DBRS Comments on HSBC Finance’s 4Q & Full Year 2011 Results; Senior Unaffected at “A”, Trend Stable

DBRS, Inc. (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 the Company’s financial results indicating a net loss, on a U.S. GAAP basis, of $278 million for 4Q11 and a $1.4 billion loss for full year 2011. The trend on all ratings is Stable.

While still loss-making, DBRS views HSBC Finance’s results as reflecting the progress the Company has achieved in lowering the risk profile of the balance sheet by running down the loan portfolio and managing the expense base, which has supported the improvement in operating performance. On an underlying basis, which excludes fair value movements on the Company’s own debt and an incremental provision for credit losses as the result of new accounting guidance, the Company’s pre-tax loss from continuing operations narrowed to $4.0 billion for 2011, a 14% improvement compared to 2010. Revenues declined 21% year-on-year to $4.6 billion reflecting lower receivable balances and reduced other revenue from lower derivative income. DBRS expects revenues to continue to decline given the run-off mode of the loan portfolio. Positively, somewhat offsetting the pressure from lower revenues is the improving credit performance and the lower receivables book which is reducing credit provisions. To this end, for 4Q11, provisions for credit losses were $945 million, down 10.5% from a year ago. For the year, provisions fell 17% to $4.4 billion. DBRS notes that credit costs improved despite a $925 million provision charge incurred in 3Q11 for the adoption of new accounting guidance related to TDR loans. DBRS views the reduced provisioning as evidence that the broad actions taken by management to remove balance sheet risk across the franchise are positively impacting the income statement.

In 2011, net interest income declined 15% to $1.8 billion reflecting the lower receivable book and a shift in the portfolio mix to lower yielding first lien mortgages as higher yielding loans have run-off at a faster pace. Nevertheless, net interest margin (NIM) improved by 28 basis points (bps) year-on-year to 2.90%, benefitting from an increase in the estimated interest receivable related to income tax receivables that are part of a pending resolution with the IRS. Excluding the impact of this item, NIM remained higher reflecting the reduced balance of non-accrual loans and lower funding costs.

HSBC Finance continues to advance the planned reduction of its run-off portfolio of consumer assets. Indeed, the run-off portfolio declined 15% to $47.9 billion during 2011. The Company expects the pace of run-off to moderate as charge-offs decline and the impact of loan modifications and the lack of re-financing alternatives keep the remaining loan book on the balance sheet longer. Further, the Company expects the sale of its Cards and Retail Services segment to Capital One Financial Corporation to close in 2Q12. DBRS notes that the Company’s overall results benefitted from the strong performance of the discontinued segment in 2011. Indeed, the discontinued Cards and Retail Services segment generated pre-tax income of $1.4 billion in 2011 compared to $997 million a year ago. DBRS views the sale as consistent with HSBC Holdings plc’s (the Group) new North American strategy, laid out at its investor day in May 2011. This strategy aims to refocus the U.S. operations on premier clients and those clients that are active internationally, which is more in line with the Group’s broader global strategy.

Liquidity remains well-managed. Funding requirements continue to decline as the non-core loan portfolio runs-off. Reflecting these run-offs, long-term debt declined by 27% to $39.8 billion during 2011. HSBC Finance has approximately $20 billion to $23 billion of funding needs in 2012, which the Company expects to be met through the sale of its Card and Retail Services business, cash generated from operations, asset attrition, and commercial paper issuance. HSBC Finance’s commercial paper program remains active, with $4.0 billion outstanding at December 31, 2011.

DBRS views capitalization as acceptable. Specifically, tangible common equity to tangible assets was 7.12% at year-end and remains above Company targets. DBRS notes that the Company received $690 million in direct capital contributions from HSBC (North America) compared to $200 million in 2010 and $2.4 billion in 2009. HSBC Finance’s ratings are underpinned by DBRS’s expectation that parental support would remain forthcoming should it be required.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other methodologies used include the DBRS Criteria – Intrinsic and Support Assessments. Both can be found on the DBRS website under Methodologies.

The sources of information used for this rating include company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

Lead Analyst: Steven Picarillo
Approver: Alan G. Reid
Initial Rating Date: May 16, 2001
Most Recent Rating Update: January 28, 2011

For additional information on this rating, please refer to the linking document under Related Research.