DBRS Comments on HSBC Finance’s Q3 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 Q3 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 September 30, 2009, HSBC Finance reported a net loss of $1.1 billion. Results in the quarter were negatively impacted by a $1.2 billion loss on debt designated at fair value and related derivatives. Excluding this mark, the Company reported a net loss from continuing operations before tax of $1.1 billion for the quarter, improving slightly from the prior quarter’s $1.1 billion loss before tax (excluding fair value marks and goodwill impairments) and up from a loss from continuing operations before tax (excluding fair value marks) of $2.0 billion for the year ago quarter. Revenues excluding fair value marks declined about 12% from Q2 2009 to $2.0 billion for the third quarter due to lower net interest income, partly due to a smaller balance sheet, and a $387 million decline in derivative income. Expenses, excluding goodwill impairments, were down nominally from the second quarter. DBRS expects HSBC Finance’s earnings to remain constrained over the medium term as portfolios run-off, pressuring revenues while credit costs remain elevated.

Importantly, loan loss provisioning was lower on both a comparable period basis and a linked quarter basis, largely attributed to the reduced portfolio and the seasoning of the loan books, but nonetheless representing a positive development. Third quarter provisions of $2.2 billion declined 11% and 42% from Q2 2009 and Q3 2008, and, notably were the lowest since Q2 2007. Moreover for a consecutive quarter, provisioning was less than net charge-offs, again reflecting seasoning and the reduced portfolio but also moderately improving macroeconomic factors. Total reserves at September 30, 2009 were $12.6 billion, 13.5% of gross receivables (excluding held for sale).

HSBC Finance continues to make progress in its planned reduction in balance sheet assets. Total receivables and receivables held for sale ended the quarter at $94.3 billion, down from $99.2 billion at June 30, 2009. To this end, the Company also announced the sale of its auto loan servicing platform and $1 billion of auto receivables to Santander Consumer USA Inc. for $904 million.

The liquidity and funding profile remains acceptable. HSBC Finance continues to benefit from its active commercial paper program, with $4.6 billion outstanding at September 30. 2009. Moreover, during Q3 2009, the Company issued $746 million of foreign currency bonds and $477 million of retail medium-term notes. Importantly, DBRS notes that funding requirements have been reduced as a result of the decision to exit all new consumer lending, except credit cards. Moreover, HSBC Finance has daily flow agreements in place with Group affiliates that provide liquidity and funding for new originations in certain card portfolios. HSBC Finance receives significant funding advantages as part of HSBC Holdings plc (the Group) through direct funding, as well as the benefits of issuing debt as a Group subsidiary.

HSBC Finance’s ratings are underpinned by DBRS’s opinion that the Group will continue to support HSBC Finance, should support be required. DBRS notes that the Company received $400 million in capital from an HSBC affiliate in the third quarter, which was significantly less than the $1.1 billion of capital received from the Group in the prior quarter. 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. The Group’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.

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.

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.