DBRS Confirms HSBC Holdings plc at AA (high), Trend Stable

DBRS, Inc. (DBRS) has today confirmed the ratings of HSBC Holdings plc (HSBC or the Group), including its AA (high) Issuer and Long-Term debt ratings and its R-1 (high) Short-Term rating. The trend on all ratings remains Stable.

The rating confirmation considers HSBC’s resilient performance, its reduced and well-managed risk profile, and overall strong fundamentals including robust liquidity, solid capitalisation, and sound internal capital generation derived from its noteworthy earnings sources. The Stable trend reflects DBRS’s recognition of HSBC’s stable, and in many cases, improving trends across key customer groups and regions despite the uneven and less than certain global economic recovery. Further, although the trend is Stable, HSBC continues to face certain challenges, which include managing the impact of the still unsettled economic environment, increasing efficiencies and capitalising on the growth opportunities in key growth markets where HSBC has a well-established presence. Moreover, there is a level of execution risk as the Group seeks to optimise and shift its business strategy. Nonetheless, in DBRS’s view, HSBC is well positioned to meet these challenges.

DBRS views HSBC’s diverse global franchise and well-respected brand as key strengths supporting the ratings. The Group benefits from its broad geographic footprint. At 31 December 2011, HSBC served customers worldwide from 7,200 offices in over 85 countries and territories in Europe, Asia-Pacific, North America, the Middle East, North Africa and Latin America. HSBC has the size, scale, and knowledge gained from its vast operations. With total assets of $2.6 trillion at the end of March 2012, and around 89 million customers, HSBC is one of the largest banking and financial services organisations in the world. The ratings also consider the depth of the Group’s operations and strong market positions across retail and corporate sectors and, its limited exposure to the more volatile investment banking businesses. DBRS considers HSBC’s strong earnings generation capability and its ability to generate earnings across products and geographic regions as key strengths of the organisation. This revenue stream has afforded HSBC the ability to absorb the sizeable credit costs associated with the global economic downturn and still be able to record pre-tax profits in the years since the onset of the 2008/2009 global financial crisis. Indeed, since 2007, HSBC has absorbed over $97.2 billion of impairment charges for loan losses and other credit provisions and yet still generated an impressive $96.4 billion of pre-tax income, excluding the $10.6 billion goodwill impairment charge recorded in 2009.

The ratings and the confirmation reflect the reduced risk profile and the positive trajectory in credit experience, which is leading to lower credit costs, which, in turn, bolsters profitability. At $2.4 billion for 1Q12, credit costs were the lowest since 2Q06. For the full year of 2011, credit costs totalled $12.1 billion, which is also at the lowest level since the onset of the crisis in 2007. Indeed, DBRS notes that credit costs are significantly lower than the elevated levels of $26.5 billion experienced in 2009 and the $24.9 billion in 2008. DBRS sees the reduced credit costs as evidence of the effectiveness of the various actions taken to reduce in the size and the risks inherent in the balance sheet. Nonetheless, given the disruption in the Euro zone, the recessionary environment in the U.K., and potential contagion effects stemming from the sovereign debt crisis, DBRS is cautious that additional progress in reducing credit costs may be difficult to achieve in the near-term.

Balance sheet risk continues to be reduced as HSBC Finance Corporation (HSBC Finance), which was the largest driver of losses in North America, continues to run-off. At 31 March 2012, on an IFRS basis, HSBC Finance’s run-off portfolio declined to a quite manageable $46 billion, or approximately 1.7% of Group assets, from a peak of some $117.5 billion, or 5% of assets at year-end 2007. While HSBC Finance continues to operate at a loss, the loss has been significantly reduced. DBRS expects further improvement in performance, as the legacy loan book runs down. Importantly to the stability of the rating, DBRS views the burden of HSBC Finance to the Group as minimal and quite manageable. As such, DBRS no longer sees HSBC Finance as adding negative drag to the rating.

DBRS considers the Group’s funding and liquidity profile as an important strength, which is in turn reflected in the high ratings. With $1.3 trillion of customer deposits at 31 March 2012, the Group’s substantial and geographically diverse deposit base is the anchor of a very sound funding profile. Market funding is well diversified across currency, product and investor types. Furthermore, HSBC benefits from a sound capital position. Since the beginning of 2009, total tier 1 capital increased from $95.3 billion to $144.0 billion at the end of March 2012. Capital benefited from solid capital retention as well as a $17.8 billion rights issue executed in 2009. As a result, HSBC’s core Tier 1 ratio improved 340 basis points (bps) since year-end 2008 to 10.4% at 31 March 2012. While DBRS sees HSBC as well-positioned to meet regulatory changes impacting capital and liquidity, there is still a level of uncertainty given the scope and pace of regulatory changes around the globe.

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.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

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

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