DBRS Comments on HSBC Finance’s 1Q10 Results, Senior at ‘A’, Trend Negative

DBRS has today commented that the ratings of HSBC Finance Corporation (HSBC Finance or the Company), including its Senior Debt rating of “A”, are unaffected by its 1Q10 earnings announcement indicating a loss of $603 million. The trend on the Long Term rating is Negative and the trend on the Short-term rating is Stable.

Improving credit performance resulted in HSBC Finance reporting a reduced underlying loss before tax for the quarter. Excluding goodwill and other intangible asset impairment charges 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 $1.1 billion, a 38% improvement over 1Q09. Reduced provisioning expense due to improving credit metrics and lower receivable balances, and reduced operating expenses partially offset by lower net interest income and lower other revenues led to the improved results. Net interest margin (NIM) declined year-on-year to 5.42% from 5.87% due to continued mortgage modification efforts, which reduced receivables yield, and an increasing shift in the loan portfolio to mortgages from higher yielding credit cards, partially offset by lower funding costs. DBRS sees the reducing of the loss as evidence of the progress the Company has made in successfully de-risking the balance sheet.

Loan loss provisions, on a dollar basis, declined on a year-over-year basis. For 1Q10, provisions totaled $1.9 billion declining 35% from 1Q09, and 24% from 4Q09. Importantly, the improvement in provisioning was experienced across each business segment. The continuing run-off of loan receivables, improving delinquency trends and reduced loss severities in both the residential mortgage and auto finance portfolios drove the improvement in provisioning. Although the overall level of provisions continues to exceed pre-provision income, the continuing trend of reduced provision levels is viewed positively by DBRS.

HSBC Finance continues to make progress in its planned reduction of its run-off portfolio of consumer assets. At March 31, 2010, the run-off portfolio totaled $69.7 billion, a decrease of 6.5% from year end 2009. Additionally, the Company maintains a $10.6 billion retail credit card portfolio as of March 31, 2010. During the quarter, the Company originated and sold $7.8 billion of credit card portfolios to HSBC Bank USA, retaining the servicing on the portfolios for a fee. Lower provisioning and operating expenses resulted in the core Card and Retail Services segment recording a profit before tax of $681 million (IFRS Management basis) in 1Q10 compared to essentially breakeven a year ago. Further, during the quarter the Company resumed limited direct marketing mailings for portions of its non-prime credit card portfolio.

Liquidity continues to improve while funding requirements are reduced as the loan portfolios run-off. HSBC Finance’s commercial paper program remains active, with $3.7 billion outstanding at March 31, 2010. During the quarter, long-term debt declined by 5% to $66.5 billion, reflecting the smaller balance sheet. HSBC Finance’s liquid investment portfolio increased to $5.2 billion due to the receipt of tax-related payments, issuances of long-term retail debt and the run-off of the Company’s liquidating receivables portfolios.

Capitalization remains acceptable. Tangible common equity to tangible assets at 7.39% remains well in excess of Company internal targets. Of note, for the second consecutive quarter, the Company did not require any capital contributions from the Group. Nonetheless, HSBC Finance’s ratings continue to be underpinned by DBRS’s opinion that the Group will support the Company (should support be required) to allow HSBC Finance to run-off its portfolio 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.