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HSBC FRANCE
Risk management (continued)
Distribution of not impaired loans and advances
by facility grade, at 31 December 2005
At 31 December 2005
Loans and Loans and
advances to advances to
(in millions of euros) customers banks
Grade 1 – low risk . . . . . . . . . . . . 213 6,227
Grade 2 – satisfactory risk . . . . . 567 5,304
Grade 3 – fair risk . . . . . . . . . . . . 35,432 4,936
Grade 4 – watch list . . . . . . . . . . . 97 89
Grade 5 – sub-standard
but not impaired . . . . . . . . . . . 515 –
36,824 16,556
Grades 1 and 2 represent facilities demonstrating
financial condition, risk factors and capacity to repay
that are good to excellent, residential mortgages with
low to moderate loan to values ratios, and other retail
accounts which are not impaired and are maintained
within product guidelines.
Grade 3 represents satisfactory risk and includes
facilities that require closer monitoring, mortgages with
higher loan to value ratios than grades 1 and 2.
Grade 4 and 5 represent corporate facilities that
require various degrees of special attention and all
retail exposures that are progressively between 30 and
90 days past due.
Grade 6 and 7 indicate impaired status including
all retail accounts that are progressively more than
90 days past due or 180 days for property.
Other securities
Debt securities and treasury bills
The following table presents an analysis of debt
securities and treasury bills by rating agency designation
at 31 December 2005, based on Standard and Poor’s
(“S&P”) ratings or their equivalent:
At 31 December 2005
Treasury Debt
(in millions of euros) bills securities Total
AAA . . . . . . . . . . . . . . . 21,159 3,135 24,294
AA – to AA + . . . . . . . . . 8,262 1,394 9,656
A – to A + . . . . . . . . . . . 485 70 555
Unrated . . . . . . . . . . . . 82 581 663
Total . . . . . . . . . . . . . . . 29,988 5,180 35,168
Of which issued by:
— governments . . . . . . 29,988 – 29,988
— corporates . . . . . . . . – 3,090 3,090
— other . . . . . . . . . . . . . – 2,090 2,090
Total . . . . . . . . . . . . . . . 29,988 5,180 35,168
Of which classified as:
— available-for-sale
securities . . . . . . . . 2,957 266 3,223
— held for trading . . . . 27,031 4,914 31,945
Total . . . . . . . . . . . . . . . 29,988 5,180 35,168
If major rating agencies have different ratings for the
same debt securities, the securities are reported against
the lower rating.
Netting of assets and liabilities
An amount of EUR 11 billion of financial assets which
is subject to a legally enforceable right of set-off against
a financial liability is not presented on the balance sheet
net as there is no intention for settlement to take place
on a net basis or simultaneously.
At 31 December 2005
Amount for
which HSBC
has a legally
enforceable
Book right to Net total
(in millions of euros) value offset 1 credit risk
Derivatives . . . . . . . . . . 18,030 (11,047) 6,983
1 Against financial liabilities with the same counterparties.
Impairment assessment
It is HSBC France policy that each entity makes
allowance for impaired loans promptly and on a
consistent basis in accordance with established Group
guidelines.
HSBC France rating process for credit facilities
extended by members of the Group is designed to
highlight exposures requiring greater management
attention based on a higher probability of default and
potential loss. Management particularly focuses on
facilities to those borrowers and portfolio segments
classified below satisfactory grades. Amendments to
risk grades, where necessary, are required to be
undertaken promptly. Management also regularly
evaluates the adequacy of the established allowances
for impaired loans by conducting a detailed review
of the loan portfolio, comparing performance and
delinquency statistics with historical trends and
assessing the impact of current economic conditions.
Group policy requires a review of the level of
impairment allowances that are above materiality
thresholds at least half-yearly, and more regularly
where individual circumstances require. This will
normally include a review of guarantees received
(including re-confirmation of its enforceability) and
an assessment of actual and anticipated cash flows.
For significant commercial and corporate debts,
specialised loan “work-out” teams with experience in
insolvency and specific market sectors are used. This
expertise enables likely losses on significant individual
exposures to be assessed more accurately. Reversals
on individually calculated impairment allowances
are recognised whenever the Group has reasonable
objective evidence that the established estimate of loss
has been reduced.
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