DBRS Downgrades HSBC Finance to A, Trend Negative

DBRS has today downgraded the ratings of HSBC Finance Corporation (HSBC Finance or the Company) and HSBC Financial Corporation Limited, including the Companies’ Senior Debt rating to “A” from AA (low). Concurrently, the Short Term rating of HSBC Finance has been downgraded to R-1 (low) from R-1 (middle). The trend on the Long Term ratings is Negative and the trend on the Short-term ratings is Stable.

This ratings action follows HSBC Holdings plc (the Group) announcement that it will discontinue all new receivable originations, except credit cards, by HSBC Finance. Moreover, the Group announced that is will be shuttering substantially all HSBC Finance branch offices in its consumer lending business. The Group has supported HSBC Finance and has indicated that it will continue provide all the support necessary to allow HSBC Finance to run-off in a measured way and fulfill all its commitments. HSBC’s statements and actions of support remain a key factor underpinning the ratings of HSBC Finance. Notwithstanding, DBRS no longer considers HSBC Finance as a core business to the Group, as such, HSBC Finance’s ratings have been lowered, removing some of the ratings lift gained from the core nature of the business.

HSBC Finance’s results continue to be impacted by the ongoing deterioration in the U.S. economy, rising unemployment and the ongoing decline in home prices. For the year ending December 31, 2008, HSBC Finance reported a net loss of $2.8 billion. This loss was largely driven by continued increases in loan loss provisions and lower overall net interest income due to a reduced balance sheet. Importantly, the year’s results were positively impacted from a pretax $2.0 billion, gain on the fair value of its outstanding debt that is designated at fair value and related derivatives.

HSBC Finance recorded $13.4 billion of loan loss provisions in 2008, increasing 28% from 2007. The increase in provisioning reflects rising loss severities in the Consumer Lending and Mortgage Services portfolios due to portfolio seasoning, continued home price deflation, lower recovery rates, as well as higher delinquency and charge-off rates. The weakening in the portfolios delinquency rate resulted in higher provisioning for the auto finance and credit card portfolios reflecting the impact of the recessionary environment in the U.S., rising unemployment and increasing personal bankruptcy filings.

HSBC Finance continues to reduce its balance sheet. During 2008, total assets declined by $24.2 billion or 15.6%, to $130.8 billion. Going forward, given the announcement by Group, DBRS expects net interest income to remain pressured as the balance sheet continues to decline. This pressure will be offset by the benefit of reduced funding and capital requirements as the balance sheet is reduced.

The Company’s liquidity and funding profile remains acceptable. HSBC Finance receives significant funding advantages as part of Group through direct funding, as well as the benefits of issuing debt as a Group subsidiary. DBRS views the Company’s funding base as sufficient, as funding requirements will be significantly reduced going forward as a result of the decision to exit all new consumer lending, except credit cards. Near term liquidity has been enhanced by HSBC Finance’s ability to participate in the US government’s Commercial Paper Funding Facility. HSBC Finance has capacity to issue up to $12.0 billion in this facility, at December 31, 2008, the Company had issued $520 million under this program.

At November 30, 2008, HSBC Financial Corporation Limited became a subsidiary of HSBC Bank Canada, yet its outstanding long-term debt remains guaranteed by HSBC Finance Corp. HSBC Financial Corporation Limited’s CP ratings have been discontinued, as all outstanding CP has been repaid.

The Negative trend on the Long Term ratings reflects that of the ultimate parent, while the Stable trend on the Short Term ratings reflects DBRS expectation that the Group will support HSBC Finance to the R-1 (low) level. Although not expected, any indications of a reduction in the level of support afforded by Group to HSBC Finance will result in significant negative ratings pressure. The Negative trend on the Long-Term ratings also reflects DBRS expectations that HSBC Finance’s profitability will remain pressured as the balance sheet continues to decline, while the uncertainty as to the severity and duration of the recession in the U.S. and increasing unemployment and personal bankruptcies are likely to result in credit costs remaining elevated in the near term further pressuring earnings.

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

The applicable methodology is Rating Finance Companies Operating in the United States, available under methodologies on our website.

This is a Corporate (Financial Institutions) rating.