DBRS Confirms HSBC Holdings plc at AA (high), Trend Revised to Stable

DBRS Inc. (DBRS) has today confirmed the ratings of HSBC Holdings plc (HSBC or the Group), including its AA (high) Issuer and Long-Term debt ratings and its R-1 (high) Short-Term rating. Concurrently, DBRS has revised the trend on the Issuer and Long-Term debt ratings to Stable from Negative. The trend on the Short-Term rating remains Stable.

The confirmation considers HSBC’s resilient performance throughout the crisis, its reduced risk profile, and overall strong fundamentals including robust liquidity, solid capitalisation, sound internal capital generation, and a conservative risk appetite. Over the past three years, HSBC has clearly benefited from its vast geographic diversity, with core strengths in the U.K., the U.S. and Hong Kong, in addition to developed or developing businesses across 87 countries and territories. The Group benefits from its size, scale, and the efficiencies and knowledge gained from its vast global operations. In DBRS’s view, HSBC’s management has effectively leveraged the Group’s diverse global franchise, well-respected brand, and market knowledge to successfully navigate through the recent difficult operating environment. Indeed, these are all key factors underpinning the rating.

In revising the trend to Stable, DBRS is recognising the positive momentum evidenced across the franchise. Credit experience continues to improve leading to lower credit costs, thereby improving earnings generation. The impact of higher credit costs on the Group’s earnings power was a significant factor considered in the now former Negative trend. At $7.5 billion for the first half 2010, credit costs were the lowest since the beginning of the crisis. DBRS sees this as proof of the effectiveness of the various actions taken to reduce risks inherent in the balance sheet, with some assistance from the overall improving, albeit uneven, global economic environment. Given recent positive trends in asset quality, as well as an improving economy in most parts of HSBC’s diverse global footprint, DBRS expects continued improvement in credit and earnings through 2011.

Further, demonstrating this positive momentum and the broad strength of the franchise, every customer group and region, except North America, was profitable in 1H10. However, DBRS notes that while still loss making on an underlying basis, the results in North America have improved dramatically from sharply lower provisions reflecting the stabilisation in real estate markets, ongoing amortisation of the run-off portfolio and risk reduction actions. Important to the stability of the rating, the trend considers DBRS’s view that HSBC will continue to generate solid and improving results while advancing the ongoing de-risking of the U.S. operations.

Further, the exposure from HSBC Finance, which has been the largest driver of losses in North America, has been greatly reduced since year-end 2006. At 30 September 2010, HSBC Finance’s loan book, which is in run-off, had declined to a quite manageable $61.3 billion, from a peak of some $150 billion. While HSBC Finance continues to operate at a loss, the loss has been markedly reduced and DBRS expects further improvement in performance as the legacy loan book runs-off. Importantly to the stability of the rating, DBRS views the burden of HSBC Finance to the Group as significantly reduced. DBRS no longer sees HSBC Finance as a negative drag on the rating.

The ratings consider the strength and diversity of the Group’s global earnings generation capability and HSBC’s ability to generate substantial earnings across retail, commercial, global banking and markets channels. This solid, diversified revenue stream has afforded the Group the ability to absorb the sizeable credit costs associated with the global economic downturn and still be able to record pre-tax profits in all three years since the onset of the global financial crisis. Indeed, since 2007, HSBC has absorbed $76.2 billion of impairment charges for loan losses and still was able to generate an impressive $ 62.3 billion of pre-tax income, excluding goodwill impairments.

DBRS views the Group as well-placed to meet forthcoming liquidity and capital requirements from regulators. Indeed, DBRS considers the Group’s funding and liquidity profile as a noteworthy strength, and as such, is reflected in the current ratings. With $1.1 trillion of deposits at the end of June 2010, the Group’s substantial and geographically diverse deposit base is the anchor to a very sound funding profile. To this end, loan books in each region, with the exception of North America, are funded with customer deposits, resulting in a Group-wide loan-to-deposit ratio of 78%. Moreover, HSBC continues to benefit from a sound capital base. Since the beginning of 2009, HSBC’s strong earnings generation ability has produced $14.6 billion of internal Tier 1 capital. As a result of this organic capital generation and a rights issue completed in early 2009, since year end 2008, HSBC’s Core Tier 1 ratio has improved 350 basis points to 10.5% at 30 September 2010. While DBRS sees HSBC as well-positioned to meet certain regulatory changes impacting capital and liquidity, there is still a level of uncertainly given the scope and pace of regulatory changes around the globe.

Notes:
All figures are in USD unless otherwise noted.

The applicable methodologies are Global Methodology for Rating Banks and Banking Organisations and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments, which can be found on the DBRS website under Methodologies.

The sources of information used for this rating include the issuer. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

Lead Analyst: Steve Picarillo
Rating Committee Chair: Alan G. Reid

Initial Rating Date: 16 May 2001
Most Recent Rating Update: 20 April 2010

For additional information on this rating, please refer to the linking document below.