DBRS Comments on HSBC Finance’s Q2 2009 Results, Remains at ‘A’, Trend Negative

DBRS has today commented that the ratings of HSBC Finance Corporation (HSBC Finance or the Company) and HSBC Financial Corporation Limited, including the Companies’ Senior Debt rating of ‘A’, are unaffected by its Q2 2009 financial results. The trend on the Long Term ratings is Negative and the trend on the Short-term ratings is Stable.

For the quarter ending June 30, 2009, HSBC Finance reported a net loss of $6.0 billion. Non-core exceptional items, most notably a pretax $4.8 billion loss on debt designated at fair value and related derivatives, contributed to the outsized loss. Moreover, the quarter’s results included a $1.6 billion pretax charge to goodwill and other intangible assets. HSBC Finance wrote off the balance of the goodwill associated with the credit card business reflecting the anticipated impact on credit performance from the ongoing deterioration in economic environment and the cash flow impact of regulatory reform. Importantly, removing these items, the Company reported a net loss from continuing operations before tax of $1.1 billion, for the quarter, as compared with a loss before tax of $1.4 billion for the same period a year ago. The loss was driven by lower net interest income, reduced other revenues, and continued high credit provisions. Offsetting factors include reduced operating expenses owed to solid progress on cost control and the reduced headcount attributed to the previously announced exit from certain business activities. DBRS anticipates HSBC Finances earnings ability will be constrained over the medium term as the portfolios run-off, further pressuring net interest income while credit costs remain elevated.

HSBC Finance continues to make progress in its planned reduction in balance sheet assets. The reduction in assets is attributable to $15.4 billion of asset sales to affiliates as well as other asset attrition. Total receivables and receivables held for sale ended the quarter at $99.2 billion, down from $124.9 billion at year end 2008. Given the reduced portfolio and the seasoning of the loan books, provisioning was lower on comparable period basis and a linked quarter basis. HSBC Finance recorded $2.4 billion of loan loss provisions in Q2 2009, decreasing 25% from the comparable period a year ago. The lower provisioning also reflects a decrease in the dollar amount of delinquencies in Mortgage Services as well as in the Credit Card loan book.

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. Although HSBC Finance’s near term liquidity is enhanced by its ability to participate in the US government’s Commercial Paper Funding Facility (CPFF), the Company had no outstandings under the program as of quarter end. The Company continues to access the commercial paper market with $5.8 billion of non-CPFF commercial paper outstanding as of the end of June 2009 with the average tenor of the paper lengthening in an additional sign of an improving funding environment.

HSBC Finance’s ratings are underpinned by DBRS’s opinion that HSBC Holdings plc (the Group) will continue to support HSBC Finance as demonstrated by the Group’s $1.1 billion capital infusion into HSBC Finance during Q2 2009. Moreover, the Group has indicated that it will continue to 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 were lowered in March 2009, removing some of the ratings lift gained from the core nature of the business.

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. Further, increasing unemployment in the U.S. as well as increasing levels of personal bankruptcy filings 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, which is available under methodologies on our website.

This is a Corporate (Financial Institutions) rating.