DBRS Confirms HSBC Finance at A, Trend Revised to Stable

DBRS Inc. (DBRS) has today confirmed the ratings of HSBC Finance Corporation (HSBC Finance), including its Senior Debt rating of A. Concurrently, the trend on the Senior Debt has been revised to Stable. The trend on the Commercial Paper ratings remains Stable. Today’s rating action follows DBRS’s confirmation of the ratings of HSBC Holdings plc (HSBC Holdings or the Group), HSBC Finance’s ultimate parent, and a revision to the trend of the long-term ratings of the Group to Stable.

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

In revising the trend of HSBC Holdings to Stable, DBRS recognizes the positive momentum evidenced across the franchise. Credit experience continues to improve leading to lower credit costs, thereby improving earnings generation ability. 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 billon 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, the Stable trend at HSBC Holdings reflects 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 September 30, 2010, the HSBC Finance loan book, which is substantially in run off, had declined to a quite manageable $69.4 billion (on a US GAAP basis), 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, as such, DBRS no longer sees HSBC Finance as a negative drag on the rating.

Note:
All figures are in U.S. dollars 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 company documents. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

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

Initial Rating Date: 16 May 2001
Most Recent Rating Update: 24 September 2010

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