DBRS Confirms Ratings of HSBC Finance Corporation, at ‘A’, Trend Negative

DBRS has today confirmed the ratings of HSBC Finance Corporation (HSBC Finance or the Company), including its Senior Debt rating of “A”. The trend on the Long-Term ratings is Negative and the trend on the Short-Term ratings is Stable.

The confirmation and ratings of HSBC Finance reflect the ownership structure and the support provided by the Company’s ultimate parent HSBC Holdings plc (the HSBC Group). The benefits of the positioning within the HSBC family allows for significant ratings uplift. Yet, the ratings are placed below those of the parent, reflecting DBRS’s view that HSBC Finance is non-core, as much of the businesses are in run-off mode.

The ratings also consider HSBC Finance’s acumen in originating and servicing credit card assets. In addition to market intelligence, this business provides the Company a reliable source of revenue and receivables, which are largely sold to affiliated companies. Since the start of the financial crisis, HSBC Finance has largely ceased new loan origination (currently, HSBC Finance only originates credit cards products), sold a significant amount of assets to both affiliated and non-affiliated entities, consolidated service locations and shuttered its mortgage services and consumer lending businesses. While the Company continues to enjoy support from its ultimate parent and has made significant progress in reducing balance sheet risks and reducing underlying losses, DBRS maintains the Negative trend on the Long-Term ratings. The negative trend reflects the trend on the ratings of the ultimate parent. The trend on the Short-Term ratings is Stable.

HSBC Finance is the sixth largest issuer of MasterCard and Visa cards in the U.S and the third largest servicer of private label credit cards. The Company services approximately $33 billion of credit card receivables for HSBC affiliates. Although the ongoing deleveraging by consumers, tighter underwriting and increased regulation of the credit card industry will limit near-term growth of this book, the recent push to increase originations in this core sector will likely keep the card book at a sufficient level so that the Company can achieve adequate economies of scale.

Earnings are under significant stress. Indeed, HSBC Finance has recorded losses since 2007; however, improving credit performance has resulted in lower credit losses thereby reducing earning pressure. Nonetheless, losses are expected to continue for the foreseeable future. For the six months ending June 30, 2010, HSBC Finance reported a net loss of $1.1 billion, including $603 million of non-recurring gains on debt designated at fair value and related derivatives, narrowing significantly from a $5.5 billion loss for the comparable period a year ago. Importantly, removing certain exceptional items, such as charges on debt designated at fair value and related derivatives, the pretax loss narrows to $2.4 billion from an underlying loss before tax of $2.8 billion for 1H09. For the full year 2009, the Company recorded a loss of $7.45 billion, which included a $2.3 billion charge to goodwill and other intangibles and a $2.1 billion loss on debt designated at fair value and related derivatives.

Recent results are evidencing continued positive momentum in credit performance, which began in the latter part of 2009 and has continued into 2010. To this end, results are showing a marked reduction in loan loss provisions; however, stemming losses in the non-core receivable portfolios will continue to be a major focus and key challenge. In addition to a level of stabilization in certain real estate markets, the Company is benefiting from the realization of the risk reduction actions taken by management. Notwithstanding, DBRS anticipates earning generation will remain constrained for the near to medium-term, as the non-core portfolios run-off and new credit card origination volume remains limited. Given this, DBRS sees returning to an acceptable level of profitability as a key challenge for the Company.

The Company continues to make progress in its planned reduction of its run-off portfolio of consumer assets, which has been achieved through a combination of asset sales and attrition. The run-off portfolio ended the half year at $65.6 billion, a 33.1% reduction from year-end 2008. Furthermore, subsequent to June 30, 2010, HSBC Finance agreed to sell the remaining $2.6 billion of auto receivables to Santander Consumer USA Inc. and transfer $432 million of associated asset-backed debt. As of June 30, 2010, the core retail credit card portfolio, maintained on HSBC Finance’s balance sheet, totaled $10.1 billion. During 2Q10, the Company originated and sold $8.7 billion of credit card portfolios to HSBC Bank USA, an increase of 11.5% over the prior quarter, retaining the servicing on the portfolios for a fee.

Liquidity and funding profile remains acceptable and well-managed, while funding needs are reduced as the non-core businesses run-off. Moreover, HSBC Finance receives significant funding advantage as part of the HSBC Group through direct funding, as well as the benefits of issuing debt as a HSBC Group subsidiary. The Company continues to access the commercial paper market with $3.7 billion of commercial paper outstanding at the end of June 2010. Maturing debt is expected to continue to be repaid through the ample liquidity, asset sales, continued balance sheet attrition and cash generated from operations.

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’s expectations 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 the Company will result in significant negative ratings pressure.

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.