Last checked at 20 Mar 2015 16:41
(Audited)
A summary of our current policies and practices regarding impairment assessment is provided in the Appendix to Risk on page 212. For an analysis of loan impairment charges and other credit risk provisions by global business, see page 76.
The tables below analyse the impairment allowances recognised for impaired loans and advances that are either individually or collectively assessed, and collective impairment allowances on loans and advances that are classified as not impaired.
Loan impairment charge to the income statement by industry sector
(Unaudited)
Europe | Asia4 | MENA | North America | Latin America | Total | |||||||
US$m | US$m | US$m | US$m | US$m | US$m | |||||||
Personal | 245 | 321 | 25 | 117 | 1,095 | 1,803 | ||||||
- first lien residential mortgages | (75) | 6 | (24) | 26 | 15 | (52) | ||||||
- other personal7 | 320 | 315 | 49 | 91 | 1,080 | 1,855 | ||||||
Corporate and commercial | 790 | 327 | 6 | 196 | 937 | 2,256 | ||||||
- manufacturing and international trade and services | 520 | 197 | 36 | 116 | 382 | 1,251 | ||||||
- commercial real estate and other property-related | 78 | 29 | (28) | 27 | 176 | 282 | ||||||
- other commercial8 | 192 | 101 | (2) | 53 | 379 | 723 | ||||||
Financial5 | 44 | (4) | (32) | (13) | 1 | (4) | ||||||
Total loan impairment charge for the year ended 31 December 2014 | 1,079 | 644 | (1) | 300 | 2,033 | 4,055 | ||||||
Personal | 320 | 345 | 46 | 963 | 1,522 | 3,196 | ||||||
- first lien residential mortgages | (11) | (7) | (13) | 647 | 11 | 627 | ||||||
- other personal7 | 331 | 352 | 59 | 316 | 1,511 | 2,569 | ||||||
Corporate and commercial | 1,467 | 152 | (13) | 253 | 1,115 | 2,974 | ||||||
- manufacturing and international trade and services | 800 | 134 | 37 | 125 | 594 | 1,690 | ||||||
- commercial real estate and other property-related | 432 | (2) | (5) | 79 | 322 | 826 | ||||||
- other commercial8 | 235 | 20 | (45) | 49 | 199 | 458 | ||||||
Financial5 | (55) | (14) | (77) | 19 | 5 | (122) | ||||||
Total loan impairment charge for the year ended31 December 2013 | 1,732 | 483 | (44) | 1,235 | 2,642 | 6,048 | ||||||
Loan impairment charge to the income statement by assessment type (Unaudited) | ||||||||||||
Europe | Asia4 | MENA | North America | Latin America | Total | |||||||
US$m | US$m | US$m | US$m | US$m | US$m | |||||||
Individually assessed impairment allowances | 617 | 351 | 32 | 190 | 590 | 1,780 | ||||||
- new allowances | 1,112 | 542 | 134 | 298 | 738 | 2,824 | ||||||
- release of allowances no longer required | (486) | (171) | (95) | (88) | (90) | (930) | ||||||
- recoveries of amounts previously written off | (9) | (20) | (7) | (20) | (58) | (114) | ||||||
Collectively assessed impairment allowances12 | 462 | 293 | (33) | 110 | 1,443 | 2,275 | ||||||
- new allowances net of allowance releases | 757 | 426 | 2 | 205 | 1,726 | 3,116 | ||||||
- recoveries of amounts previously written off | (295) | (133) | (35) | (95) | (283) | (841) | ||||||
Total loan impairment charge for the year ended 31 December 2014 | 1,079 | 644 | (1) | 300 | 2,033 | 4,055 | ||||||
Individually assessed impairment allowances | 1,376 | 145 | (86) | 262 | 623 | 2,320 | ||||||
- new allowances | 1,828 | 316 | 196 | 398 | 702 | 3,440 | ||||||
- release of allowances no longer required | (402) | (145) | (235) | (98) | (31) | (911) | ||||||
- recoveries of amounts previously written off | (50) | (26) | (47) | (38) | (48) | (209) | ||||||
Collectively assessed impairment allowances12 | 356 | 338 | 42 | 973 | 2,019 | 3,728 | ||||||
- new allowances net of allowance releases | 943 | 479 | 82 | 1,058 | 2,253 | 4,815 | ||||||
- recoveries of amounts previously written off | (587) | (141) | (40) | (85) | (234) | (1,087) | ||||||
Total loan impairment charge for the year ended31 December 2013 | 1,732 | 483 | (44) | 1,235 | 2,642 | 6,048 | ||||||
For footnotes, see page 202.
Total loan impairment charges of US$4.1bn were US$2.0bn lower than in 2013 reflecting reduced impairment charges in both the personal lending andthe corporate and commercial lending portfolios, primarily in North America, Europe and Latin America.
In North America, loan impairment charges relating to both first lien mortgages and other personal lending decreased, which reflected reduced levels of both delinquency and new impaired loans in the CML portfolio, and a fall in lending balances from continued run-off and loan sales. This was partly offset by lower favourable market value adjustments of underlying properties as improvements in housing market conditions were less pronounced in 2014 than in 2013.
In Europe, the reduction in loan impairment charges was primarily in corporate and commercial lending, as a result of lower individually assessed impairment allowances reflecting the improved quality of the portfolio and economic conditions. Loan impairment charges also decreased in personal lending, albeit to a lesser extent, due to lower delinquency levels in the improved economic environment and as customers continued to reduce outstanding credit card and loan balances. These factors were partly offset by an increase in collectively assessed allowances in the corporate and commercial lending sector as we revised certain estimates in our collective corporate loan impairment calculation, and in the financial industry sector reflecting charges compared with releases in 2013.
In Latin America, the reduction in loan impairment charges in the other personal lending and the corporate and commercial portfolios primarily reflected the prior year adverse effect of changes to the impairment model and assumption revisions for restructured loan portfolios in Brazil. Individually assessed allowances were broadly stable. There were lower loan impairment charges in Mexico in the commercial real estate and other property related sector, in particular relating to certain homebuilders. In Brazil individually assessed allowances increased due to an impairment relating to a corporate customer in the other commercial sector.
Charge for impairment losses as a percentage of average gross loans and advances to customers by geographical region
(Unaudited)
Europe | Asia4 | MENA | North America | Latin America | Total | |||||||
% | % | % | % | % | % | |||||||
New allowances net of allowance releases | 0.37 | 0.22 | 0.14 | 0.32 | 5.00 | 0.53 | ||||||
Recoveries | (0.08) | (0.04) | (0.14) | (0.09) | (0.72) | (0.10) | ||||||
Total charge for impairment losses at 31 December 2014 | 0.29 | 0.18 | - | 0.23 | 4.28 | 0.43 | ||||||
Amount written off net of recoveries | 0.49 | 0.13 | 0.58 | 0.97 | 3.59 | 0.58 | ||||||
New allowances net of allowance releases | 0.65 | 0.20 | 0.15 | 1.00 | 5.93 | 0.81 | ||||||
Recoveries | (0.17) | (0.05) | (0.29) | (0.09) | (0.57) | (0.14) | ||||||
Total charge for impairment losses at 31 December 2013 | 0.48 | 0.15 | (0.14) | 0.91 | 5.36 | 0.67 | ||||||
Amount written off net of recoveries | 0.42 | 0.12 | 0.38 | 1.10 | 3.69 | 0.59 |
For footnote, see page 202.
Movement in impairment allowances by industry sector and by geographical region
(Unaudited)
Europe | Asia4 | MENA | North America | Latin America | Total | |||||||
US$m | US$m | US$m | US$m | US$m | US$m | |||||||
Impairment allowances at 1 January 2014 | 5,598 | 1,214 | 1,583 | 4,242 | 2,564 | 15,201 | ||||||
Amounts written off | ||||||||||||
Personal | (724) | (463) | (157) | (1,030) | (1,359) | (3,733) | ||||||
- first lien residential mortgages | (21) | (17) | (4) | (731) | (40) | (813) | ||||||
- other personal7 | (703) | (446) | (153) | (299) | (1,319) | (2,920) | ||||||
Corporate and commercial | (1,202) | (146) | (47) | (346) | (684) | (2,425) | ||||||
- manufacturing and international trade and services | (732) | (86) | (41) | (81) | (428) | (1,368) | ||||||
- commercial real estate and other property-related | (342) | (53) | (6) | (153) | (39) | (593) | ||||||
- other commercial8 | (128) | (7) | - | (112) | (217) | (464) | ||||||
Financial5 | (203) | - | (8) | (6) | (4) | (221) | ||||||
Total amounts written off | (2,129) | (609) | (212) | (1,382) | (2,047) | (6,379) | ||||||
Recoveries of amounts written off in previous years | ||||||||||||
Personal | 271 | 143 | 35 | 86 | 283 | 818 | ||||||
- first lien residential mortgages | 3 | 3 | - | 40 | 33 | 79 | ||||||
- other personal7 | 268 | 140 | 35 | 46 | 250 | 739 | ||||||
Corporate and commercial | 29 | 9 | 7 | 25 | 58 | 128 | ||||||
- manufacturing and international trade and services | 19 | 7 | 7 | 6 | 46 | 85 | ||||||
- commercial real estate and other property-related | 11 | - | - | 3 | 1 | 15 | ||||||
- other commercial8 | (1) | 2 | - | 16 | 11 | 28 | ||||||
Financial5 | 4 | 1 | - | 4 | - | 9 | ||||||
Total recoveries of amounts written off in previous years | 304 | 153 | 42 | 115 | 341 | 955 | ||||||
Charge to income statement | 1,079 | 644 | (1) | 300 | 2,033 | 4,055 | ||||||
Exchange and other movements13 | (397) | (46) | (6) | (635) | (362) | (1,446) | ||||||
Impairment allowances at 31 December 2014 | 4,455 | 1,356 | 1,406 | 2,640 | 2,529 | 12,386 |
Europe | Asia4 | MENA | North America | Latin America | Total | |||||||
US$m | US$m | US$m | US$m | US$m | US$m | |||||||
Impairment allowances against banks: | ||||||||||||
- individually assessed | 31 | - | 18 | - | - | 49 | ||||||
Impairment allowances against customers: | ||||||||||||
- individually assessed | 2,981 | 812 | 1,110 | 276 | 1,016 | 6,195 | ||||||
- collectively assessed12 | 1,443 | 544 | 278 | 2,364 | 1,513 | 6,142 | ||||||
Impairment allowances at 31 December 2014 | 4,455 | 1,356 | 1,406 | 2,640 | 2,529 | 12,386 | ||||||
Impairment allowances at 1 January 2013 | 5,361 | 1,219 | 1,811 | 5,616 | 2,162 | 16,169 | ||||||
Amounts written off | ||||||||||||
Personal | (876) | (461) | (107) | (1,330) | (1,593) | (4,367) | ||||||
- first lien residential mortgages | (83) | (7) | (2) | (779) | (25) | (896) | ||||||
- other personal7 | (793) | (454) | (105) | (551) | (1,568) | (3,471) | ||||||
Corporate and commercial | (1,264) | (96) | (78) | (277) | (514) | (2,229) | ||||||
- manufacturing and international trade and services | (680) | (73) | (64) | (80) | (386) | (1,283) | ||||||
- commercial real estate and other property-related | (289) | (7) | (2) | (141) | (23) | (462) | ||||||
- other commercial8 | (295) | (16) | (12) | (56) | (105) | (484) | ||||||
Financial5 | (40) | (3) | (10) | (3) | (3) | (59) | ||||||
Total amounts written off | (2,180) | (560) | (195) | (1,610) | (2,110) | (6,655) | ||||||
Recoveries of amounts written off in previous years | ||||||||||||
Personal | 584 | 153 | 41 | 82 | 237 | 1,097 | ||||||
- first lien residential mortgages | 25 | 4 | - | 67 | 23 | 119 | ||||||
- other personal7 | 559 | 149 | 41 | 15 | 214 | 978 | ||||||
Corporate and commercial | 52 | 14 | 46 | 41 | 45 | 198 | ||||||
- manufacturing and international trade and services | 19 | 7 | 2 | 6 | 27 | 61 | ||||||
- commercial real estate and other property-related | 6 | 4 | - | 18 | 1 | 29 | ||||||
- other commercial8 | 27 | 3 | 44 | 17 | 17 | 108 | ||||||
Financial5 | 1 | - | - | - | - | 1 | ||||||
Total recoveries of amounts written off in previous years | 637 | 167 | 87 | 123 | 282 | 1,296 | ||||||
Charge to income statement | 1,732 | 483 | (44) | 1,235 | 2,642 | 6,048 | ||||||
Exchange and other movements13 | 48 | (95) | (76) | (1,122) | (412) | (1,657) | ||||||
Impairment allowances at 31 December 2013 | 5,598 | 1,214 | 1,583 | 4,242 | 2,564 | 15,201 | ||||||
Impairment allowances against banks: | ||||||||||||
- individually assessed | 35 | - | 18 | 5 | - | 58 | ||||||
Impairment allowances against customers: | ||||||||||||
- individually assessed | 4,019 | 634 | 1,131 | 410 | 878 | 7,072 | ||||||
- collectively assessed12 | 1,544 | 580 | 434 | 3,827 | 1,686 | 8,071 | ||||||
Impairment allowances at 31 December 2013 | 5,598 | 1,214 | 1,583 | 4,242 | 2,564 | 15,201 |
For footnotes, see page 202.
Movement in impairment allowances on loans and advances to customers and banks
(Audited)
Banks | Customers | |||||||
individually assessed | Individually assessed | Collectively assessed | Total | |||||
US$m | US$m | US$m | US$m | |||||
At 1 January 2014 | 58 | 7,072 | 8,071 | 15,201 | ||||
Amounts written off | (6) | (2,313) | (4,060) | (6,379) | ||||
Recoveries of loans and advances previously written off | - | 114 | 841 | 955 | ||||
Charge to income statement | 4 | 1,776 | 2,275 | 4,055 | ||||
Exchange and other movements13 | (7) | (454) | (985) | (1,446) | ||||
At 31 December 2014 | 49 | 6,195 | 6,142 | 12,386 | ||||
Impairment allowances: | ||||||||
on loans and advances to customers | 6,195 | 6,142 | 12,337 | |||||
- personal | 468 | 4,132 | 4,600 | |||||
- corporate and commercial | 5,532 | 1,909 | 7,441 | |||||
- financial | 195 | 101 | 296 | |||||
as a percentage of loans and advances1 | 0.04% | 0.63% | 0.62% | 1.13% | ||||
Movement in impairment allowances on loans and advances to customers and banks (continued)
(Audited)
Banks | Customers | |||||||
individually assessed | Individually assessed | Collectively assessed | Total | |||||
US$m | US$m | US$m | US$m | |||||
At 1 January 2013 | 57 | 6,572 | 9,540 | 16,169 | ||||
Amounts written off | (4) | (1,937) | (4,714) | (6,655) | ||||
Recoveries of loans and advances previously written off | - | 209 | 1,087 | 1,296 | ||||
Charge to income statement | 5 | 2,315 | 3,728 | 6,048 | ||||
Exchange and other movements13 | - | (87) | (1,570) | (1,657) | ||||
At 31 December 2013 | 58 | 7,072 | 8,071 | 15,201 | ||||
Impairment allowances: | ||||||||
on loans and advances to customers | 7,072 | 8,071 | 15,143 | |||||
- personal | 589 | 6,013 | 6,602 | |||||
- corporate and commercial | 6,096 | 1,963 | 8,059 | |||||
- financial | 387 | 95 | 482 | |||||
as a percentage of loans and advances1 | 0.05% | 0.70% | 0.80% | 1.35% |
For footnotes, see page 202.
Wholesale lending
On a reported basis gross loans decreased by US$11bn, which included adverse foreign exchange movements of US$32bn, mainly in Europe.
The following commentary is on a constant currency basis.
Wholesale lending grew by US$21bn in the year. In Asia, balances grew by US$16bn as we continued to leverage our position in emerging markets. In North America, we also experienced strong growth of US$10bn as we executed our strategy of expanding our core offerings and proactively targeting companies with international banking requirements in key growth markets. The fall in lending in Europe of US$15bn was mainly driven by a reduction in corporate overdraft balances. In the UK, a small number of clients benefited from the use of net interest arrangements across their overdraft and deposit positions. During the year, as we aligned our approach in our Payments and Cash Management business to be more globally consistent, many of these clients increased the frequency with which they settled these balances, reducing their overdraft and deposit balances, which fell by US$28bn. The Middle East and North Africa and Latin America grew by US$6bn and US$4bn, respectively.
Total wholesale lending
(Unaudited)
Europe | Asia4 | MENA | North America | Latin America | Total | |||||||
US$m | US$m | US$m | US$m | US$m | US$m | |||||||
Corporate and commercial (A) | 210,585 | 220,799 | 20,588 | 57,862 | 30,722 | 540,556 | ||||||
- manufacturing | 39,456 | 37,767 | 2,413 | 15,299 | 12,051 | 106,986 | ||||||
- international trade and services | 76,629 | 72,814 | 9,675 | 13,484 | 8,189 | 180,791 | ||||||
- commercial real estate | 28,187 | 35,678 | 579 | 6,558 | 2,291 | 73,293 | ||||||
- other property-related | 7,126 | 34,379 | 1,667 | 8,934 | 281 | 52,387 | ||||||
- government | 2,264 | 1,195 | 1,552 | 164 | 968 | 6,143 | ||||||
- other commercial8 | 56,923 | 38,966 | 4,702 | 13,423 | 6,942 | 120,956 | ||||||
Financial (non-bank financial institutions) (B) | 23,103 | 13,997 | 3,291 | 9,034 | 1,393 | 50,818 | ||||||
Asset-backed securities reclassified | 1,938 | - | - | 131 | - | 2,069 | ||||||
Loans and advances to banks (C) | 21,978 | 62,960 | 10,495 | 7,405 | 9,360 | 112,198 | ||||||
Gross loans at 31 December 2014 (D) | 257,604 | 297,756 | 34,374 | 74,432 | 41,475 | 705,641 | ||||||
Impairment allowances on wholesale lending | ||||||||||||
Corporate and commercial (a) | 3,112 | 1,089 | 1,171 | 608 | 1,461 | 7,441 | ||||||
- manufacturing | 529 | 242 | 141 | 152 | 348 | 1,412 | ||||||
- international trade and services | 877 | 533 | 536 | 157 | 237 | 2,340 | ||||||
- commercial real estate | 909 | 44 | 147 | 101 | 476 | 1,677 | ||||||
- other property-related | 203 | 55 | 219 | 57 | 12 | 546 | ||||||
- government | 4 | - | 1 | - | - | 5 | ||||||
- other commercial | 590 | 215 | 127 | 141 | 388 | 1,461 | ||||||
Financial (non-bank financial institutions) (b) | 221 | 13 | 21 | 39 | 2 | 296 | ||||||
Loans and advances to banks (c) | 31 | - | 18 | - | - | 49 | ||||||
Impairment allowances at 31 December 2014 (d) | 3,364 | 1,102 | 1,210 | 647 | 1,463 | 7,786 | ||||||
(a) as a percentage of (A) | 1.48% | 0.49% | 5.69% | 1.05% | 4.76% | 1.38% | ||||||
(b) as a percentage of (B) | 0.96% | 0.09% | 0.64% | 0.43% | 0.14% | 0.58% | ||||||
(c) as a percentage of (C) | 0.14% | - | 0.17% | - | - | 0.04% | ||||||
(d) as a percentage of (D) | 1.31% | 0.37% | 3.52% | 0.87% | 3.53% | 1.10% |
Europe | Asia4 | MENA | North America | Latin America | Total | |||||||
US$m | US$m | US$m | US$m | US$m | US$m | |||||||
Corporate and commercial (I) | 239,116 | 203,894 | 19,760 | 50,307 | 30,188 | 543,265 | ||||||
- manufacturing | 55,920 | 30,758 | 3,180 | 11,778 | 12,214 | 113,850 | ||||||
- international trade and services | 76,700 | 79,368 | 8,629 | 11,676 | 8,295 | 184,668 | ||||||
- commercial real estate | 31,326 | 34,560 | 639 | 5,900 | 2,421 | 74,846 | ||||||
- other property-related | 7,308 | 27,147 | 1,333 | 8,716 | 328 | 44,832 | ||||||
- government | 3,340 | 1,021 | 1,443 | 499 | 974 | 7,277 | ||||||
- other commercial8 | 64,522 | 31,040 | 4,536 | 11,738 | 5,956 | 117,792 | ||||||
Financial (non-bank financial institutions) (J) | 27,872 | 9,688 | 2,532 | 9,055 | 1,376 | 50,523 | ||||||
Asset-backed securities reclassified | 2,578 | - | - | 138 | - | 2,716 | ||||||
Loans and advances to banks (K) | 24,273 | 72,814 | 6,419 | 6,420 | 10,178 | 120,104 | ||||||
Gross loans at 31 December 2013 (L) | 293,839 | 286,396 | 28,711 | 65,920 | 41,742 | 716,608 | ||||||
Impairment allowances on wholesale lending | ||||||||||||
Corporate and commercial (i) | 3,821 | 918 | 1,212 | 769 | 1,339 | 8,059 | ||||||
- manufacturing | 618 | 246 | 182 | 89 | 384 | 1,519 | ||||||
- international trade and services | 1,216 | 428 | 502 | 188 | 349 | 2,683 | ||||||
- commercial real estate | 1,116 | 22 | 153 | 202 | 396 | 1,889 | ||||||
- other property-related | 269 | 102 | 236 | 93 | 8 | 708 | ||||||
- government | 3 | - | 10 | 1 | - | 14 | ||||||
- other commercial | 599 | 120 | 129 | 196 | 202 | 1,246 | ||||||
Financial (non-bank financial institutions) (j) | 344 | 17 | 60 | 50 | 11 | 482 | ||||||
Loans and advances to banks (k) | 35 | - | 18 | 5 | - | 58 | ||||||
Impairment allowances at 31 December 2013 (l) | 4,200 | 935 | 1,290 | 824 | 1,350 | 8,599 | ||||||
(i) as a percentage of (I) | 1.60% | 0.45% | 6.13% | 1.53% | 4.44% | 1.48% | ||||||
(j) as a percentage of (J) | 1.23% | 0.18% | 2.37% | 0.55% | 0.80% | 0.95% | ||||||
(k) as a percentage of (K) | 0.14% | - | 0.28% | 0.08% | - | 0.05% | ||||||
(l) as a percentage of (L) | 1.43% | 0.33% | 4.49% | 1.25% | 3.23% | 1.20% |
For footnotes, see page 202.
(Unaudited)
Europe | Asia4 | MENA | North America | Latin America | Total | |||||||
US$m | US$m | US$m | US$m | US$m | US$m | |||||||
Neither past due nor impaired | 25,860 | 35,430 | 333 | 6,136 | 1,535 | 69,294 | ||||||
Past due but not impaired | 18 | 170 | 47 | 100 | 28 | 363 | ||||||
Impaired loans | 2,309 | 78 | 199 | 322 | 728 | 3,636 | ||||||
Total gross loans and advances at 31 December 2014 | 28,187 | 35,678 | 579 | 6,558 | 2,291 | 73,293 | ||||||
Of which: | ||||||||||||
- renegotiated loans14 | 1,954 | 19 | 183 | 191 | 377 | 2,724 | ||||||
909 | ||||||||||||
Impairment allowances | 909 | 44 | 147 | 101 | 476 | 1,677 | ||||||
Neither past due nor impaired | 28,044 | 34,433 | 402 | 5,400 | 2,249 | 70,528 | ||||||
Past due but not impaired | 95 | 103 | 18 | 29 | 35 | 280 | ||||||
Impaired loans | 3,187 | 24 | 219 | 471 | 137 | 4,038 | ||||||
Total gross loans and advances at 31 December 2013 | 31,326 | 34,560 | 639 | 5,900 | 2,421 | 74,846 | ||||||
Of which: | ||||||||||||
- renegotiated loans14 | 2,590 | 20 | 229 | 280 | 461 | 3,580 | ||||||
Impairment allowances | 1,116 | 22 | 153 | 202 | 396 | 1,889 |
For footnotes, see page 202.
Commercial real estate lending includes the financing of corporate, institutional and high net worth individuals who are investing primarily in income producing assets and, to a lesser extent, in their construction and development. The business focuses mainly on traditional core asset classes such as retail, offices, light industrial and residential building projects. The portfolio is globally diversified with larger concentrations in Hong Kong, the UK, the US and Canada.
In more developed markets, our exposure mainly comprises the financing of investment assets, the redevelopment of existing stock and the augmentation of both commercial and residential markets to support economic and population growth. In lesser developed commercial real estate markets our exposures comprise lending for development assets on relatively short tenors with a particular focus on supporting the larger, better capitalised developers involved in residential construction or in assets supporting economic expansion.
Many of these markets are beginning to move away from the rapid construction of recent years with an increasing focus on investment assets consistent with more
developed markets. A significant amount of exposure is centred on cities which are key locations of economic, political or cultural importance.
Total commercial real estate was US$73bn at 31 December 2014, a reduction of US$1.6bn which included adverse foreign exchange movements of US$3.3bn, mainly in Europe.
Refinance risk in commercial real estateCommercial real estate lending tends to require the repayment of a significant proportion of the principal at maturity. Typically, a customer will arrange repayment through the acquisition of a new loan to settle the existing debt. Refinance risk is the risk that a customer, being unable to repay the debt on maturity, fails to refinance it at commercial rates. Refinance risk is described in more detail on page 214. We monitor our commercial real estate portfolio closely, assessing those drivers that may indicate potential issues with refinancing. The principal driver is the vintage of the loan, when origination reflected previous market norms which do not apply in the current market. Examples might be higher LTV ratios and/or lower interest cover ratios. The range of refinancing sources in the local market is also an important consideration, with risk increasing when lenders are restricted to banks and when bank liquidity is limited. In addition, underlying fundamentals such as the reliability of tenants, the ability to let and the condition of the property are important, as they influence property values.
For the Group's commercial real estate portfolios as a whole, the behaviour of markets and the quality of assets did not cause undue concern in 2014. In the UK, which was subject to heightened concerns in recent years, the drivers described above are not currently causing sufficient concern to warrant enhanced management attention.
Further details on our UK portfolio are as follows: at 31 December 2014, we had US$20bn (2013: US$22bn) of commercial real estate loans of which US$5.9bn (2013: US$6.8bn) were due to be refinanced within the next 12 months. Of these balances, cases subject to close monitoring in our Loan Management Unit amounted to US$2.1bn (2013: US$2.4bn). US$1.3bn (2013: US$1.6bn) were disclosed as impaired with impairment allowances of US$0.6bn (2013: US$0.6bn). Where these loans are not considered impaired it is because there is sufficient evidence to indicate that the associated contractual cash flows will be recovered or that the loans will not need to be refinanced on terms we would consider below market norms.
Collateral on loans and advancesDetails of the Group's practice regarding the use of collateral are provided in the Appendix to Risk on page 213.
Collateral held is analysed separately below for commercial real estate and for other corporate, commercial and financial (non-bank) lending. This reflects the greater correlation between collateral performance and principal repayment in the commercial real estate sector than applies to other lending. In each case, the analysis includes off‑balance sheet loan commitments, primarily undrawn credit lines.
The collateral measured in the tables below consists of fixed first charges on real estate and charges over cash and marketable financial instruments. The values in the tables represent the expected market value on an open market basis; no adjustment has been made to the collateral for any expected costs of recovery. Cash is valued at its nominal value and marketable securities at their fair value. The LTV ratios presented are calculated by directly associating loans and advances with the collateral that individually and uniquely supports each facility. When collateral assets are shared by multiple loans and advances, whether specifically or, more generally, by way of an all monies charge, the collateral value is pro-rated across the loans and advances protected by the collateral.
Other types of collateral which are commonly taken for corporate and commercial lending such as unsupported guarantees and floating charges over the assets of a customer's business are not measured in the tables below. While such mitigants have value, often providing rights in insolvency, their assignable value is not sufficiently certain and they are therefore assigned no value for disclosure purposes.
For impaired loans the collateral values cannot be directly compared with impairment allowances recognised. The LTV tables below use open market values with no adjustments. Impairment allowances are calculated on a different basis, by considering other cash flows and adjusting collateral values for costs of realising collateral as explained further on page 212.
Commercial real estate loans and advances
The value of commercial real estate collateral is determined by using a combination of professional and internal valuations and physical inspections. Due to the complexity of valuing collateral for commercial real estate, local valuation policies determine the frequency of review on the basis of local market conditions. Revaluations are sought with greater frequency as concerns over the performance of the collateral or the direct obligor increase. Revaluations may also be sought where customers amend their banking requirements, resulting in the Group extending further funds or other significant rearrangements of exposure or collateral, which may change the customer risk profile. As a result, the real estate collateral values used for CRR1-7 might date back to the last point at which such considerations applied. For CRR 8 and 9-10 almost all collateral would have been revalued within the last three years.
In Hong Kong, market practice is typically for lending to major property companies to be either secured by guarantees or unsecured. In Europe, facilities of a working capital nature are generally not secured by a first fixed charge and are therefore disclosed as not collateralised.
Commercial real estate loans and advances including loan commitments by level of collateral
(Audited)
Europe | Asia4 | MENA | North America | Latin America | Total | |||||||
US$m | US$m | US$m | US$m | US$m | US$m | |||||||
Rated CRR/EL 1 to 7 | ||||||||||||
Not collateralised | 5,351 | 16,132 | 361 | 87 | 1,719 | 23,650 | ||||||
Fully collateralised | 25,873 | 26,323 | 23 | 9,093 | 556 | 61,868 | ||||||
Partially collateralised (A) | 1,384 | 1,599 | - | 1,819 | 152 | 4,954 | ||||||
- collateral value on A | 1,032 | 901 | - | 1,199 | 47 | 3,179 | ||||||
32,608 | 44,054 | 384 | 10,999 | 2,427 | 90,472 | |||||||
Rated CRR/EL 8 | ||||||||||||
Not collateralised | 34 | 7 | - | 9 | 2 | 52 | ||||||
Fully collateralised | 568 | 23 | - | 30 | 1 | 622 | ||||||
LTV ratio: | ||||||||||||
- less than 50% | 64 | - | - | 16 | 1 | 81 | ||||||
- 51% to 75% | 222 | 11 | - | 10 | - | 243 | ||||||
- 76% to 90% | 132 | 9 | - | 4 | - | 145 | ||||||
- 91% to 100% | 150 | 3 | - | - | - | 153 | ||||||
Partially collateralised (B) | 365 | - | - | 7 | - | 372 | ||||||
- collateral value on B | 296 | - | - | 2 | - | 298 | ||||||
967 | 30 | - | 46 | 3 | 1,046 | |||||||
Rated CRR/EL 9 to 10 | ||||||||||||
Not collateralised | 369 | 48 | 6 | 1 | 499 | 923 | ||||||
Fully collateralised | 992 | 15 | 7 | 166 | 178 | 1,358 | ||||||
LTV ratio: | ||||||||||||
- less than 50% | 78 | 6 | 7 | 28 | 10 | 129 | ||||||
- 51% to 75% | 593 | 2 | - | 91 | 43 | 729 | ||||||
- 76% to 90% | 167 | 2 | - | 17 | 53 | 239 | ||||||
- 91% to 100% | 154 | 5 | - | 30 | 72 | 261 | ||||||
Partially collateralised (C) | 1,085 | 15 | 181 | 37 | 50 | 1,368 | ||||||
- collateral value on C | 664 | 5 | 89 | 30 | 13 | 801 | ||||||
2,446 | 78 | 194 | 204 | 727 | 3,649 | |||||||
At 31 December 2014 | 36,021 | 44,162 | 578 | 11,249 | 3,157 | 95,167 | ||||||
Rated CRR/EL 1 to 7 | ||||||||||||
Not collateralised | 4,865 | 14,164 | 192 | 137 | 935 | 20,293 | ||||||
Fully collateralised | 24,154 | 25,317 | 21 | 8,627 | 1,728 | 59,847 | ||||||
Partially collateralised (D) | 2,664 | 2,377 | 139 | 704 | 484 | 6,368 | ||||||
- collateral value on D | 1,827 | 1,688 | 24 | 303 | 292 | 4,134 | ||||||
0 | ||||||||||||
31,683 | 41,858 | 352 | 9,468 | 3,147 | 86,508 | |||||||
Rated CRR/EL 8 | ||||||||||||
Not collateralised | 109 | 10 | - | 1 | 3 | 123 | ||||||
Fully collateralised | 793 | - | 72 | 68 | 1 | 934 | ||||||
LTV ratio: | ||||||||||||
- less than 50% | 139 | - | - | 15 | - | 154 | ||||||
- 51% to 75% | 367 | - | 72 | 49 | 1 | 489 | ||||||
- 76% to 90% | 173 | - | - | 4 | - | 177 | ||||||
- 91% to 100% | 114 | - | - | - | - | 114 | ||||||
Partially collateralised (E) | 360 | 2 | - | 13 | - | 375 | ||||||
- collateral value on E | 281 | 1 | - | 11 | - | 293 | ||||||
1,262 | 12 | 72 | 82 | 4 | 1,432 | |||||||
Rated CRR/EL 9 to 10 | ||||||||||||
Not collateralised | 564 | - | 7 | 4 | 521 | 1,096 | ||||||
Fully collateralised | 1,079 | 12 | 31 | 233 | 286 | 1,641 | ||||||
LTV ratio: | ||||||||||||
- less than 50% | 275 | 2 | 7 | 39 | 32 | 355 | ||||||
- 51% to 75% | 436 | 6 | 7 | 110 | 57 | 616 | ||||||
- 76% to 90% | 209 | 3 | 17 | 62 | 62 | 353 | ||||||
- 91% to 100% | 159 | 1 | - | 22 | 135 | 317 | ||||||
Partially collateralised (F) | 1,815 | 5 | 181 | 240 | 56 | 2,297 | ||||||
- collateral value on F | 1,284 | 5 | 89 | 115 | 34 | 1,527 | ||||||
3,458 | 17 | 219 | 477 | 863 | 5,034 | |||||||
At 31 December 2013 | 36,403 | 41,887 | 643 | 10,027 | 4,014 | 92,974 |
For footnote, see page 202.
Other corporate, commercial and financial(non-bank loans) are analysed separately below. For financing activities in other corporate and commercial lending, collateral value is not strongly correlated to principal repayment performance. Collateral values are generally refreshed when an obligor's general credit performance deteriorates and we have to assess the likely performance of secondary sources of repayment should it prove necessary to rely on them.
Accordingly, the table below reports values only for customers with CRR 8 to 10, recognising that these loans and advances generally have valuations which are comparatively recent.
Other corporate, commercial and financial (non-bank) loans and advances including loan commitments by level of collateral rated CRR/EL 8 to 10 only
(Audited)
Europe | Asia4 | MENA | North America | Latin America | Total | |||||||
US$m | US$m | US$m | US$m | US$m | US$m | |||||||
Rated CRR/EL 8 | ||||||||||||
Not collateralised | 2,051 | 237 | 15 | 320 | 227 | 2,850 | ||||||
Fully collateralised | 629 | 56 | 72 | 331 | 11 | 1,099 | ||||||
LTV ratio: | 13 | |||||||||||
- less than 50% | 120 | 13 | - | 186 | 5 | 324 | ||||||
- 51% to 75% | 293 | - | - | 72 | 6 | 371 | ||||||
- 76% to 90% | 51 | 9 | 69 | 46 | - | 175 | ||||||
- 91% to 100% | 165 | 34 | 3 | 27 | - | 229 | ||||||
Partially collateralised (A) | 105 | 44 | 1 | 148 | 6 | 304 | ||||||
- collateral value on A | 46 | 17 | 1 | 68 | 4 | 136 | ||||||
68 | ||||||||||||
2,785 | 337 | 88 | 799 | 244 | 4,253 | |||||||
Rated CRR/EL 9 to 10 | ||||||||||||
Not collateralised | 4,185 | 939 | 813 | 62 | 1,420 | 7,419 | ||||||
Fully collateralised | 615 | 143 | 147 | 231 | 124 | 1,260 | ||||||
LTV ratio: | ||||||||||||
- less than 50% | 169 | 68 | 25 | 48 | 48 | 358 | ||||||
- 51% to 75% | 136 | 27 | 19 | 39 | 35 | 256 | ||||||
- 76% to 90% | 168 | 16 | 6 | 35 | 26 | 251 | ||||||
- 91% to 100% | 142 | 32 | 97 | 109 | 15 | 395 | ||||||
Partially collateralised (B) | 624 | 364 | 547 | 251 | 140 | 1,926 | ||||||
- collateral value on B | 341 | 169 | 92 | 141 | 46 | 789 | ||||||
5,424 | 1,446 | 1,507 | 544 | 1,684 | 10,605 | |||||||
At 31 December 2014 | 8,209 | 1,783 | 1,595 | 1,343 | 1,928 | 14,858 | ||||||
Rated CRR/EL 8 | ||||||||||||
Not collateralised | 2,411 | 185 | 37 | 328 | 456 | 3,417 | ||||||
Fully collateralised | 259 | 51 | 1 | 227 | 70 | 608 | ||||||
LTV ratio: | ||||||||||||
- less than 50% | 65 | 38 | 1 | 84 | 11 | 199 | ||||||
- 51% to 75% | 103 | 4 | - | 47 | 10 | 164 | ||||||
- 76% to 90% | 25 | 8 | - | 31 | 5 | 69 | ||||||
- 91% to 100% | 66 | 1 | - | 65 | 44 | 176 | ||||||
Partially collateralised (C) | 435 | 23 | 528 | 345 | 73 | 1,404 | ||||||
- collateral value on C | 17 | 5 | 398 | 89 | 18 | 527 | ||||||
3,105 | 259 | 566 | 900 | 599 | 5,429 | |||||||
Rated CRR/EL 9 to 10 | ||||||||||||
Not collateralised | 1,467 | 685 | 1,089 | 26 | 1,615 | 4,882 | ||||||
Fully collateralised | 1,121 | 161 | 49 | 309 | 266 | 1,906 | ||||||
LTV ratio: | ||||||||||||
- less than 50% | 124 | 57 | 2 | 24 | 159 | 366 | ||||||
- 51% to 75% | 161 | 21 | 47 | 29 | 49 | 307 | ||||||
- 76% to 90% | 156 | 53 | - | 46 | 43 | 298 | ||||||
- 91% to 100% | 680 | 30 | - | 210 | 15 | 935 | ||||||
Partially collateralised (D) | 1,192 | 304 | 770 | 359 | 290 | 2,915 | ||||||
- collateral value on D | 606 | 150 | 102 | 149 | 131 | 1,138 | ||||||
3,780 | 1,150 | 1,908 | 694 | 2,171 | 9,703 | |||||||
At 31 December 2013 | 6,885 | 1,409 | 2,474 | 1,594 | 2,770 | 15,132 |
For footnote, see page 202.
Loans and advances to banks are typically unsecured. Collateral values held for customers rated CRR 9 to 10 (i.e. classified as impaired) are separately disclosed.
Loans and advances to banks including loan commitments by level of collateral
(Audited)
Europe | Asia4 | MENA | North America | Latin America | Total | |||||||
US$m | US$m | US$m | US$m | US$m | US$m | |||||||
Rated CRR/EL 1 to 8 | ||||||||||||
Not collateralised | 22,405 | 64,210 | 10,472 | 7,985 | 9,406 | 114,478 | ||||||
Fully collateralised | 104 | 1,587 | - | - | - | 1,691 | ||||||
Partially collateralised (A) | 5 | - | - | - | - | 5 | ||||||
- collateral value on A | 3 | - | - | - | - | 3 | ||||||
22,514
| ||||||||||||
22,514 | 65,797 | 10,472 | 7,985 | 9,406 | 116,174 | |||||||
Rated CRR/EL 9 to 10 | ||||||||||||
Not collateralised | 102 | 1 | 21 | - | - | 124 | ||||||
At 31 December 2014 | 22,616 | 65,798 | 10,493 | 7,985 | 9,406 | 116,298 | ||||||
Rated CRR/EL 1 to 8 | ||||||||||||
Not collateralised | 21,225 | 72,986 | 6,373 | 7,210 | 9,837 | 117,631 | ||||||
Fully collateralised | 3,614 | 1,376 | - | - | 266 | 5,256 | ||||||
Partially collateralised (B) | 68 | 560 | - | - | - | 628 | ||||||
- collateral value on B | 3 | 389 | - | - | - | 392 | ||||||
24,907 | 74,922 | 6,373 | 7,210 | 10,103 | 123,515 | |||||||
Rated CRR/EL 9 to 10 | ||||||||||||
Not collateralised | 153 | - | 312 | 14 | - | 479 | ||||||
At 31 December 2013 | 25,060 | 74,922 | 6,685 | 7,224 | 10,103 | 123,994 |
For footnote, see page 202.
In addition to collateralised lending, other credit enhancements are employed and methods used to mitigate credit risk arising from financial assets. These are described in more detail below:
· some securities issued by governments, banks and other financial institutions benefit from additional credit enhancement provided by government guarantees that cover the assets.
Details of government guarantees are included in Notes 12, 15 and 18 on the Financial Statements.
· debt securities issued by banks and financial institutions include ABSs and similar instruments which are supported by underlying pools of financial assets. Credit risk associated with ABSs is reduced through the purchase of credit default swap ('CDS') protection.
Disclosure of the Group's holdings of ABSs and associated CDS protection is provided on page 162.
· trading assets include loans and advances held with trading intent. These mainly consist of cash collateral posted to satisfy margin requirements on derivatives, settlement accounts, reverse repos and stock borrowing. There is limited credit risk on cash collateral posted since in the event of default of the counterparty these would be set-off against the related liability. Reverse repos and stock borrowing are by their nature collateralised.
Collateral accepted as security that the Group is permitted to sell or repledge under these arrangements is described in Note 19 on the Financial Statements.
· the Group's maximum exposure to credit risk includes financial guarantees and similar contracts granted, as well as loan and other credit-related commitments. Depending on the terms of the arrangement, we may have recourse to additional credit mitigation in the event that a guarantee is called upon or a loan commitment is drawn and subsequently defaults. For further information on these arrangements, see Note 37 on the Financial Statements.
DerivativesHSBC participates in transactions exposing us to counterparty credit risk. Counterparty credit risk is the risk of financial loss if the counterparty to a transaction defaults before satisfactorily settling it. It arises principally from OTC derivatives and securities financing transactions and is calculated in both the trading and non-trading books. Transactions vary in value by reference to a market factor such as interest rate, exchange rate or asset price.
The counterparty risk from derivative transactions is taken into account when reporting the fair value of derivative positions. The adjustment to the fair value is known as the credit value adjustment ('CVA').
For an analysis of CVA, see Note 13 on the Financial Statements.
The table below reflects by risk type the fair values and gross notional contract amounts of derivatives cleared through an exchange, central counterparty and non-central counterparty.