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

DBRS has today confirmed the ratings of HSBC Bank Canada (HSBC or the Bank) and related entity, 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 Stable. 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 for the Group is AA (high) with a Stable 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 Rating Policies on the DBRS website for more information). The benefits of HSBC’s relationship with the Group include branding, added revenue generation 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 Canada itself 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.

In September 2011, HSBC announced an agreement to sell its full-service investment advisory business to National Bank of Canada (National). The business has 120 advisors and $14.2 billion in assets under administration. HSBC and National will enter into an agreement in which HSBC will refer brokerage clients to National and National will provide access to its brokerage network to HSBC for equity and debt public offerings. The transaction, which is expected to close before year-end subject to regulatory approvals, does not have any rating implications.

HSBC adopted International Financial Reporting Standards (IFRS) effective January 1, 2011. Profit attributed to shareholders increased by 6% in the first half of 2011 compared with the first half of 2010 (under IFRS), although only as a result of lower taxes and minority interest deductions; pre-tax earnings decreased 2%. The decline was a result of lower net interest and non-interest income and higher non-interest expenses, partially offset by a reduction in loan loss provisions. There were a number of factors that contributed noise to the results in both periods.

For the year ended December 31, 2010, under previous Canadian Generally Accepted Accounting Principles (CGAAP), pre-tax income decreased by 4% on an adjusted basis to $726 million over 2009 on lower non-interest income and higher non-interest expense, partially offset by lower loan loss provisions and higher net interest income. Earnings would have increased significantly if not for accounting mark-to-market losses primarily related to the effect of changes in interest rates on derivatives used for hedging purposes where no actual loss is anticipated if the hedge is held to maturity. It should be noted that pre-tax earnings were materially higher in 2010 under IFRS than under previous CGAAP.

Asset quality metrics have generally shown signs of improvement in 2010 and H1 2011. Loan loss provisions declined by 35% in 2010 compared with 2009 (under previous CGAAP) and by 43% in H1 2011 over H1 2010 (under IFRS). HSBC continues to have a more concentrated portfolio by industry, geography and single-name exposures than its peers.

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

The applicable methodologies are the Global Methodology for Rating Banks and Banking Organisations (January 14, 2010), Rating Bank Preferred Shares and Equivalent Hybrids (June 29, 2009), Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments (February 11, 2009) and Guarantees and Other Forms of Explicit Support (August 5, 2010), which can be found on the DBRS website under Methodologies.