DBRS Comments on HSBC Finance’s 4Q09 and Full Year 2009 Results, at “A”, Trend Negative

DBRS has today commented that the ratings of HSBC Finance Corporation (HSBC Finance or the Company), including the Company’s Senior Debt rating of “A”, and the legacy debt of HSBC Financial Corporation Limited, which is guaranteed by HSBC Finance, are unaffected by its 4Q09 and full year 2009 financial results. The trend on the long-term ratings is Negative and the trend on the short-term ratings is Stable.

HSBC Finance reported, on a U.S. GAAP basis, a loss of $1.2 billion in 4Q09 and a net loss of $7.5 billion for the full year 2009. Excluding goodwill impairments, the impact of certain charge-off policy changes, and marks related to the fair value movement of own debt and related derivatives, the Company’s underlying loss before tax from continuing operations narrowed to $5.1 billion for 2009, a 24.5% improvement over 2008. The improved results were driven by lower loan loss provisioning and reduced operating expenses partially offset by lower net interest income. Net interest income was reduced by lower receivable balances and the increasing impact of non-performing loans and reduced overall asset yields.

Importantly, on dollar basis, loan loss provisioning was lower on both a comparable quarter and annual basis. In addition to lower receivable balances, the improvement reflects reduced levels of non-prime receivables in the card portfolio, and a higher percentage of charge-offs on first lien mortgages, which have lower loss severities than second liens. While overall provisions continue to exceed pre-provision income, the continuing trend of lower provision levels is viewed positively by DBRS. For 4Q09, provisions totaled $2.5 billion declining 31% from 4Q08, while full year 2009 provisions at $10.1 billion were some 25% lower than 2008.

HSBC Finance continues to make progress in its planned reduction in its run-off portfolio of consumer assets. At December 31, 2009, the run-off portfolio totaled $74.6 billion, a decrease of 24% from year end 2008. The core Card and Retail Services portfolio declined 12% to $11.6 billion as of year end 2009. The decline was mainly due to lower consumer spending and prior actions to manage risk. Overall customer loans declined, 40.9%, from a high of $145.8 billion at 4Q07 to $86.2 billion, at December 31, 2009.

The liquidity and funding profile remains adequate given the Company’s position within the HSBC family and the declining balance sheet. HSBC Finance’s commercial paper program remains active, with $4.3 billion outstanding at December 31, 2009. During 2009, long-term debt declined by 22.6% to $69.7 billion reflecting the smaller balance sheet. HSBC Finance has daily flow agreements in place with Group affiliates that provide liquidity and funding for new originations in certain card portfolios.

Capitalization remains acceptable. Tangible common equity to tangible assets improved to 7.60%, from year end 2008, remaining well in excess of company internal targets. DBRS notes that the Company received $2.4 billion in direct capital injections and $275 million from a conversion of preferred securities into common equity by HSBC affiliates in 2009, but did not require any capital support in 4Q09. HSBC Finance’s ratings are underpinned by DBRS’s opinion that the Group will support the Company (should support be required) to allow HSBC Finance to run-off in a measured way and fulfill all its commitments.

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.