Interim Report - 16 of 28

Credit risk is the risk of financial loss if a customer or counterparty fails to meet an obligation under a contract. It arises principally from direct lending, trade finance and leasing business, but also from certain other products such as guarantees and credit derivatives and from holding assets in the form of debt securities.

There have been no material changes to our policies and practices for the management of credit risk as described in the Annual Report and Accounts 2013. Following the change in balance sheet presentation explained on page 41, non-trading reverse repos are shown separately on the face of the balance sheet and are no longer included in 'Loans and advances to customers' and 'Loans and advances to banks'. Comparative data have been re-presented accordingly. As a result, any analysis that references loans and advances to customers or banks excludes non-trading reverse repos to customers or banks, respectively. The amount of the non-trading reverse repos to customers and banks is set out on page 121.

Credit risk in the first half of 2014

Total exposure to credit risk increased in the first half of 2014 with gross loans and advances of US$1,189bn recorded at 30 June 2014, compared with US$1,127bn at 31 December 2013.

During the first half of 2014, there was an overall increase in loans and advances of US$61bn which was accompanied by an overall decrease in impairment allowances of US$1.2bn, principally reflecting run-off of the CML portfolios within North America.

The following commentary is on a constant currency basis.

Total personal lending of US$416bn at 30 June 2014, was broadly unchanged from 31 December 2013. Decreases in lending balances in North America due to the continued run-off of the CML portfolio were partly offset by increases in residential mortgage balances in Asia and Latin America.

Total wholesale lending increased to US$773bn at 30 June 2014 from US$725bn at the end of 2013, due to increases in Asia and Europe. In Asia, lending grew across a number of sectors reflecting continued buoyancy in credit market activity. In Europe, the increases were principally driven by a rise in
Loans and advances excluding held for sale: total exposure, impairment allowances and charges

For footnote, see page 172.

corporate overdraft balances, mainly in GB&M, in accounts which are structured to allow customer corporate treasury functions to benefit from net interest arrangements but where net settlement is not intended to occur, together with a corresponding rise in current accounts.

Impairment allowances fell from US$15.4bn at the end of 2013 to US$14bn at 30 June 2014. In personal lending, impairment allowances decreased by US$0.8bn, principally due to the run-off of the CML portfolio within North America. In wholesale lending, impairment allowances decreased by US$0.6bn, mainly in Europe, due to amounts written off and a reduction in new impairment allowances reflecting an improved economic environment.

Loan impairment charges in the first half of 2014 decreased to US$2.0bn from US$3.1bn in the first half of 2013. In personal lending, loan impairment charges decreased by US$0.5bn, mainly in North America and Latin America.

In wholesale lending, loan impairment charges reduced by US$0.6bn, mainly driven by lower individually assessed impairment charges. However, during the first half of 2014, in North America, we revised certain estimates used in our corporate loan collective impairment calculation to better reflect inherent losses in a growing loan portfolio. This resulted in an increase to our allowance for credit losses of approximately US$93m for these loans. We are continuing to refine aspects of our loan allowance calculation and, as a result, there could be further adjustments to our credit loss estimates for corporate loans in future periods. 

Credit exposure

Maximum exposure to credit risk

The following commentary is on a reported basis.

The table on page 112 provides information on balance sheet items, offsets and loan and other credit-related commitments. Commentary on the balance sheet movements is provided on page 39.

Loans and advances

The loans and advances offset in the table on page 112 relates to customer loans and deposits and balances where there is a legally enforceable right of offset in the event of counterparty default and where, as a result, there is a net exposure for credit risk purposes. However, as there is no intention to settle these balances on a net basis under normal circumstances, they do not qualify for net presentation for accounting purposes.

Derivatives

The derivatives offset amount in the table below relates to exposures where the counterparty has an offsetting derivative exposure with HSBC, a master netting arrangement is in place and the credit risk exposure is managed on a net basis, or the position is specifically collateralised, normally in the form of cash.

At 30 June 2014, the total amount of such offsets was US$251bn (31 December 2013: US$252bn), of which US$212bn (31 December 2013: US$209bn) were offsets under a master netting arrangement, US$32bn (31 December 2013: US$36bn) was collateral received in cash and US$7bn (31 December 2013: US$7bn) was other collateral. Whilst the derivative balances have reduced by US$12.4bn over the last six months, the offsets have remained broadly consistent. These amounts do not qualify for offset for accounting purposes as settlement is not intended to be made on a net basis.

Reverse repurchase agreements - non-trading

The reverse repurchase agreements - non-trading offset in the table on page 112 relates to amounts where there is a legally enforceable right of offset in the event of counterparty default and where, as a result, there is a net exposure for credit risk purposes. However, as there is no intention to settle these balances on a net basis under normal circumstances, they do not qualify for net presentation for accounting purposes. The effects of collateral held are not taken into account.

Loan and other credit-related commitments

Loan and other credit-related commitments largely consist of corporate and commercial off-balance sheet commitments, including term and trade-related lending balances and overdrafts, retail off-balance sheet commitments including overdrafts, residential mortgages and personal loans and credit card balances.

As at 30 June 2014, loan and other credit-related commitments increased by US$54bn over the last six months to US$642bn. This was primarily due to corporate loan facilities and undrawn credit card commitments in Asia, undrawn facilities in Europe and increased lending activity with our corporate customers in North America, reflecting our focus on growing in target commercial segments in the US.

Other credit risk mitigants

While not disclosed as an offset in the maximum exposure to credit risk table, other arrangements are in place which reduce our maximum exposure to credit risk. These include short positions in securities and financial assets held as part of linked insurance/ investment contracts where the risk is predominantly borne by the policyholder. In addition, we hold collateral in the form of financial instruments that are not recognised on the balance sheet.