DBRS: HSBC Results: Solid Performance Supported by Lower Impairment Charges

Summary
•Lower impairment charges, absence of fines and lower customer redress drive improved underlying profit before tax (PBT)
•Higher underlying earnings in all regions and products except Latin America and Global Private Banking
•DBRS rates HSBC Holdings plc Senior Unsecured Long-Term Debt at AA with a Stable trend

The 2013 results of HSBC Holdings plc (HSBC or the Group) demonstrate the strength of HSBC’s strong and diversified franchise, a key underpinning for the Group’s ratings. On an underlying basis (excluding fair value of own debt (FVOD), the impact of acquisitions, disposals and FX) HSBC reported Profit Before Tax (PBT) of USD 21.6 billion, up 41% on 2012, driven by lower impairment charges, the absence of fines and lower customer redress payments. The reported PBT in 4Q13 excluding FVOD was USD 4.6 billion (down 20% on 4Q12), reflecting the impact of disposals on revenues and a higher UK bank levy.

On a geographic basis, in 2013 the Group reported growth in underlying PBT in all but one of its regions. An important factor in the Group’s improved results was the contribution of USD 1.6 billion PBT from North America compared to a loss of USD 1.5 billion in 2012. The run-off of legacy US businesses continues to reduce tail-risk with remaining balances in the Consumer and Mortgage Lending (CML) portfolio of USD 30.4 billion (down USD 12.3 billion from 2012). Latin America, which was affected by slower economic growth and higher loan impairment charges, underperformed. Furthermore, DBRS Ratings Limited (DBRS) notes that although a number of emerging markets have been experiencing a downturn in investor sentiment, DBRS expects the impact of the weaker performance of these markets on the Group’s own activities to be manageable given the diversification of the Group’s franchise.

By business division, the Group reported higher underlying PBT in all divisions except Global Private Banking, where the repositioning of this business led to a drop in underlying PBT to USD 0.2 billion from USD 0.9 billion. DBRS notes that the increase in PBT for Global Banking and Markets (GB&M) in 2013 (and stable PBT in 4Q13), reflects a different business mix to other global investment banks. Within the division, a weak performance in the Rates business in 4Q 2013 reflecting challenging conditions in Europe was largely offset by a strong performance in Equities, particularly in Hong Kong.

Costs remain an important challenge for the Group with an overall cost efficiency ratio of 59.6% (62.8% in 2012) reported for 2013 against a target ratio of mid-50s. DBRS notes, however, that on an underlying basis, costs were 6% lower. This reflected the positive impact of an increase in sustainable cost saves and the absence of fines and lower UK customer redress charges, as well as the negative impacts of inflation, ongoing compliance and regulatory spending, and the offset of a higher UK bank levy.

Retained earnings and a reduction in risk-weighted assets (RWAs) following business disposals contributed to the Group’s strengthened regulatory capital ratios at year end. HSBC’s estimated end-point CRD IV Common Equity Tier 1 ratio was 10.9% (up from 9.5%) and the Prudential Regulatory Authority (PRA) end-point leverage ratio was 4.4%. Regulatory uncertainty remains regarding final capital requirements, particularly for large global banks, but DBRS considers HSBC well positioned to meet future needs.

DBRS views positively the progress HSBC continues to make in simplifying the Group. Over 2011 – 2013 HSBC completed the first phase of its Strategic Plan, which included the initiation of the disposal or closure of 63 non-strategic business or non-core investments. The Group has affirmed its strategic priorities for 2014 – 2016: growing the business and dividends; further implementing Global Standards; and a continued focus on costs/ streamlining processes and procedures.

DBRS rates HSBC Holdings plc Senior Unsecured Long-Term Debt at AA with a Stable trend.

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

The principal methodology applicable is: the Global Methodology for Rating Banks and Banking Organisations. Other methodologies used include the DBRS Criteria: Support Assessment for Banks and Banking Organisations. The rating methodologies and criteria used in the analysis of this transaction can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include company reports and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This is an unsolicited rating. This credit rating was not initiated at the request of the issuer.

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Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period. DBRS’s outlooks and ratings are under regular surveillance.

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Lead Analyst: Elisabeth Rudman
Approver: Roger Lister
Initial Rating Date: May 16, 2001
Most Recent Rating Update: January 27, 2014

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