DBRS Confirms HSBC Bank Canada at AA and R-1 (high), Negative Trend

DBRS has today confirmed the ratings of HSBC Bank Canada (HSBC or the Bank) and its related entities, including the Bank’s non-guaranteed long-term deposits and senior debt at AA and short-term instruments at R-1 (high). All trends remain Negative.

DBRS ratings of HSBC are based on the relationship the Bank has with its ultimate parent, HSBC Holdings plc (the Group). DBRS’s long-term issuer rating of the Group is AA (high) with a Negative trend. Under DBRS’s bank rating methodology, HSBC’s support assessment is SA1, reflecting a strong expectation of timely support from the Group. Given the strategic nature of the relationship between HSBC and the Group but lack of an explicit guarantee, the non-guaranteed long-term deposit and senior debt, subordinated debt, innovative instruments and preferred shares have been assigned a rating one notch below the equivalent or implied ratings of the Group, while the short-term rating is derived through the long-term rating (please see DBRS’s website under Rating Policies for more information). In the event of a downgrade to the Group’s ratings, all ratings of the Bank would be reduced in tandem.

The benefits of HSBC’s relationship with the Group include branding, added revenue-generating opportunities using the Group’s global distribution network and client contacts, cost efficiencies, risk-management expertise and the potential as an alternative funding source. HSBC has good intrinsic strengths, including its low cost-to-income ratio (partially due to the business mix and Group relationship) and superior customer service model.

Net income increased by 9% in the first nine months of 2010 compared with the first nine months of 2009; the improvement would have been substantially larger were it not for accounting mark-to-market (MTM) charges. The underlying improvement was driven by reduced loan loss provisions, improved margins and stronger non-interest income (excluding the MTM charges). Although a small component of the Bank, the Consumer Finance segment swung to a profit in the first nine months of 2010 from a loss in the comparative period in 2009 as a result of reduced loan losses. Management has been actively addressing the Consumer Finance issue for several years now and its efforts are apparent.

While overall asset quality has shown signs of recovery thus far in 2010, the Business and Government portfolio experienced an increase in gross non-performing loans to 4.0% of the portfolio in 2009 and has not improved materially in the first nine months of 2010.

In the second quarter of 2010, the Bank sold substantially all of its remaining asset-backed commercial paper (ABCP) holdings, booking a small reversal of the writedown.

HSBC is well placed relative to its peers in the adoption of International Financial Reporting Standards (IFRS) since it has been reporting under IFRS to its parent.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodologies are the Global Methodology for Rating Banks and Banking Organisations, Rating Bank Preferred Shares and Equivalent Hybrids, Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments and DBRS Criteria: Guarantees and Other Forms of Explicit Support, which can be found on the DBRS website under Methodologies.