Interim Report - 18 of 28

RNS Number : 2047P

HSBC Holdings PLC

15 August 2014

 



Securitisation exposures and other structured products

This section contains information about our exposure to asset-backed securities ('ABS's), including mortgage-backed securities ('MBS's) and related collateralised debt obligations ('CDO's) and direct

lending at fair value through profit or loss summarised in the table below:

A summary of the nature of HSBC's exposures is provided on page 274 of the Annual Report and Accounts 2013.

Overall exposure of HSBC

	Carrying amount28 at
	30 June                2014		30 June                2013		31 December                2013
	US$bn		US$bn		US$bn
Asset-backed securities ...............................................................................	46.6		54.6		50.1
- fair value through profit or loss .............................................................	3.1		3.1		3.1
- available for sale29 .................................................................................	39.6		46.4		42.7
- held to maturity29 ..................................................................................	1.0		1.3		1.1
- loans and receivables ..............................................................................	2.9		3.8		3.2
Direct lending at fair value through profit or loss .......................................	-		0.2		0.1
Total ABSs and direct lending at fair value through profit or loss ...............	46.6		54.8		50.2

For footnotes, see page 172.

Within the above table are assets held in the GB&M legacy credit portfolio with a carrying value of US$26.9bn (30 June 2013: US$29.2bn; 31 December 2013: US$28.0bn).

ABSs classified as available for sale

Our principal holdings of available-for-sale ABSs are held in GB&M structured entities ('SE's) established from the outset with the benefit of external investor first loss protection support, and positions held directly and by Solitaire Funding Ltd ('Solitaire'), where we provide first loss risk protection of US$1.2bn through a liquidity facility.

Movement in the available-for-sale reserve

	Half-year to 30 June 2014						Half-year to 30 June 2013						Half-year to 31 December 2013
	Directly       held/ Solitaire30		SEs		Total		Directly        held/   Solitaire30		SEs		Total		Directly        held/   Solitaire30		SEs		Total
	US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m
Available-for-sale reserve at beginning of period ........	(1,514)		(129)		(1,643)		(1,473)		(720)		(2,193)		(1,586)		(362)		(1,948)
Increase/(decrease) in fair value of securities ..........	593		96		689		(215)		374		159		(227)		225		(2)
Effect of impairments31 ....	13		-		13		124		8		132		(23)		53		30
Repayment of capital ........	34		116		150		(35)		55		20		73		30		103
Other movements .............	(106)		(54)		(160)		13		(79)		(66)		249		(75)		174
Available-for-sale reserve at end of period .................	(980)		29		(951)		(1,586)		(362)		(1,948)		(1,514)		(129)		(1,643)

For footnotes, see page 172.

The table below summarises the carrying amount of our ABS exposure by categories of collateral and details where the risk of our ABS
exposure is mitigated through credit derivatives with monoline insurance companies and other financial institutions.

Carrying amount of HSBC's consolidated holdings of ABSs, and direct lending held at fair value through profit or loss

	Trading		Available     for sale		Held to   maturity		Designated at fair value      through      profit or loss		Loans and receivables		Total		Of which held through consolidated               SEs		Gross    principal   exposure32		Credit       default           swap protection33		Net    principal    exposure34
	US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m
At 30 June 2014
Mortgage-related assets:
Sub-prime residential .............................	150		3,231		-		-		394		3,775		3,041		4,495		107		4,388
-  direct lending ....................................	23		-		-		-		-		23		-		62		-		62
-  MBSs and MBS CDOs ........................	127		3,231		-		-		394		3,752		3,041		4,433		107		4,326
US Alt-A residential ..............................	96		3,214		18		-		128		3,456		2,738		4,881		97		4,784
-  direct lending ....................................	1		-		-		-		-		1		-		-		-		-
-  MBSs ................................................	95		3,214		18		-		128		3,455		2,738		4,881		97		4,784
US Government agency and sponsored enterprises:
MBSs ................................................	136		16,739		1,004		-		-		17,879		-		16,411		-		16,411
Other residential ...................................	266		1,737		-		-		362		2,365		1,336		2,458		49		2,409
-  direct lending ....................................	-		-		-		-		-		-		-		-		-		-
-  MBSs ................................................	266		1,737		-		-		362		2,365		1,336		2,458		49		2,409
Commercial property
MBSs and MBS CDOs ........................	469		4,942		-		-		593		6,004		4,472		6,417		-		6,417
	1,117		29,863		1,022		-		1,477		33,479		11,587		34,662		253		34,409
Leveraged finance-related assets:
ABSs and ABS CDOs .............................	298		4,836		-		-		242		5,376		4,209		5,601		357		5,244
Student loan-related assets:
ABSs and ABS CDOs .............................	227		3,654		-		-		123		4,004		3,546		4,629		200		4,429
Other assets:
ABSs and ABS CDOs .............................	1,375		1,245		-		22		1,051		3,693		995		4,030		812		3,218
	3,017		39,598		1,022		22		2,893		46,552		20,337		48,922		1,622		47,300

	Trading		Available       for sale		Held to     maturity		Designated at fair value        through profit or loss		Loans and   receivables		Total		Of which held through consolidated               SEs		Gross      principal     exposure32		Credit         default            swap   protection33		Net      principal      exposure34
	US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m
At 30 June 2013
Mortgage-related assets:
Sub-prime residential .............................	195		2,607		-		-		419		3,221		2,380		4,318		121		4,197
-  direct lending ....................................	54		-		-		-		-		54		-		127		-		127
-  MBSs and MBS CDOs ........................	141		2,607		-		-		419		3,167		2,380		4,191		121		4,070
US Alt-A residential ..............................	104		3,641		30		-		127		3,902		2,996		6,208		100		6,108
-  direct lending ....................................	11		-		-		-		-		11		-		17		-		17
-  MBSs ................................................	93		3,641		30		-		127		3,891		2,996		6,191		100		6,091
US Government agency and sponsored enterprises:
MBSs ................................................	196		21,814		1,257		-		-		23,267		-		22,663		-		22,663
Other residential ...................................	579		1,877		-		-		449		2,905		1,324		3,727		62		3,665
-  direct lending ....................................	166		-		-		-		-		166		-		166		-		166
-  MBSs ................................................	413		1,877		-		-		449		2,739		1,324		3,561		62		3,499
Commercial property
MBSs and MBS CDOs ........................	197		6,082		-		105		1,155		7,539		5,270		8,260		-		8,260
	1,271		36,021		1,287		105		2,150		40,834		11,970		45,176		283		44,893
Leveraged finance-related assets:
ABSs and ABS CDOs .............................	279		4,980		-		-		239		5,498		4,164		5,845		374		5,471
Student loan-related assets:
ABSs and ABS CDOs .............................	205		4,003		-		-		120		4,328		3,662		5,286		199		5,087
Other assets:
ABSs and ABS CDOs .............................	1,398		1,395		-		63		1,279		4,135		1,016		5,352		1,143		4,209
	3,153		46,399		1,287		168		3,788		54,795		20,812		61,659		1,999		59,660

Carrying amount of HSBC's consolidated holdings of ABSs, and direct lending held at fair value through profit or loss (continued)

	Trading		Available       for sale		Held to     maturity		Designated at fair value        through profit or loss		Loans and   receivables		Total		Of which held through consolidated               SEs		Gross      principal     exposure32		Credit          default             swap   protection33		Net      principal      exposure34
	US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m
At 31 December 2013
Mortgage-related assets:
Sub-prime residential .............................	178		2,977		-		-		403		3,558		2,782		4,504		112		4,392
-  direct lending ....................................	46		-		-		-		-		46		-		106		-		106
-  MBSs and MBS CDOs ........................	132		2,977		-		-		403		3,512		2,782		4,398		112		4,286
US Alt-A residential ..............................	101		3,538		18		-		134		3,791		2,926		5,692		100		5,592
-  direct lending ....................................	10		-		-		-		-		10		-		14		-		14
-  MBSs ................................................	91		3,538		18		-		134		3,781		2,926		5,678		100		5,578
US Government agency and sponsored enterprises:
MBSs ................................................	178		18,661		1,110		-		-		19,949		-		19,812		-		19,812
Other residential ...................................	618		1,925		-		-		399		2,942		1,513		3,981		53		3,928
-  direct lending ....................................	-		-		-		-		-		-		-		-		-		-
-  MBSs ................................................	618		1,925		-		-		399		2,942		1,513		3,981		53		3,928
Commercial property
MBSs and MBS CDOs ........................	133		5,667		-		104		669		6,573		5,146		7,188		-		7,188
	1,208		32,768		1,128		104		1,605		36,813		12,367		41,177		265		40,912
Leveraged finance-related assets:
ABSs and ABS CDOs .............................	294		5,011		-		-		251		5,556		4,310		5,841		365		5,476
Student loan-related assets:
ABSs and ABS CDOs .............................	196		3,705		-		-		121		4,022		3,495		4,897		199		4,698
Other assets:
ABSs and ABS CDOs .............................	1,271		1,265		-		34		1,186		3,756		989		4,805		1,010		3,795
	2,969		42,749		1,128		138		3,163		50,147		21,161		56,720		1,839		54,881

For footnotes, see page 172.

The above table excludes leveraged finance transactions.

Representations and warranties related to mortgage sales and securitisation activities

We have been involved in various activities related to the sale and securitisation of residential mortgages, that are not recognised on our balance sheet. These activities include:

·     the purchase of US$24bn of third-party originated mortgages by HSBC Bank USA and the securitisation of these by HSBC Securities (USA) Inc. ('HSI') between 2005 and 2007;

·     HSI acting as underwriter for third-party issuance of private label MBSs with an original issuance value of US$37bn, most of which were sub-prime; and

·     the origination and sale by HSBC Bank USA of mortgage loans, primarily to government sponsored entities.

In selling and securitising mortgage loans, various representations and warranties may be made to purchasers of the mortgage loans and MBSs. When purchasing and securitising mortgages originated by third-parties and underwriting third-party MBSs, the obligation to repurchase loans in the event of a breach of loan level representations and warranties resides predominantly with the organisation that originated the loan.

Participants in the US mortgage securitisation market that purchased and repackaged whole loans, such as servicers, originators, underwriters, trustees or sponsors of securitisations have been the subject of lawsuits and governmental and regulatory investigations and inquiries. Further details are provided in Note 25 on the Financial Statements.

At 30 June 2014, a liability of US$34m (30 June 2013: US$217m; 31 December 2013: US$99m) was recognised in respect of various representations and warranties relating to the origination and sale by HSBC Bank USA of mortgage loans, primarily to government sponsored entities. These relate to, among other things, the ownership of the loans, the validity of the liens, the loan selection and origination process, and compliance with the origination criteria established by the agencies. In the event of a breach of its representations and warranties, HSBC Bank USA may be obliged to repurchase the loans with identified defects or to indemnify the buyers. The estimated liability was based on the level of outstanding repurchase demands, the level of outstanding requests for loan files and the expected future repurchase demands in respect of mortgages sold to date which were either two or more payments delinquent or might become delinquent at an estimated conversion rate. Repurchase demands of US$3m were outstanding at 30 June 2014 (30 June 2013: US$53m; 31 December 2013: US$44m).

 

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