HSBC Holdings Regulatory News (HSBA)

Notional contract amounts and fair values of derivatives by product type

The purposes for which HSBC uses derivatives are described in Note 16 on the Financial Statements.

The International Swaps and Derivatives Association ('ISDA') Master Agreement is our preferred agreement for documenting derivatives activity. It provides the contractual framework within which dealing activity across a full range of OTC products is conducted, and contractually binds both parties to apply close-out netting across all outstanding transactions covered by an agreement if either party defaults or another pre-agreed termination event occurs. It is common, and our preferred practice, for the parties to execute a Credit Support Annex ('CSA') in conjunction with the ISDA Master Agreement. Under a CSA, collateral is passed between the parties to mitigate the counterparty risk inherent in outstanding positions.

We manage the counterparty exposure arising from market risk on our OTC derivative contracts by using collateral agreements with counterparties and netting agreements. Currently, we do not actively manage our general OTC derivative counterparty exposure in the credit markets, although we may manage individual exposures in certain circumstances.

We place strict policy restrictions on collateral types and as a consequence the types of collateral received and pledged are, by value, highly liquid and of a strong quality, being predominantly cash.

Where a collateral type is required to be approved outside the collateral policy (which includes collateral that includes wrong way risks), a submission to one of three regional Documentation Approval Committees ('DAC's) for approval is required. These DACs require the participation and sign-off of senior representatives from regional Markets Chief Operating Officers, Legal and Risk.

The majority of our CSAs are with financial institutional clients.

As a consequence of our policy, the type of agreement we enter into is predominately ISDA CSAs, the majority of which are written under English law. The table below provides a breakdown of OTC collateral agreements by agreement type:

OTC collateral agreements by type

For footnotes, see page 191.

See page 122 and Note 32 on the Financial Statements for details regarding legally enforceable right of offset in the event of counterparty default and collateral received in respect of derivatives.

Reverse repos - non-trading by geographical region

The amount of non-trading reverse repos include transactions with customers and banks and is set out below.

Reverse repos - non-trading by geographical region

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Personal lending

We provide a broad range of secured and unsecured personal lending products to meet customer needs. Personal lending includes advances to customers for asset purchases such as residential property where theloans are secured by the assets being acquired. We also offer loans secured on existing assets, such as first liens on residential property, and unsecured lending products such as overdrafts, credit cards and payroll loans.

Total personal lending

Total personal lending (continued)

On a reported basis, total personal lending was $374bn at 31 December 2015, down from $394bn at the end of 2014. The reduction of $20bn was mainly due to adverse foreign exchange movements of $19bn, the reclassification of $7.6bn of assets of our Brazilian operations as 'Assets held for sale' and the run-off of our CML portfolio in North America of $5bn during the year. Excluding these factors, personal lending balances grew by $12bn in 2015. This was primarily driven by increased mortgage and other lending in Asia.

Loan impairment allowances reduced by $1.7bn on a reported basis, mainly due to the Brazilian reclassification ($0.8bn) and the run-off of the US CML portfolio ($0.7bn).

Personal lending loan impairment charges were largely unchanged at $1.8bn on a reported basis. On a constant currency basis, they were $0.3bn higher than in 2014, reflecting increased write-offs in the UAE following a review of the quality and value of residential mortgage collateral and the effects of adverse macroeconomic conditions in Brazil.

Mortgage lending

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

Group credit policy prescribes the range of acceptable residential property LTV thresholds with the maximum upper limit for new loans set at between 75% and 95%.

Specific LTV thresholds and debt-to-income ratios are managed at regional and country levels and, although the parameters must comply with Group policy, strategy and risk appetite, they differ in the various locations in which we operate to reflect the local economic and housing market conditions, regulations, portfolio performance, pricing and other product features.

Reported gross mortgage lending balances declined by $12bn. Adverse foreign exchange differences and the Brazilian reclassification reduced the gross mortgage lending balances by further $13bn and $2.1bn respectively.

The commentary that follows is on a constant currency basis, while tables are presented on a reported basis.

Excluding the effect of the Brazilian reclassification and the US CML run-off portfolio, mortgage lending balances increased by $7.7bn during the year.

Mortgage lending in Asia, excluding the reclassification to other personal lending discussed on page 145, grew by $6.4bn. The increases were primarily attributable to continued growth in Hong Kong ($4.2bn), mainland China ($1.7bn) and Australia ($1.1bn) as a result of strong demand and our competitive customer offerings. During the year, mortgage lending in Singapore fell by $1.1bn due to a business decision to constrain the level of our mortgage portfolio, coupled with the effect of a range of personal lending regulations. The quality of our Asian mortgage book remained high with negligible defaults and impairment allowances. The average LTV ratio on new mortgage lending in Hong Kong was 43% compared with an estimated 29% for the overall portfolio.

In North America, the US CML portfolio, including second lien mortgages, declined by $5.2bn in 2015 as we continued to run it off. The US Premier mortgage portfolio increased by $1.1bn during 2015 as we focused on growth in our core portfolios of higher quality mortgages. Our Canadian mortgage lending balances also grew by $0.8bn during the year. Collectively assessed impairment allowances reduced during the year due to continued improvements in the credit quality of the mortgage portfolio and continued loan sales.

In Europe, UK mortgage balances were unchanged and our products remained competitive in the prolonged low interest rate market environment. In the UK, the credit quality of our mortgage portfolio remained high, the LTV ratio on new lending was 57.8% compared with an average of 42.6% for the overall portfolio.

Exposure to UK interest-only mortgage loans

Interest-only mortgage products made up $40bn of total UK mortgage lending, including $16bn of offset mortgages in First Direct and $1.7bn of endowment mortgages.

The following information is presented for HSBC Bank plc's UK interest-only mortgage loans with balances of $18bn at the end of 2015. $0.2bn of interest-only mortgages matured during 2015. Of these, 2,636 loans with total balances of $0.1bn were repaid in full, 164 loans with balances of $0.03bn have agreed future repayment plans and 550 loans with balances of $0.1bn are subject to ongoing individual assessments.

The profile of expiring UK interest-only loans was as follows:

UK interest-only mortgage loans

Other personal lending

Reported other personal lending balances declined by $7.5bn during the year, mainly due to adverse foreign exchange movements of $5.8bn and the Brazilian reclassification of $5.5bn. The reduction was offset by the growth in other personal lending in Hong Kong.

The commentary that follows is on a constant currency basis, while tables are presented on a reported basis.

Excluding the Brazilian reclassification, other personal lending increased by $4bn in 2015. This was driven by strong growth in personal loans and overdrafts in Hong Kong ($1.5bn), other unsecured personal lending portfolio in UK ($0.7bn) and other personal lending in France ($0.6bn). In Mexico, other unsecured personal lending grew by $0.6bn mainly in payroll and personal loans as a result of various sales and credit initiatives. In addition, we reclassified a total of $1.8bn of loans in Malaysia and India, and $0.4bn in the UAE, from residential mortgages to other personal lending following a review of the supporting collateral.

HSBC Finance

HSBC Finance US Consumer and Mortgage Lending - residential mortgages16

For footnote, see page 191.

Mortgage lending balances in HSBC Finance declined by $5.2bn or 21% during 2015. In addition to the continued loan sales in the CML portfolio, we transferred a further$2.4bn to 'Assets held for sale' during the year, and these loans were sold in May, August and November 2015.

There was a decrease in impairment allowances reflecting reduced levels of delinquency, and lower levels of both new impaired loans and loan balances outstanding as a result of continued liquidation of the portfolio.

Among the first and second lien residential mortgages in our CML portfolio, two months and over delinquent balances halved to $1.2bn during 2015.

At 31 December 2015, renegotiated real estate secured accounts in HSBC Finance represented 91% (2014: 93%) of North America's total renegotiated loans. $5.1bn of renegotiated real estate secured loans was classified as impaired (2014: $7.6bn).

In HSBC Bank USA, mortgage balances grew by $1.1bn to $18bn at 31 December 2015 as we continued to implement our strategy to grow the HSBC Premier and Advance customer base. We continued to sell all agency-eligible new originations in the secondary market.

Trends in two months and over contractual delinquency in the US

Gross loan portfolio of HSBC Finance real estate secured balances

For footnote, see page 191.

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

HSBC Finance loan modifications and re-age programmes

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.

Qualifying criteria

For an account to qualify for renegotiation it must meet certain criteria, and HSBC Finance retains the right to decline a renegotiation.

Renegotiated real estate secured loans are not eligible for a subsequent renegotiation for six or 12 months depending upon the action, with a maximum of five renegotiations permitted within a five-year period. Borrowers must be approved for a modification and, to activate it, must generally make two minimum qualifying monthly payments within 60 days. In certain circumstances where the debt has been restructured in bankruptcy proceedings, fewer or no payments may be required. Real estate secured loans involving a bankruptcy and accounts whose borrowers are subject to a Chapter 13 plan filed with a bankruptcy court generally may be considered current upon receipt of one qualifying payment, while accounts whose borrowers have filed for Chapter 7 bankruptcy protection may be re-aged upon receipt of a signed reaffirmation agreement. In addition, any account may be re-aged without receipt of a payment in certain special circumstances (for example, in the event of a natural disaster or a hardship programme).

Within the constraints of our Group credit policy, we allow for multiple renegotiations under certain circumstances. Consequently, a significant proportion of loans included in the table above have undergone multiple re-ages or modifications. In this regard, multiple modifications have remained consistent at 70% to 75% of total modifications.

The accounts that received second or subsequent renegotiations during the year do not appear in the statistics presented. These statistics treat a loan as an addition to the volume of renegotiated loans on its first renegotiation only.

Collateral and other credit enhancements held

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The tables below provide a quantification of the value of fixed charges we hold over specific assets where we have a history of enforcing, and are able to enforce, collateral in satisfying a debt in the event of the borrower failing to meet its contractual obligations, and wherethe collateral is cash or can be realised by sale in an established market. The collateral valuation excludes any adjustments for obtaining and selling the collateral and, in particular, loans shown as not collateralised or partially collateralised may also benefit from other forms of credit mitigants. UK and Hong Kong are shown, both within regional figures and separately, due to the size of their portfolios.

Residential mortgage loans including loan commitments by level of collateral

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