Interim Report - 15 of 26

RNS Number : 1204M

HSBC Holdings PLC

12 August 2011

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. Our wholesale portfolios are well diversified across geographical and industry sectors, with certain exposures subject to specific portfolio controls. Loan impairment charges fell during the first half of 2011, as economies generally demonstrated signs of recovery.

We continued to closely manage our exposure to sovereign debt in the first half of 2011. The overall quality of the portfolio was strong with most in‑country and cross-border limits extended to countries with high-grade internal credit risk ratings. We regularly update our assessment of higher risk countries and adjust our risk appetite accordingly.

Exposures to countries in the eurozone

The eurozone as a whole retained substantial economic and financial strength and demonstrated positive signs of economic recovery in the first half of 2011, despite the stresses from the financial crisis.

However, the transfer of private sector liabilities to sovereign bodies which started after the 2007 financial crisis continued to put pressure on government balance sheets. The resulting fiscal imbalance in some industrialised economies led to intensified market concerns about sovereign credit risk in these countries.

In the first half of 2011, there were periods of significant market volatility related to a number of sovereigns in the eurozone, notably Greece, Ireland, Portugal, Italy and Spain. Sovereign spreads remained high and the lack of market access eventually resulted in Portugal joining Greece and Ireland in seeking bailout funding amounting to €78bn (US$113bn) from the European Financial Stability Facility ('EFSF') and International Monetary Fund ('IMF') in early April 2011. Political instability in Greece, Ireland and Portugal also exacerbated the situation and all three countries were downgraded by major credit rating agencies during the period. Italy and Spain made progress in implementing fiscal adjustments and banking reforms but still experienced volatility in credit spreads.

The tables overleaf summarise our exposures to selected eurozone countries, including:

· governments and central banks of selected eurozone countries along with near/quasi government agencies;

· banks; and

· other financial institutions and other corporates.

Exposures to banks, other financial institutions and other corporates are based on the country of domicile of the counterparty.

The countries presented were selected because during the period they exhibited levels of market volatility which exceeded other eurozone countries and demonstrated fiscal or political uncertainty which may persist through the second half of 2011. In addition, certain of these countries exhibit high sovereign debt to GDP ratios and short to medium-term maturity concentration of those liabilities. An analysis of loans and advances to customers by significant countries is provided on page 95.

Off-balance sheet exposures mainly relate to commitments to lend and the amount shown in the tables represents the maximum amount that could be drawn down by the counterparty.

Eurozone sovereigns and agencies

Concerns remained over the capacity of certain sovereign borrowers to refinance given the problems with market liquidity and the uncertainty surrounding support arrangements in the longer term.

In July 2011, the second Greek support package was formalised as EU leaders announced a 3-year programme that included €109bn (US$158bn) of new loans and a target of €37bn (US$54bn) in bondholder commitments. In addition, EFSF rules were changed to allow EFSF to buy bonds on the secondary market, finance the recapitalisation of banks and provide pre-emptive credit lines to eurozone countries under pressure in debt markets. This is intended to help contain the fears of contagion to other eurozone countries. HSBC in principle supports this programme, which is expected to trigger a selective default as predicted by two of the three major rating agencies.

In the second half of 2011, we expect that the ECB and eurozone countries will continue to focus on resolving intra-eurozone imbalances, rebuilding public finances, improving fiscal discipline, strengthening the banking system and managing cross-border risk. Concerns of contagion of the debt crisis in Greece, Ireland and Portugal to other peripheral countries, notably Italy and Spain, may persist, causing the risk premium on most European countries to remain high.

At 30 June 2011, our exposure to the sovereign and agency debt of Greece, Ireland, Italy, Portugal and Spain was US$8.2bn. Of the total financial investments available for sale, approximately 43% matures within one year, 27% between one and three years and 30% in excess of three years.

During the first half of 2011, an impairment charge of US$105m was recognised in respect of Greek sovereign and agency exposures classified as available for sale, reflecting the further deterioration in Greece's fiscal position and the recently announced support measures. The amount of the impairment charge represented the cumulative fair value loss on these securities as at 30 June 2011, and does not necessarily represent the expectation of future cash losses. The impairment charge was recycled from the available-for-sale reserve to the income statement. Our sovereign exposures to Ireland, Portugal, Italy and Spain are not considered to be impaired at 30 June 2011 because, despite financial difficulties in these countries, the situation is not severe enough to conclude that loss events have occurred which will have an impact on the future cash flows of these countries' sovereign securities.

Exposures to selected eurozone countries - sovereigns and agencies

	Greece	Ireland	Italy	Portugal	Spain	Total
	US$bn	US$bn	US$bn	US$bn	US$bn	US$bn
At 30 June 2011
Cash and balances at central banks .	0.1	-	-	-	0.1	0.2

Assets held at amortised cost .........	-	-	0.1	-	-	0.1

Financial investments available for sale⁸ .....	0.2	0.1	1.5	0.1	1.0	2.9
- cumulative impairment ..........	0.1	-	-	-	-	0.1

Net trading assets⁹ .........................	0.7	0.2	3.0	0.4	0.3	4.6
Derivatives¹⁰ .................................	0.1	0.1	-	-	0.2	0.4

Total .............................................	1.1	0.4	4.6	0.5	1.6	8.2

Off-balance sheet exposures ..........	-	-	-	-	0.7	0.7

CDS asset positions .......................	0.9	0.2	0.2	0.2	0.2	1.7
CDS liability positions ...................	(0.7)	(0.2)	(0.2)	(0.2)	(0.2)	(1.5)
CDS asset notionals .......................	2.1	0.9	4.6	1.1	2.5	11.2
CDS liability notionals ...................	1.8	1.0	4.5	1.0	2.6	10.9

Exposures to selected eurozone countries - banks

	Greece	Ireland	Italy	Portugal	Spain	Total
	US$bn	US$bn	US$bn	US$bn	US$bn	US$bn
At 30 June 2011
Loans and advances .......................	0.1	0.7	1.9	0.3	0.8	3.8
Financial investments held to maturity ................................	-	0.3	0.2	-	-	0.5
Financial investments available for sale⁸ ..	-	0.1	1.0	0.2	0.6	1.9
Net trading assets⁹ .........................	-	0.8	0.4	0.1	1.6	2.9
Derivatives¹⁰ .................................	0.3	0.3	0.1	-	0.5	1.2

Total .............................................	0.4	2.2	3.6	0.6	3.5	10.3

Off-balance sheet exposures ..........	0.2	-	0.4	-	-	0.6

CDS asset positions .......................	-	0.1	0.2	0.1	0.1	0.5
CDS liability positions ...................	-	(0.1)	(0.2)	(0.1)	(0.1)	(0.5)
CDS asset notionals .......................	-	0.3	4.3	0.7	1.5	6.8
CDS liability notionals ...................	-	0.3	4.0	0.9	2.0	7.2

For footnote, see page 146.

Eurozone banks

The banking sector in the eurozone remained under stress, mainly as a result of governments having to finance large budget deficits, weaknesses in property markets and slow credit growth. The size of the financial sector's exposure to sovereign debt in some eurozone countries rendered the re-capitalisation of European banks critical.

Concerns about the size and quality of eurozone banks' exposure to weaker eurozone countries were entwined with concerns about their ability to obtain funding. It is estimated that European banks share over three quarters of the banks' public and private sector debt in Greece, Ireland, Portugal, Italy and Spain, with regional and local banks in the eurozone considered to be more vulnerable than the diversified global banks. The second Greek rescue package announced in July 2011 involves the private sector sharing some economic loss. This is likely to put a strain on the banks with significant holdings of Greek bonds. The details of the plan, level of take-up and application will become clear in the second half of the year.

We expect that the pace of reforms outlined by various policymakers will gather speed in the second half of 2011, most notably the Basel III proposals. These regulations will require banks to hold more capital and a higher quality of capital and implement new liquidity rules, and are likely to result in a rise in the cost of funding and put pressure on credit pricing. The European Banking Authority published the results of this year's stress test on 15 July 2011. We successfully passed these tests with a core tier 1 ratio of 8.5% under the modelled adverse scenario, exceeding the post-stress minimum core tier 1 capital requirement of 5% used in this exercise.

Our overall exposure within the eurozone is largely to the banks in stronger countries. We continue to closely monitor and manage eurozone bank exposures in the weaker countries, and are cautious in lending to this sector. We regularly update our assessment of higher-risk eurozone banks and adjust our risk appetite accordingly. We also, where possible, seek to play a positive role in maintaining credit and liquidity supply. We have not recognised any impairment in respect of the exposures outlined above.

Exposures to selected eurozone countries - other financial institutions and corporates

	Greece	Ireland	Italy	Portugal	Spain	Total
	US$bn	US$bn	US$bn	US$bn	US$bn	US$bn
At 30 June 2011
Loans and advances .......................	3.5	2.4	1.1	0.1	5.4	12.5
- gross ......................................	3.6	2.4	1.1	0.1	5.5	12.7
- impairment allowances ..........	(0.1)	-	-	-	(0.1)	(0.2)

Financial investments available for sale⁸ .........	-	-	0.3	0.1	0.2	0.6
Net trading assets⁹ .........................	-	-	-	-	0.1	0.1
Derivatives¹⁰ .................................	-	-	-	-	0.2	0.2

Total .............................................	3.5	2.4	1.4	0.2	5.9	13.4

Off-balance sheet exposures ..........	2.1	0.1	1.0	-	0.2	3.4

CDS asset positions .......................	-	0.1	-	0.1	-	0.2
CDS liability positions ...................	-	-	-	(0.1)	-	(0.1)
CDS asset notionals .......................	0.3	0.7	2.8	0.6	1.1	5.5
CDS liability notionals ...................	0.3	0.3	3.8	0.9	1.5	6.8

For footnotes, see page 146.

Other financial institutions and other corporates

The credit quality of the other financial institutions and other corporates portfolios remains strong with no significant impairments recognised in respect of these portfolios. The portfolios largely comprise large multinational corporates and other financial institutions with significant operations outside these countries that mitigate the risk. At 30 June 2011, our exposure to Greek shipping companies amounted to US$1.8bn. We believe the industry is less sensitive to the Greek economy as it is mainly dependent on international trade.

Personal lending

Our retail activities within these countries are limited, with our only significant exposures in Greece which amounted to US$1.2bn. Substantially all of this exposure is in the form of residential mortgage lending where the level of delinquencies is low.

US budget deficit

In the US, the large budget deficit, growing government indebtedness and continued failure to reach agreement on raising the Federal debt ceiling have resulted in increased scrutiny during the first half of 2011, to the extent that two major rating agencies placed their US sovereign debt rating on negative watch. While the need to build a political consensus around the interplay of budget discipline and an increase in the current sovereign debt ceiling has been the immediate concern, there is an underlying risk that lower growth, fiscal challenges and a general lack of political consensus will result in a deterioration in the US credit standing over the longer term.

While the potential effects of a US downgrade are broad and impossible to accurately predict, they could include a widening of sovereign and corporate credit spreads, devaluation of the US dollar and a general market move away from riskier assets.

We are monitoring events closely and have stress-tested our capital position for potential scenarios.

Elevated risk of overheating in emerging markets

Market concerns emerged during the first half of 2011 about the overheating of certain emerging market countries, mainly due to the inflationary pressures, growth rates, risk of asset bubbles and large potentially volatile capital inflows they are experiencing. The policy makers in countries including mainland China, India and Brazil have taken steps to address these issues including increasing interest rates, restricting capital flows and raising reserve requirements. We regularly perform economic analyses and closely monitor our exposures to these countries.

Middle East and North Africa

Although significant unrest and political change were witnessed in the Middle East and North Africa in the first half of 2011, the majority of the Group's exposures in the region were concentrated in our associate investment in Saudi Arabia and in the UAE, where the respective political landscapes remained stable and economic growth continued to recover. In the remaining countries in which we have a presence and there was unrest or political change (or which exhibited similar socio-economic, political and demographic profiles to countries experiencing unrest), we continued to carefully monitor and respond to developments while assisting our customers in managing their own risks in the volatile environment.

We also continued to work closely with Dubai World and the various entities related to the Government of Dubai to address their prevailing issues. In March 2011, Dubai World signed a final deal with HSBC and other creditors restructuring US$25bn of its debt. The arrangement extends loan maturities for five to eight years at discounted rates, allowing Dubai World to sell off its non-core assets while focusing on its core earnings.

Commercial real estate

Our exposure to the commercial real estate sector is concentrated in Hong Kong, the UK and North America. In Hong Kong, the economy continued to grow and the market remained relatively buoyant during the first half of 2011, characterised by continuing demand and credit appetite. While the markets in the UK and North America have been relatively stable, this is in part supported by the continued low levels of interest rates.

On a constant currency basis, the aggregate of our commercial real estate and other property-related lending of US$110bn at 30 June 2011 was in line with our exposure at 31 December 2010 and represented 10% of total loans and advances to customers. In the first half of 2011, credit quality across this sector was generally stable but there remains risk of stress in certain markets.

Across our 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. We also set and monitor sector risk appetite limits for the sector at Group and regional levels to detect and prevent higher risk concentrations. While individual regions may differ with regard to local market regulatory and legal structures and real estate market characteristics, typically origination loan-to-value ratios would be less than 65% across the Group.

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.

In the first half of 2011, credit quality in our personal lending portfolios improved, reflecting the continued recovery of economic conditions in most markets. Delinquency levels and loan impairment charges reduced as customer repayments remained strong, lending balances in the US run-off portfolios continued to decline and some higher-risk portfolios in Latin America, Rest of Asia-Pacific and the Middle East and North Africa were managed down.

The commentary that follows is on an underlying basis.

At 30 June 2011, total personal lending was US$439bn, slightly higher than at 31 December 2010 as growth in the UK and Hong Kong was partly offset by the continued planned decline in personal lending balances in the US. Within our RBWM business, total loan impairment charges and other credit risk provisions of US$4.3bn were 34% lower than in the first half of 2010 with the most significant fall in the US reflecting the reduction in balances and improved delinquency rates.

Total personal lending in the UK increased by 3% from 31 December 2010 to US$136bn. The increase was mainly due to growth in mortgage balances following the success of marketing campaigns and high levels of customer retention. (UK mortgage lending is discussed in greater detail on page 104). This was partly offset by a 3% fall in other personal lending balances, reflecting a reduction in unsecured lending products, specifically the credit cards portfolio.

In Hong Kong, total personal lending grew by 8% to US$62bn, mainly due to growth in residential mortgage lending as the property market in the region remained strong, and as a result of our leadership in new mortgage business. Personal lending balances in Rest of Asia-Pacific also reflected a strong property sector with residential mortgage lending growth of 8%, most notably in Singapore and Australia.

Total personal lending balances in the US at 30 June 2011 were US$102bn, a decrease of 7% compared with the end of 2010. The decline reflected lower balances in our Card and Retail Services portfolio due to fewer active accounts, an increased focus by customers on reducing outstanding credit card debt and seasonal improvements in our collection activities as our customers used tax refunds to make repayments. Residential mortgage lending balances in the US continued to fall reflecting the run-off of our Consumer Lending and Mortgage Services portfolios. Based on current experience, we expect these portfolio balances to decline to between 40% and 50% of the 31 December 2010 balance.

For an analysis of loan impairment allowances and impaired loans, see page 115.

Total personal lending

	UK	Rest of Europe	US¹¹	Rest of North America	Other regions¹²	Total
	US$m	US$m	US$m	US$m	US$m	US$m
At 30 June 2011
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
- 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 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
Residential mortgages ..............................	(336)	(61)	(3,980)	(24)	(323)	(4,724)

Other personal lending .............................	(920)	(475)	(3,299)	(131)	(1,681)	(6,506)
- vehicle finance .....................................	-	(4)	-	-	(233)	(237)
- credit cards ...........................................	(237)	(220)	(1,670)	(35)	(466)	(2,628)
- second lien 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%

At 30 June 2010
Residential mortgages ..................................	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 on personal lending
Residential mortgages ..............................	(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 ...........................................................	(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 31 December 2010
Residential mortgages ..................................	103,037	8,581	57,630	21,212	78,221	268,681

Other personal lending ................................	25,636	24,463	51,686	8,589	46,265	156,639
- vehicle finance .....................................	-	35	72	55	5,886	6,048
- credit cards ...........................................	11,612	1,916	33,744	1,334	13,778	62,384
- second lien mortgages ...........................	846	2	9,322	578	422	11,170
- other	13,178	22,510	8,548	6,622	26,179	77,037


Total personal lending .................................	128,673	33,044	109,316	29,801	124,486	425,320

Impairment allowances on personal lending
Residential mortgages ..............................	(275)	(58)	(3,592)	(25)	(297)	(4,247)

Other personal lending .............................	(1,348)	(467)	(4,436)	(179)	(1,616)	(8,046)
- vehicle finance .....................................	-	(5)	-	-	(244)	(249)
- credit cards ...........................................	(506)	(216)	(2,256)	(62)	(483)	(3,523)
- second lien mortgages ...........................	(58)	-	(889)	(19)	-	(966)
- other	(784)	(246)	(1,291)	(98)	(889)	(3,308)


Total ...........................................................	(1,623)	(525)	(8,028)	(204)	(1,913)	(12,293)

- as a percentage of total personal lending ..	1.3%	1.6%	7.3%	0.7%	1.5%	2.9%

For footnotes, see page 146.

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 an underlying basis.

US mortgage lending

US mortgage lending balances, comprising residential and second lien lending, were US$64bn at 30 June 2011, a decline of 5% compared with the end of 2010. Overall, US mortgage lending represented 14% of the Group's total personal lending compared with 16% at the 31 December 2010.

Mortgage lending in HSBC Finance was US$47bn at 30 June 2011, a decline of 7% from 31 December 2010 due to the continued run‑off in the Consumer Lending and Mortgage Services portfolios and the seasonal improvement in collections as some customers used tax refunds to make repayments. The rate at which balances declined slowed in the first half of 2011, as we continued to be affected by the lack of refinancing opportunities available to our customers, improvements in the flow of balances into late stage delinquency and delays in the foreclosure processes. See page 106 for a breakdown of mortgage lending in HSBC Finance.

In HSBC Bank USA, mortgage lending balances were US$16bn at 30 June 2011, an increase of 2% compared with the end of 2010. 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. Additions to our portfolio primarily comprise Premier relationship products.

Following an industry-wide examination into foreclosure practices in 2010, we temporarily suspended foreclosures while we worked to implement improvements in our processes. We worked closely with the regulators to address these issues quickly and effectively, and made several improvements to enhance our processes. We have now resumed foreclosures on a limited basis in certain states, but it will be a number of months before we fully resume foreclosures in all states as we need to ensure that all necessary enhancements have been satisfactorily implemented.

The effects of the industry-wide slowdown in foreclosures remains highly uncertain, particularly in the long-term, as servicers begin to increase foreclosure activity and sell properties in large numbers, which may result in a significant oversupply. This may lead to a substantial increase in losses on foreclosed properties.

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 107.

Mortgage lending - rest of the world

Mortgage lending in the UK was US$112bn at 30 June 2011, the Group's largest concentration of this exposure. The balance was 4% higher than at the end of 2010.

Our UK mortgage portfolio remained of high quality with an average loan-to-value ratio for new business of 53%. We restricted lending to purchase residential property for the purpose of rental, and almost all new business was originated through our own salesforce, with the self-certification of income not permitted. The majority of mortgage lending was to existing customers holding current or savings accounts with HSBC.

Loan impairment charges and delinquency levels in our UK mortgage book remained at low levels, reflecting the economic environment and low interest rates which helped to make mortgage repayments more affordable for customers, some of whom were actively reducing their outstanding debt levels.

In Hong Kong, mortgage lending was US$45bn, an increase of 7% compared with the end of 2010 as the local property market remained strong. The continued strong growth in the Hong Kong property market led the HKMA to reduce the maximum loan-to-value ratios for new loans in both the second half of 2010 and in June 2011. The quality of our mortgage book was good with an average loan-to-value ratio of 51% on new mortgage sales.

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 regions¹²	Total
	US$m	US$m	US$m	US$m	US$m	US$m
At 30 June 2011
Residential mortgages ..................................	110,768	9,225	55,118	21,572	85,408	282,091
Second lien 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)
Residential mortgages ..............................	(336)	(61)	(3,980)	(24)	(323)	(4,724)
Second lien mortgages ..............................	(51)	-	(697)	(12)	-	(760)

Interest-only (including endowment) 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%

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 percentage of total mortgage lending .....................................................	0.9%	-	14.5%	2.8%	0.7%	4.6%

Impairment allowances on mortgage lending .................................................................	(294)	(47)	(4,907)	(50)	(242)	(5,540)
Residential mortgages ..............................	(226)	(47)	(3,695)	(25)	(242)	(4,235)
Second lien mortgages ..............................	(68)	-	(1,212)	(25)	-	(1,305)

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 mortgages¹³ ........................	3,263	-	17,783	127	496	21,669
Other loan-to-value ratios greater than 90%¹⁴ .................................................................	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%

	UK	Rest of Europe	US¹¹	Rest of North America	Other regions¹²	Total
	US$m	US$m	US$m	US$m	US$m	US$m
At 31 December 2010
Residential mortgages ...................................	103,037	8,581	57,630	21,212	78,221	268,681
Second lien mortgages ...................................	846	2	9,322	578	422	11,170

Total mortgage lending .................................	103,883	8,583	66,952	21,790	78,643	279,851

Second lien as percentage of total mortgage lending ......................................................	0.8%	-	13.9%	2.7%	0.5%	4.0%

Impairment allowances on mortgage lending .	(333)	(58)	(4,481)	(44)	(297)	(5,213)
Residential mortgages ................................	(275)	(58)	(3,592)	(25)	(297)	(4,247)
Second lien mortgages ...............................	(58)	-	(889)	(19)	-	(966)

Interest-only (including endowment) mortgages .................................................	45,039	51	-	908	1,282	47,280
Affordability mortgages, including ARMs ......	1,089	326	18,494	274	7,855	28,038
Other ............................................................	102	-	-	-	183	285

Total interest-only and affordability mortgages .................................................	46,230	377	18,494	1,182	9,320	75,603

- as a percentage of total mortgage lending	44.5%	4.4%	27.6%	5.4%	11.9%	27.0%

Negative equity mortgages¹³ .........................	2,436	-	15,199	103	291	18,029
Other loan-to-value ratios greater than 90%¹⁴ ..................................................................	5,802	263	10,460	1,698	1,348	19,571

Total negative equity and other mortgages ...	8,238	263	25,659	1,801	1,639	37,600

- as a percentage of total mortgage lending ..	7.9%	3.1%	38.3%	8.3%	2.1%	13.4%

For footnotes, see page 146.

HSBC Finance held approximately US$47bn of residential mortgage and second lien loans and advances to personal customers secured on real estate at 30 June 2011, 11% 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 lending¹⁵

	At 30 June 2011			At 30 June 2010			At 31 December 2010
			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 rate .......................	10,768	29,706	80	12,436	34,523	97	11,447	31,759	87

Other .............................	5,325	1,391	2	7,084	1,653	5	6,122	1,517	2
Adjustable-rate.............	4,445	1,391	2	5,799	1,653	5	5,042	1,517	2
Interest-only (affordability mortgages)¹⁶ ...........	880	-	-	1,285	-	-	1,080	-	-


	16,093	31,097	82	19,520	36,176	102	17,569	33,276	89

First lien .........................	14,123	28,092	61	16,898	32,296	77	15,300	29,950	66
Second lien .....................	1,970	3,005	21	2,622	3,880	25	2,269	3,326	23

	16,093	31,097	82	19,520	36,176	102	17,569	33,276	89

Stated income¹⁷ ..............	2,571	-	-	3,360	-	-	2,905	-	-
Negative equity mortgages¹³ ................	5,326	9,770	-	6,096	10,413	-	5,161	8,910	-

Impairment allowances ...	1,783	2,721	-	1,931	2,695	1	1,837	2,474	-
- as a percentage of total mortgage lending ........	11.1%	8.8%	-	9.9%	7.4%	1.0%	10.5%	7.4%	-

For footnotes, see page 146.

US personal lending

Credit quality

During the first half of 2011, economic conditions in the US improved marginally, although the pace of the recovery in the second quarter slowed as a result of higher energy costs, supply disruptions in the manufacturing sector and a significant reduction in the pace of job creation. These factors undermined consumer confidence, which continued to be low by historical standards. In addition, uncertainty remained in the housing market resulting in continuing house price declines in many states.

Unemployment rates, which have been a major factor in the deterioration of credit quality and continue to affect our allowance for loan impairments, improved but remained high at 9.2% in June 2011, down from 9.4% in December 2010 and some 40 basis points higher than in March 2011. Unemployment rates were at or above the US national average in 18 states and were at or above 10% in 7 states, including California and Florida where we have lending balances in excess of 5% of HSBC Finance's total loan balance.

An improvement in the US economy depends on a sustained recovery in the housing market, a fall in unemployment rates, the stabilisation of energy prices and improved consumer confidence. Any further weakening in these factors may adversely affect consumer payment patterns and credit quality.

Mortgage lending

In the first half of 2011, we further reduced our mortgage exposure in the US as balances continued to run-off in our Consumer Lending and Mortgage Services portfolios, as discussed on page 104. At 30 June 2011, residential mortgage lending balances were US$55bn, a decline of 4% compared with the end of 2010.

Real estate markets in the majority of the US have been, and will continue to be, affected by stagnation or declines in property values. As a result, loan-to-value ratios for our real estate secured loans have generally deteriorated since origination. At 30 June 2011, loans in negative equity were US$16bn, compared with US$15bn at the end of 2010.

In both our Consumer Lending and Mortgage Services portfolios, despite continued high unemployment levels, two months or more delinquent balances declined compared with the end of 2010 as lending balances continued to run-off and economic conditions continued to recover. We also experienced seasonal improvements in our collections as some of our customers used tax refunds to repay outstanding debt. The reduction was partly offset by our suspension of foreclosure activities, which resulted in a slowing in the rate at which lending balances were transferred to foreclosed. As a result of these factors, in our Consumer Lending portfolio two months or more delinquency rates improved from 16.2% at 31 December 2010 to 15.7%, while in our Mortgage Services portfolio they improved from 18.0% to 17.2%.

At HSBC Bank USA, two months or more delinquency rates improved from 7.9% to 7.6% at 31 December 2010, reflecting the improved credit quality, partly offset by the effects of higher levels of unemployment, the continued weakness in the housing market and the suspension of foreclosure activities, as discussed above.

Second lien mortgage loans have a risk profile characterised by higher loan-to-value ratios because in the majority of cases the loans were taken out to complete the refinancing 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. In the US, second lien mortgage balances declined by 9% to US$9bn, representing 13% of the overall US mortgage lending portfolio. Two months or more delinquency rates improved from 9.1% at 31 December 2010 to 7.6% at 30 June 2011.

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. As a result, and together with an increase in sales, the number of foreclosed properties at HSBC Finance at 30 June 2011 decreased compared with the end of December 2010. We expect the number of foreclosed properties added to the inventory to remain low through the remainder of 2011 as the effects of the foreclosure suspension continue to be reflected in our reported numbers.

The average total loss on foreclosed properties increased slightly compared with the end of 2010 as a result of the continued declines in house prices, partly attributable to the high levels of foreclosed properties. The average loss on sale of foreclosed properties decreased compared with the end of 2010, reflecting lower sales of properties located in states that have experienced the greatest deterioration in house prices in the past few years.

HSBC Finance: geographical concentration of US lending^15,18

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

For footnotes, see page 146.

HSBC Finance: foreclosed properties in the US

	Half year	Quarter ended
	to 30 June 2011	30 June 2011	31 March 2011	31 December 2010		30 September 2010

Number of foreclosed properties at end of period .........	6,982	6,982	10,204		10,940		9,798
Number of properties added to foreclosed inventory in the half year/quarter .............................................	8,071	2,548	5,523		5,763		5,413
Average loss on sale of foreclosed properties¹⁹ ............	14%	13%	15%		15%		10%
Average total loss on foreclosed properties²⁰ ...............	55%	55%	55%		54%		52%
Average time to sell foreclosed properties (days) .........	168	169	167		165		158

For footnotes, see page 146.

Credit cards

In our US credit card business, which comprises both general and private label cards, lending balances declined by 9% from the end of 2010 to US$31bn despite consumer spending remaining relatively strong. The fall reflected fewer active accounts, an increase in focus by customers on reducing outstanding debt, seasonal improvements in our collections as some customers used tax refunds to repay credit card debt, lower balances in certain segments of the portfolio where we no longer originate new accounts and, in the private label portfolio, the exit of certain merchant relationships. Credit quality continued to improve in the first half of 2011, reflecting improved customer payment patterns which led to a continued fall in delinquency rates. In our credit card portfolio, two months or more delinquency rates declined to 3.3% at 30 June 2011, while in our private label cards portfolio, two months or more delinquency rates decreased to 2.4% at 30 June 2011.

Other personal lending

Unsecured personal lending balances in the US continued to fall, largely due to run-off. Two months or more delinquency rates declined reflecting the run-off and seasonal improvement in collections.

Loan delinquency

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

Forbearance strategies and renegotiated loans

For a description of current policies and practices regarding forbearance and renegotiated loans, see page 150. There were no significant changes to them in the period.

Renegotiated loans that would otherwise be past due or impaired totalled US$33bn at 30 June 2011 (30 June 2010: US$36bn; 31 December 2010: US$35bn). The largest concentration was in the US and amounted to US$26bn or 78% (30 June 2010: US$31bn or 85%; 31 December 2010: US$28bn or 82%) of our total renegotiated loans, substantially all of which were held by HSBC Finance.

The second largest concentration was in Latin America and amounted to US$3bn (30 June 2010: US$1bn; 31 December 2010: US$2bn), constituting 10% of total renegotiated loans (30 June 2010: 3%; 31 December 2010: 5%). Although, Europe and the UK in particular represented the single largest lending portfolio, forbearance activities remained limited and renegotiated loans in the UK totalled only US$2bn (30 June 2010: US$2bn; 31 December 2010: US$2bn), reflecting the quality of the portfolios including the residential mortgage book. Similarly, the continued economic growth in Hong Kong and Rest of Asia-Pacific meant that forbearance activity remained low and renegotiated loans totalled only US$0.4bn and US$0.5bn, respectively (30 June 2010: US$0.4bn and US$0.5bn; 31 December 2010: US$0.3bn and US$0.5bn).

HSBC Finance loan modifications and re-ageing

HSBC Finance maintains customer account management policies and practices, including account modification and re-age programmes. Modification occurs when the terms of a loan are changed either temporarily or permanently. Modification may also lead to a re‑ageing of an account, although it may be re-aged without any modification to the original terms and conditions of the loan. In the first half of 2011, HSBC Finance modified 18,700 loans in Consumer Lending and Mortgage Services through its foreclosure avoidance and account modification programmes, with an aggregate balance of US$2.6bn.

At 30 June 2011, the total balance outstanding on HSBC Finance real estate secured accounts which had been re-aged or modified was US$25.4bn, compared with US$26.7bn at the end of 2010. US$10.4bn related to loans that had been re-aged without modification to the terms (30 June 2010: US$10.7bn; 31 December 2010: US$10.6bn), and US$13.3bn related to loans whose terms had been modified and re-aged (30 June 2010: US$14.6bn; 31 December 2010: US$13.9bn). These amounts are included in the renegotiated loans balance disclosed above. In addition, US$1.7bn of loans had been modified but not re-aged (30 June 2010: US$3.1bn; 31 December 2010: US$2.2bn) and as such did not meet the definition of a renegotiated loan as the impairment or past-due status of the loans did not change on modification. At 30 June 2011, 66% of modified or re-aged real estate loans remained up-to-date or past due less than 30 days (30 June 2010: 63%; 31 December 2010: 62%) and 24% were two or more months delinquent (30 June 2010: 25%; 31 December 2010: 26%).

Trends in two months and over contractual delinquency in the US

	At 30 Jun 2011	At 31 Dec 2010	At 30 Jun 2010
	US$m	US$m	US$m
In Personal Lending in the US
Residential mortgages ...................................................................................	7,864	8,632	8,591
Second lien mortgage lending ........................................................................	646	847	930
Vehicle finance .............................................................................................	-	-	152
Credit card ....................................................................................................	628	957	1,201
Private label .................................................................................................	285	404	478
Personal non-credit card ...............................................................................	517	811	987

Total ............................................................................................................	9,940	11,651	12,339

	%²¹	% ²¹	%²¹

Residential mortgages ...................................................................................	14.28	15.00	14.02
Second lien mortgage lending ........................................................................	7.60	9.10	8.98
Vehicle finance .............................................................................................	-	-	3.59
Credit card ....................................................................................................	3.33	4.69	5.65
Private label .................................................................................................	2.41	3.03	3.80
Personal non-credit card ...............................................................................	7.22	9.49	9.60

Total ............................................................................................................	9.80	10.67	10.28

	At 30 Jun 2011	At 31 Dec 2010	At 30 Jun 2010
	US$m	US$m	US$m
In Mortgage Services and Consumer Lending²²
Mortgage Services: .......................................................................................	2,596	3,002	3,067
- first lien ................................................................................................	2,432	2,757	2,788
- second lien ............................................................................................	164	245	279

Consumer Lending: ......................................................................................	4,734	5,284	5,278
- first lien ................................................................................................	4,420	4,861	4,795
- second lien ............................................................................................	314	423	483

	% ²¹	% ²¹	% ²¹
Mortgage Services:
- first lien ................................................................................................	17.22	18.02	16.50
- second lien ............................................................................................	8.32	10.80	10.63
- total ......................................................................................................	16.13	17.09	15.71

Consumer Lending:
- first lien ................................................................................................	15.73	16.23	14.85
- second lien ............................................................................................	10.46	12.72	12.44
- total ......................................................................................................	15.22	15.88	14.59

For footnotes, see page 146.

Credit quality of financial instruments

The five classifications describing the credit quality of HSBC's lending, debt securities portfolios and derivatives are set out in the Appendix to Risk on page 150 and defined on page 114 of the Annual Report and Accounts 2010. Additional credit quality information in respect of our consolidated holdings of ABSs is provided on page 121.

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 not disclosed within the EL grade to which they relate, but are separately classified as past due but not impaired.

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	allowances²⁵		Total
	US$m	US$m	US$m	US$m	US$m	US$m		US$m	US$m

At 30 June 2011
Cash and balances at central banks ..................................	66,860	999	229	130	-	-			68,218
Items in the course of collection from other banks ...........................................	14,107	658	291	2	-	-			15,058
Hong Kong Government certificates of indebtedness .	19,745	-	-	-	-	-			19,745

Trading assets²⁶ ....................	318,456	51,432	62,735	5,609					438,232
- treasury and other eligible bills ..............................	21,488	1,197	1,214	-					23,899
- debt securities .................	173,233	10,726	22,215	2,631					208,805
- loans and advances:
to banks .......................	73,490	20,773	4,347	1,524					100,134
to customers ................	50,245	18,736	34,959	1,454					105,394

Financial assets designated at fair value²⁶ ........................	7,856	5,356	6,700	65					19,977
- treasury and other eligible bills ..............................	207	-	-	-					207
- debt securities .................	6,660	5,085	6,686	65					18,496
- loans and advances:
to banks .......................	70	271	14	-					355
to customers ................	919	-	-	-					919

Derivatives²⁶ ........................	211,625	34,718	11,096	3,233					260,672

Loans and advances held at amortised cost ....................	692,926	306,987	193,916	33,765	29,052	26,179		(18,894)	1,263,931
- to banks ..........................	182,273	35,168	7,666	785	116	197		(162)	226,043
- to customers²⁷ .................	510,653	271,819	186,250	32,980	28,936	25,982		(18,732)	1,037,888

Financial investments ...........	351,940	24,373	25,631	4,103	-	2,603			408,650
- treasury and other similar bills ..............................	54,771	3,370	3,479	44	-	-			61,664
- debt securities .................	297,169	21,003	22,152	4,059	-	2,603			346,986

Other assets ..........................	11,982	7,285	15,106	1,525	637	254			36,789
- endorsements and acceptances ..................	1,801	4,228	4,776	499	16	18			11,338
- accrued income and other	10,181	3,057	10,330	1,026	621	236			25,451


Total financial instruments ...	1,695,497	431,808	315,704	48,432	29,689	29,036		(18,894)	2,531,272

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	allowances²⁵		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 assets²⁶ ....................	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
to customers ................	34,239	22,304	25,133	704					82,380

Financial assets designated at fair value²⁶ ........................	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
to customers ................	799	-	-	-					799

Derivatives²⁶ ........................	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
- to banks ..........................	142,135	40,911	12,064	983	140	228		(165)	196,296
- to customers²⁷ .................	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


Total financial instruments ...	1,508,670	390,366	287,385	50,499	35,409	30,991		(22,198)	2,281,122

	Neither past due nor impaired				Past due			Impair-
			Satisfac-	Sub-	but not			ment
	Strong	Good	tory	standard	impaired	Impaired	allowances²⁵		Total
	US$m	US$m	US$m	US$m	US$m	US$m		US$m	US$m

At 31 December 2010
Cash and balances at central banks ................................	51,682	3,100	2,461	140					57,383
Items in the course of collection from other banks ..........................................	5,631	101	340	-					6,072
Hong Kong Government certificates of indebtedness	19,057	-	-	-					19,057

Trading assets²⁶ ....................	256,576	41,620	43,278	2,492					343,966
- treasury and other eligible bills ..............................	23,663	1,000	957	-					25,620
- debt securities .................	141,837	8,254	17,222	955					168,268
- loans and advances:
to banks .......................	55,534	9,980	4,865	77					70,456
to customers ................	35,542	22,386	20,234	1,460					79,622

Financial assets designated at fair value²⁶ ........................	8,377	4,640	6,536	40					19,593
- treasury and other eligible bills ..............................	158	-	1	-					159
- debt securities .................	7,310	4,368	6,530	40					18,248
- loans and advances:
to banks .......................	38	272	5	-					315
to customers ................	871	-	-	-					871

Derivatives²⁶ ........................	199,920	45,042	13,980	1,815					260,757

Loans and advances held at amortised cost ....................	653,248	251,265	186,704	37,057	30,320	28,284		(20,241)	1,166,637
- to banks ..........................	166,943	33,051	6,982	1,152	108	193		(158)	208,271
- to customers²⁷ ................	486,305	218,214	179,722	35,905	30,212	28,091		(20,083)	958,366

Financial investments ...........	345,265	23,253	17,168	4,479	16	2,591			392,772
- treasury and other similar bills ..............................	52,423	2,702	1,882	115	-	7			57,129
- debt securities .................	292,842	20,551	15,286	4,364	16	2,584			335,643

Other assets ..........................	9,752	6,067	12,212	1,510	513	317			30,371
- endorsements and acceptances ..................	2,074	3,305	4,227	493	9	8			10,116
- accrued income and other ..........................................	7,678	2,762	7,985	1,017	504	309			20,255


Total financial instruments ...	1,549,508	375,088	282,679	47,533	30,849	31,192		(20,241)	2,296,608

For footnotes, see page 146.

Financial instruments on which credit quality has been assessed increased by 10% to US$2,531bn in the first half of 2011, of which US$1,695bn or 67% was classified as 'strong'. This percentage was in line with 31 December 2010. The proportion of financial instruments classified as 'good' and 'satisfactory' remained broadly stable at 17% and 12%, respectively. The proportion of 'sub-standard' financial instruments was 2%.

Loans and advances held at amortised cost on which credit quality has been assessed increased by 8% to US$1,264bn. The increase in balances was mainly due to growth in corporate and commercial

lending, as economic conditions generally improved and trade flows increased. The proportion of balances classified as 'strong' was broadly in line with the end of 2010 while the portion of balances classified as 'good' increased from 22% to 24%.

Trading assets on which credit quality has been assessed grew by 27% to US$438bn from 31 December 2010. The rise reflected an increase in our holdings of debt securities, together with a rise in settlement accounts and higher reverse repo balances. The proportion of balances classified as 'strong' declined from 75% to 73%.

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	MENA	North America	Latin America	Total
	US$m	US$m	US$m	US$m	US$m	US$m	US$m

At 30 June 2011 ...........................	2,529	1,071	2,377	1,319	18,156	3,600	29,052
At 30 June 2010 .............................	2,717	1,230	2,019	1,372	23,483	3,928	34,749
At 31 December 2010 .....................	2,518	1,158	2,092	1,351	20,227	2,974	30,320

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

	At 30 June 2011	At 30 June 2010	At 31 December 2010
	US$m	US$m	US$m

Banks ................................................................................................................	116	140	108

Customers .........................................................................................................	28,936	34,609	30,212
Personal ........................................................................................................	23,435	28,995	24,824
Corporate and commercial .............................................................................	5,187	5,451	5,292
Financial ........................................................................................................	314	163	96


	29,052	34,749	30,320

Ageing analysis of 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 2011
Loans and advances held at amortised cost ..	19,254	6,257	3,169	235	137	29,052
- to banks ................................................	116	-	-	-	-	116
- to customers .........................................	19,138	6,257	3,169	235	137	28,936

Other assets .................................................	317	166	72	30	52	637
- endorsements and acceptances ..............	13	1	-	-	2	16
- other ....................................................	304	165	72	30	50	621


	19,571	6,423	3,241	265	189	29,689

At 30 June 2010
Loans and advances held at amortised cost ..	22,627	8,058	3,682	238	144	34,749
- to banks ................................................	140	-	-	-	-	140
- 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

	Up to 29 days	30-59 days	60-89 days	90-179 days	180 days and over	Total
	US$m	US$m	US$m	US$m	US$m	US$m
At 31 December 2010
Loans and advances held at amortised cost ..	19,481	6,915	3,281	482	161	30,320
- to banks ................................................	108	-	-	-	-	108
- to customers .........................................	19,373	6,915	3,281	482	161	30,212

Financial investments
- debt securities .......................................	16	-	-	-	-	16

Other assets .................................................	262	123	57	26	45	513
- endorsements and acceptances ..............	7	-	-	1	1	9
- other ....................................................	255	123	57	25	44	504


	19,759	7,038	3,338	508	206	30,849

Impairment of loans and advances

Impaired loans and advances to customers and banks by industry sector

	Impaired loans and advances at 30 June 2011			Impaired loans and advances at 30 June 2010			Impaired loans and advances at 31 December 2010
	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 ............................	197	-	197	228	-	228	193	-	193

Customers ......................	14,806	11,176	25,982	14,462	13,425	27,887	15,201	12,890	28,091
- personal ..................	2,145	10,861	13,006	1,877	13,119	14,996	2,121	12,592	14,713
- corporate and commercial ................	11,462	315	11,777	11,663	305	11,968	11,964	298	12,262
- financial ..................	1,199	-	1,199	922	1	923	1,116	-	1,116


	15,003	11,176	26,179	14,690	13,425	28,115	15,394	12,890	28,284

Impairment allowances

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

Impairment allowances on loans and advances to customers by geographical region

	Europe	Hong Kong	Rest of Asia- Pacific	MENA	North America	Latin America	Total
	US$m	US$m	US$m	US$m	US$m	US$m	US$m
At 30 June 2011
Gross loans and advances
Individually assessed impaired loans²⁸ ......................................	8,923	489	1,081	1,896	1,553	864	14,806

Collectively assessed²⁹ ..................	482,740	159,454	121,176	25,367	185,991	67,086	1,041,814
- impaired loans²⁸ .....................	1,279	21	127	299	7,793	1,657	11,176
- non-impaired loans³⁰ .............	481,461	159,433	121,049	25,068	178,198	65,429	1,030,638


TGLAC ........................................	491,663	159,943	122,257	27,263	187,544	67,950	1,056,620

Total impairment allowances ..	5,332	573	828	1,569	8,282	2,148	18,732
- individually assessed ...............	3,607	297	518	1,098	384	339	6,243
- collectively assessed ...............	1,725	276	310	471	7,898	1,809	12,489


Net loans and advances .................	486,331	159,370	121,429	25,694	179,262	65,802	1,037,888

	Europe	Hong Kong	Rest of Asia- Pacific	MENA	North America	Latin America	Total
	%	%	%	%	%	%	%
Individually assessed allowances as a percentage of individually assessed impaired loans ...........................	40.4	60.7	47.9	57.9	24.7	39.2	42.2
Collectively assessed allowances as a percentage of collectively assessed loans and advances ....................	0.4	0.2	0.3	1.9	4.2	2.7	1.2
Total allowances as a percentage of TGLAC .....................................	1.1	0.4	0.7	5.8	4.4	3.2	1.8

	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 loans²⁸ .......................................	8,420	782	989	1,718	1,699	854	14,462

Collectively assessed²⁹ ...................	404,641	114,024	91,539	23,263	217,349	50,092	900,908
- impaired loans²⁸ .....................	1,837	32	157	260	9,420	1,719	13,425
- non-impaired loans³⁰ ..............	402,804	113,992	91,382	23,003	207,929	48,373	887,483


TGLAC .........................................	413,061	114,806	92,528	24,981	219,048	50,946	915,370

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


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 impaired loans ...........................	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 TGLAC .....................................	1.4	0.6	0.9	6.4	5.0	4.2	2.4

	US$m	US$m	US$m	US$m	US$m	US$m	US$m
At 31 December 2010
Gross loans and advances
Individually assessed impaired loans²⁸ .......................................	8,831	637	1,185	2,137	1,632	779	15,201

Collectively assessed²⁹ ...................	432,631	140,683	108,505	24,141	198,070	59,218	963,248
- impaired loans²⁸ .....................	1,726	23	139	296	9,095	1,611	12,890
- non-impaired loans³⁰ ..............	430,905	140,660	108,366	23,845	188,975	57,607	950,358


TGLAC .........................................	441,462	141,320	109,690	26,278	199,702	59,997	978,449

Total impairment allowances .......	5,663	629	959	1,652	9,170	2,010	20,083
- individually assessed ................	3,563	345	629	1,163	390	367	6,457
- collectively assessed ...............	2,100	284	330	489	8,780	1,643	13,626


Net loans and advances .................	435,799	140,691	108,731	24,626	190,532	57,987	958,366

	%	%	%	%	%	%	%
Individually assessed allowances as a percentage of individually assessed impaired loans ...........................	40.3	54.2	53.1	54.4	23.9	47.1	42.5
Collectively assessed allowances as a percentage of collectively assessed loans and advances ....................	0.5	0.2	0.3	2.0	4.4	2.8	1.4
Total allowances as a percentage of TGLAC .....................................	1.3	0.4	0.9	6.3	4.6	3.4	2.1

For footnotes, see page 146.

Movement in impairment allowances on loans and advances to customers and banks

	Banks	Customers
	individually assessed⁷	Individually assessed	Collectively assessed	Total
	US$m	US$m	US$m	US$m

At 1 January 2011 .............................................................	158	6,457	13,626	20,241
Amounts written off ..........................................................	-	(986)	(5,975)	(6,961)
Recoveries of loans and advances previously written off ....	-	107	623	730
Charge to income statement ..............................................	1	637	4,335	4,973
Exchange and other movements ........................................	3	28	(120)	(89)

At 30 June 2011 ................................................................	162	6,243	12,489	18,894

Impairment allowances:
on loans and advances to customers ................................		6,243	12,489	18,732
- personal ..................................................................		679	10,550	11,229
- corporate and commercial .......................................		4,966	1,853	6,819
- financial ..................................................................		598	86	684

as a percentage of loans and advances^31,32 .......................	0.10%	0.64%	1.27%	1.66%

	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 previously written off ....	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

Impairment allowances:
on loans and advances to customers ................................		6,402	15,631	22,033
- personal ..................................................................		544	13,465	14,009
- corporate and commercial .......................................		5,471	2,050	7,521
- financial ..................................................................		387	116	503

as a percentage of loans and advances^31,32 .......................	0.13%	0.76%	1.86%	2.29%

	US$m	US$m	US$m	US$m

At 1 July 2010 ...................................................................	165	6,402	15,631	22,198
Amounts written off ..........................................................	(1)	(1,766)	(7,172)	(8,939)
Recoveries of loans and advances previously written off ....	-	85	482	567
Charge to income statement ..............................................	-	1,556	4,758	6,314
Exchange and other movements ........................................	(6)	180	(73)	101

At 31 December 2010 ........................................................	158	6,457	13,626	20,241

Impairment allowances:
on loans and advances to customers ................................		6,457	13,626	20,083
- personal ..................................................................		615	11,678	12,293
- corporate and commercial .......................................		5,274	1,863	7,137
- financial ..................................................................		568	85	653

as a percentage of loans and advances^31,32 .......................	0.11%	0.70%	1.49%	1.91%

For footnotes, see page 146.

Impairment charge

Net loan impairment charge by geographical region

	Europe US$m	Hong Kong US$m	Rest of Asia- Pacific US$m	MENA US$m	North America US$m	Latin America US$m	Total US$m
Half-year to 30 June 2011
Individually assessed impairment allowances
New allowances ....................................	744	20	78	96	182	89	1,209
Release of allowances no longer required ..........................................................	(269)	(23)	(61)	(37)	(41)	(35)	(466)
Recoveries of amounts previously written off .....................................................	(21)	(13)	(11)	(11)	(15)	(34)	(105)

	454	(16)	6	48	126	20	638

Collectively assessed impairment allowances
New allowances net of allowance releases ..............................................	684	52	188	81	3,004	951	4,960
Recoveries of amounts previously written off .....................................................	(288)	(13)	(90)	(30)	(55)	(149)	(625)

	396	39	98	51	2,949	802	4,335

Total charge for impairment losses ........	850	23	104	99	3,075	822	4,973
Banks ..................................................	-	-	-	-	-	1	1
Customers ............................................	850	23	104	99	3,075	821	4,972


	%	%	%	%	%	%	%
Charge for impairment losses as a percentage of closing gross loans and advances (annualised) ...........................	0.30	0.02	0.12	0.57	2.99	1.73	0.78

	US$m	US$m	US$m	US$m	US$m	US$m	US$m
At 30 June 2011
Impaired loans ........................................	10,309	514	1,210	2,215	9,408	2,523	26,179
Impairment allowances ...........................	5,412	573	828	1,586	8,346	2,149	18,894

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

	Europe US$m	Hong Kong US$m	Rest of Asia- Pacific US$m	MENA US$m	North America US$m	Latin America US$m	Total US$m
Half-year to 31 December 2010
Individually assessed impairment allowances
New allowances ....................................	1,092	51	239	173	340	116	2,011
Release of allowances no longer required ...........................................................	(164)	(25)	(32)	(22)	(89)	(38)	(370)
Recoveries of amounts previously written off .....................................................	(24)	(5)	(21)	1	(15)	(21)	(85)

	904	21	186	152	236	57	1,556

Collectively assessed impairment allowances
New allowances net of allowance releases ..............................................	562	67	177	63	3,565	806	5,240
Recoveries of amounts previously written off .....................................................	(148)	(14)	(82)	(29)	(73)	(136)	(482)

	414	53	95	34	3,492	670	4,758

Total charge for impairment losses .........	1,318	74	281	186	3,728	727	6,314
Customers ..........................................	1,318	74	281	186	3,728	727	6,314


	%	%	%	%	%	%	%
Charge for impairment losses as a percentage of closing gross loans and advances (annualised) ...........................	0.51	0.09	0.38	1.05	3.43	1.68	1.07

	US$m	US$m	US$m	US$m	US$m	US$m	US$m
At 31 December 2010
Impaired loans ........................................	10,663	665	1,324	2,453	10,789	2,390	28,284
Impairment allowances ...........................	5,741	629	959	1,669	9,234	2,010	20,241

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	MENA	North America	Latin America	Total
	%	%	%	%	%	%	%
Half-year to 30 June 2011
New allowances net of allowance releases .................................	0.57	0.07	0.36	1.04	3.27	3.20	1.20
Recoveries .................................	(0.15)	(0.03)	(0.18)	(0.31)	(0.07)	(0.58)	(0.15)

Total charge for impairment losses ....................................	0.42	0.04	0.18	0.73	3.20	2.62	1.05

Amount written off net of recoveries .............................	0.68	0.10	0.38	0.45	3.89	2.39	1.31

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 31 December 2010
New allowances net of allowance releases .................................	0.77	0.13	0.80	1.65	3.71	3.24	1.53
Recoveries .................................	(0.09)	(0.03)	(0.21)	(0.23)	(0.09)	(0.58)	(0.13)

Total charge for impairment losses ....................................	0.68	0.10	0.59	1.42	3.62	2.66	1.40

Amount written off net of recoveries .............................	0.92	0.14	0.48	0.83	5.08	3.38	1.86

Impaired loans by geographical region

	31 Dec 10 as reported	Constant currency effect	31 Dec 10 at 30 Jun 11 exchange rates	Movement on a constant currency basis	30 Jun 11 as reported	Reported change	Movement on a constant currency basis
	US$m	US$m	US$m	US$m	US$m	%	%

Europe ..............................	10,663	421	11,084	(775)	10,309	(3)	(7)
Hong Kong .......................	665	-	665	(151)	514	(23)	(23)
Rest of Asia-Pacific ..........	1,324	33	1,357	(147)	1,210	(9)	(11)
Middle East and North Africa ............................	2,453	(4)	2,449	(234)	2,215	(10)	(10)
North America ..................	10,789	26	10,815	(1,407)	9,408	(13)	(13)
Latin America ...................	2,390	116	2,506	17	2,523	6	1

Total ................................	28,284	592	28,876	(2,697)	26,179	(7)	(9)

Impaired loans and net loan impairment allowances

On a reported basis, loan impairment charges to the income statement of US$5.0bn in the first half of 2011 declined by 31% compared with the first half of 2010 and by 21% compared with the second half of 2010. Reported impaired loans were US$26.2bn, 7% lower than at 31 December 2010.

The following commentary is on a constant currency basis.

New loan impairment allowances were US$6.2bn, a decline of 26% compared with the first half of 2010, reflecting an overall improvement in the credit environment and lower lending balances in our US run-off portfolios. Releases and recoveries of US$1.2bn were 24% higher, mainly in the UK reflecting economic recovery.

Impaired loans were 2% of total gross loans and advances at 30 June 2011, in line with 31 December 2010.

In Europe, new loan impairment allowances were US$1.4bn, 13% lower than in the first half of 2010, reflecting an improved credit environment across the region. Individually assessed new loan impairment allowances decreased, mainly in the UK, as a result of lower loan impairment charges against specific exposures. Collectively assessed new loan impairment allowances also declined, mainly in the UK personal lending book, as a result of improved delinquency rates in both the secured and unsecured portfolios, strengthened risk management practices and improved collections. In addition, lower new loan impairment allowances reflected lower levels of unsecured lending. Impaired loans of US$10.3bn were 7% lower than at 31 December 2010.

Releases and recoveries in Europe were US$580m, an increase of 61% compared with the first half of 2010 due to higher recoveries in the UK.

In Hong Kong, new loan impairment allowances fell by 37% compared with the first half of 2010. New individually assessed loan impairment allowances declined, reflecting fewer loan impairment charges against specific exposures, while collectively assessed allowances remained broadly flat. Impaired loans declined by 23% from 31 December 2010, reflecting debt restructuring, repayments and write-offs.

Releases and recoveries in Hong Kong were US$49m, in line with the first half of 2010.

New loan impairment allowances in Rest of Asia-Pacific decreased by 11% to US$266m. The decline reflected lower collectively assessed new loan impairment allowances, mainly in India, where lending balances fell as certain higher risk unsecured portfolios were managed down. This was partly offset by increases in collectively assessed new loan impairment allowances in other parts of the region. Individually assessed new loan impairment allowances increased, mainly in Australia, due to loan impairment charges raised against a small number of CMB exposures. Impaired loans in the region decreased by 11% from the end of 2010 to US$1.2bn at 30 June 2011, mainly in India due to the write-off of a previously impaired loan.

Releases and recoveries in the region decreased by 12%, mainly due to lower releases for cards and unsecured products.

In the Middle East and North Africa, new loan impairment allowances declined by 65% to US$177m in the first half of 2011. Individually assessed new loan impairment charges fell, as charges in 2011 were restricted to a small number of corporate exposures and due to the non-recurrence of a significant charge related to a single corporate exposure in the UAE. Collectively assessed new loan impairment allowances also declined, primarily in the UAE due to lower delinquencies as a result of an improvement in the credit environment. Impaired loans decreased by 10% from 31 December 2010 to US$2.2bn due to the derecognition of a previously impaired loan in the UAE following debt restructuring.

Releases and recoveries in the region decreased by 26% to US$78m from the first half of 2010.

In North America, new loan impairment allowances declined markedly, reducing by 33% to US$3.2bn. In our Consumer Finance portfolios, the fall in new loan impairment allowances reflected a reduction in lending balances and an improvement in credit quality resulting in lower delinquency rates and higher recovery rates. This was partly offset by additional impairment charges as a result of changes in assumptions on the pace of recovery in house prices and delays in the timing of expected cash flows as a result of the temporary foreclosure suspension.

In our corporate and commercial portfolios, new loan impairment allowances also declined in the commercial real estate and middle market sectors, and lower write-offs in business banking reflected improved credit quality and lower delinquency levels. This was partially offset by a specific loan impairment charge associated with the downgrade of an individual commercial real estate loan. Releases and recoveries in North America declined by 45% to US$111m due to lower levels of payments on loans resulting in lower releases.

Impaired loans decreased by 13% from the end of 2010 to US$9.4bn, driven by the continued run‑off of the Consumer Lending and Mortgage Services portfolios.

In Latin America, new loan impairment allowances increased by 3% to US$1.0bn. The increase in new loan impairment allowances was primarily in Brazil, driven by lending growth and higher delinquency partly offset by lower collective new loan impairment allowances reflecting the reduction in the size of the credit card portfolio in Mexico. Impaired loans were broadly in line with 31 December 2010 as an increase in Brazil reflecting increased delinquency and higher lending balances was broadly offset by a decline in Mexico following settlement of a previously impaired loan, and lower impaired loans in Argentina.

Releases and recoveries in Latin America increased by 51% from the first half of 2010 to US$218m, primarily in Brazil due to improved collections initiatives.

Securitisation exposures and other structured products

This section contains information about our exposure to the following:

· asset-backed securities ('ABS's), including mortgage-backed securities ('MBS's) and related collateralised debt obligations ('CDO's);

· direct lending at fair value through profit or loss;

· monolines;

· credit derivative product companies ('CDPC's);

· leveraged finance transactions; and

· representations and warranties related to mortgage sales and securitisation activities.

Business model

MBSs and other ABSs are held in Balance Sheet Management and as part of our investment portfolios in order to earn net interest income and management fees. Some are also held in the trading portfolio and hedged through credit derivative protection with the intention of earning the spread differential over the life of the instruments.

Our investment portfolios include securities investment conduits ('SIC's) and money market funds, as described in Note 21 on the Financial Statements. We also originate leveraged finance loans for the purpose of syndicating or selling them down to generate trading profit or holding them to earn interest margin over their lives.

These activities are not a significant part of GB&M's ongoing activities. The purchase and securitisation of US mortgage loans and the secondary trading of US MBSs, which was conducted in our US MBS business, was discontinued in 2007.

Exposure in the first half of 2011

The first half of 2011 and, in particular, the second quarter saw renewed uncertainty and concerns over sovereign credit risk, and a more pessimistic outlook for the US housing market. However, despite these developments, the levels of write-downs and losses on our holdings of structured assets remained modest with net write-downs to the income statement of US$0.2bn in the first half of 2011 (first half of 2010: US$0.1bn net write-backs; second half of 2010: US$0.1bn net write-downs). Unrealised losses in our available-for-sale reserve continued to reduce due to increases in fair value and the principal amortisation of ABSs as repayments were received at par with the available-for-sale ABS reserve deficit down US$1.6bn to US$4.8bn.

This information is provided by RNS

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