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Rating Action:

Moody's downgrades HSBC Mexico's intrinsic strength to ba3 and deposits to Baa2; stable outlook

 The document has been translated in other languages

30 Jun 2016

Mexico, June 30, 2016 -- Moody's de Mexico lowered HSBC Mexico, S.A.'s standalone baseline credit assessment (BCA) to ba3, from baa3, and downgraded the long- and short-term local currency deposit and senior debt ratings to Baa2/Prime-2 from A2/Prime-1. The long-term foreign currency deposit rating was downgraded two notches to Baa2. The outlook on these ratings is stable.

Moody's also lowered the adjusted BCA to baa3 from a2, and as a result downgraded the subordinated debt rating to Ba1 from A3, and the junior subordinated program debt rating to (P) Ba2 from (P) Baa1. The long-term Mexican National Scale deposit and senior unsecured debt ratings were downgraded two notches to Aa2.mx, and the subordinated and junior subordinated National Scale ratings were downgraded to A1.mx and A2.mx, respectively.

Moody's lowered the bank's long- and short-term counterparty risk assessment (CR Assessment) to Baa1(cr)/Prime-2(cr), from A1(cr)/Prime-1(cr).

At the same time, Moody's downgraded HSBC Casa de Bolsa, S.A. de C.V.'s issuer ratings to Baa3/Prime-3 from A2/Prime-1, and the long-term Mexican National Scale rating by one notch to Aa3.mx. The outlook is stable.

These actions conclude the review initiated on 4 April 2016.

A detailed list of affected ratings is provided below.

RATINGS RATIONALE

LOWERING OF BASELINE CREDIT ASSESSMENT

In lowering HSBC Mexico's BCA to ba3 from baa3, Moody's considered the heightened transition and execution risks stemming from management's ambitious growth strategy coupled with the bank's slow progress in improving its sluggish profitability. Though profitability returned to positive net income in 1Q2016, earnings remain weak and will continue to constrain the bank's capacity to bolster its relatively limited capital levels organically, while they provide a thin cushion to credit losses stemming from nonperforming loans higher than the system.

Moody's notes that HSBC Mexico has been challenged to restore profitability metrics to levels reported before the bank embarked on a risk contention period between 2012-2014. During that period, management tightened underwriting standards and shed relationships with riskier customers. That strategy led to significant declines in revenues and market share, especially in retail lending, and contributed to a loss of competitive edge, which the bank has not overcome.

Weak profitability is also the result of increasing loan loss provisions, which have soared to nearly 90% of the bank's pre-provision income as of 1Q2016, a figure that is twice as high the peers' average. This performance in part relates to legacy sizable problem corporate exposures to the construction segment, and more recently to deterioration of consumer loans.

Moody's also notes management's goal to expand the loan portfolio at seemingly above market trends in response to parent HSBC Holdings plc's (HSBC, A1 negative) aggressive goals for revenue and earnings growth laid on the Mexican subsidiary. The ambitious growth goals, which combined with efforts to potentially expand the customer base by attracting new customers, will challenge the bank's underwriting standards, in Moody's view. These dynamics will likely lead to setbacks in asset quality and additional provisioning needs, further pressuring earnings.

Though asset quality metrics improved in recent quarters, the bank continues to exhibit the weakest asset risk metrics among the largest banks in the country, with a delinquency ratio of 5.1% as of 1Q2016 versus peers' 2.1%, in average. While this ratio incorporates arrears that have been already fully provisioned for, Moody's sees limited room for improvement as the bank expands in riskier, yet more profitable, consumer loans and lends to small and medium-sized enterprises. Moreover, asset quality remains pressured by the highest borrower concentrations among the large Mexican banks when measured against tangible common equity.

Lastly, capitalization ratios will continue under pressure due to loan expansion and the bank's weak capacity to replenish capital organically derived from currently poor profitability.

DOWNGRADE OF DEPOSIT AND SENIOR DEBT RATINGS

Moody's continues to regard HSBC Mexico as important to its parent and assesses a very high likelihood of parent support in case of need, which results in three notches of uplift from its BCA. However, the lackluster performance of the Mexican bank to date, if not improved substantially, could lead to shifts in likelihood of parental support. HSBC Mexico's deposit rating was downgraded to Baa2 reflecting Moody's reassessment of the Mexican government's willingness to provide support to the bank to high from very high. That said, Moody's continues to regard HSBC Mexico as a systemically important bank in light of its 7.1% market share of the system's deposits.

WHAT COULD MOVE THE RATINGS UP OR DOWN

The BCA could be further lowered if profitability and asset quality metrics continue to deteriorate. But even if the BCA were downgraded, the deposit ratings would not be affected as long as our assessment of the likelihood of affiliate and government support remain unchanged.

There is no upward pressure on HSBC Mexico's ratings at this juncture, but the ratings could benefit from substantial and sustainable improvements in profitability and asset quality metrics.

LIST OF AFFECTED RATINGS

-- HSBC Mexico, S.A.

The following ratings were downgraded:

Long-term global local currency deposit rating to Baa2, from A2, stable outlook

Short-term global local currency deposit rating to Prime-2, from Prime-1

Long-term foreign currency deposit rating to Baa2, from A3, stable outlook

Long-term global local currency senior unsecured debt rating to Baa2, from A2, stable outlook

Long-term global local currency provisional senior unsecured MTN debt program rating to (P)Baa2, from (P)A2

Short-term global local currency provisional senior unsecured MTN debt program rating to (P)Prime2, from (P)Prime-1

Long-term global local currency subordinated debt rating to Ba1, from A3

Long-term global local currency provisional subordinated MTN debt program rating to (P)Ba1, from (P)A3

Long-term global local currency provisional junior subordinated MTN debt program rating to (P)Ba2, from (P)Baa1

Long-term Mexican National Scale deposit rating to Aa2.mx, from Aaa.mx

Long-term Mexican National Scale senior unsecured debt rating to Aa2.mx, from Aaa.mx

Long-term Mexican National Scale senior unsecured MTN debt program rating to Aa2.mx, from Aaa.mx

Long-term Mexican National Scale subordinated debt rating to A1.mx, from Aaa.mx

Long-term Mexican National Scale subordinated MTN debt program rating to A1.mx, from Aaa.mx

Long-term Mexican National Scale junior subordinated MTN debt program rating to A2.mx, from Aa1.mx

Standalone baseline credit assessment to ba3, from baa3

Adjusted baseline credit assessment to baa3, from a2

Long-term counterparty risk assessment to Baa1(cr), from A1(cr)

Short-term counterparty risk assessment to Prime-2(cr), from Prime-1(cr)

Overall rating outlook: Stable

-- HSBC Casa de Bolsa, S.A. de C.V.

The following ratings were downgraded:

Long-term global local currency issuer rating to Baa3, from A2, stable outlook

Short-term global local currency issuer rating to Prime-3, from Prime-1

Long-term Mexican National Scale issuer rating to Aa3.mx, from Aaa.mx

Overall rating outlook: Stable

The principal methodology used in rating HSBC Mexico, S.A. was Banks published in January 2016. The principal methodology used to rate HSBC Casa de Bolsa, S.A. de C.V. was Global Securities Industry Methodology published in May 2013. Please see the Ratings Methodologies page on www.moodys.com.mx for a copy of these methodologies.

The period of time covered in the financial information used to determine HSBC Mexico, S.A. and HSBC Casa de Bolsa, S.A. de C.V. ratings is between 1 January 2011 and 31 March 2016 (source: Moody's, HSBC Mexico, S.A. and HSBC Casa de Bolsa, S.A. de C.V.)

Moody's National Scale Credit Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. NSRs differ from Moody's global scale credit ratings in that they are not globally comparable with the full universe of Moody's rated entities, but only with NSRs for other rated debt issues and issuers within the same country. NSRs are designated by a ".nn" country modifier signifying the relevant country, as in ".za" for South Africa. For further information on Moody's approach to national scale credit ratings, please refer to Moody's Credit rating Methodology published in May 2016 entitled "Mapping National Scale Ratings from Global Scale Ratings". While NSRs have no inherent absolute meaning in terms of default risk or expected loss, a historical probability of default consistent with a given NSR can be inferred from the GSR to which it maps back at that particular point in time. For information on the historical default rates associated with different global scale rating categories over different investment horizons, please see https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_189530.

REGULATORY DISCLOSURES

Information sources used to prepare the rating are the following: parties involved in the ratings, parties not involved in the rating, public information, and confidential and proprietary Moody's information.

The ratings have been disclosed to the rated entities prior to public dissemination.

A general listing of the sources of information used in the rating process, and the structure and voting process for the rating committees responsible for the assignment and monitoring of ratings can be found in the Disclosure tab in www.moodys.com.mx.

The date of the last Credit Rating Action was 13 June 2016.

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.mx.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity.Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

This Rating is subject to upgrade or downgrade based on future changes in the financial condition of the Issuer/Security, and said modifications will be made without Moody's de México S.A. de C.V accepting any liability as a result.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see Moody's Rating Symbols and Definitions on www.moodys.com.mx for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com.mx for the last rating action and the rating history. The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see our website www.moodys.com.mx for further information.

Please see www.moodys.com.mx for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

The ratings issued by Moody's de Mexico are opinions regarding the credit quality of securities and/or their issuers and not a recommendation to invest in any such security and/or issuer.

Please see the ratings tab on the issuer/entity page on www.moodys.com.mx for additional regulatory disclosures for each credit rating.

David Olivares Villagomez
VP - Senior Credit Officer
Financial Institutions Group
Moody's de Mexico S.A. de C.V
Ave. Paseo de las Palmas
No. 405 - 502
Col. Lomas de Chapultepec
Mexico, DF 11000
Mexico
JOURNALISTS: 001-888-779-5833
SUBSCRIBERS:52-55-1253-5700

M. Celina Vansetti
MD - Banking
Financial Institutions Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's de Mexico S.A. de C.V
Ave. Paseo de las Palmas
No. 405 - 502
Col. Lomas de Chapultepec
Mexico, DF 11000
Mexico
JOURNALISTS: 001-888-779-5833
SUBSCRIBERS:52-55-1253-5700

Moody's downgrades HSBC Mexico's intrinsic strength to ba3 and deposits to Baa2; stable outlook
No Related Data.
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