Annual Report and Accounts 2011 - Bermuda Stock Exchange

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
Financial summary > Group performance
settlement accounts) compared with 2.2% at
31 December 2010.
In 2011, loan impairment charges and other
credit risk provisions declined in all regions except
Latin America and Hong Kong. The reduction was
most significant in our consumer finance portfolios
in HSBC Finance in North America, which
contributed 66% of the reduction, reflecting lower
lending balances in the run-off portfolio along with a
reduction in lending balances and lower delinquency
rates as our Card and Retail Services customers
focused on repayments. In Latin America, principally
Brazil, and also in Hong Kong, collective loan
impairment allowances rose as we grew our lending
book on the back of strong economic growth and
increased customer demand.
During 2011, we reported US$631m of
impairments related to available-for-sale debt
securities, compared with US$472m in 2010. In
2011, we recognised a charge of US$212m to write
down to market value available-for-sale Greek
sovereign debt now judged to be impaired following
the deterioration in Greece’s fiscal position. This was
partly offset as losses arising in underlying collateral
pools generated lower charges on asset-backed
securities.
In our US run-off portfolios, loan impairment
charges of US$5.0bn were 14% lower than in 2010.
The decline was mainly in our Consumer and
Mortgage Lending (‘CML’) portfolio, driven by the
reduction in customer lending balances, in part offset
by higher loan impairment allowances reflecting a
rise in the estimated cost to obtain collateral as well
as delays in the timing of expected cash flows, both
the result of the industry-wide delays in foreclosure
processing.
In the third quarter of 2011, loan impairment
charges in the CML portfolio increased markedly as
delinquency worsened compared with the first half of
2011. In addition, we increased our loan impairment
allowances to reflect a rise in the expected cost to
obtain and realise collateral following delays in
foreclosure processing. Despite a decline in loan
impairment charges in the fourth quarter, these
factors contributed significantly to a rise in the
Group’s loan impairment charges in the second half
of 2011 compared with the first half of the year.
In Card and Retail Services, loan impairment
charges fell by 26% to US$1.6bn reflecting lower
lending balances and improved delinquency rates as
customer repayment rates remained strong during
2011.
In CMB, loan impairment charges and other
credit risk provisions in North America declined in
both Canada and the US reflecting improved credit
quality, and in Canada this was also due to lower
lending balances. These declines were partly offset
by a loan impairment charge on a commercial real
estate lending exposure.
The reduction in loan impairment charges and
other credit risk provisions in North America was
partly offset by an increase in GB&M, reflecting
lower releases of collective loan impairment
allowances compared with 2010. In addition, 2011
included a loan impairment charge associated with a
corporate lending relationship.
Loan impairment charges and other credit risk
provisions in Europe fell by 20% to US$2.5bn,
notably in the UK. The reduction was mainly in our
RBWM business where loan impairment charges
declined by 53% to US$596m despite the difficult
economic climate and continued pressures on
households’ finances. Delinquency rates declined
across both the secured and unsecured lending
portfolios, reflecting improvement in portfolio
quality and the continued low interest rate
environment as well as successful actions taken to
mitigate credit risk and proactive account
management. In CMB, loan impairment charges and
other credit risk provisions were 7% lower, mainly in
the UK. This was partly offset by an increase in
individually assessed loan impairment charges in
Greece as economic conditions worsened.
In GB&M in Europe, loan impairment charges
and other credit risk provisions increased by 8% as
we recorded an impairment of US$145m to write
down to market value available-for-sale Greek
sovereign debt now judged to be impaired following
the deterioration in Greece’s fiscal position. Further
information on our exposures to countries in the
eurozone is provided in ‘Areas of special interest –
wholesale lending’ on page 112.
In the Middle East and North Africa, loan
impairment charges and other credit risk provisions
fell by 53% to US$293m, primarily due to a marked
decline in loan impairment charges and other credit
risk provisions in our GB&M business. This
reflected the non-recurrence of individually assessed
loan impairment charges recorded in the first half of
2010 related to restructuring activity for a small
number of large corporate customers in the United
Arab Emirates (‘UAE’). In RBWM, loan impairment
charges declined by 45%, due to significantly
improved delinquency rates reflecting a repositioning
of the loan book towards higher quality lending as
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