TEXT-Fitch:HSBC's Strong Capital Generation Dips on Additional Costs

Tue Nov 13, 2012 4:45am EST

Nov 13 - HSBC Holding PLC's underlying pre-tax profit of USD14.9bn in 9M12 was up 21% compared with 9M11. Key profit drivers in 9M12 and Q312 were higher loan and deposit volumes in commercial banking mainly in Asia including Hong Kong, revenue growth from credit and rates businesses, and significantly lower loan impairment charges in the US and a reduction in other credit risk provisions for asset backed securities. Underlying profit excludes USD3.9bn credit-spread driven fair value losses on its own debt and USD5.3bn disposal gains. However it includes various notable items as further discussed below.

Fitch says that there are no immediate rating impacts. As advised earlier, the agency will conclude its detailed review of the group in December. Internal capital generation remains solid and continues to benefit from non-recurring income, in particular from the USD4bn gain on the sale of US branches and the card business booked in Q212. However, net income minus dividends fell to 5% of capital in 9M12 (H112: 7%, 2011: 6%) as a result of provision top-ups for fines and penalties for misconduct in the US and UK customer redress schemes. Reserves for the latter amounted to about USD1bn covering around 15 months of HSBC's expected pay-outs.

HSBC USA's USD1.5bn provision for various regulatory findings exceeds Fitch's expectation. Higher charges, coupled with higher operational and compliance cost, could put downward pressure on HSBC USA's Viability Rating (VR). The noted provision absorbed 38% of the gains from the sale of the cards and retail services business and certain branches. Worries over the bank's US loan quality should subside as delinquencies normalise, the US run-off portfolio shrinks and the bank accelerates (unsecured) loan sales.

Fitch expects that further loan growth and asset deterioration, in particular in Asia, will increase risk weighted assets (RWA). RWAs declined by 4% from end-2011 as solid credit growth in Asia, primarily in China, and Europe (UK mortgages, Turkey) was offset by declining RWAs related to large corporate's borrowings in Europe, reduced securitisation RWAs and the run-down of the retail portfolios in North America. Including Hong Kong, Asia's share in RWAs increased to around 37% compared with 32% at end-2011 while North America's declined to 23% from 28% and the other geographies' remained stable.

Market risk related RWAs declined by 39% in 9M12 to 4% of total RWA as the bank managed down Basel 2.5 impacts through restructuring transactions and exiting unprofitable relationships, amongst other measures. Impaired loans improved slightly to 3.9% of gross loans at end-September 2012 (H112: 4.1%).

HSBC's core equity tier 1 ratio would be around 9.6% at end-September 2012 if Basel 3 was already implemented without taking any mitigating actions. This compares to Fitch's Core Capital ratio of about 11% at end-September 2012 or the actual regulatory core equity tier 1 ratio of 11.7%.