DBRS Confirms HSBC USA Inc. at AA, Trend Revised to Stable

DBRS Inc. (DBRS) has today confirmed the ratings of HSBC USA Inc. (HUSI or the Company) and its banking subsidiary HSBC Bank USA, National Association (HBUS), including the Company’s Issuer & Senior Debt rating of AA. At the same time, the trend on all non-FDIC guaranteed ratings has been revised to Stable. Company issued debt guaranteed by the FDIC remains rated AAA with a Stable trend. The ratings action follows DBRS’s confirmation of HSBC Holdings plc’s (HSBC – rated AA (high) with a Stable trend) ratings and the revision of the trend on its Issuer and Long-Term debt ratings to Stable from Negative.

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 has today had its trend revised to Stable.

The confirmation considers HSBC Holdings’ resilient performance throughout the crisis, its reduced risk profile and overall strong fundamentals including robust liquidity, solid capitalization, sound internal capital generation and a conservative risk-appetite. 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, HSBC 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 its 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 HSBC’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.

For the first nine months of 2010, HUSI reported net income of $1.3 billion, compared to a net loss of $142 million for the full year 2009 and a net loss of $1.7 billion for 2008. Better trading results, gains on financial instruments carried at fair value and sharply lower provisions for credit losses drove the improvement in 2010. Net interest income fell by 12% from 9M09 as NIM contracted and the loan portfolio declined $10 billion from year-ago levels to $72.2 billion at the end of 3Q10. The decline in balances reflected continued runoff in the mortgage portfolio as well as the sale of its auto loan portfolio in 3Q10.

Like most U.S. banks, credit improved considerably at HUSI in 9M10, benefiting from the recovery in the U.S. economy. Relative to 2009, the Company reported lower levels of charge-offs and delinquencies across its consumer portfolios, while estimated losses in the commercial portfolio declined due to the improving economic conditions. As a percent of gross loans, loans 60+ days delinquent fell to 4.30% at September 30, 2010, from 4.85% at year-end. Total nonperforming assets also declined from year-end, down 20% from year-end to $3.1 billion. As a result, the provision for credit losses was $912 million in 9M10 down from $3.2 billion in the prior year period. Nevertheless, DBRS remains somewhat cautious on credit, given the persistent high levels of unemployment. DBRS anticipates that further material improvement in credit costs will occur only when households begin to benefit more extensively from increased job creation and a stronger economic recovery.

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

The applicable methodologies are Global Methodology for Rating Banks and Banking Organisations and Rating Bank Preferred Shares and Equivalent Hybrids, which can be found on our website under Methodologies.

The sources of information used for this rating include the company documents, the Federal Deposit Insurance Corporation and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

Lead Analyst: Michael Driscoll
Rating Committee Chair: Alan. G. Reid

Initial Rating Date: 11 October 2005
Most Recent Rating Update: 20 April 2010

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