HSBC Bank plc Annual Report and Accounts 2024 | 31 |
Credit risk
Credit risk is the risk of financial loss if a customer or counterparty
fails to meet an obligation under a contract. Credit risk arises
principally from direct lending, trade finance and leasing business, but
also from certain other products such as guarantees and derivatives.
Credit risk management
Key developments in 2024
There were no material changes to the policies and practices for the
management of credit risk in 2024. We continued to apply the
requirements of IFRS 9 ‘Financial Instruments’ within the Credit Risk
sub-function.
We actively managed the risks related to macroeconomic
uncertainties, including interest rates, inflation, fiscal and monetary
policy, broader geopolitical uncertainties and conflicts.
Governance and structure
We have established HSBC Group-wide credit risk management and
related IFRS 9 processes. We continue to assess the impact of
economic developments in key markets on specific customers,
customer segments or portfolios. As credit conditions change, we
take mitigating actions, including the revision of risk appetites or limits
and tenors, as appropriate. In addition, we continue to evaluate the
terms under which we provide credit facilities within the context of
individual customer requirements, the quality of the relationship, local
regulatory requirements, market practices and our local market
position.
Credit Risk sub-function
(Audited)
Credit approval authorities are delegated by the Board to the Chief
Executive together with the authority to sub-delegate them. The
Credit risk sub-function in Risk is responsible for the key policies and
processes for managing credit risk, which include formulating credit
policies and risk rating frameworks, guiding the appetite for credit risk
exposures, undertaking independent reviews and objective
assessment of credit risk, and monitoring performance and
management of portfolios.
The principal objectives of our credit risk management are:
– to maintain across HSBC a strong culture of responsible lending
and a robust risk policy and control framework;
– to both partner and challenge global businesses in defining,
implementing and continually re-evaluating our risk appetite under
actual and scenario conditions; and
– to ensure there is independent, expert scrutiny of credit risks, their
costs and their mitigation.
Key risk management processes
IFRS 9 ‘Financial Instruments’ process
The IFRS 9 process comprises three main areas: modelling, data and
forward economic guidance; implementation; and governance.
Modelling, data and forward economic guidance
The HSBC Group has established IFRS 9 modelling and data
processes in various geographies, which are subject to internal model
risk governance including independent review of significant model
developments.
We have a centralised process for generating unbiased and
independent global economic scenarios. Scenarios are subject to a
process of review and challenge by a dedicated central team, and
individually for each region. Each quarter, the scenarios and probability
weights are reviewed and checked for consistency with the economic
conjuncture and current economic and financial risks. These are
subject to final review and approval by senior management in a
forward economic guidance global business impairment committee.
Implementation
A centralised impairment engine performs the expected credit losses
calculation using data, which is subject to a number of validation
checks and enhancements, from a variety of client, finance and risk
systems. Where possible, these checks and processes are performed
in a globally consistent and centralised manner.
Governance
Management review forums are established in order to review and
approve the impairment results. Regional management review forums
have representatives from Credit Risk and Finance. Required
members of the forums are the heads of Wholesale Credit, Market
Risk, and Wealth and Personal Banking Risk, as well as the global
business Chief Financial Officers and the Chief Accounting Officer.
Concentration of exposure
(Audited)
Concentrations of credit risk arise when a number of counterparties or
exposures have comparable economic characteristics, or such
counterparties are engaged in similar activities or operate in the same
geographical areas or industry sectors so that their collective ability to
meet contractual obligations is similarly affected by changes in
economic, political or other conditions. The group uses a number of
controls and measures to minimise undue concentration of exposure
in the group’s portfolios across industry, country and customer
groups. These include portfolio and counterparty limits, approval and
review controls, and stress testing.
Credit quality of financial instruments
(Audited)
Our risk rating system facilitates the internal ratings-based approach
under the Basel framework adopted by the HSBC Group to support
the calculation of our minimum credit regulatory capital requirement.
The five credit quality classifications encompass a range of granular
internal credit rating grades assigned to wholesale and retail
customers, and the external ratings attributed by external agencies to
debt securities.
For debt securities and certain other financial instruments, external
ratings have been aligned to the five quality classifications based upon
the mapping of related Customer Risk Rating (‘CRR’) to external credit
rating.
Wholesale lending
The CRR 10-grade scale summarises a more granular underlying
23-grade scale of obligor PD. All corporate customers are rated using
the 10- or 23-grade scale, depending on the degree of sophistication
of the Basel approach adopted for the exposure.
Each CRR band is associated with an external rating grade by
reference to long-run default rates for that grade, represented by the
average of issuer-weighted historical default rates. This mapping
between internal and external ratings is indicative and may vary over
time.
Retail lending
Retail lending credit quality is based on a 12-month point-in-time
probability-weighted PD.
