DBRS Confirms HSBC Bank Canada, Ratings Remain Under Review with Negative Implications

DBRS has today confirmed the ratings of HSBC Bank Canada (HSBC or the Bank) and related entities, including the Bank’s Long-Term Deposits and Senior Debt rating at AA and its Short-Term Instruments rating at R-1 (high). All ratings remain Under Review with Negative Implications.

On July 20, 2012, DBRS placed all the ratings of HSBC Bank Canada and related entities Under Review with Negative Implications following the rating action of Under Review with Negative Implications on the ratings of HSBC Holdings plc (the Parent). Under DBRS’s global bank rating methodology, HSBC Bank Canada has been assigned a support assessment of SA1, reflecting expected timely support from the Parent, of which HSBC Bank Canada’s ratings are largely based on. DBRS anticipates resolving the ratings review on HSBC Bank Canada once the review has been completed for HSBC Holdings plc.

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, somewhat offset with geographic and industry concentrations, higher interest rate risk tolerance and scale issues in its retail banking and wealth management businesses.

In March 2012, HSBC announced the wind-down of its Consumer Finance business, notwithstanding the efforts made toward improving profitability in this segment. While HSBC has continued to work at generating better returns, the opportunities to cross-sell products to customers from the Consumer Finance business have been limited.

The sale of its full-service investment advisory business closed in January 2012, leading to a significant drop in assets under management, constraining the Bank’s ability to generate fee income.

HSBC is the seventh largest bank in Canada with over $84 billion in assets at September 30, 2012. Operations are primarily commercial banking focused, although the Bank also serves retail customers. HSBC enjoys a unique competitive advantage in its ability to leverage its position as a subsidiary of London-based HSBC Holdings plc. The Bank has four operating groups: (1) Retail Banking and Wealth Management, (2) Commercial Banking, (3) Global Banking and Markets and (4) Consumer Finance, representing 5%, 56%, 29% and 10% of adjusted pre-tax income in the first nine months of 2012, respectively (excluding the Other segment).

The metrics and income statement for the nine months ended Q3 2012 have been adjusted by DBRS to remove the impact of the $84 million gain on the sale of the full-service retail brokerage business and the $36 million dollar restructuring charge relating mostly to the wind-down of the consumer finance business.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodologies are the Global Methodology for Rating Banks and Banking Organisations (June 29, 2012), DBRS Criteria: Rating Bank Preferred Shares and Equivalent Hybrids (June 29, 2009), DBRS Criteria: Intrinsic and Support Assessments (February 11, 2009) and DBRS Criteria: Guarantees and Other Forms of Explicit Support (June 20, 2012), which can be found on the DBRS website under Methodologies.

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