DBRS Comments on Interim Statement of HSBC Holdings plc, Senior at AA (high), Trend Remains Negative

DBRS has today commented that the ratings of HSBC Holdings plc (HSBC or the Company), including its AA (high) Issuer and Long-Term debt ratings and its R-1 (high) Short-Term rating, remain unchanged following the release of the Company’s Interim Management Statement for Q3 2009. The trend on all long-term ratings remains Negative, while the trend on the short-term rating remains Stable.

The Statement indicated that HSBC’s results continued to reflect improving trends in most markets, with Asia being notably strong. Excluding marks related to movements in the fair value of Company debt, pre-tax profits for the first nine months of the year were ahead of the comparable period in 2008. Net interest income for Q3 2009 was marginally below first half run rates, as prevailing low interest rate environments in most markets continued to pressure deposit margins, somewhat offsetting the still strong results in the Global Banking and Markets (GBM) segment. Overall, GBM remains on track for record annual results although third quarter results declined somewhat from H1 2009. The Company reported that net fee income for the third quarter was higher than both Q1 2009 and Q2 2009.

Importantly, impairment charges and other credit risk provisions declined in Q3 2009 and were at their lowest levels since Q2 2008. Credit performance in the U.S. continued to show signs of stabilisation. In the run-off portfolios, impairment allowances declined in Q3 2009 for the first time since 2006 and HSBC reported continued progress in reducing the level of U.S. consumer finance assets. DBRS also notes that, unlike the previous quarter, North American operations did not require any capital support from HSBC in the third quarter. DBRS views HSBC’s capital position as sound. Despite a still-challenging environment, HSBC continues to generate capital from its operations. The Company’s Tier 1 ratio improved to 10.3% and its core equity Tier 1 ratio was 9.0% at the end of the third quarter. Liquidity remains solid, evidenced by a customer advances-to-deposits ratio that remained under 80%.

In DBRS’s view, the Company’s continuing solid operating performance highlights the strength of HSBC’s diverse global franchise. HSBC’s underlying earnings generation ability enhances its ability to absorb losses resulting from the current difficult operating environment. The current rating at AA (high) reflects DBRS’s opinion that HSBC is well positioned to, not only protect its franchise, but to strengthen, its already strong franchise, during this period of evolution of the banking industry. In maintaining the Negative trend, DBRS notes that uncertainty remains in the current operating environment, presenting continuing risks and reflects DBRS’s ongoing concern that the recovery in the global economy remains tenuous. However, DBRS continues to look for further evidence that the recent positive signposts suggesting that the operating environment has improved are sustainable. Accordingly, should the positive developments in the economic and capital markets continue, DBRS would likely revert the rating trend to Stable.

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

The applicable methodologies are Analytical Background and Methodology for European Bank Ratings, Second Edition, and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.