TEXT - Fitch comments on HSBC Mexico capital injection

Wed Feb 6, 2013 3:13pm EST

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(The following statement was released by the rating agency)
    Feb 6 - Fitch Ratings considers the recent announcement that HSBC Holdings
plc (rated 'AA-' with Stable Outlook by Fitch) will inject $500 million dollars
of capital into its Mexican subsidiary, HSBC Mexico a positive action. The
capital injection will strengthen HSBC Mexico's capitalization level and places
the bank in a better position to continue growing a base of productive assets,
franchise, and business scale. Fitch believes the action does not have a
material impact on HSBC Mexico's viability rating (VR) of 'bbb', since most of
the capital will be deployed in the near future to increase risky assets and
also because the ability of HSBC Mexico's parent to enhance its capital base is
already somewhat factored in into its VR of 'bbb'.

HSBC's VR is mostly driven by its sound funding and liquidity profiles, 
comfortable capital position (Fitch Core Capital to risk weighed assets of 10.2%
at 3Q'12), and its robust overall franchise. However, the VR is constrained by 
low profitability (net income to average total assets of 0.8% at 9M'12) and 
relatively weaker and more volatile asset quality metrics in recent years 
(impaired to gross loans of 2% and net charge offs to average gross loans of 
2.9% at the same date). Fitch does not expect significant and/or immediate 
changes in these two rating constraints as a result of the recently announced 
capitalization.

The capital injection involves two tranches. The first is a direct increase to 
the bank's common equity through an issuance of common shares for an amount of 
$390 million dollars, while the second tranche will be made through a 
potentially convertible subordinated debt of $110 million dollars with a 10 year
tenor. While the proposed notes are dated instruments, these will likely receive
a 50% equity credit during the first five years outstanding, due to their loss 
absorbing features (subordination, coupon omission, and permanence). Coupons and
even principal could be deferred well before the bank reaches a non-viability 
condition. This is in accordance with the relatively stringent regulatory 
framework that gives loss absorbing elements, but their features are not as 
robust as mandatorily convertible instruments covered by Basel III, which will 
likely receive 100% equity credit by Fitch. 

HSBC Mexico's support rating and Issuer Default Ratings (IDRs) reflect the 
strong propensity of its ultimate parent, HSBC Holdings plc, to provide support 
to HSBC Mexico, if this were needed. Mexico is a priority growth market for HSBC
Holdings, and HSBC Mexico is an strategically important subsidiary, which 
explains why HSBC Mexico's 'A' rated local currency IDR is the highest among any
Mexican bank rated by Fitch in Mexico. HSBC Mexico's 'A-' foreign currency IDR 
is capped by Mexico's country ceiling. The Stable Outlook on the IDRs reflects 
the cushion arising from the relatively high rating of its parent. 

Given Fitch's perception of HSBC Mexico's strategic importance to the group, its
IDRs could be as close as one notch below HSBC Holdings' IDR, although HSBC 
Mexico's IDRs are also limited by sovereign and/or country ceiling 
considerations. A potential upgrade of Mexico's sovereign rating could 
positively affect HSBC Mexico's IDRs if the parent is still rated significantly 
above the sovereign. Conversely, a downgrade of two or more notches in HSBC 
Holding's IDRs could negatively affect HSBC Mexico's rating and/or rating 
Outlook. 

For further information on HSBC Mexico's ratings, please refer to Fitch's press 
release entitled 'Fitch Affirms HSBC Mexico and its Brokerage Unit Ratings' and 
dated Aug. 15, 2012.

 (Caryn Trokie, New York Ratings Unit)
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