Fitch: Emerging markets growth key for HSBC to meet profit target

March 5 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings says there is no immediate rating impact from HSBC Holding PLC's latest results. HSBC reported an increase in underlying pre-tax profit of 18% compared with 2011 as growth in Hong Kong, India, Brazil, France and Canada offset various non-recurring charges including USD1.9bn fines for misconduct in the US and USD2.3bn provisions for customer redress in UK. Key profit drivers were trade-related commercial banking activities and the European global banking and markets operations, in particular as credit and rates trading benefited from liquid markets. Underlying profit excludes USD5.2bn credit-spread driven fair value losses on its own debt (FVOD) and USD9.5bn disposal gains.

Fitch believes that organic growth in higher-risk markets, further restructuring in retail banking and wealth management in the US and Europe and the wind-down of its considerable legacy assets will be crucial for the bank to meet an unchanged 12%-15% return on equity target (2012: 8.4% or 11.5% adjusted for FVOD losses). Management has simplified the group since it announced a USD3.5bn annual cost savings target in May 2011 with key disposals in North America, Asia and Latin America contributing to cumulated annual cost savings of USD3.6bn and a reduction in staff numbers by 12% over the same period.

The agency expects the bank to accelerate the run-down of its sizeable legacy assets in 2013. They accounted for 13% of total RWAs at end-2012 (2011: 15%).

Consolidated RWAs have declined by 7.1% from end-2011 as loan growth in Asia, primarily in China and Hong Kong was offset by the disposal of US retail assets.

While North America cut its RWAs by a quarter to 23% of overall RWAs at end-2012 (2011: 28%) Asia's and Hong Kong's share increased to around 37% compared (2011: 32%).

HSBC's common equity Tier 1 ratio would be 9.0% at end-2012 if Basel 3 was already implemented without taking any mitigating actions. The 60bps decline compared with the bank's previous estimate at end-9M12 results from more clarity around the implementation of the evolving rules. The ratio improved to 9.8% following the completed sale of Ping An early February 2013 and a smaller stake in Industrial Bank as of January 2013. Fitch views this level as solid; it compares with Fitch's core capital ratio of about 11.6% or the regulatory core Tier 1 ratio of 12.3% at end-2012.

Impaired loans fell to 3.8% of gross loans at end-2012 (2011: 4.3%) as loan quality improved in all geographies bar Latin America due to Brazil. The key driver for the reduction remains North America where impaired loans improved to 13.9% of gross customer loans (15.1%). However, loans in arrears for more than 60 days in HSBC Finance's legacy consumer and mortgage loan portfolio continued to creep up to 19.4% (18%).

HSBC's impairment reserves remain moderate and declining at 42% of impaired loans at end-2012 with as low as 28% for North America. Fitch does not expect coverage levels to recover to the levels prior to 2011 when the bank decided to include non-impaired renegotiated loans in its definition of impaired loans. The subsequent drop was most pronounced for North America where coverage fell to 32% from 74% at end-2011 (consolidated: to 42% from 64%).