to Portugal

	At 30 June 2012
	Sovereign and agencies		Banks		Other         financial    institutions and corporates		Personal		Total
	US$bn		US$bn		US$bn		US$bn		US$bn
Cash and balances at central banks ...	-		-		-		-		-
Loans and advances .........................	-		0.5		0.2		-		0.7
- gross .........................................	-		0.5		0.2		-		0.7
- impairment allowances .............	-		-		-		-		-
Financial investments held to maturity ..........................................	-		-		-		-		-
- fair value ..................................	-		-		-		-		-
Financial investments available for sale ..................................................	0.1		-		-		-		0.1
- cumulative impairment .............	-		-		-		-		-
- amortised cost ..........................	0.1		-		-		-		0.1
- available-for-sale reserve ..........	-		-		-		-		-
Financial assets designated at fair value ...............................................	-		-		-		-		-
Trading assets ..................................	0.7		0.1		-		-		0.8
Derivative assets .............................	0.3		0.2		-		-		0.5
Gross balance sheet exposure before risk mitigation .............	1.1		0.8		0.2		-		2.1
Risk mitigation ................................	0.4		0.2		-		-		0.6
- short trading positions ..............	0.1		-		-		-		0.1
- collateral and derivative liabilities .........................................	0.3		0.2		-		-		0.5
Net on-balance sheet exposure ........	0.7		0.6		0.2		-		1.5
Off-balance sheet exposures ............	-		0.1		1.0		-		1.1
- commitments ...........................	-		-		1.0		-		1.0
- guarantees and others ...............	-		0.1		-		-		0.1
Total net exposure .......................	0.7		0.7		1.2		-		2.6
Of which:
- net trading assets representing cash collateral posted ............	0.4		-		-		-		0.4
- on-balance sheet exposures held to meet DPF insurance liabilities	0.1		-		-		-		0.1
									-
Total credit default swaps
- CDS asset positions ...................	0.3		0.1		0.1		-		0.5
- CDS liability positions ..............	(0.3)		(0.1)		(0.1)		-		(0.5)
- CDS asset notionals ..................	1.5		0.6		0.7		-		2.8
- CDS liability notionals ..............	1.4		0.6		0.8		-		2.8

At 30 June 2012, our total net exposure to Portugal was US$2.6bn, US$1.5bn higher than at the end of 2011. The increase was primarily in respect of other financial institutions and corporates for which there were higher amounts of off-balance sheet
commitments in the first half of 2012. These increases were predominantly in support of internationally active corporates with significant operations outside Portugal, which reduces the risk.

Exposures to Cyprus

	At 30 June 2012
	Sovereign and agencies		Banks		Other         financial    institutions and corporates		Personal		Total
	US$bn		US$bn		US$bn		US$bn		US$bn
Cash and balances at central banks .....	-		-		-		-		-
Loans and advances ...........................	-		-		0.2		0.1		0.3
- gross ...........................................	-		-		0.2		0.1		0.3
- impairment allowances ................	-		-		-		-		-
Financial investments held to maturity ...........................................................	-		-		-		-		-
- fair value .....................................	-		-		-		-		-
Financial investments available for sale ....................................................	-		-		-		-		-
- cumulative impairment ...............	-		-		-		-		-
- amortised cost .............................	-		-		-		-		-
- available-for-sale reserve .............	-		-		-		-		-
Financial assets designated at fair value ...........................................................	-		-		-		-		-
Trading assets ....................................	-		-		-		-		-
Derivative assets ................................	-		-		-		-		-
Gross balance sheet exposure before risk mitigation ................	-		-		0.2		0.1		0.3
Risk mitigation ..................................	-		-		-		-		-
- short trading positions ................	-		-		-		-		-
- collateral and derivative liabilities	-		-		-		-		-
Net on-balance sheet exposure ...........	-		-		0.2		0.1		0.3
Off-balance sheet exposures ...............	-		-		0.2		-		0.2
- commitments ..............................	-		-		0.1		-		0.1
- guarantees and others ..................	-		-		0.1		-		0.1
Total net exposure ..........................	-		-		0.4		0.1		0.5
Of which:
- net trading assets representing cash collateral posted ...............	-		-		-		-		-
- on-balance sheet exposures held to meet DPF insurance liabilities ..	-		-		-		-		-
									-
Total credit default swaps
- CDS asset positions .....................	-		-		-		-		-
- CDS liability positions .................	-		-		-		-		-
- CDS asset notionals .....................	-		-		-		-		-
- CDS liability notionals ................	-		-		-		-		-

Exposures to selected other eurozone countries

Summary of net on-balance sheet exposures to selected other eurozone countries

	At 30 June 2012
	France		Germany		The   Netherlands		Total
	US$bn		US$bn		US$bn		US$bn
Sovereign and agencies .............................................	50		27		15		92
Banks ......................................................................	34		15		6		55
Other financial institutions and corporates ..............	37		18		10		65
Personal ..................................................................	14		-		-		14

At 30 June 2012, our net on-balance sheet exposure to France, Germany and the Netherlands was US$226bn, US$9bn lower than at the end of 2011.

At 30 June 2012, our net on-balance sheet exposure to the sovereign and agency debt of France, Germany and the Netherlands was US$92bn, US$5bn higher than at the end of 2011. Our exposure to France and Germany was commensurate with the size of our operations in these countries. In 2012, cash balances held with the Dutch Central Bank were reduced and redirected to the French Central Bank to align more closely with our underlying operations. The cash placements continued to be put into the euro clearing system managed by the ECB.

At 30 June 2012, our exposure to the bank debt of France, Germany, and the Netherlands was US$55bn, US$28bn lower than at the end of 2011. The decrease reflected our ongoing efforts to reduce exposure to counterparties domiciled in these countries with exposures to sovereigns and/or banks in peripheral eurozone countries of sufficient size to threaten the counterparties' on-going viability in the event of an unfavourable conclusion to the current crisis.

At 30 June 2012, our exposure to the corporate and other financial institution debt of France, Germany and the Netherlands was US$65bn, US$14bn higher than at the end of 2011. Our exposure in Germany and France was commensurate with the size of our operations and was well diversified across portfolios, sectors and products.

Our relationships in these countries are mostly with large global entities that have significant operations outside their respective domestic markets. This mitigates our risk as these corporates have diversified the sources of their revenue and, more importantly, their ability to raise finance internationally should their domestic markets become strained.

In France, our exposure to personal lending at 30 June 2012 was US$14bn, similar to the amount of our exposure at the end of 2011. The exposure was mainly in residential mortgages, loans secured by a national guarantee scheme and unsecured personal loans, and both delinquency and impairment changes remained low.

Exposure to other eurozone countries

In addition to the countries disclosed above, HSBC had net on-balance sheet exposures to other eurozone countries that were not significant to the Group. Of these, the largest exposure was represented by our retail and corporate banking operations in Malta, which held assets of approximately US$4bn. Our second largest exposure was in Luxembourg with approximately US$2bn of exposure to sovereign, agencies and banks (mostly money market placements) and approximately US$2bn to other financial institutions and corporates (mostly loans and advances). We also had approximately US$2bn of exposure to sovereign and agencies in Austria. Our remaining net on-balance sheet exposure to the eurozone is less than 5% of the Group's total equity.

Redenomination risk

As a result of the continuing distressed conditions experienced by the peripheral eurozone countries, there is an increased possibility of a member state exiting from the eurozone. There is currently no established legal framework within the European treaties to facilitate such an event; consequently, it is not possible to accurately predict the course of events and legal consequences that would ensue.

Our current view is that there would be a greater impact on HSBC from a euro exit of Greece, Italy or Spain than from Ireland, Portugal or Cyprus, where our exposures are substantially lower.

Key risks associated with an exit by a eurozone member include:

Foreign exchange losses: an exit would probably be accompanied by the passing of laws in the country concerned establishing a new local currency and providing for a redenomination of euro-denominated assets into the new local currency. The value of assets and liabilities in the country would immediately fall assuming the value of the redenominated currency is less than the original euros when translated into the carrying amounts. It is not possible to predict what the total consequential loss might be as it is uncertain which assets and liabilities would be legally re-denominated or what the extent of the devaluation would be. However, in order to provide an indication of one part of the possible exposure, the table below identifies assets and liabilities booked in our banking operations in Greece, Italy and Spain (described as 'in-country'). These assets and liabilities predominantly comprise loans and deposits arising from our commercial banking operations in these countries. The net assets represent our net funding exposure to those countries which we consider most likely to be affected by a redenomination event. The table also identifies in-country off-balance sheet exposures as these are at risk of redenomination should they be called, giving rise to a balance sheet exposure. It is to be noted that this analysis can only be an indication as it does not include euro-denominated exposures booked by HSBC outside the countries at risk which are connected with those countries (see 'external contracts' below).

External contracts redenomination risk: contracts entered into between HSBC businesses based outside a country exiting the euro with in-country counterparties or those otherwise closely connected with the relevant country, may be affected by redenomination. The effect is subject to a high level of uncertainty. Factors such as the country law under which the contract is documented, the HSBC entity involved and the payment mechanism may all be relevant to this assessment, as will the precise exit scenario as the consequences on external contracts of a disorderly exit or one sanctioned under EU law may be different. In addition, capital controls could be introduced which may affect the ability to repatriate funds including currencies not affected by the redenomination event.

We have been actively identifying and monitoring potential redenomination risks and, where possible, taking steps with the potential to mitigate them and/or reduce our overall exposure to losses that might arise in the event of a redenomination. We would emphasise, however, that a euro exit could take the form of a number of different scenarios giving rise to distinct legal consequences which could significantly alter the potential effectiveness of any steps taken, and it is accordingly not possible to predict how effective particular measures may be until they are tested against the precise circumstances of a redenomination event.

In-country funding exposure at 30 June 2012

	Denominated in:
	Euros		US dollars		other      currencies		Total
	US$bn		US$bn		US$bn		US$bn
Greece
In-country assets ....................................	2.2		0.1		0.1		2.4
In-country liabilities ...............................	(1.4)		(0.8)		(0.1)		(2.3)
Net in-country funding exposure ............	0.8		(0.7)		-		0.1
Off-balance sheet exposure/hedging ........	(0.3)		0.4		0.1		0.2
Italy
In-country assets ....................................	1.3		-		-		1.3
In-country liabilities10 ............................	(2.0)		-		-		(2.0)
Net in-country funding exposure ............	(0.7)		-		-		(0.7)
Off-balance sheet exposure .....................	0.3		-		-		0.3
Spain
In-country assets ....................................	3.3		0.7		0.1		4.1
In-country liabilities ...............................	(2.0)		(0.5)		-		(2.5)
Net in-country funding exposure ............	1.3		0.2		0.1		1.6
Off-balance sheet exposure .....................	1.1		0.2		-		1.3

For footnote, see page 180.

Risk management and contingency planning

There is an established framework for dealing with counterparty and systemic crisis situations, both regionally and globally, which is complemented by regular specific and enterprise-wide stress testing and scenario planning. The framework functions both at pre and in-crisis situations and ensures that we have detailed operational plans in case an adverse scenario materialises.

The main focus continues to be Greece and Spain although we also consider additional scenarios including contagion risk or the exit of a higher impact country. This includes the setting up of a Eurozone Major Incident Group which meets regularly, complemented by a regional eurozone contingency plan covering all global businesses and

functions. The plan has been tested and considers payments, legal, client account, internal and external communication and regulatory and compliance issues associated with eurozone breakup.

Stress testing

Our stress testing programme is described in the Annual Report and Accounts 2011 (page 188), and is a tool used to assess the impact of potential scenarios on regulatory capital.

In the course of 2012, we have examined several scenarios reflecting potential developments, both in the eurozone and more widely. Scenarios examined and reported to senior management in the course of the first half of 2012 included the following.

Two global stress scenarios were considered, taking into account the market turmoil that may arise from an orderly or a disorderly Greek default. The analysis generated by the enterprise-wide stress testing informs and shapes ongoing and future management actions which the Group would need to take to mitigate the impact of the stress scenario. The analysis demonstrated that HSBC would remain satisfactorily capitalised under the mild and severe scenarios after taking account of assumed management actions. The assumptions which were applied in each scenario are set out below:

Mild scenario assumptions:

·     the situation in Greece worsens and there is an orderly default in Greece;

·     Greek banks also default and, with support from the EU and International Monetary Fund, they are bailed out;

·     increasing bond yields in Portugal, Ireland, Spain and Italy trigger further fiscal austerity measures, and governments strive to disassociate their countries from Greece;

·     through financial and trade linkages, an orderly default of Greece results in the spread of contagion to the rest of the world;

·     the UK, US and emerging markets are adversely affected, albeit to varying degrees; and

·     slower global demand curbs growth and increases the risk premium on interest rates as well as commodity prices.

Severe scenario assumptions:

·     a disorderly default of Greece, where the eurozone governments are unable to ring-fence peripheral countries and their banks;

·     default of Portugal and Ireland with increases in bond yields for high debt countries;

·     the ensuing credit crunch together with declining business and consumer confidence more than offset any relief gained from the depreciation of the euro;

·     investors become increasingly uncomfortable with the US and the UK's fiscal positions, with the severe scenario resulting in a global slowdown; and

·     emerging economies are less affected by the financial shock.

In addition, our reverse stress test takes into consideration the eurozone crisis as one of its constituent scenarios.

Wholesale lending

Wholesale lending covers the range of credit facilities granted to sovereign borrowers, banks, non‑bank financial institutions, corporate entities and commercial borrowers. Our wholesale portfolios are well diversified across geographical and industry sectors, with certain exposures subject to specific portfolio controls.

Middle East and North Africa

In the first half of 2012, significant unrest and political changes in the Middle East and North Africa were mainly confined to Syria and Egypt. Potential future risks arise from the threat to regional stability caused by the potential for the deteriorating internal situation in Syria to affect its neighbours. In Egypt, there is a risk that social unrest and the concomitant disruption to the management of the economy may persist if the recent presidential elections fail to defuse the threat of sustained political intervention by the Egyptian military.

The Group's exposures in the region remain concentrated in our associate investment in Saudi Arabia and in the UAE, where the political landscapes remained stable. Economic growth in these countries is, however, showing signs of slowing as oil prices are affected by the weakening in the world economy. In the countries in which we have a presence we continue to carefully monitor and respond to developments while assisting customers in managing their own risks in the volatile environment.

We continued to work closely with the various entities related to the Government of Dubai to address their prevailing issues. In the first half of 2012, an agreement was reached between Dubai International Capital and its creditors for the restructuring of US$2.4bn of debt which has been extended for five years.

Commercial real estate

In 2012, credit quality across this sector showed some deterioration and there remains a risk of stress in certain markets. Our exposure to commercial real estate lending continued to be concentrated in Hong Kong, the UK and North America. The market in Hong Kong, after relative buoyancy in 2011, began to stabilise in 2012, partly due to initiatives taken by supervisory authorities. In the UK, many regions were negatively affected by weak growth in the economy, though London and the South East continued to exhibit relative strength. We are closely monitoring re-financing requirements in the UK market over the next two to three years. In North America, the market continued to be relatively stable, in part supported by the continued low levels of interest rates.

The aggregate of our commercial real estate and other property-related lending was US$115bn at 30 June 2012, broadly in line with 31 December 2011, representing 12% of total loans and advances to customers.

Personal lending

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

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

Group credit policy prescribes the range of acceptable residential property LTV thresholds with the acceptable maximum upper limit for new loans set between 75% and 95%. Specific LTV thresholds and debt-to-income ratios are managed at regional and country levels and, although the parameters must comply with Group policy, strategy and risk appetite, they differ in the various locations in which we operate in order to reflect the local economic and housing market conditions, regulations, portfolio performance, pricing and other product features.

In the first half of 2012, the credit quality of most of our personal lending portfolios improved, reflecting the continued low levels of interest rates and strong customer repayments in many markets, as well as actions taken in previous periods to tighten our lending criteria. Delinquency levels and loan impairment charges reduced in most markets while lending balances in our higher risk portfolios continued to be managed down.

In the US, the origination of new personal lending was limited as we have discontinued all new consumer finance real estate lending following the closure of the consumer finance distribution network. Customer lending balances across HSBC Finance portfolios continued to decline and, in May 2012, we completed the sale of the US Card and Retail Services business. In addition, in the first half of 2012, we engaged an adviser to assist us in exploring options to accelerate the liquidation of the CML portfolio and identified certain loan pools that we are targeting to sell in the future as market conditions permit.

The commentary that follows is on a constant currency basis.

At 30 June 2012, the Group's exposure to personal lending was US$401bn, 2% higher than at 31 December 2011 reflecting a rise in first lien residential mortgage lending, mainly in the UK and Hong Kong, partly offset by a reduction in other personal lending. Loan impairment allowances on our personal lending portfolios were US$9.4bn, compared with US$9.7bn at the end of 2011, while the ratio of loan impairment allowances to total personal lending reduced from 2.5% at 31 December 2011 to 2.3% at 30 June 2012.

Loan impairment charges in our personal lending portfolios were US$3.2bn in the first half of 2012, 23% lower than in the first half of 2011 and representing 69% of the overall Group charge for loan impairment charges and other credit risk provisions. The decline was predominantly in the US and mainly reflected the reduction in balances in the CML portfolio, as well as an improvement in two-months-and-over contractual delinquency on balances less than 180 days past due. The decrease also reflected the sale of the Card and Retail Services business on 1 May 2012.

At 30 June 2012, total personal lending in the UK was US$139bn, representing a small increase from 31 December 2011, mainly due to growth in first lien residential mortgage balances following the success of marketing campaigns and competitive pricing. (UK mortgage lending is discussed in greater detail on page 135).

In Hong Kong, total personal lending grew by 4% compared with the end of 2011 to US$66bn, mainly due to a rise in first lien residential mortgage lending as our mortgage pricing remained competitive backed by a resilient property market.

In Rest of Asia-Pacific, we increased our personal lending following growth in first lien residential mortgage lending in Singapore, Malaysia and Australia, which reflected successful marketing efforts. This was partly offset by the transfer of personal lending balances in Korea to 'assets held for sale' following the announcement of the disposal of our RBWM business there.

Total personal lending balances in the US at 30 June 2012 were US$63bn, a decrease of 5% compared with the end of 2011. The decline reflected the run-off of our CML portfolio, as well as the seasonal improvements in our collections as customers used tax refunds received in the first half of the year to repay debt.

In Latin America, personal lending decreased by 5% compared with 31 December 2011, following the transfer of balances to assets held for sale, as well as a reduction in other personal lending, in Brazil where we managed down our exposure to non-strategic portfolios, including vehicle finance and certain other lending products and focused on higher quality lending including first lien residential mortgage lending. This complemented the range of corrective actions, including improving our collections capabilities, reducing third party originations and improving credit scoring models, that were implemented to limit our exposure to further market weakness following a rise in delinquency in 2011 which continued into the first half of 2012.

Total personal lending

	UK		Rest of       Europe		US11		Rest of         North     America		Other     regions11		Total
	US$m		US$m		US$m		US$m		US$m		US$m
At 30 June 2012
First lien residential mortgages ....................	116,949		8,780		50,773		20,809		89,469		286,780
Other personal lending ................................	21,807		26,114		12,405		7,624		46,072		114,022
- motor vehicle finance ...........................	-		29		15		24		3,852		3,920
- credit cards ...........................................	10,961		2,640		791		1,188		13,543		29,123
- second lien residential mortgages ..........	644		-		6,352		424		144		7,564
- other ....................................................	10,202		23,445		5,247		5,988		28,533		73,415
Total personal lending .................................	138,756		34,894		63,178		28,433		135,541		400,802
Impairment allowances on personal lending
First lien residential mortgages .................	(441)		(59)		(4,463)		(38)		(248)		(5,249)
Other personal lending .............................	(609)		(400)		(1,425)		(121)		(1,581)		(4,136)
- motor vehicle finance ...........................	-		(4)		-		(1)		(166)		(171)
- credit cards ...........................................	(165)		(189)		(35)		(33)		(417)		(839)
- second lien residential mortgages ..........	(33)		-		(634)		(9)		-		(676)
- other ....................................................	(411)		(207)		(756)		(78)		(998)		(2,450)
Total ...........................................................	(1,050)		(459)		(5,888)		(159)		(1,829)		(9,385)
- as a percentage of total personal lending ..	0.8%		1.3%		9.3%		0.6%		1.3%		2.3%
At 30 June 2011
First lien residential mortgages ....................	110,768		9,225		55,118		21,572		85,408		282,091
Other personal lending ................................	25,666		26,724		46,396		8,590		49,883		157,259
- motor vehicle finance ...........................	-		29		60		38		5,918		6,045
- credit cards ...........................................	11,122		2,007		30,670		1,282		14,048		59,129
- second lien residential mortgages ..........	795		1		8,509		553		288		10,146
- other ....................................................	13,749		24,687		7,157		6,717		29,629		81,939
Total personal lending .................................	136,434		35,949		101,514		30,162		135,291		439,350
Impairment allowances on personal lending
First lien residential mortgages .................	(336)		(61)		(3,980)		(24)		(323)		(4,724)
Other personal lending .............................	(920)		(475)		(3,299)		(131)		(1,681)		(6,506)
- motor vehicle finance ...........................	-		(4)		-		-		(233)		(237)
- credit cards ...........................................	(237)		(220)		(1,670)		(35)		(466)		(2,628)
- second lien residential mortgages ..........	(51)		-		(697)		(12)		-		(760)
- other ....................................................	(632)		(251)		(932)		(84)		(982)		(2,881)
Total ...........................................................	(1,256)		(536)		(7,279)		(155)		(2,004)		(11,230)
- as a percentage of total personal lending ..	0.9%		1.5%		7.2%		0.5%		1.5%		2.6%

Total personal lending (continued)

	UK		Rest of        Europe		US11		Rest of          North      America		Other       regions11		Total
	US$m		US$m		US$m		US$m		US$m		US$m
At 31 December 2011
First lien residential mortgages ....................	111,224		8,678		52,484		20,794		85,783		278,963
Other personal lending ................................	22,218		24,027		14,087		7,971		46,359		114,662
- motor vehicle finance ...........................	-		24		20		29		4,494		4,567
- credit cards ...........................................	11,279		2,192		833		1,262		13,922		29,488
- second lien residential mortgages ..........	694		-		7,063		468		233		8,458
- other ....................................................	10,245		21,811		6,171		6,212		27,710		72,149
Total personal lending .................................	133,442		32,705		66,571		28,765		132,142		393,625
Impairment allowances on personal lending
First lien residential mortgages .................	(383)		(58)		(4,551)		(27)		(302)		(5,321)
Other personal lending .............................	(745)		(366)		(1,659)		(109)		(1,560)		(4,439)
- motor vehicle finance ...........................	-		(4)		-		-		(164)		(168)
- credit cards ...........................................	(177)		(148)		(46)		(35)		(428)		(834)
- second lien residential mortgages ..........	(42)		(1)		(740)		(9)		-		(792)
- other ....................................................	(526)		(213)		(873)		(65)		(968)		(2,645)
Total ...........................................................	(1,128)		(424)		(6,210)		(136)		(1,862)		(9,760)
- as a percentage of total personal lending ..	0.8%		1.3%		9.3%		0.5%		1.4%		2.5%

For footnotes, see page 180.

Mortgage lending

We offer a wide range of mortgage products designed to meet customer needs, including capital repayment, interest-only, affordability and offset mortgages.

The commentary that follows is on a constant currency basis.

At 30 June 2012, total mortgage lending, comprising both first lien and second lien residential mortgages, was US$294bn, an increase of 2% compared with the end of 2011.

US mortgage lending

In the US, total mortgage lending balances were US$57bn at 30 June 2012, a decline of 4% compared with the end of 2011. Overall, US mortgage lending represented 14% of our total personal lending and 19% of our total mortgage lending, compared with 15% and 21%, respectively, at 31 December 2011.

At 30 June 2012, mortgage lending balances at HSBC Finance were US$41bn, a decline of 7% compared with the end of 2011 due to the continued run-off of the CML portfolio. The reduction in balances also reflected seasonal improvements in collections as customers used tax refunds to make repayments. During the first half of 2012, we engaged an adviser to assist us in exploring options to accelerate the liquidation of this portfolio. 

The rate at which balances in the CML portfolio are declining continues to be affected by the lack of refinancing opportunities available to our customers and the temporary suspension of foreclosure activities. We have now resumed foreclosure processing in substantially all states, though it will take time to work through the backlog of loans that have not yet been referred to foreclosure. In addition, our loan modification programmes, which are designed to improve cash collections and avoid foreclosure, are contributing to slower loan repayment rates.

See below for a breakdown of mortgage lending in HSBC Finance.

HSBC Finance US Consumer and Mortgage Lending¹² - residential mortgages

	At     30 Jun         2012		At       30 Jun         2011		At      31 Dec         2011
	US$m		US$m		US$m
Residential mortgages
First lien .................	37,188		42,276		39,608
Second lien .............	4,042		4,996		4,520
Total (A) ................	41,230		47,272		44,128
Impairment allowances ...........	4,884		4,504		5,088
- as a percentage of (A) .............	11.8%		9.5%		11.5%

For footnote, see page 180.

In HSBC Bank USA, we continued to sell the majority of new originations to the secondary market as a means of managing our interest rate risk and improving structural liquidity. Mortgage lending balances were US$16bn at 30 June 2012, an increase of 3% compared with the end of 2011, driven by increased origination to our Premier customers.

A discussion of credit trends in the US mortgage lending portfolio and the steps taken to mitigate risk is provided in 'US personal lending - credit quality' on page 136.

Mortgage lending - rest of the world

Mortgage lending in the UK was US$118bn at 30 June 2012, representing the Group's largest concentration of mortgage exposure, an increase of 4% compared with the end of 2011. In the first half of 2012, house prices in parts of the UK remained under pressure, with sentiment among potential buyers remaining cautious given economic uncertainty and high levels of unemployment.

The credit quality of our UK mortgage portfolio remained high, reflecting actions taken in previous periods including the restrictions on lending to purchase residential property for the purpose of rental. Almost all lending is originated through our own salesforce, and the self-certification of income is not permitted. The majority of our mortgage lending in the UK is to existing customers that hold current or savings accounts with HSBC. The average LTV ratio for new business was 58% at 30 June 2012, while loan impairment charges and delinquency levels in our UK mortgage book remained low, aided by the continued low levels of interest rates. In Hong Kong, mortgage lending was US$49bn, an increase of 4% compared with the end of 2011. The quality of our mortgage book was very strong with loan impairment charges at very low levels. The average LTV ratio on new mortgage sales was 50%.

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

Mortgage lending products

	UK		Rest of       Europe		US11		Rest     of North     America		Other     regions11		Total
	US$m		US$m		US$m		US$m		US$m		US$m
At 30 June 2012
First lien residential mortgages ....................	116,949		8,780		50,773		20,809		89,469		286,780
Second lien residential mortgages .................	644		-		6,352		424		144		7,564
Total mortgage lending ...............................	117,593		8,780		57,125		21,233		89,613		294,344
Second lien as percentage of total mortgage lending .....................................................	0.5%		-		11.1%		2.0%		0.2%		2.6%
Impairment allowances on mortgage lending .................................................................	(474)		(59)		(5,097)		(47)		(248)		(5,925)
First lien residential mortgages .................	(441)		(59)		(4,463)		(38)		(248)		(5,249)
Second lien residential mortgages .............	(33)		-		(634)		(9)		-		(676)
Interest-only (including offset) mortgages ...	47,605		48		-		582		1,225		49,460
Affordability mortgages, including adjustable-rate mortgages ('ARM's) .........................	35		480		16,424		276		6,014		23,229
Other ..........................................................	102		-		-		-		201		303
Total interest-only and affordability mortgages ................................................	47,742		528		16,424		858		7,440		72,992
- as a percentage of total mortgage lending .	40.6%		6.0%		28.8%		4.0%		8.3%		24.8%
Negative equity mortgages13 ........................	2,291		-		13,782		166		155		16,394
Other loan to value ratios greater than 90%14 .................................................................	5,039		186		7,131		1,378		958		14,692
Total negative equity and other mortgages ..	7,330		186		20,913		1,544		1,113		31,086
- as a percentage of total mortgage lending .	6.2%		2.1%		36.6%		7.3%		1.2%		10.6%

Mortgage lending products (continued)

	UK		Rest of        Europe		US11		Rest      of North      America		Other       regions11		Total
	US$m		US$m		US$m		US$m		US$m		US$m
At 30 June 2011
First lien residential mortgages ....................	110,768		9,225		55,118		21,572		85,408		282,091
Second lien residential mortgages .................	795		1		8,509		553		288		10,146
Total mortgage lending ...............................	111,563		9,226		63,627		22,125		85,696		292,237
Second lien as percentage of total mortgage lending .....................................................	0.7%		-		13.4%		2.5%		0.3%		3.5%
Impairment allowances on mortgage lending .................................................................	(387)		(61)		(4,677)		(36)		(323)		(5,484)
First lien residential mortgages .................	(336)		(61)		(3,980)		(24)		(323)		(4,724)
Second lien residential mortgages .............	(51)		-		(697)		(12)		-		(760)
Interest-only (including offset) mortgages ...	45,730		54		-		810		1,362		47,956
Affordability mortgages, including ARMs ....	692		572		17,789		276		7,816		27,145
Other ..........................................................	118		-		-		-		195		313
Total interest-only and affordability mortgages ................................................	46,540		626		17,789		1,086		9,373		75,414
- as a percentage of total mortgage lending .	41.7%		6.8%		28.0%		4.9%		10.9%		25.8%
Negative equity mortgages13 ........................	2,365		-		16,368		86		317		19,136
Other loan to value ratios greater than 90%14 .................................................................	5,925		265		9,168		1,648		1,193		18,199
Total negative equity and other mortgages ..	8,290		265		25,536		1,734		1,510		37,335
- as a percentage of total mortgage lending .	7.4%		2.9%		40.1%		7.8%		1.8%		12.8%
	US$m		US$m		US$m		US$m		US$m		US$m
At 31 December 2011
First lien residential mortgages ....................	111,224		8,678		52,484		20,794		85,783		278,963
Second lien residential mortgages .................	694		-		7,063		468		233		8,458
Total mortgage lending ................................	111,918		8,678		59,547		21,262		86,016		287,421
Second lien as percentage of total mortgage lending .....................................................	0.6%		-		11.9%		2.2%		0.3%		2.9%
Impairment allowances on mortgage lending .................................................................	(425)		(59)		(5,291)		(36)		(302)		(6,113)
First lien residential mortgages .................	(383)		(58)		(4,551)		(27)		(302)		(5,321)
Second lien residential mortgages .............	(42)		(1)		(740)		(9)		-		(792)
Interest-only (including offset) mortgages ...	46,886		48		-		667		1,256		48,857
Affordability mortgages, including ARMs ....	177		496		17,089		277		6,894		24,933
Other ..........................................................	106		-		-		-		189		295
Total interest-only and affordability mortgages ................................................	47,169		544		17,089		944		8,339		74,085
- as a percentage of total mortgage lending .	42.1%		6.3%		28.7%		4.4%		9.7%		25.8%
Negative equity mortgages13 ........................	2,149		-		14,401		64		823		17,437
Other loan to value ratios greater than 90%14 .................................................................	4,845		210		7,964		1,430		1,469		15,918
Total negative equity and other mortgages ..	6,994		210		22,365		1,494		2,292		33,355
- as a percentage of total mortgage lending .	6.2%		2.4%		37.6%		7.0%		2.7%		11.6%

For footnotes, see page 180.

US personal lending

Credit quality

During the first half of 2012, the muted improvement in US economic conditions continued. In the second quarter, GDP growth was 1.5% annualised, while consumer spending growth remained moderate. Serious threats to economic growth remain, including high energy costs, uncertainty in the housing market and unemployment levels, which declined from the end of 2011 but remained high at 8.2%

Mortgage lending

In the first half of 2012, we further reduced our mortgage exposure in the US as balances continued to run off in our CML portfolio as discussed on page 134. At 30 June 2012, first lien residential mortgage lending balances were US$51bn, a decline of 3% compared with the end of 2011.

In our CML first lien residential mortgage portfolio, two-months and over delinquent balances were US$7.7bn, compared with US$7.9bn at December 2011 over the same period. The decline reflected seasonal improvements in our collections in the first half of 2012. In addition, the improvement reflected a decrease in delinquency on accounts less than 180 days contractually delinquent as lending balances continued to run off and economic conditions improved. The reduction was partly offset by the increase in late stage delinquency driven by the temporary suspension of foreclosure activities which began in late 2010, although this has now resumed in substantially all states. In our HSBC Bank USA portfolio, two-months and over delinquent balances remained unchanged at US$1.1bn.

Second lien residential mortgage loans have a risk profile characterised by higher LTV ratios, because in the majority of cases the loans were taken out to complete the refinancing of properties. Loss experience on default of second lien loans has typically approached 100% of the amount outstanding, as any equity in the property is initially applied to the first lien loan.

The majority of second lien residential mortgages are taken up by customers who hold a first lien mortgage issued by a third party. Impairment allowances for these loans are determined by applying a roll-rate migration analysis which captures the propensity of these loans to default based on past experience.

Approximately 97% of our US second lien residential mortgages, where the first lien residential mortgages are held or serviced by us and have a delinquency status of 90 days or more past due, are themselves 90 days or more past due. Once we assume a second lien residential mortgage loan is likely to progress to write-off, the loss severity assumed in establishing our impairment allowance is close to 100%.

In the US, second lien mortgage balances declined by 10% to US$6.4bn at 30 June 2012, representing 11% of the overall US mortgage lending portfolio. Two months or more delinquent balances were US$515m at 30 June 2012 compared with US$674m at 31 December 2011.

Valuation of foreclosed properties in the US

We obtain real estate by foreclosing on the collateral pledged as security for residential mortgages. Prior to foreclosure, carrying amounts of the loans in excess of fair value less costs to sell are written down to the discounted cash flows expected to be recovered, including from the sale of the property. Broker price opinions are obtained and updated every 180 days and real estate price trends are reviewed quarterly to reflect any improvement or additional deterioration. Our methodology is regularly validated by comparing the discounted cash flows expected to be recovered based on current market conditions (including estimated cash flows from the sale of the property) to the updated broker price opinion, adjusted for the estimated historical difference between interior and exterior appraisals. The fair values of foreclosed properties are initially determined based on broker price opinions. Within 90 days of foreclosure, a more detailed property valuation is performed reflecting information obtained from a physical interior inspection of the property and additional loan impairment allowances or write-downs are recorded as appropriate. Updates to the valuation are performed no less than once every 45 days until the property is sold, with declines or increases recognised through changes to impairment allowances.

As previously reported, beginning in late 2010 we temporarily suspended all new foreclosure

proceedings and in early 2011 ceased foreclosures where judgement had yet to be entered while we enhanced our processes. We have now resumed the processing of suspended foreclosures and initiating new foreclosures in substantially all states. There remains a significant backlog of foreclosures which will take time to resolve. Any additional delays in the processing of foreclosures could result in an increase in loss severity.

The number of foreclosed properties at HSBC Finance at 30 June 2012 decreased compared with the end of December 2011 due to the suspension of foreclosures discussed above, as well as continuing sales of foreclosed properties. We expect the number of foreclosed properties added to the inventory will begin to increase in the second half of 2012, but this will continue to be affected by ongoing refinements to our processes and extended foreclosure timelines.

The average total loss on foreclosed properties and the average loss on sale of foreclosed properties decreased compared with the second half of 2011. This reflected a lower mix of properties sold which we had held for longer periods of time. Generally the length of time a property is held is reflected in the condition and ultimately the sale price. In addition, a greater proportion of properties sold where we had accepted a deed-in-lieu, partly offset by lower house prices in the first half of 2012. Typically, losses on a deed-in-lieu are lower than losses from properties acquired through a standard foreclosure process and provide quicker resolution to the delinquent account.

HSBC Finance: foreclosed properties in the US

	Half-year to
	30 June		30 June		31 December
	2012		2011		2011
Number of foreclosed properties at end of period .........................................	2,836		6,982		3,511
Number of properties added to foreclosed inventory in the half year ............	3,615		8,071		3,116
Average loss on sale of foreclosed properties15 .............................................	7%		8%		9%
Average total loss on foreclosed properties16 ................................................	55%		55%		57%
Average time to sell foreclosed properties (days) ..........................................	179		168		200

For footnotes, see page 180.

Credit cards

In the first half of 2012 we completed the sale of our US Card and Retail Services business, transferring the related general and private label credit card lending balances to the purchaser. The residual balances in the US related to HSBC Bank USA's credit card programme.

Personal non-credit card lending

Personal non-credit card lending balances in the US fell, largely due to run-off. Two months or more delinquent balances declined reflecting the run-off and seasonal improvement in collections.

Loan delinquency

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

Trends in two months and over contractual delinquency in the US

	At          30 June                2012		At            30 June                2011		At   31 December                2011
	US$m		US$m		US$m
In Personal lending in the US
First lien residential mortgages .....................................................................	8,851		7,864		9,065
Consumer and Mortgage Lending ..............................................................	7,662		6,852		7,922
Other mortgage lending ............................................................................	1,189		1,012		1,143
Second lien residential mortgages ..................................................................	515		646		674
Consumer and Mortgage Lending ..............................................................	372		478		501
Other mortgage lending ............................................................................	143		168		173
Credit card ....................................................................................................	29		628		714
Private label .................................................................................................	-		285		316
Personal non-credit card ...............................................................................	339		517		513
Total ............................................................................................................	9,734		9,940		11,282
	%17		%17		%17
First lien residential mortgages .....................................................................	17.4		14.3		17.1
Second lien residential mortgages ..................................................................	7.9		7.6		8.5
Credit card ....................................................................................................	3.7		3.3		3.8
Private label .................................................................................................	-		2.4		2.5
Personal non-credit card ...............................................................................	6.3		7.2		8.3
Total ............................................................................................................	15.3		9.8		11.4

For footnote, see page 180.

 

END

 

 

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