DBRS Confirms HSBC USA Inc. at AA; Trend Still Negative

DBRS has today confirmed the ratings of HSBC USA Inc. (HUSI or the Company) and its operating bank subsidiary, HSBC Bank USA, N.A. (HBUS), including HUSI’s Issuer & Senior Debt rating of AA. The trend on all ratings is Negative. The ratings of HUSI, a wholly-owned U.S. subsidiary of HSBC Holdings plc (HSBC – rated AA (high) with a Negative trend), reflect its important role in HSBC’s overall strategy and DBRS’s expectation that HSBC has the resources and motivation to support HUSI if needed. The ratings also take into account the Company’s well-diversified earnings stream and a strong deposit franchise. These strengths are offset by below-peer profitability and a loan portfolio weighted towards a weakening U.S. consumer.

As a result of HUSI’s position in HSBC’s global franchise, DBRS has assigned a SA1 designation to the Company, which implies strong and predictable support from the parent. As a supported rating with a SA1 designation, HUSI’s rating will move in tandem with HSBC’s rating, which currently has a Negative trend. HSBC has indicated it remains committed to supporting HUSI. This support was demonstrated by several recent capital injections. Specifically, HUSI received three capital contributions totaling $3.6 billion in 2008 and has already received approximately $1.1 billion in 2009. These capital contributions were used to support ongoing operations and maintain adequate capital levels.

HUSI reported a net loss of $1.7 billion in 2008 compared to modest net income of $138 million in 2007. Significantly higher trading losses and provisions for credit losses were primarily responsible for the decline in earnings, particularly in Q4 2008. Within trading, derivatives losses of $2.4 billion more than offset solid performances in the foreign exchange, precious metals and emerging markets businesses. Meanwhile, the deteriorating housing and job markets in the U.S. led to incremental provisions for credit losses of $1.0 billion. DBRS notes that towards the end of the year, the weakness in the U.S. economy spread to other non-consumer related asset classes like commercial loans.

With a loan portfolio weighted towards the consumer, the Company’s asset quality has come under pressure given rising unemployment and declining housing values. Indeed, nonperforming assets (NPAs) to gross loans and other real estate owned at HBUS has jumped to 1.62% at the end of Q4 2008 from 0.92% a year ago and this metric has steadily increased throughout 2008. Meanwhile, net charge-offs (NCOs) have increased to 1.74% in 2008 from 1.13% in 2007. Consumer charge-offs significantly outpaced commercial charge-offs as credit cards, home equity and other consumer loans showed the most deterioration. With unemployment increasing and a housing market yet to hit bottom, DBRS expects asset quality to remain under pressure for the remainder of 2009 leading to increased credit costs and muted profitability.

DBRS notes that as a foreign owned subsidiary, HUSI was not eligible to participate in the U.S. Treasury’s Capital Purchase Program. However, DBRS expects HSBC to inject capital to support its U.S. subsidiary if needed. While not eligible for the Treasury’s preferred shares investment, the Company is participating in the FDIC’s Temporary Liquidity Program and Transaction Account Guarantee Program, which is helping funding and liquidity.

The Negative trend follows the trend of HSBC Holdings plc. Despite posting a profit, HSBC’s results were negatively impacted by a slowing global economy including losses from both HUSI and HSBC Finance in the United States. The Negative trend reflects DBRS’s concern that further economic weakening in HSBC’s markets will result in continued elevated credit costs, which will pressure earnings. Moreover, the Negative trend reflects DBRS’s expectation that the global economic slowdown may pressure HSBC’s revenue generation ability. While DBRS considers HSBC’s solid earnings power a fundamental strength and a significant factor underpinning the rating, the unprecedented weakness in the capital markets and the global recessionary environment may result in a weakening of HSBC’s sizeable pre-provisioning earnings generation ability and exacerbate earnings pressure.

Headquartered in New York, New York, HSBC Bank USA, N.A. reported $181.6 billion in assets as of December 31, 2008.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodologies are Rating Banks and Bank Holding Companies Operating in the United States, and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.