DBRS Places HSBC Finance Corp.’s ‘A’ Senior Debt Rating Under Review with Negative Implications

DBRS, Inc. (DBRS) has today placed the ratings of HSBC Finance Corporation (HSBC Finance), including its Senior Debt rating of ‘A’, Under Review with Negative Implications. Concurrently, DBRS has confirmed the Company’s R-1 (low) Commercial Paper rating. Today’s rating action follows DBRS’s placing of the ratings of HSBC Holdings plc (HSBC or the Group), HSBC Finance’s ultimate parent, Under Review with Negative Implications.

Today’s rating actions are driven by the combination of more detailed revelations of HSBC’s historic missteps in relation to certain regulatory and legal issues, as well as the changed environment that poses greater challenges to HSBC’s franchise and credit fundamentals. While the missteps are generally in the past, they continue to have consequences for the Group and highlight the difficulties of managing large globally active, complex financial institutions in this difficult environment.

The review will focus on HSBC Holdings plc’s prospects for ensuring that it delivers on improved controls to prevent future missteps. The review will also consider the evolving LIBOR/EURIBOR investigations and the more negative environment for large banking organizations. Among the consequences, the Group’s organization and credit fundamentals could be impacted through increased compliance costs, added fees, limits on pay, increased capital requirements and ring-fencing that could disrupt the efficient operation of a global universal bank.

DBRS recognizes that the Group has taken important steps to rectify deficiencies in controls with new leadership appointed in 2011, implementing a more cohesive operating model including consistent global standards. Nevertheless, these changes take time to permeate an organization as large as HSBC that was previously run in a much more decentralized manner. Given the Group’s franchise that successfully reaches into many countries around the world, these changes are critical to ensure that risk is appropriately managed and proper controls are consistently applied across the Group’s extensive operations. DBRS’s tolerance for further problems is limited.

The ratings of HSBC Finance reflect the ownership structure and the support provided by the Company’s ultimate parent HSBC Group. The benefits of the positioning within the HSBC family allows for significant ratings uplift. Yet, the ratings are placed below those of the parent, reflecting DBRS’s view that HSBC Finance is non-core with the business largely in run-off mode. Importantly, the ratings of HSBC Finance consider DBRS’s expectations that parental support would continue to be forthcoming, if needed.

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: Roger Lister
Rating Committee Chair: 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.