DBRS Confirms HSBC Finance Corporation, Senior Debt at A (low), Trend Stable

DBRS, Inc. (DBRS) has today confirmed the ratings of HSBC Finance Corporation (HSBC Finance), including its Senior Debt rating of A (low). Concurrently, DBRS has confirmed the Company’s R-1 (low) Commercial Paper rating. The trend on all ratings is Stable. Today’s rating action follows DBRS’s confirmation of the ratings of HSBC Holdings plc (HSBC or the Group), HSBC Finance’s ultimate parent at AA.

The ratings of HSBC Finance are underpinned by the ownership structure and the support provided by the Company’s ultimate parent HSBC Holdings plc (HSBC Group). The benefits of the positioning within the HSBC family allows for significant uplift to the ratings. 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. As such, DBRS continues to assign an SA1 designation to HSBC Finance. As a supported rating with a SA1 designation, the ratings of HSBC Finance will likely move in tandem with HSBC Holdings rating.

The trend on the ratings is Stable reflecting 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 supporting the continuing recovery in the U.S. housing market benefiting HSBC Finance’s earnings.

On a standalone basis, DBRS considers HSBC Finance’s financial performance through 9M13 as underscoring the noteworthy progress the Company has achieved in reducing balance sheet risk while running down the legacy loan portfolio. Moreover, earnings have benefited from the improving U.S. housing market. For 9M13, HSBC Finance reported, on a U.S. GAAP basis, net income of $613 million compared to a loss of $550 million for the comparable period a year ago. On an underlying basis, which excludes fair value movements on the Company’s own debt and the fair value adjustment on loans transferred to held for sale, the Company generated a pre-tax income from continuing operations of $1.2 billion, compared to a pre-tax loss of $2.9 billion a year ago. DBRS- calculated adjusted revenues (excluding fair value movement on own debt and the fair value adjustment on receivables held for sale) were solid at $897 million, or 11% lower YoY. DBRS expects revenues to continue to decline over time as the portfolio winds down. However, further strengthening of the U.S. housing market could potentially result in improving credit performance reducing provisions for credit losses there by relieving some of the pressure on underlying earnings. Indeed, for 9M13 provision for credit losses totaled $131 million, a noteworthy reduction from $1.8 billion in the comparable period a year ago.

HSBC Finance continues to make progress in running down its real estate secured receivable portfolio. Over the last twelve months, the run-off portfolio, excluding held for sale, was reduced to $27.8 billion as of September 30, 2013, from $34.0 billion a year ago. This 18% reduction in the portfolio was achieved through asset sales, balance sheet attrition, and write downs.

Liquidity continues to be managed appropriately while funding requirements continue to diminish amidst balance sheet runs-down. Long-term debt has been reduced to $23.7 billion as of the end of September 2013, down from $30.2 billion a year ago and $120.2 billion at its peak in December 2006. Maturities are well-laddered with $3.9 billion of debt maturing in 2014. At September 30, 2013, liquidity comprised of $6.2 billion of securities under repurchase agreements. Liquidity is further supported by facilities in place from HSBC affiliates.

Capitalization continues to be acceptable. Tangible common equity to tangible assets was 12.68% at September 30, 2013, remaining well in excess of Company targets. Importantly, the Company has received no capital support from HSBC (North America) since 2011.

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

The principal applicable methodology is the Rating Finance Companies Operating in the United States. Other methodologies used include the DBRS Criteria:Support Assessment for Banks and Banking Organisations. 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: 16 May 2001
Most Recent Rating Update: 8 February 2013

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