DBRS Confirms HSBC USA Inc. Senior Debt at AA (low), Trend Stable

DBRS, Inc. (DBRS) has today confirmed the ratings of HSBC USA Inc. (HUSI or the Company) and its banking subsidiary HSBC Bank USA, National Association (HBUS), including the Company’s Issuer & Senior Debt rating of AA (low). Concurrently, DBRS has confirmed the Company’s Short-Term Instruments rating of R-1 (middle). The trend on all ratings is Stable. The ratings action follows DBRS’s confirmation of HSBC Holdings plc (HSBC or the Group), HUSI’s and HBUS’s ultimate parent, at AA.

The ratings of HUSI reflect its role in HSBC’s overall strategy and DBRS’s expectation that HSBC has the resources and motivation to support HUSI, if needed. As a result of HUSI’s position in HSBC’s global franchise, DBRS has assigned a SA1 designation to the Company, which implies strong and predictable support from the parent. As a supported rating with a SA1 designation, HUSI’s ratings and trend will move in tandem with HSBC’s rating.

The Stable trend reflects that of HSBC Holdings, which considers the strength of the Group’s credit fundamentals that generate the underlying earnings to cope with any renewed stress in the environment, the declining burden of its legacy issues, and the progress it is making in tackling its challenges. The Stable trend also takes into account DBRS’s view that the U.S. economy will continue to strengthen in 2014 resulting in a relatively benign credit environment and a modest improvement in demand for lending and banking products benefiting HUSI’s earnings.

HUSI’s ratings also take into account the Company’s intrinsic strengths including a diversified business model across products and services, sound financial risk profile and its refocused strategy which seeks to better position HUSI to benefit from HSBC’s global franchise. Importantly, DBRS sees early evidence of HUSI executing on this transformation strategy with Global Banking and Markets (GBM) growth in revenues generated from Commercial Banking (CMB) and Retail Banking and Wealth Management (RBWM) customers in the nine months ending September 30, 2013. Nevertheless, the ratings also consider the challenges HUSI faces including further executing on the transformation program particularly in RBWM and Private Banking, improving profitability and implementing the broad changes to the structure and culture of compliance being introduced across the Group globally following the Group’s anti-money laundering issues in the U.S.

For 9M13, HUSI reported, on an IFRS basis, underlying income from continuing operations before tax, excluding fair value option of own debt, totaling $583 million compared to a loss of $669 million in the comparable period a year ago. The non-recurrence of a $1.5 billion charge in 2012 related to regulatory matters was the primary driver of the improved results. Net interest income was lower on the impact of lower rates on investments and reduced deposit levels as a result of the upstate New York branch sale in 2012 more than offset margin improvement from deposit repricing on non-Premier customers and higher loan balances in CMB. Other income was lower YoY primarily due to the aforementioned branch sale. Excluding the gain on the sale of the branches, other income increased YoY due to better trading results in GBM. Loan impairment charges continue to decline reflecting the improving operating environment and rising home prices in most regions.

HUSI’s sound financial risk profile continues to benefit from the robust liquidity profile and solid capitalization. At September 30, 2013, the Company’s core deposits-to-net loans ratio was a very solid 131%. Regulatory capital remains well-above regulatory requirements with a Tier 1 capital ratio of 11.66%

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:Support Assessment for Banks and Banking Organisations and DBRS Criteria: Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities. All DBRS methodologies and criteria can be found on 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: David Laterza
Rating Committee Chair: William Schwartz
Initial Rating Date: 11 October 2005
Most Recent Rating Update: 8 February 2013

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