DBRS Comments on HSBC Finance’s 3Q10 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 3Q10 earnings announcement. The trend on the long-term ratings is Negative and the trend on the short-term ratings is Stable.

Results for 3Q10 show HSBC Finance stabilizing losses while reducing the run-off portfolio and continuing to operate a profitable credit card business. For the quarter, the Company reported a loss of $751 million compared to a $1.2 billion loss in 3Q09 and a $521 million loss in the prior quarter. However, on an underlying basis, pre-tax earnings, excluding debt valuation adjustments, were largely unchanged. Excluding fair value movements on own debt, the Company reported a pre-tax loss of $1.1 billion in 3Q10, largely unchanged from a year ago and a slight improvement from $1.3 billion in the prior quarter. While revenues are expected to continue to decline with the portfolio run-off, improving credit performance is resulting in lower credit provisions thereby reducing earnings pressure.

In addition to a level of stabilization in certain real estate markets, the Company is benefiting from the realization of the risk reduction actions already taken by management. During the third quarter, provisions for credit losses were $1.5 billion, falling $608 million or 29% from last year. Importantly, for the third consecutive quarter, each business segment enjoyed lower provision expenses. However, the reduction in net interest income and lower other revenues have somewhat offset the benefit from the decline in provisioning expense. Net interest income declined by almost $300 million (year-on-year) to $1.1 billion impacted by a lower receivable book, loss mitigation efforts and the ongoing change in receivables mix. These negative drivers were partially offset by a reduction in overall funding costs. As a result, net interest margin (NIM) declined 23 basis points (bps) year-on-year to 5.37%. Given the ongoing efforts to reduce the balance sheet and the factors that influenced the reduction in NIM, DBRS sees continued pressure on net interest income.

HSBC Finance continues to make solid progress in its planned reduction of its run-off portfolio of consumer assets. During the quarter, the Company completed the sale of the remainder of its auto finance receivable portfolio totaling $2.6 billion. At September 30, 2010, the run-off portfolio totaled $59.5 billion, a 5% reduction from the prior quarter. The Company, however, remains active in the credit card business. During the quarter, the Company originated and sold $8.8 billion of credit card receivables to HSBC Bank USA. For 3Q10, the Card and Retail Services segment generated a $522 million pre-tax profit, bringing the profit before tax for the nine months ending September 30, 2010, to $1.5 billion (on an IFRS Management Basis).

Liquidity remains well-managed. Funding requirements continue to be reduced as the non-core businesses run-off. HSBC Finance’s commercial paper program remains active, with $3.1 billion outstanding at September 30, 2010. Since year end, long-term debt has declined by 16% to $57.9 billion, reflecting the smaller balance sheet. Maturing debt is expected to continue to be repaid through ongoing balance sheet attrition and cash generated from operations, selected issuance of debt (either externally or internally) and future asset sales. HSBC Finance’s liquid investment portfolio totaled $4.8 billion, down slightly from the prior quarter, but a noteworthy increase of 65.5% from year-end 2009.

Capitalization remains acceptable. Tangible common equity to tangible assets at 7.11% remains in excess of Company internal targets. Due to its improved performance, the Company did not require parent capital support during the quarter and has only received $200 million of capital contribution from HSBC (North America) so far this year. DBRS views this very positively, but expects that support would be forthcoming should it be required. During the fourth quarter, HSBC Finance anticipates executing a liability management exercise that will convert certain long-term debt held by HSBC (North America) into preferred stock, enhancing the Company’s total capital level. DBRS sees this as a further example of the cooperation amongst HSBC affiliates.

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.