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

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 or the Bank), including the Company’s Issuer & Senior Debt rating of A (high). Concurrently, DBRS confirmed the Company’s Short-Term Instruments rating of R-1 (low). The trend on all ratings is Stable. The rating action follows DBRS’s rating confirmation of HSBC Holdings plc (HSBC or the Group), HUSI’s ultimate parent at AA (low).

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. Given 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, 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 HSBC Holdings, which considers the strength and breadth of the Group’s franchise across developed and emerging markets and HSBC’s strong underlying earnings, solid capital base and robust liquidity. The Stable trend also incorporates DBRS’s expectation that the U.S. economy will continue to grow during 2016, supporting demand for lending and banking products, benefitting HUSI’s earnings.

The ratings consider HUSI’s intrinsic strengths including a diversified business model across products and services, sound financial risk profile and its refocused strategy that seeks to better position HUSI to benefit from HSBC’s global franchise. Furthermore, the ratings also take into account the challenges HUSI faces including further executing on the reshaping program, particularly in Retail Banking and Wealth Management, improving profitability, which continues to lag peers, and continuing to implement a global program to overhaul standards and controls following the Group’s anti-money laundering issues in the U.S.

For 2015, HUSI reported, on an IFRS basis, adjusted income before taxes, excluding the fair value option on its own debt, of $415 million, which was down from $528 million in 2014, a 21% decline, primarily due to a substantial increase in its provision for credit losses associated with its oil and gas industry loan exposures. Positively, net interest income grew compared to the prior year despite net interest margin compression, reflecting loan growth. However, other revenues, on an adjusted basis, were weaker versus 2014 driven by lower residential mortgage banking and trading revenues. Moreover, DBRS-calculated adjusted expenses were flat year-over-year and remain elevated.

Importantly, HUSI’s balance sheet fundamentals remain sound, supported by a strong funding and liquidity profile, robust capitalization and conservative commercial underwriting standards. Indeed, deposits continue to easily fund the entire loan portfolio, with the Company’s loan to deposit ratio representing a strong 70% at YE15. Moreover, cash and securities comprised a high 30% of total assets at year-end. Finally, commercial nonperforming loans and loan losses remain at very low levels.

While HUSI’s asset quality metrics remain sound, the energy book remains pressured by sustained low oil prices, resulting in a significant increase in commercial non-accrual and criticized loans. At year-end, the Company reported $12.2 billion total oil and gas exposure, which represented 8.8% of total commercial credit exposures. Nonetheless, DBRS views the Company’s energy exposure as manageable.

HSBC USA, Inc., a bank holding company headquartered in New York, reported $188.3 billion in assets at December 31, 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 (December 2015). Other applicable methodologies include the DBRS Criteria – Support Assessments for Banks and Banking Organisations (December 2015) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2016). 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: Michael McTamney
Rating Committee Chair: William Schwartz
Initial Rating Date: 11 October 2005
Most Recent Rating Update: 29 September 2015

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