Fitch Affirms HSBC Mexico's IDR at 'A' & VR at 'bbb'; Outlook Stable

Wed Aug 13, 2014 1:56pm EDT

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(The following statement was released by the rating agency) MONTERREY, August 13 (Fitch) Fitch Ratings has affirmed HSBC Mexico, S.A.'s (HSBCM) Viability Rating (VR) at 'bbb' and its local and foreign currency Issuer Default Ratings (IDRs) at 'A+' and 'A', respectively. Simultaneously, Fitch has affirmed the national scale ratings of HSBCM and HSBC Casa de Bolsa, S.A. de C.V. (HSBCCB) at 'AAA(mex)' and 'F1+(mex)'. A full list of the rating actions follows at the end of this press release. The Rating Outlook is Stable. KEY RATING DRIVERS - IDRs and Support Rating HSBCM's local and foreign currency IDRs, as well as its Support Rating (SR) are driven by the strong propensity of its ultimate parent; HSBC Holdings plc (HSBC) to provide support to HSBCM, if it would be required. Mexico is an important market for HSBC so in Fitch's opinion HSBCM is a strategically important subsidiary, which explains why HSBCM's local currency IDR of 'A+' is the highest among the Mexican banks rated by Fitch. HSBCM's foreign currency IDR of 'A' is capped by Mexico's Country Ceiling. The Stable Outlook on the IDRs reflects the cushion arising from the relatively high rating of the parent of HSBCM. Given Fitch's perception of HSBCM's strategic importance to the group and the current rating criteria, HSBCM's local currency IDR is one notch down from HSBC's IDR, although HSBCM's IDRs are also limited by sovereign and/or country ceiling considerations. KEY RATING DRIVERS - VR HSBCM's VR has been affirmed as the bank has sustained its major strength, namely its sound funding and liquidity profile, its robust franchise and good and stable capital metrics. However, the VR also considers bank's low profitability and deteriorated asset quality. HSBCM is the fifth largest bank in Mexico by total assets and loans and has one of the largest and most stable customer deposits base, accounting for roughly 8.8% of the banking system's core deposits. The bank has one of the strongest liquidity profiles among major banks. HSBCM's loan to deposits ratio as of June 2014 was a sound 78% and almost 60% of total deposits were in the form of core demand accounts. HSBCM's operating profits are weak compared to the largest Mexican banks and international peers in the 'bbb' category. The profitability in 2013 was affected by higher loan loss provisions due to resumption in consumer lending and the negative implications on its exposure to the troubled homebuilder industry. Although HSBCM's profitability in 2014 shows signs of recovery, it sustainability would be dependent mostly on the ability of the bank to keep its credit costs at bay. Despite weak earnings, capital metrics have remained stable in view of moderate loan growth and some capital injections. A capital injection in January 2013 helped to strengthen HSBCM's capitalization levels. The expected increase on lending activity may help HSBCM to recover its profitability and enhance its internal capital generation capacity; although, as mentioned before this will depend on lower credits costs. HSBCM's asset quality shows a significant deterioration, mainly due to its credit exposure to large homebuilders and its consumer portfolio. Loan loss reserve coverage runs below the average of the larger bank peers and below the median for the 'bbb' rated banks. In Fitch's opinion, the greatest challenge of HSBCM is to lower and stabilize its impaired loans. KEY RATING DRIVERS - NATIONAL RATINGS AND SENIOR DEBT HSBCM's national scale ratings were affirmed since its IDRs are above those of the sovereign, and national scale ratings are relative rankings of creditworthiness within a certain jurisdiction. HSBCCB's national scale ratings were also affirmed since it's perceived by Fitch as a strategically important affiliate of HCBCM and fully integrated into its operations and franchise. Also, the local holding company of both operating entities, Grupo Financiero HSBC, is legally enforced to provide support to its subsidiaries. Therefore, the national scale ratings of the brokerage unit are aligned with the bank's ratings. The ratings of HSBCM's subordinated debt reflect Fitch's opinion that support from HSBC, if needed, would extend to any outstanding debt in the local market, in order to prevent negative effects on its reputational risk and overall funding costs. Coupled with the relatively high IDR of HSBC, the subordinated debt ratings are equal to that of HSBCM senior unsecured debt. RATING SENSITIVITIES - IDRs and Support Rating There is limited upside potential on HSBCM's local currency IDR, since this is already one notch below HSBC's IDR. It could only be upgraded by the confluence of upgrades in both the parent and the sovereign ratings. Similarly, the foreign currency IDR could only be upgraded in the event of a similar action on Mexico's country ceiling. RATING SENSITIVITIES - VR HSBCM's VR could be upgraded if the bank achieves and sustains operating ROAA ratios higher than 1.5% and an adjusted impairment ratio consistently below to 6%. In turn, HSBCM's VR could be negatively affected if the bank fails to improve its profitability metrics, operating ROAs below 1%, and FCC ratios below 10%. Also, a further deterioration of asset quality could be negatively affects the VR. RATING SENSITIVITIES - NATIONAL RATINGS AND SENIOR DEBT HSBCM and HSBCCB's national scale ratings could only be negatively affected by a multi-notch downgrade of HSBC's IDRs, or a change in their propensity to support these affiliates. Given Fitch's criteria for ranking bank hybrids and non-performance risk of these securities, the subordinated debt could be affected by a downgrade of HSBC's VR, even before such downgrade could affect the national scale issuer and senior unsecured debt ratings, and IDRs of HSBCM. RATING SENSITIVITIES - SUPPORT RATING HSBCM's SR could be affected if Fitch changes its view of HSBC Holdings' ability or willingness to support the Mexican bank. Fitch has affirmed the following ratings: HSBCM --Foreign currency long-term IDR at 'A'; Outlook Stable; --Foreign currency short-term IDR at 'F1'; --Local currency long-term IDR at 'A+'; Outlook Stable; --Local currency short-term IDR at 'F1'; --Viability Rating at 'bbb'; --Support Rating at '1'; --Long-term national scale rating at 'AAA(mex)'; Outlook Stable; --Short-term national scale rating at 'F1+(mex)'; --Long-term national scale rating for local senior debt issuances at 'AAA(mex)'; --Long-term national scale rating for local subordinated debt issuances at 'AAA(mex)'. HSBCCB --Long-term national scale rating at 'AAA(mex)'; Outlook Stable; --Short-term national scale rating at 'F1+(mex)'. Contact: Primary Analyst Alejandro Tapia Director +52 81 8399 9156 Fitch Mexico SA de CV Prol. Alfonso Reyes 2612, Edificio Connexity Piso 8 Col. Del Paseo Residencial 64920 Monterrey, N.L., Mexico Secondary Analyst Alejandro Garcia Senior Director +52 81 8399 9146 Committee Chairperson Franklin Santarelli Managing Director +1-212-908-0739 Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: Additional information is available on Applicable Criteria and Related Research: -- Global Financial Institutions Rating Criteria (Jan 31, 2014); -- Rating Financial Institutions Above the Sovereign (Dec. 12, 2012); -- Securities Firm Criteria (Jan. 31, 2014); -- Rating FI Subsidiaries and Holding Companies (Aug. 10, 2012); -- National Scale Ratings Criteria (Oct. 30, 2013). Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria here Rating Financial Institutions Above the Sovereign here Securities Firms Criteria here Rating FI Subsidiaries and Holding Companies here National Scale Ratings Criteria here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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