DBRS Downgrades HSBC USA Inc.’s Senior Debt Rating to A (high), Trend Stable

DBRS, Inc. (DBRS) has today downgraded the ratings of HSBC USA Inc. (HUSI or the Company) and its banking subsidiary HSBC Bank USA, National Association (HBUS or the Bank), including the Company’s Issuer & Senior Debt rating to A (high) from AA (low). Concurrently, DBRS downgraded the Company’s Short-Term Instruments rating to R-1 (low) from R-1 (middle), while the Bank’s Short-Term Instruments rating of R-1 (middle) was confirmed. The trend on all ratings is Stable. As a result of today’s actions, the ratings have been removed from Under Review with Negative Implications, where they were placed on May 20, 2015. Today’s rating action follows DBRS’s lowering of the ratings of HSBC Holdings plc (HSBC or the Group), HUSI’s ultimate rated parent to AA (low) from AA.

Today’s rating actions are driven by DBRS, Inc. and DBRS Ratings Limited, collectively DBRS, having downgraded the senior debt and deposit ratings of a number of banking groups in Europe, including HSBC Holdings plc, that had previously benefited from some uplift for systemic support. These rating actions conclude the review that was initiated on May 20, 2015 and reflect DBRS’s view that developments in European regulation and legislation mean that there is less certainty about the likelihood of timely systemic support. Given HUSI’s position in HSBC’s global franchise, DBRS has assigned an SA1 designation to the Company, which implies strong and predictable support from the parent, should it be required. As a supported rating with a SA1 designation, HUSI’s rating will likely move in tandem with HSBC’s rating.

The Stable trend reflects that of the Group, as well as DBRS’s expectation that economic growth in the U.S. should remain resilient entering 2016 supporting demand for both corporate and consumer lending, which should benefit HUSI’s operating performance.

The ratings consider HUSI’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 views the Company’s 1H15 results as providing further evidence that HUSI is making progress in executing the transformation strategy with strong expansion in profit before tax for both the Commercial Banking (CB) and Global Banking and Markets (GBM) segment. Growth in the commercial loan portfolio was seen across all products and at levels that outpaced peers. Further, revenues from Payments and Cash Management were up notably year-on-year (YoY), while collaborative fee income in CB from GBM clients were higher. Nevertheless, the ratings also take into account the challenges HUSI still faces including further executing on the reshaping program especially in Retail Banking and Wealth Management, improving Company-wide profitability and returns, which continue to trail the peer group, and continuing to implement a global program to overhaul standards and controls following the Group’s anti-money laundering misconduct in the U.S.

HUSI’s sound balance sheet that is supported by traditionally conservative commercial underwriting standards, a robust liquidity position and solid capitalization, are key factors underpinning the intrinsic strength of HUSI. Commercial loan losses and commercial non-performing loans remain at very low levels and are below peer averages reflecting the Company’s focus on large corporates with international requirements. Liquidity remains sound with the loan portfolio continuing to be funded entirely by deposits. Meanwhile, regulatory capital remain solid with a Basel III Common Equity Tier 1 ratio of 11.77%, on the standardized approach.

HSBC USA, Inc, a bank holding company headquartered in New York, New York, had $196.6 billion in assets at June 30, 2015.

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 2015). Other applicable methodologies include the DBRS Criteria – Support Assessments for Banks and Banking Organisations (March 2015) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2015). 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: Roger Lister
Initial Rating Date: 11 October 2005
Most Recent Rating Update: 19 May 2015

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