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