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 Group or the Group), HUSI’s and HBUS’s ultimate parent, at AA.

The rating confirmation reflects HUSI’s position within the larger HSBC Group and DBRS’s expectations of timely support from HSBC Group, should it be required. By using its global network, the Group focuses on customers with international requirements with the United States being an important part of this strategy. Indeed, DBRS views HUSI as serving a critical role within HSBC Group given its ability to supply products and services to the Group’s global customer base. The rating action also considers DBRS’s view that HSBC Group has the resources and willingness to support HUSI, if needed. As a result, DBRS has assigned a SA-1 designation to the Company, which implies strong and predictable support from the parent. As a supported rating with a SA-1 designation, HUSI’s ratings and trend would likely move in tandem with HSBC’s rating.

The Stable trend also takes into account DBRS’s view that the U.S. economy will continue to strengthen in 2015 underpinning improving demand for lending and banking products benefiting HUSI’s earnings. Moreover, DBRS sees impairment costs remaining modest supported by a moderate improvement in house prices in 2015 and the improving economy.

HUSI’s ratings also take into account the Company’s intrinsic strengths including a diversified business model across products and services, sound balance sheet and its refocused strategy that seeks to better position HUSI to benefit from HSBC’s global franchise. DBRS sees evidence that HUSI is successfully executing on this transformation strategy, but recognizes that more work needs to be done. Positively, through 9M14, the Commercial Banking (CMB) loan portfolio growth has outpaced most banks in a competitive marketplace. Meanwhile, Private Banking (PB) has made good progress, as it continues to focus on internationally connected clients in key markets, resulting in an improved operating performance through 9M14. Lastly, Global Banking and Markets (GBM) continues to experience solid expansion in revenues generated from CMB customers, although this progress has been masked by the revenue challenges faced in the Markets business due to lower capital markets activity. Nevertheless, the ratings also consider the challenges HUSI faces including further executing on the transformation program particularly in Retail Banking and Wealth Management, improving profitability and further implementation of the broad changes to the structure and culture of compliance introduced globally across the Group over the last 18 months following the Group’s anti-money laundering issues in the U.S.

From DBRS’s perspective, strengthening profitability is a key challenge for HUSI going forward. While DBRS sees successful execution on the transformation strategy as the key component to restoring earnings to a level more in line with its peers, DBRS expects this to be a gradual process given the headwinds faced by HUSI. Similar to other banks, the low rate environment and subdued capital markets have constrained revenues while elevated compliance costs have also pressured earnings. However, volatility in capital markets early in 2015, if sustained, could potentially underpin more favorable results for GBM. Positively, net interest income has improved with growth in the CMB portfolio, but RBWM remains loss making and will likely remain so over the near-term.

HUSI’s sound balance sheet that is supported by traditionally conservative commercial underwriting standards, a robust liquidity position and solid capitalization, is a primary factor supporting the ratings. Commercial loan losses and levels of non-performing commercial loans continue to decline and are below peer averages reflecting the Company’s focus on large corporates with international requirements. Given the pace of growth in the CMB portfolio, DBRS will monitor performance for any indications that growth is being achieved at the expense of HUSI’s traditionally conservative commercial lending standards. Moreover, DBRS is mindful that credit issues could potentially surface should energy prices remain at current levels or lower, for a prolonged period.

Liquidity remains sound with the loan portfolio continuing to be funded with deposits with the Company’s core deposits-to-net loans ratio at a very solid 117% as of September 30, 2014. Regulatory capital remains well-above regulatory requirements with a Basel III Common Equity Tier 1 ratio of 10.45%, on a transitional basis.

HSBC USA, Inc, a bank holding company headquartered in New York, New York, had $175.0 billion in assets at September 30, 2014.

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 (June 2014). Other applicable methodologies include the DBRS Criteria – Support Assessments for Banks and Banking Organisations (January 2014) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (December 2013). These can be found at: http://www.dbrs.com/about/methodologies.

The primary 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: 28 January 2014

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