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Rating Action:

Moody's downgrades financial strength of HSBC Mexico to C-; lowers local-currency deposits to A2

 The document has been translated in other languages

19 Oct 2009

Mexico City, October 19, 2009 -- Moody's Investors Service downgraded HSBC Mexico's bank financial strength rating (BFSR) to C- from C, which maps to an unsupported baseline credit assessment (BCA) of Baa1, from A3. Moody's also lowered the bank's global local-currency long-term deposit and debt ratings to A2 from Aa2, and confirmed the Prime1 short- term rating. At the same time, the bank's long- term subordinated debt ratings (eligible for Tier 2 and Tier 1 capital treatment, respectively) were downgraded to A3 and Baa1.

Moody's also lowered HSBC Mexico Casa de Bolsa, S.A.'s global local-currency long-term issuer rating to A2 from Aa2, while confirming the Prime-1 short-term rating. These rating actions conclude the review for possible downgrade initiated on July 1, 2009.

The outlook on all these ratings is now stable.

The downgrade of the deposit ratings was driven by the rating agency's global reassessment of the ability of governments to support their countries' banks during a protracted systemic crisis. The likelihood of such support is an important part of Moody's credit analysis, and it provides uplift to the ratings above that which would be implied by the banks' own financial strength. For the Mexican banks, the downgrades bring the ratings closer in line with that of the government's own local currency bond rating of Baa1.

The A2 local currency deposit rating for HSBC Mexico, which is two notches above the bank's unsupported baseline credit assessment of Baa1, incorporates a high probability of support from its ultimate parent, HSBC Holdings Plc. The parent-supported rating is consistent with the new A2 systemic support indicator for Mexico, such that HSBC Mexico's deposit rating no longer benefits from uplift due to systemic support.

HSBC Mexico's Baa1/Prime-2 foreign currency deposit ratings were not affected by this action; they are still constrained by Mexico's foreign currency deposit ceiling, which has a stable outlook. The bank's Mexican National Scale deposit and debt ratings of Aaa.mx and MX-1 also remain unchanged.

DOWNGRADE OF HSBC MEXICO'S BANK FINANCIAL STRENGTH RATING

The downgrade of HSBC Mexico's BFSR reflects Moody's view that the bank's core earnings capacity has declined significantly, and that its balance sheet is weaker after higher-than-expected credit losses and major loan write- offs, particularly in its credit card portfolio. In addition, pending provisioning of consumer loans in the context of an already pressured earnings environment and HSBC Mexico's relatively thinner Tier-1 capital adequacy are also important credit concerns. This is so because - in Moody's view - the bank's loss- absorption capacity has weakened both on an absolute basis and as compared with those of its large peers in Mexico.

Moody's said that while the bank's major asset quality problem has been largely reduced due to heavy write-offs and a restructuring and strengthening of its credit risk management function, Moody's remains cautious with respect to the bank's risk management and controls. Moody's acknowledges, however, that recent initiatives to strengthen HSBC Mexico's risk practices, as well as its underwriting and collections, should curtail significant deterioration of the loan book going forward.

HSBC Mexico has also lost market share and some of its competitive edge which could affect its overall franchise strength, particularly in light of the currently harsh credit environment and tough competition from larger and healthier competitors in Mexico. The bank's modest prospects for earnings and loan growth are also important concerns as it could take longer to resume more comfortable profitability levels.

Moody's views as positive management's capitalization plans, which include a recent issuance of nearly US$200 million of Tier-2 capital eligible instruments, as well as a strict cost-reduction campaign to support earnings generation and ultimately capital accretion.

DEPOSIT-RATING CHANGE REFLECTS REVISED APPROACH TO SYSTEMIC SUPPORT

Moody's has refined its assessment of systemic support for the Mexican banks to better reflect the capacity of the government to support the banking system as a whole in the event of a systemic crisis. Moody's continues to believe that most governments are likely to support their banking systems to avoid a meltdown of the local payment system in such an event.

Nevertheless, the agency also views the capacity of a country and its central bank to support the nation's banks to be more closely aligned with the government's own creditworthiness. The revised approach to systemic support is outlined in Moody's special comment entitled "Financial Crisis More Closely Aligns Bank Credit Risk and Government Ratings in Non-Aaa Countries", published in May 2009.

Moody's said that the new systemic support indicator for Mexico has been established at A2, thus replacing the Aaa local-currency deposit ceiling as the systemic support input for bank ratings. The new A2 support indicator nevertheless reflects two notches of uplift above the government's Baa1 local currency bond rating.

The two-notch difference reflects Moody's view of the Mexican government's strong ability and willingness to support the banking system, including a broad array of financial and non-financial tools, as well as the intrinsic strength of the banking system demonstrated during the recent global crisis. This view is underpinned by the following:

1. The Mexican government gave full support to the banks during the economic and financial crisis ("Tequila") of 1994-1995.

2. Concrete actions during the current crisis, which include partially guaranteed short-term liquidity lines provided through development banks to keep domestic commercial paper markets flowing, as well as accounting forbearance on repurchase (repo) operations and mark to market valuations, are further indicative of the high priority the government places on the health and stability of the financial system.

3. Banking institutions are primarily core funded in local currency, which has allowed them to manage through the current financial crisis. Credit stress in the Mexican banking system has been manageable through the global recession because of banks' strong bank fundamentals going into the crisis. Although bank performance has come under pressure due to Mexico's sharp economic downturn, the major banks continue to perform profitably, with manageable asset quality, good liquidity, and solid Tier-1 capital ratios and reserve levels.

4. The relatively small size of the banking system in relation to government resources (loans represent 34% of GDP), as well as the fact that foreign liabilities of the Mexican banks comprise a low 24% of the country's foreign currency reserves, suggest that the risk of crystallization of banking losses on the government's balance sheet should be moderate.

Moody's, however, highlighted that the Mexican banking system still faces the challenges presented by the country's ongoing economic recession and difficult credit environment overall. Bank earnings have been affected by a sharp increase in loan delinquencies and hence higher provisioning requirements, as well as much reduced lending activity and lower interest rates in 2009. At the same time, the banks' sound capitalization levels have largely withstood increased delinquencies through the downturn, and these remain at comfortable levels.

PRINCIPAL METHODOLOGIES AND LAST RATING ACTIONS

The principal methodologies used in rating HSBC Mexico were "Bank Financial Strength Ratings: Global Methodology" and "Incorporation of Joint Default Analysis into Moody's Bank Ratings: A Refined Methodology", available on www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating these issuers can also be found in the Rating Methodologies sub-directory on Moody's website.

The last rating action on HSBC Mexico was on August 6, 2009, when Moody's affirmed the bank's foreign currency deposit ratings with stable outlook. On July 1, 2009, the bank's BFSR was placed under review for possible downgrade. On the same date the bank's GLC deposit and debt ratings and foreign currency debt ratings were also placed on review for possible downgrade.

The following rating actions were taken:

HSBC Mexico, S.A.

- Bank financial strength rating: lowered to C-, with stable outlook, from C

- Long- term local- currency deposits: downgraded to A2, with stable outlook, from Aa2

- Long- term local- currency senior debt: downgraded to A2, with stable outlook, from Aa2

- Long- term local- currency subordinated debt: downgraded to A3, with stable outlook, from Aa3

- Long- term local- currency junior subordinated debt: downgraded to Baa1, with stable outlook, from A1

- Short- term local- currency deposits and senior debt: Prime-1, confirmed

HSBC Mexico Cayman Branch

- Long- term foreign currency senior debt: downgraded to A2, stable, from A1

- Short- term foreign currency senior debt: Prime-1, confirmed

HSBC Mexico Casa de Bolsa, S.A.

- Long- term local currency issuer: downgraded to A2, with stable outlook, from Aa2

- Short- term local currency issuer: Prime-1, confirmed

Mexico City
David Olivares Villagomez
VP - Senior Credit Officer
Financial Institutions Group
Moody's de Mexico S.A. de C.V
Telephone:+52-55-1253-5700

New York
Jeanne Del Casino
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's downgrades financial strength of HSBC Mexico to C-; lowers local-currency deposits to A2
No Related Data.
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