Interim Report - 15x of 25

RNS Number : 6291J

HSBC Holdings PLC

10 August 2012

 



Credit quality of financial instruments

The five classifications describing the credit quality of our lending, debt securities portfolios and derivatives are set out in the Appendix to Risk on page 183 and defined on page 191 of the Annual Report and Accounts 2011. Additional credit quality information in respect of our consolidated holdings of ABSs is provided on page 154.

During 2011, we amended our presentation of impaired loans for portfolios with significant levels of forbearance to provide more relevant information on the effect of forbearance on the credit risk of loans and advances. This change in presentation does not affect the accounting policy for the recognition of loan impairment allowances. Further details are provided on page 146.

For the purpose of the following disclosure, retail loans which are past due up to 89 days and are not otherwise classified as impaired in accordance with our disclosure convention (see page 146), are not disclosed within the expected loss ('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	allowances18			Total
	US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m
At 30 June 2012
Cash and balances at central banks ................................	146,337		1,364		210		-		-		-				147,911
Items in the course of collection from other banks ..........................................	10,628		173		274		-		-		-				11,075
Hong Kong Government certificates of indebtedness	21,283		-		-		-		-		-				21,283
Trading assets19 ....................	242,618		68,646		49,377		711								361,352
- treasury and other eligible bills ..............................	26,256		2,726		1,116		-								30,098
- debt securities .................	97,559		14,196		19,458		350								131,563
- loans and advances:
to banks .......................	60,832		26,423		7,474		101								94,830
to customers ................	57,971		25,301		21,329		260								104,861
Financial assets designated at fair value19 ........................	8,356		5,438		608		133								14,535
- treasury and other eligible bills ..............................	77		-		14		-								91
- debt securities .................	8,228		5,359		520		131								14,238
- loans and advances:
to banks .......................	51		-		74		2								127
to customers ................	-		79		-		-								79
Derivatives19 ........................	271,850		53,347		27,875		2,862								355,934
Loans and advances held at amortised cost ...................	611,942		259,989		217,188		26,981		17,517		40,832		(17,273)		1,157,176
- to banks .........................	142,693		28,284		10,531		639		12		88		(56)		182,191
- to customers20 ................	469,249		231,705		206,657		26,342		17,505		40,744		(17,217)		974,985
Financial investments ...........	330,781		27,343		23,265		3,456		-		2,205				387,050
- treasury and other similar bills ..............................	62,669		4,691		4,093		99		-		-				71,552
- debt securities .................	268,112		22,652		19,172		3,357		-		2,205				315,498
Assets held for sale ...............	4,677		1,365		3,125		665		449		366		(106)		10,541
- disposal groups ...............	4,632		1,365		3,125		665		447		255		(106)		10,383
- non-current assets held for sale .............................	45		-		-		-		2		111		-		158
Other assets ..........................	11,908		7,672		12,403		1,604		290		520				34,397
- endorsements and acceptances ..................	2,172		4,807		4,849		945		5		4				12,782
- accrued income and other	9,736		2,865		7,554		659		285		516				21,615
	1,660,380		425,337		334,325		36,412		18,256		43,923		(17,379)		2,501,254

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		Impaired7	allowances18			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 assets19 ....................	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 value19 ........................	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
Derivatives19 ........................	211,625		34,718		11,096		3,233								260,672
Loans and advances held at amortised cost ...................	695,086		302,837		186,904		31,426		22,166		44,406		(18,894)		1,263,931
- to banks .........................	182,273		35,168		7,666		785		116		197		(162)		226,043
- to customers20 ................	512,813		267,669		179,238		30,641		22,050		44,209		(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
	1,697,657		427,658		308,692		46,093		22,803		47,263		(18,894)		2,531,272

	Neither past due nor impaired								Past due				Impair-
					Satisfac-		Sub-		but not				ment
	Strong		Good		tory		standard		impaired		Impaired	allowances18			Total
	US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m
At 31 December 2011
Cash and balances at central banks ...............................	126,926		2,678		263		35		-		-				129,902
Items in the course of collection from other banks .........................................	7,707		150		350		1		-		-				8,208
Hong Kong Government certificates of indebtedness	20,922		-		-		-		-		-				20,922
Trading assets19 ...................	231,594		37,182		39,171		1,502								309,449
- treasury and other eligible bills .............................	33,199		538		564		8								34,309
- debt securities ..............	103,163		8,497		18,188		639								130,487
- loans and advances:
to banks ......................	49,021		20,699		5,186		619								75,525
to customers ...............	46,211		7,448		15,233		236								69,128
Financial assets designated at fair value19 .......................	7,176		4,728		830		192								12,926
- treasury and other eligible bills .............................	123		-		-		-								123
- debt securities ...............	6,148		4,728		767		191								11,834
- loans and advances:
to banks ......................	55		-		63		1								119
to customers ...............	850		-		-		-								850
Derivatives19 .......................	279,557		45,858		18,627		2,337								346,379
Loans and advances held at amortised cost .................	609,081		245,352		194,661		28,210		20,009		41,739		(17,636)		1,121,416
- to banks ........................	144,815		28,813		6,722		568		39		155		(125)		180,987
- to customers20 ..............	464,266		216,539		187,939		27,642		19,970		41,584		(17,511)		940,429
Financial investments ..........	340,173		24,757		22,139		3,532		-		2,233				392,834
- treasury and other similar bills .............................	58,627		3,348		3,144		104		-		-				65,223
- debt securities ...............	281,546		21,409		18,995		3,428		-		2,233				327,611
Assets held for sale ..............	14,365		12,587		7,931		536		2,524		1,479		(1,614)		37,808
- disposal groups ..............	14,317		12,587		7,931		536		2,522		1,467		(1,614)		37,746
- non-current assets held for sale .............................	48		-		-		-		2		12		-		62
Other assets .........................	11,956		6,526		12,379		1,193		421		517				32,992
- endorsements and acceptances ................	1,789		4,075		4,629		504		10		3				11,010
- accrued income and other .........................................	10,167		2,451		7,750		689		411		514				21,982
	1,649,457		379,818		296,351		37,538		22,954		45,968		(19,250)		2,412,836

For footnotes, see page 180.

We assess credit quality on all financial instruments which are subject to credit risk. The balance of these financial instruments at 30 June 2012 was US$2,501bn, of which US$1,661bn or 66% were classified as 'strong'. This percentage was broadly in line with 31 December 2011. The proportion of financial instruments classified as 'good' and 'satisfactory' remained broadly stable at 17% and 13%, respectively. The proportion of 'sub-standard' financial instruments remained low at 1% at 30 June 2012.

Loans and advances held at amortised cost on which credit quality has been assessed increased by 3% to US$1,157bn. At 30 June 2012, 75% of the Group's lending balances were classified as either 'strong' or 'good', broadly in line with the end of 2011.

Financial investments on which credit quality is assessed were US$387bn at 30 June 2012, compared with US$393bn at 31 December 2011. The majority of the Group's exposure was in the form of available-for-sale debt securities issued by government and government agencies classified as 'strong' and this proportion was broadly in line with the end of 2011.

Derivative assets on which credit quality has been assessed increased by 3% to US$356bn compared with 31 December 2011. This rise was mainly in Europe, driven by a significant rise in the fair value of interest rate contracts due to downward movements of yield curves in major currencies, reflecting the ongoing monetary response to the economic weakness and turmoil in the eurozone. The proportion of balances classified as 'strong' declined marginally from 81% at the end of 2011 to 76% at 30 June 2012 and the proportion of 'satisfactory' balances increased from 5% to 8%.

Trading assets on which credit quality has been assessed grew by 17% to US$361bn from 31 December 2011, as client activity increased from the subdued levels seen in the second half of 2011. This resulted in higher reverse repo and equity securities balances as well as a rise in settlement account balances, which vary significantly in proportion to the level of trading activity. The proportion of balances classified as 'strong' declined despite an overall increase in total balances classified as 'strong'. This reflected a rise in the reverse repo transactions with counterparties classified as 'good' and 'satisfactory', as well as the downgrade of certain eurozone countries which resulted in the movement of related debt securities balances from 'strong' to 'good'.

Cash and balances at central banks, on which credit quality has been assessed, increased by 14% to US$148bn, reflecting the deposit of surplus liquidity in Europe with the local central bank. Substantially all of the Group's cash and balances at central banks were classified as 'strong', with the most significant concentrations in Europe and North America.

Assets held for sale on which credit quality has been assessed declined, with reductions across all classifications, following the completion of the sale of our Card and Retail Services business in the US.

Past due but not impaired gross financial instruments

Past due but not impaired loans are those for which the customer is in the early stages of delinquency and has failed to make a payment, or a partial payment, in accordance with the contractual terms of the loan agreement. This is typically where a loan is past due up to 89 days and there are no other indicators of impairment.

Further examples of exposures past due but not impaired include individually assessed mortgages that are in arrears 90 days  or more where there are no other indicators of impairment, 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. Where groups of loans are collectively assessed for impairment, collective impairment allowances are recognised for loans classified as past due but not impaired.

At 30 June 2012, US$17.5bn of loans and advances held at amortised cost were classified as past due but not impaired (31 December 2011: US$20.0bn; 30 June 2011: US$22.2bn). The largest concentration of these balances was in HSBC Finance. The decrease in 2012 was primarily due to lower lending balances resulting in a reduction in early stage delinquency in the CML portfolio.

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 2012 ...........................	2,259		1,084		2,548		980		7,874		2,772		17,517
At 30 June 20117 ............................	2,528		1,071		2,377		1,292		11,447		3,451		22,166
At 31 December 2011 .....................	1,990		1,107		2,319		1,165		10,216		3,212		20,009

For footnote, see page 180.

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

	At        30 June              2012		At          30 June              20117		At 31 December              2011
	US$m		US$m		US$m
Banks ................................................................................................................	12		116		39
Customers .........................................................................................................	17,505		22,050		19,970
Personal ........................................................................................................	12,153		16,689		13,951
Corporate and commercial .............................................................................	5,011		5,047		5,855
Financial ........................................................................................................	341		314		164
	17,517		22,166		20,009

For footnote, see page 180.

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

	Up to 29            days		30-59            days		60-89            days		90-179            days		180 days     and over		Total
	US$m		US$m		US$m		US$m		US$m		US$m
At 30 June 2012
Loans and advances held at amortised cost ..	13,137		2,903		1,307		79		91		17,517
- to banks ................................................	12		−		−		−		−		12
- to customers .........................................	13,125		2,903		1,307		79		91		17,505
Assets held for sale1 .....................................	270		116		50		6		7		449
- disposal groups ......................................	270		114		50		6		7		447
- non-current assets held for sale .............	−		2		−		−		−		2
Other assets .................................................	168		39		30		10		43		290
- endorsements and acceptances ..............	3		1		−		−		1		5
- other ....................................................	165		38		30		10		42		285
	13,575		3,058		1,387		95		141		18,256
At 30 June 2011
Loans and advances held at amortised cost7 .	16,125		3,808		1,911		185		137		22,166
- to banks ................................................	116		-		-		-		-		116
- to customers .........................................	16,009		3,808		1,911		185		137		22,050
Other assets .................................................	317		166		72		30		52		637
- endorsements and acceptances ..............	13		1		-		-		2		16
- other ....................................................	304		165		72		30		50		621
	16,442		3,974		1,983		215		189		22,803
At 31 December 2011
Loans and advances held at amortised cost ..	14,239		3,680		1,727		223		140		20,009
- to banks ................................................	39		-		-		-		-		39
- to customers .........................................	14,200		3,680		1,727		223		140		19,970
Assets held for sale1 .....................................	1,563		644		307		8		2		2,524
- disposal groups ......................................	1,563		644		307		7		1		2,522
- non-current assets held for sale .............	-		-		-		1		1		2
Other assets .................................................	225		80		37		22		57		421
- endorsements and acceptances ..............	7		2		-		1		-		10
- other ....................................................	218		78		37		21		57		411
	16,027		4,404		2,071		253		199		22,954

For footnotes, see page 180.

Renegotiated loans and forbearance

Current policies and procedures regarding renegotiated loans and forbearance are described in the Appendix to Risk on page 183.

The contractual terms of a loan may be modified for a number of reasons including changing market conditions, customer retention and other factors not related to the current or potential credit deterioration of a customer. When the contractual payment terms of a loan have been modified because we have significant concerns about the borrower's ability to meet contractual payments when due, these loans are classified as 'renegotiated loans'. For the purposes of this disclosure the term 'forbearance' is synonymous with the renegotiation of loans for these purposes.

Renegotiated loans and advances to customers

	At 30 June 2012
	Neither                 past           due nor         impaired		Past due            but not         impaired		Impaired		Total
	US$m		US$m		US$m		US$m
Retail .................................................................................	8,007		3,532		19,229		30,768
First lien residential mortgages........................................	5,841		2,842		16,096		24,779
Other personal ...............................................................	2,166		690		3,133		5,989
Commercial real estate........................................................	2,392		30		3,216		5,638
Corporate and commercial..................................................	4,387		401		3,993		8,781
Financial ............................................................................	261		-		560		821
Governments .....................................................................	44		-		117		161
	15,091		3,963		27,115		46,169
Total renegotiated loans and advances to customers as a percentage of total gross loans and advances to customers ...............................................................................................								4.7%

	At 30 June 2011									At 31 December 2011
	Neither          past     due nor   impaired		Past due      but not   impaired		Impaired		Total				Neither          past     due nor   impaired		Past due      but not   impaired		Impaired		Total
	US$m		US$m		US$m		US$m				US$m		US$m		US$m		US$m
Retail .........................	8,504		4,074		20,454		33,032				8,133		4,401		19,125		31,659
First lien residential mortgages ...........	5,595		3,123		16,872		25,590				5,916		3,560		15,932		25,408
Other personal ........	2,909		951		3,582		7,442				2,217		841		3,193		6,251
Commercial real estate	2,697		10		2,659		5,366				2,793		9		3,248		6,050
Corporate and commercial..............	4,092		342		3,141		7,575				3,432		461		3,376		7,269
Financial ....................	341		-		552		893				249		-		491		740
Governments ..............	116		-		21		137				113		2		132		247
	15,750		4,426		26,827		47,003				14,720		4,873		26,372		45,965
Total renegotiated loans and advances to customers as a percentage of total gross loans and advances to customers .........................							4.4%										4.8%

Renegotiated loans and advances to customers by geography

	At		At		At
	30 June		30 June		31 December
	2012		2011		2011
	US$m		US$m		US$m
Europe .............................................................................................	12,423		11,250		11,464
Hong Kong ......................................................................................	419		478		447
Rest of Asia-Pacific ..........................................................................	445		608		448
Middle East and North Africa ...........................................................	2,649		2,095		2,655
North America .................................................................................	27,528		29,761		28,475
Latin America ..................................................................................	2,705		2,811		2,476
	46,169		47,003		45,965
Total impairment allowances on renegotiated loans .........................	7,350		8,899		7,670
Individually assessed .....................................................................	2,422		1,989		2,311
Collectively assessed .....................................................................	4,928		6,910		5,359

Renegotiated loans totalled US$46.2bn at 30 June 2012 (30 June 2011: US$47.0bn; 31 December 2011: US$46.0bn). The most significant portfolio of renegotiated loans remains in North America and, at 30 June 2012, amounted to US$27.5bn or 60% of total renegotiated loans

(30 June 2011: US$29.8bn or 63%; 31 December 2011: US$28.5bn or 62%), substantially all of which were retail loans held by HSBC Finance. Of the total renegotiated loans in North America, US$17.9bn were presented as impaired at 30 June 2012 (30 June 2011: US$19.2bn; 31 December 2011: US$17.8bn),

and the ratio of total impairment allowances to impaired loans at 30 June 2012 was 27% (30 June 2011: 34%; 31 December 2011: 28%).

Europe is the next largest portfolio of renegotiated loans which, at 30 June 2012, amounted to US$12.4bn (30 June 2011: US$11.3bn; 31 December 2011: US$11.5bn), constituting 27% of total renegotiated loans (30 June 2011: 24%; 31 December 2011: 25%). Of the total renegotiated loans in Europe, US$6.2bn were presented as impaired at 30 June 2012 (30 June 2011: US$5.4bn; 31 December 2011: US$6.0bn), and the ratio of total impairment allowances to impaired loans at 30 June 2012 was 27% (30 June 2011: 30%; 31 December 2011: 30%). Renegotiated balances in Europe were largely concentrated in the commercial real estate sector 38% (30 June 2011: 40%; 31 December 2011: 41%) and the corporate and commercial sector 38% (30 June 2011: 34%; 31 December 2011: 32%). The commercial real estate sector, particularly in the UK, continued to face weakening in property values and a reduction in institutions funding commercial real estate lending. The commercial real estate mid-market sector continued to experience higher levels of renegotiation activity than is evident with larger corporates, where borrowers are generally better capitalised and have access to wider funding market opportunities. In all cases, in assessing the acceptability of renegotiated loans, we consider the

ability to service interest as a minimum and reduce capital repayments if possible. Despite Europe and the UK, in particular, holding the single largest retail lending portfolio in the Group, renegotiations of retail loans in this region were limited due to the quality of the residential mortgage book.

The balance of renegotiated loans in the Middle East and North Africa and Latin America (primarily in Mexico and Brazil) remained predominately concentrated in the corporate and commercial sectors. Forbearance in Hong Kong and Rest of Asia-Pacific remained insignificant.

HSBC Finance loan modifications and re‑ageing

HSBC Finance maintains loan modification and re‑age ('loan renegotiation') programmes in order to manage customer relationships, improve collection opportunities and, if possible, avoid foreclosure. For further details on HSBC Finance's loan renegotiation programmes, see page 131 of the Annual Report and Accounts 2011.

At 30 June 2012, renegotiated real estate secured accounts represented 85% (30 June 2011: 86%; 31 December 2011: 86%) of North America's total renegotiated loans, and US$15.6bn (30 June 2011: US$17.4bn; 31 December 2011: US$16.0bn) of renegotiated real estate secured loans in HSBC Finance were classified as impaired.

Gross loan portfolio of HSBC Finance real estate secured accounts

	Re-aged21		Modified and re-aged		Modified		Total re- negotiated loans	Total non- renegotiated loans			Total gross loans		Total impair- ment allowances		Impair- ment allowances/ gross loans
	US$m		US$m		US$m		US$m		US$m		US$m		US$m		%
30 June 2012 ............	9,906		12,171		1,293		23,370		17,860		41,230		4,884		12
30 June 2011 ..............	10,507		13,460		1,757		25,724		21,548		47,272		4,504		10
31 December 2011 .....	10,265		12,829		1,494		24,588		19,540		44,128		5,088		12

For footnote, see page 180.

Number of renegotiated real estate secured accounts remaining in HSBC Finance's portfolio

	Number of renegotiated loans
	Re-aged		Modified and re-aged		Modified		Total
	(000s)		(000s)		(000s)		(000s)
30 June 2012 ...................................................................	118		109		13		240
30 June 2011 .....................................................................	122		113		17		252
31 December 2011 .............................................................	121		112		14		246

During the half-year to 30 June 2012, the aggregate number of renegotiated loans reduced, despite renegotiation activity continuing, due to the run-off of the portfolio. Within the constraints of our Group credit policy, HSBC Finance's policies allow for multiple renegotiations under certain circumstances, and a number of accounts received a second (or further) renegotiation during the year which are not duplicated in the statistics presented above. These statistics present a loan as an addition to the volume of renegotiated loans on its first renegotiation only. At 30 June 2012, renegotiated loans were 57% (30 June 2011: 55%; 31 December 2011: 56%) of HSBC Finance's real estate secured accounts.

Corporate and commercial forbearance

For the current policies and procedures regarding forbearance in the corporate and commercial sector, see page 188 in the Annual Report and Accounts 2011.

In the corporate and commercial sector, the increase of US$1,512m in renegotiated loans for the half-year ended 30 June 2012 compared with the end of 2011 was a result of increased forbearance activity in Europe, Middle East and North Africa and Latin America. In Europe the increases primarily related to CMB customers in the UK. In Middle East and North Africa, the increase was due largely to two significant individual loan renegotiations for UAE based borrowers, the larger of the two being cash secured. In Latin America the increase was largely related to Brazil due to a small number of larger corporate restructurings and increased restructuring activity in Business Banking.

In the commercial real estate sector the balance of renegotiated loans decreased by US$412m, compared with the end of 2011, mainly in the Middle East and North Africa. This predominately related to a decrease in balances for a single CMB customer in Bahrain.

Impaired loans

During 2011 we adopted a revised disclosure convention for the presentation of impaired loans and advances for geographical regions with significant levels of forbearance. The previous impaired loans disclosure convention was that impaired loans and advances were those classified as customer risk rating ('CRR') 9, CRR 10, EL 9 or EL 10 and all retail loans 90 days or more past due, unless individually they had been assessed as not impaired. Our current impaired loan disclosure convention is described below.

Impaired loans and advances are those that meet any of the following criteria:

·     loans and advances classified as CRR 9, CRR 10, EL 9 or EL 10 (a description of our internal credit rating grades is provided on page 184);

·    
retail exposures 90 days or more past due, unless individually they have been assessed as not impaired; or

·     renegotiated loans and advances that have been subject to a change in contractual cash flows as a result of a concession which the lender would not otherwise consider, and where it is probable that without the concession the borrower would be unable to meet its contractual payment obligations in full, unless the concession is insignificant and there are no other indicators of impairment. Renegotiated loans remain classified as impaired until there is sufficient evidence to demonstrate a significant reduction in the risk of non-payment of future cash flows, and there are no other indicators of impairment.

For loans that are assessed for impairment on a collective basis, the evidence to support reclassification as no longer impaired typically comprises a history of payment performance against the original or revised terms, depending on the nature and volume of forbearance and the credit risk characteristics surrounding the renegotiation. For loans that are assessed for impairment on an individual basis, all available evidence is assessed on a case by case basis.

In HSBC Finance, where a significant majority of HSBC's loan forbearance activity occurs, the demonstrated history of payment performance is with reference to the original terms of the contract, reflecting the higher credit risk characteristics of this portfolio. The payment performance periods are monitored to ensure they remain appropriate to the levels of recidivism observed within the portfolio.

Further disclosure about loans subject to forbearance is provided on page 143. Renegotiated loans and forbearance disclosures are subject to evolving industry practice and regulatory guidance.

Impaired loan comparative data at 30 June 2011 have been restated to reflect the revised impaired loans disclosure convention. The following table shows the effect of the restatement on 30 June 2011 total reported impaired loans and advances to customers.

The impaired loan comparative data at 31 December 2011 were previously published in accordance with the revised disclosure convention. For further details see page 133 of the Annual Report and Accounts 2011.

Impaired loans and advances to customers

	At
	30 June
	2011
	US$m
Previous disclosure convention ..........................................................................................................................	25,982
Reclassified from neither past due nor impaired .................................................................................................	11,341
Europe ..........................................................................................................................................................	675
Middle East and North Africa ........................................................................................................................	71
North America ..............................................................................................................................................	9,602
Latin America ...............................................................................................................................................	993
Reclassified from past due but not impaired .......................................................................................................	6,886
Europe ..........................................................................................................................................................	-
Middle East and North Africa ........................................................................................................................	28
North America ..............................................................................................................................................	6,708
Latin America ...............................................................................................................................................	150
Revised disclosure convention ...........................................................................................................................	44,209

Impairment of loans and advances

Impaired loans and advances to customers and banks by industry sector

	Impaired loans and advances at 30 June 2012						Impaired loans and advances at 30 June 20117						Impaired loans and advances at 31 December 2011
	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 ............................	88		-		88		197		-		197		155		-		155
Customers ......................	16,973		23,771		40,744		15,794		28,415		44,209		16,554		25,030		41,584
- personal ..................	2,280		23,211		25,491		2,198		27,144		29,342		2,473		24,070		26,543
- corporate and commercial ................	13,692		560		14,252		12,396		1,268		13,664		12,898		960		13,858
- financial ..................	1,001		-		1,001		1,200		3		1,203		1,183		-		1,183
	17,061		23,771		40,832		15,991		28,415		44,406		16,709		25,030		41,739

For footnote, see page 180.

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 2012
Gross loans and advances to customers
Individually assessed impaired loans22 ....................................	9,680		475		1,035		2,309		1,946		1,528		16,973
Collectively assessed23 ................	440,958		165,265		129,300		27,360		158,843		53,503		975,229
- impaired loans22 ...................	1,201		80		113		205		20,240		1,932		23,771
- non-impaired loans24 ...........	439,757		165,185		129,187		27,155		138,603		51,571		951,458
TGLAC ......................................	450,638		165,740		130,335		29,669		160,789		55,031		992,202
Total impairment allowances .........	5,193		536		846		1,773		6,798		2,071		17,217
- individually assessed .................	3,709		250		564		1,324		439		368		6,654
- collectively assessed .................	1,484		286		282		449		6,359		1,703		10,563
Net loans and advances ...................	445,445		165,204		129,489		27,896		153,991		52,960		974,985

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

	Europe		Hong        Kong		Rest of        Asia-     Pacific		MENA		North America		Latin America		Total
	%		%		%		%		%		%		%
Allowances as a percentage of loans and advances:
- individually assessed (in each case) ..........................................	38.3		52.6		54.5		57.3		22.6		24.1		39.2
- collectively assessed (in each case) ..........................................	0.3		0.2		0.2		1.6		4.0		3.2		1.1
- total (in each case) ..................	1.2		0.3		0.6		6.0		4.2		3.8		1.7
	US$m		US$m		US$m		US$m		US$m		US$m		US$m
At 30 June 2011
Gross loans and advances to customers7
Individually assessed impaired loans22 ...................................	9,584		489		1,081		1,949		1,826		865		15,794
Collectively assessed23 ................	482,079		159,454		121,176		25,314		185,718		67,085		1,040,826
- impaired loans22 ..................	1,294		21		127		344		23,831		2,798		28,415
- non-impaired loans24 ...........	480,785		159,433		121,049		24,970		161,887		64,287		1,012,411
TGLAC ......................................	491,663		159,943		122,257		27,263		187,544		67,950		1,056,620
Total impairment allowances .........	5,332		573		828		1,569		8,282		2,148		18,732
- individually assessed ................	3,607		297		518		1,098		384		339		6,243
- collectively assessed ................	1,725		276		310		471		7,898		1,809		12,489
Net loans and advances ..................	486,331		159,370		121,429		25,694		179,262		65,802		1,037,888
	%		%		%		%		%		%		%
Allowances as a percentage of loans and advances:
- individually assessed (in each case) ..........................................	37.6		60.7		47.9		56.3		21.0		39.2		39.5
- collectively assessed (in each case) ..........................................	0.4		0.2		0.3		1.9		4.3		2.7		1.2
- total (in each case) ..................	1.1		0.4		0.7		5.8		4.4		3.2		1.8
	US$m		US$m		US$m		US$m		US$m		US$m		US$m
At 31 December 2011
Gross loans and advances to customers
Individually assessed impaired loans22 ...................................	10,490		519		963		2,187		1,832		563		16,554
Collectively assessed23 ................	429,088		157,727		123,687		25,402		148,096		57,386		941,386
- impaired loans22 ..................	1,261		85		106		238		20,864		2,476		25,030
- non-impaired loans24 ...........	427,827		157,642		123,581		25,164		127,232		54,910		916,356
TGLAC ......................................	439,578		158,246		124,650		27,589		149,928		57,949		957,940
Total impairment allowances  ........	5,242		581		782		1,714		7,181		2,011		17,511
- individually assessed ................	3,754		288		505		1,250		416		324		6,537
- collectively assessed ................	1,488		293		277		464		6,765		1,687		10,974
Net loans and advances ..................	434,336		157,665		123,868		25,875		142,747		55,938		940,429
	%		%		%		%		%		%		%
Allowances as a percentage of loans and advances:
- individually assessed (in each case) ..........................................	35.8		55.5		52.4		57.2		22.7		57.4		39.5
- collectively assessed (in each case) ..........................................	0.3		0.2		0.2		1.8		4.6		2.9		1.2
- total (in each case) ..................	1.2		0.4		0.6		6.2		4.8		3.5		1.8

For footnotes, see page 180.

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 2012 .............................................................	125		6,537		10,974		17,636
Amounts written off ..........................................................	(70)		(963)		(4,110)		(5,143)
Recoveries of loans and advances previously written off ....	-		84		484		568
Charge to income statement ..............................................	1		1,102		3,422		4,525
Exchange and other movements ........................................	-		(106)		(207)		(313)
At 30 June 2012 ................................................................	56		6,654		10,563		17,273
Impairment allowances:
on loans and advances to customers ................................			6,654		10,563		17,217
- personal ..................................................................			700		8,686		9,386
- corporate and commercial .......................................			5,341		1,809		7,150
- financial ..................................................................			613		68		681
as a percentage of loans and advances26,27 .......................	0.04%		0.71%		1.12%		1.60%
	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 advances26,27 .......................	0.10%		0.64%		1.27%		1.66%
	US$m		US$m		US$m		US$m
At 1 July 2011 ...................................................................	162		6,243		12,489		18,894
Amounts written off ..........................................................	(16)		(647)		(4,856)		(5,519)
Recoveries of loans and advances previously written off ....	-		84		612		696
Charge to income statement ..............................................	(17)		1,294		5,255		6,532
Exchange and other movements25 ......................................	(4)		(437)		(2,526)		(2,967)
At 31 December 2011 ........................................................	125		6,537		10,974		17,636
Impairment allowances:
on loans and advances to customers ................................			6,537		10,974		17,511
- personal ..................................................................			694		9,066		9,760
- corporate and commercial .......................................			5,231		1,820		7,051
- financial ..................................................................			612		88		700
as a percentage of loans and advances26,27 .......................	0.09%		0.71%		1.20%		1.67%

For footnotes, see page 180.

Impairment charge

Net loan impairment charge to the income statement 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 2012
Individually assessed impairment allowances
New allowances ..................................	988		15		129		176		193		191		1,692
Release of allowances no longer required ............................................	(312)		(16)		(39)		(54)		(59)		(25)		(505)
Recoveries of amounts previously written off .......................................	(22)		(3)		(8)		(17)		(26)		(8)		(84)
	654		(4)		82		105		108		158		1,103
Collectively assessed impairment allowances
New allowances net of allowance releases ............................................	371		54		179		54		2,103		1,145		3,906
Recoveries of amounts previously written off .......................................	(171)		(13)		(67)		(24)		(55)		(154)		(484)
	200		41		112		30		2,048		991		3,422
Total charge for impairment losses .......	854		37		194		135		2,156		1,149		4,525
Banks ................................................	1		−		−		−		−		−		1
Customers ..........................................	853		37		194		135		2,156		1,149		4,524
At 30 June 2012
Impaired loans ......................................	10,935		555		1,148		2,534		22,200		3,460		40,832
Impairment allowances .........................	5,232		536		846		1,790		6,798		2,071		17,273
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
At 30 June 2011
Impaired loans7 .....................................	10,985		514		1,210		2,313		25,719		3,665		44,406
Impairment allowances .........................	5,412		573		828		1,586		8,346		2,149		18,894

	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 2011
Individually assessed impairment allowances
New allowances ..................................	926		59		129		232		216		133		1,695
Release of allowances no longer required ............................................	(109)		(18)		(53)		(43)		(70)		(39)		(332)
Recoveries of amounts previously written off .......................................	(9)		(7)		(15)		(38)		(29)		12		(86)
	808		34		61		151		117		106		1,277
Collectively assessed impairment allowances
New allowances net of allowance releases ............................................	497		74		178		66		3,890		1,160		5,865
Recoveries of amounts previously written off .......................................	(253)		(14)		(69)		(24)		(32)		(218)		(610)
	244		60		109		42		3,858		942		5,255
Total charge for impairment losses .......	1,052		94		170		193		3,975		1,048		6,532
Banks ...............................................	(11)		-		-		-		(5)		(1)		(17)
Customers ........................................	1,063		94		170		193		3,980		1,049		6,549
At 31 December 2011
Impaired loans ......................................	11,819		608		1,070		2,445		22,758		3,039		41,739
Impairment allowances .........................	5,292		581		782		1,731		7,239		2,011		17,636

For footnote, see page 180.

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 2012
New allowances net of allowance releases .................................	0.55		0.07		0.42		1.26		2.89		4.59		1.12
Recoveries .................................	(0.10)		(0.02)		(0.12)		(0.29)		(0.10)		(0.57)		(0.13)
Total charge for impairment losses ....................................	0.45		0.05		0.30		0.97		2.79		4.02		0.99
Amount written off net of recoveries .............................	0.47		0.10		0.18		0.53		3.20		3.01		0.99
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 31 December 2011
New allowances net of allowance releases .................................	0.62		0.15		0.41		1.87		4.94		3.93		1.51
Recoveries .................................	(0.12)		(0.03)		(0.14)		(0.46)		(0.07)		(0.65)		(0.14)
Total charge for impairment losses ....................................	0.50		0.12		0.27		1.41		4.87		3.28		1.37
Amount written off net of recoveries .............................	0.38		0.11		0.24		0.18		3.61		2.42		1.00

Reconciliation of reported and constant currency changes in impaired loans by geographical region

	31 Dec 11 as reported		Constant   currency         effect		31 Dec 11 at 30 Jun 12  exchange          rates		Movement            on a     constant    currency           basis		30 Jun 12 as reported		Reported    change		Change         on a constant currency        basis
	US$m		US$m		US$m		US$m		US$m		%		%
Europe .......................................	11,819		59		11,878		(943)		10,935		(7)		(8)
Hong Kong .................................	608		1		609		(54)		555		(9)		(9)
Rest of Asia-Pacific ....................	1,070		-		1,070		78		1,148		7		7
Middle East and North Africa .....	2,445		(2)		2,443		91		2,534		4		4
North America ...........................	22,758		-		22,758		(558)		22,200		(2)		(2)
Latin America ............................	3,039		(109)		2,930		530		3,460		14		18
Total ..........................................	41,739		(51)		41,688		(856)		40,832		(2)		(2)

Impaired loans and net loan impairment allowances

On a reported basis, loan impairment charges to the income statement of US$4.5bn in the first half of 2012 declined by 9% compared with the first half of 2011 and by 31% compared with the second half of 2011. Impaired loans were US$40.8bn, 2% lower than at 31 December 2011.

The following commentary is on a constant currency basis.

New loan impairment allowances were US$5.6bn, a decline of 6% compared with the first half of 2011, reflecting lower lending balances in our US run-off portfolios. Releases and recoveries of US$1.1bn were 6% lower, mainly in Europe.

Impaired loans were 3% of total gross loans and advances at 30 June 2012, in line with 31 December 2011.

In Europe, new loan impairment allowances were US$1.4bn, 1% lower than in the first half of 2011, primarily in the UK as we continued to focus our lending on higher quality assets. New collectively assessed loan impairment allowances declined, mainly in the UK due to lower delinquency rates in both the secured and unsecured lending portfolios in RBWM and the shortening of the write-off period for balances greater than 180 days in Marks and Spencer Retail Financial Services Holdings Limited ('M&S Money') which resulted in an increase in allowances in 2011. New individually assessed loan impairment allowances increased, mainly in the UK, reflecting the challenging economic conditions. Impaired loans of US$10.9bn were 8% lower than at 31 December 2011 due to lower delinquency rates.

Releases and recoveries in Europe were US$507m, a decrease of 9% compared with the first half of 2011, mainly in the UK due to the shortening of the write-off period for balances greater than 180 days overdue in M&S Money which resulted in an increase in releases and recoveries last year.

In Hong Kong, new loan impairment allowances fell by 5% compared with the first half of 2011, reflecting lower loan impairment charges against specific exposures and a reduction in general provisions as a result of lower delinquency rates. Impaired loans declined by 9% from 31 December 2011, reflecting improved delinquency in the mortgage portfolio.

Releases and recoveries in Hong Kong were US$32m, 35% lower than in the first half of 2011 due to the non-recurrence of significant releases and recoveries from two GB&M customers.

New loan impairment allowances in Rest of Asia-Pacific increased by 20% to US$308m as a result of a specific impairment on a corporate exposure in Australia and a number of individual loan impairment charges in India and New Zealand. Impaired loans in the region increased by 7% from the end of 2011 to US$1.1bn at 30 June 2012, mainly in Malaysia.

Releases and recoveries in the region decreased by 26%, mainly due to lower releases for cards as we run-off the portfolio in India, and the non-recurrence of recoveries in Thailand following the sale of the RBWM business.

In the Middle East and North Africa, new loan impairment allowances increased by 30% to US$230m in the first half of 2012 due to an increase in individually assessed impairment charges in GB&M. New collectively assessed loan impairment allowances declined, primarily in RBWM due to lower delinquencies driven by stricter acquisition criteria which resulted in an improvement in credit quality. Impaired loans of US$2.5bn increased marginally at 30 June 2012 from US$2.4bn at 31 December 2011.

Releases and recoveries in the region increased by 23% to US$95m, compared with the first half of 2011.

In North America, new loan impairment allowances declined markedly, reducing by 28% to US$2.3bn. In our CML portfolio, the fall in new collectively assessed loan impairment allowances reflected a reduction in lending balances as the portfolio continued to run off, and an improvement in two-months-and-over contractual delinquency on balances less than 180 days past due. Loan impairment charges were adversely affected by delays in expected cash flows from mortgage loans due, in part, to the delays in foreclosure processing, though the effects were less pronounced than in the first half of 2011. Additionally, in the first half of 2012, we increased our loan impairment allowances having updated our assumptions regarding the timing of expected cash flows received from customers with loan modifications. Impaired loans decreased by 2% from the end of 2011 to US$22.2bn, driven by the continued run‑off of the CML portfolio.

Releases and recoveries in North America increased by US$29m, due to higher customer repayments within the corporate and commercial sector, as well as a significant recovery in the first half of 2012.

In Latin America, new loan impairment allowances increased by 46% to US$1.3bn, driven by higher new collectively assessed loan impairment allowances in Brazil, primarily reflecting strong balance sheet growth in previous periods as a result of increased marketing, a focus on acquiring customers and strong customer demand in buoyant economic conditions which subsequently weakened, notably in the personal and corporate portfolios. We implemented a number of actions to address the increase in delinquencies including improving our collections capabilities reducing third-party originations and lowering credit limits where appropriate. New individually assessed loan impairment charges also rose, mainly in Brazil following a rise in individually assessed loan impairment charges and significantly increased loan impairment charges in Business Banking. Impaired loans increased by 18% compared with 31 December 2011, driven by worsening delinquency in Brazil.

Releases and recoveries in Latin America decreased by 3% from the first half of 2011 to US$187m, primarily in Brazil due to weaker economic conditions.

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;

·     monoline insurance companies ('monolines');

·     credit derivative product companies;

·     leveraged finance transactions; and

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

Within the above is included information on the GB&M legacy credit activities in respect of Solitaire Funding Limited ('Solitaire'), the securities investment conduits ('SIC's), the ABSs trading portfolios and derivative transactions with monolines. Further information in respect of Solitaire and the SICs is provided in Note 22 to the Financial Statements.

Business model

Balance Sheet Management holds ABSs primarily issued by government agency and sponsored enterprises as part of our investment portfolios.

Our investment portfolios include SICs and money market funds. 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.

Exposure in the first half of 2012

The first half of 2012 saw continued uncertainty and concerns over sovereign credit risk and continued challenges for the US housing market. Despite this, there was modest price appreciation across a range of ABSs asset classes. Unrealised losses in our available-for-sale portfolios reduced in the first half of 2012 from US$5.1bn to US$3.9bn, mainly as a result of this price appreciation.

Within the following tables are assets held in the GB&M legacy credit portfolio with a carrying value of US$33.3bn (30 June 2011: US$44.5bn; 31 December 2011: US$35.4bn).

A summary of the nature of HSBC's exposures is provided in the Appendix to Risk on page 183.

 

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