Consolidated financial statements (continued)
32 Notes on the cash flow statement (continued) Breakdown of cash and cash equivalents
(in millions of euros) 31.12.2012 31.12.2011
Cash and balances at central banks . . . 6,770 4,805 Items in the course of collection from other banks . . . 815 806 Loans and advances to banks due in one month or less . . . 22,605 23,984 Treasury bills, other bills and certificates of deposit due in less than three months . . . 401 195 Less: cash accounts (liabilities) . . . (771) (757)
29,820 29,033
33 Risk management
All the HSBC France group’s activities involve analysis, evaluation, acceptance and management of some degree of risk or combination of risks.
The most important types of risk arising from financial instruments are credit risk (which includes country and cross-border risk), liquidity risk and market risk. Market risk includes foreign exchange, interest rate and equity price risk. In addition, risk also arises from transactions with special purpose entities, both on- and off-balance sheet, and other types of off-balance sheet arrangements, including financial guarantees, letters of credit and lending commitments.
The management of risks that are significant to the group is discussed in the Risk management section on pages 75 to 97.
Credit risk management
Initiatives undertaken and risks identified
The management of credit risk within the HSBC France is discussed in the Risk management section on pages 75 to 80.
Impairment assessment
Management 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.
Two types of impairment allowance are in place: individually assessed and collectively assessed, which are discussed in Note 2 g.
Exposure to countries in the eurozone
The transfer of private sector liabilities to sovereign bodies, which started after the 2007 financial crisis, continued to put pressure on government balance sheets. The resulting fiscal imbalance in some industrialised economies led to intensified market concerns about sovereign credit risk in these countries.
In 2012, the decisions of the European governments and the European Central Bank (ECB) calmed significantly the stress about the loans and advances to banks and states and the investors’ worries related to the systemic risk inside the eurozone.
The ECB organised LTRO (Long-Term Refinancing Operations) on 22 December 2011 and on 3 March 2012 which suppressed, for the banks, the liquidity risk providing more than EUR 1,000 billion cash into the European financial system.
Moreover, the proposal of the European Commission to create a European Banking Union to sooth the relationship between banks and governments, the creation for the ECB of a European banking monitoring power by the European Meeting, the Outright Monetary Transactions, permitted a tightening of spreads among the entirety of the eurozone.
The eurozone sovereign debt crisis remained the centre of attention throughout the year. The difficulties in implementing the prescribed austerity measures and fiscal discipline, the possibility of countries exiting the eurozone, the escalating fears around high debt to GDP ratios and the need for aid to recapitalise banks weighed down on market sentiment.
HSBC France Global Markets acts as a market-maker and primary dealer on the sovereign debt of eurozone countries for the Group. HSBC France continued to closely manage its exposure in 2012 and regularly updated its assessment of higher risk countries and adjusted its risk appetite accordingly.
Consolidated financial statements
(continued)33 Risk management (continued)
The table overleaf summarises group exposures to selected eurozone countries, for governments and central banks of selected eurozone countries along with near/quasi government agencies.
The countries presented were selected because, during the period considered, they exhibited levels of market volatility which exceeded other eurozone countries and demonstrated fiscal or political uncertainty during 2012. In addition, certain of these countries exhibit high sovereign debt to GDP ratios and short to medium-term maturity concentration of those liabilities.
Exposures to selected Eurozone countries – sovereigns and agencies At 31 December 2012
(in millions of euros) Greece Ireland Italy Portugal Spain Total
Cash and balances
at central banks . . . − − − − − −
Assets held at amortised cost . . . − − − − − −
Financial investments
available for sale . . . − − 273 − − 273 Net trading assets1 . . . − 85 1,070 27 206 1,388 Derivatives2 . . . − − 3 − − 3 Total . . . − 85 1,346 27 206 1,664
Off-balance sheet exposures . . . − − − − − −
1 Treasury bills and debt securities held for trading net of short positions.
2 Derivative assets net of collateral and derivative liabilities for which a legally enforceable right of offset exists.
During the first half of 2011, HSBC Group decided to impair the Greek sovereign and agency exposures classified as available for sale, reflecting the further deterioration in Greece’s fiscal position and the announced support measures. Since then, HSBC Group didn’t impair its sovereign exposures to Ireland, Portugal, Italy and Spain because, despite financial difficulties in these countries, the situation is not severe enough to conclude that loss events have occurred which will have an impact on the future cash flows of these countries’ sovereign securities.
In the HSBC France group, the vast majority of the sovereign exposure is classified as trading and the group has no Greek sovereign exposure classified as available for sale. Nevertheless, HSBC in France includes the insurance business which held in 2011 limited exposures classified as available for sale. An impairment charge of EUR 19 million was recognised in 2011 on Greek bonds which represented the cumulative fair value loss on these securities as at 31 December 2011. At the end of 2012, HSBC Assurance sold all of its Greek government securities. The impairment of EUR 19 million was recovered, generating a small positive income.
33 Risk management (continued) Maximum exposure to credit risk
The following table presents the maximum exposure to credit risk with respect to financial instruments, before taking account of any collateral held or other credit enhancements, unless such credit enhancements meet offsetting requirements as set out in Note 2. For financial assets recognised in the balance sheet, the exposure to credit risk equals their carrying amount. For financial guarantees granted, the maximum exposure to credit risk is the maximum amount that the group would have to pay if the guarantees were called upon. For loan commitments and other credit-related commitments that are irrevocable over the life of the respective facilities, the maximum exposure to credit risk is the full amount of the committed facilities.
With respect to certain financial assets, the group typically has legally enforceable rights to offset certain credit exposures against amounts owing to the same counterparty. In normal circumstances, there would be no intention of settling net, or of realising the financial assets and settling the financial liabilities simultaneously. Consequently, for reporting purposes, the financial assets are not offset against the respective financial liabilities. However, the exposure to credit risk relating to the respective financial assets is reduced as tabulated below.
31.12.2012
(in millions of euros) Maximum
exposure Offset
Net exposure to credit risk Cash and balances at central banks . . . . 6,770 − 6,770 Items in the course of collection from other banks . . . 815 − 815 Trading assets . . . 40,577 − 40,577 – treasury and other eligible bills . . . 1,392 − 1,392 – debt securities . . . 25,130 − 25,130 – loans and advances . . . 14,055 − 14,055 Financial assets designated at fair value . . . 5 − 5 – debt securities . . . 5 − 5 – loans and advances . . . − − − Derivatives . . . . 90,258 (87,742) 2,516 Loans and advances held at amortised cost . . . 76,486 (17,119) 59,367 – loans and advances to banks . . . 28,132 (11,863) 16,269 – loans and advances to customers . . . 48,354 (5,256) 43,098 Financial investments . . . 8,018 − 8,018 – treasury and other eligible bills . . . 273 − 273 – debt securities . . . 7,745 − 7,745 Other assets . . . 1,084 − 1,084 Off-balance sheet . . . 22,594 − 22,594 – financial guarantees and other credit-related guarantees . . . 4,509 − 4,509 – loan commitments and other credit-related commitments . . . 18,085 − 18,085 Total . . . 246,607 (104,861) 141,746
Consolidated financial statements
(continued)33 Risk management (continued)
31.12.2011
(in millions of euros)
Maximum
exposure Offset
Net exposure to credit risk Cash and balances at central banks . . . 4,805 − 4,805 Items in the course of collection from other banks . . . 806 − 806 Trading assets . . . 39,013 − 39,013 – treasury and other eligible bills . . . 699 − 699 – debt securities . . . 24,762 − 24,762 – loans and advances . . . 13,552 − 13,552 Financial assets designated at fair value . . . 598 − 598 – debt securities . . . 4 − 4 – loans and advances . . . 594 − 594 Derivatives . . . 82,738 (80,594) 2,144 Loans and advances held at amortised cost . . . 82,984 (12,805) 70,179 – loans and advances to banks . . . 29,705 (2,305) 27,400 – loans and advances to customers . . . 53,279 (10,500) 42,779 Financial investments . . . 7,096 − 7,096 – treasury and other eligible bills . . . 200 − 200 – debt securities . . . 6,896 − 6,896 Other assets . . . 1,896 − 1,896 Off-balance sheet . . . 27,073 − 27,073 – financial guarantees and other credit-related guarantees . . . 6,031 − 6,031 – loan commitments and other credit-related commitments . . . 21,042 − 21,042 Total . . . 247,009 (93,398) 153,610 Loans and advances to customers by industry sector
31.12.2012 31.12.2011
Gross loans and advances to customers (in millions of euros)
Gross loans by industry sector as a
% of total gross loans (%)
Gross loans and advances to customers (in millions of euros)
Gross loans by industry sector as a
% of total gross loans (%) Personal . . . . 10,315 21.00 9,786 18.11
− residential mortgages . . . 2,004 4.08 2,592 4.80
− other personal . . . 8,311 16.92 7,194 13.31 Corporate and commercial . . . . 21,856 44.51 22,481 41.61 – commercial, industrial and international trade . . . 11,099 22.60 11,102 20.55 – commercial real estate
(including private real estate companies*) . . . 6,195 12.62 6,110 11.31 – other property-related . . . 254 0.52 267 0.49 – government . . . 248 0.50 141 0.26 – other commercial . . . 4,060 8.27 4,861 9.00
Financial 16,935 34.49 21,767 40.28
– non-bank financial institutions . . . 16,934 34.48 21,748 40.24 – settlement accounts . . . 1 0.01 19 0.04 Total gross loans and advances to customers . . . 49,106 100.00 54,034 100.00
* SCI familiales.
33 Risk management (continued)
Loans and advances to customers by geographical area (excluding reverse repo transactions and settlement accounts) As at 31 December 2012, 87 per cent of loans to customers (excluding reverse repo transactions and settlement accounts) were to French counterparties (84 per cent as at 31 December 2011).
Reverse repo transactions amounted to 29 per cent with French counterparties and 71 per cent with counterparties in other European countries (primarily in the United Kingdom).
Credit quality of financial instruments
The five classifications below describe the credit quality of the group’s lending, debt securities portfolios and derivatives.
These categories each encompass a range of more granular internal credit rating grades assigned to wholesale and retail lending business, as well as the external ratings attributed by external agencies to debt securities.
There is no direct correlation between the internal and external ratings at granular level, except insofar as both fall within one of the five classifications.
Quality Classification
Wholesale lending
and derivatives Retail lending Debt securities/other Strong . . . CRR 1 and CRR 2 EL 1 and EL 2 A- and above
Good . . . CRR 3 EL 3 BBB+ to
BBB-Satisfactory . . . CRR 4 and CRR 5 EL 4 and EL 5 BB+ to B+ and unrated Sub-standard . . . CRR 6 and CRR 8 EL 6 and EL 8 B and below Impaired . . . CRR 9 and CRR 10 EL 9 and EL 10 Impaired Quality classification definitions
“Strong”: exposures demonstrate a strong capacity to meet financial commitments, with negligible or low probability of default and/or low levels of expected loss. Retail accounts operate within applicable product parameters and only exceptionally show any period of delinquency.
“Good”: exposures require closer monitoring and demonstrate a good capacity to meet financial commitments, with low default risk. Retail accounts typically showing only short periods of delinquency, with any losses expected to be minor following the adoption of recovery processes.
“Satisfactory”: exposures require closer monitoring and demonstrate an average to fair capacity to meet financial commitments, with moderate default risk. Retail accounts typically showing only short periods of delinquency, with any losses expected to be minor following the adoption of recovery processes.
“Sub-standard”: exposures require varying degrees of special attention and default risk is of greater concern. Retail portfolio segments showing longer delinquency periods of generally up to 90 days; past due and/or expected losses are higher due to a reduced ability to mitigate these through security realisation or other recovery processes.
“Impaired”: exposures have been assessed, individually or collectively, as impaired. The group observes the disclosure convention, reflected in the quality classification definitions above, that all retail accounts delinquent by 90 days or more (180 days for mortgage loans) are considered impaired.
Granular risk rating scales
The CRR (Customer Risk Rating) 10-grade scale maps to a more granular underlying 22-grade scale of obligor probability of default. The scales are used group-wide for all distinct customers, depending on the Basel II approach adopted for the exposure in question. The EL (Expected Loss) 10-grade scale for retail business summarises a more granular, group-wide, 29-grade scale combining obligor and facility/product risk factors in a composite measure. The composite EL measure enables the diverse risk profiles of retail portfolios across the HSBC Group to be assessed on a more comparable scale than through the direct utilisation of Probability of Default (PD) and Loss Given Default (LGD) measures. For consistency of disclosure and based on market practice for transactions in debt securities and certain other financial instruments, external ratings have been aligned as above, and in the table of “Distribution of financial instruments by credit quality” below, to the five quality classifications defined for internally-rated exposures, although it should be noted that there is no fixed correlation between internal and external ratings. The Standard and Poor’s ratings are cited, along with those of other agencies being treated in an equivalent fashion. Debt securities with short-term ratings are reported below against the long-term rating of the issuer of the short-term debt securities. If major rating agencies have different ratings for the same debt securities, the securities are reported against the lower rating.
Consolidated financial statements
(continued)33 Risk management (continued)
Impairment is not measured for assets held in trading portfolios or designated at fair value, as assets in such portfolios are managed according to movements in fair value, and the fair value movement is taken directly through the profit and loss statement. Consequently, all such balances are reported under “Neither past due nor impaired”.
For details of impairment incurred on available-for-sale debt and equity securities, see “Accounting policies” in Note 2 j page 113.
Distribution of financial instruments by credit quality
31.12.2012