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Rating Action:

Moody's revises HSBC Holdings and subs' outlook to stable from positive

29 Nov 2007
Moody's revises HSBC Holdings and subs' outlook to stable from positive

All of the firms' ratings were affirmed

London, 29 November 2007 -- Moody's Investors Service today revised the outlook on HSBC Holdings plc ("HSBC", senior at Aa2/P-1) and related subsidiaries including HSBC Finance Corporation (senior at Aa3; "HFC") to stable from positive. (Please see full list of affected entities below). All of the firms' ratings were affirmed.

Commenting further, Moody's said that the revision of the outlook to stable reflects the deterioration in the intrinsic financial strength of HSBC's US operations, most notably HFC as well as the challenges that the rating agency expects the group will be facing over the remainder of 2007 and during 2008 due to the more difficult global credit environment.

HSBC's US consumer operations have been experiencing rapidly escalating delinquencies and impairments over the course of 2007, conditions which the group now expects will continue into 2008. In addition, in line with other banks with structured credit exposure, Moody's expects that HSBC faces the possibility of additional write-downs in these portfolios related to the continued deterioration in the credit quality of the assets in these structures. Lastly, revenue growth may be slower due to less buoyant credit conditions and tighter availability of capital. As a result, Moody's anticipates that the group's earnings will be depressed for the near term but will nevertheless remain positive year-on-year, with losses in the US consumer portfolio more than offset by sustained strong earnings from other parts of the group.

The revision in the outlook for the related subsidiaries reflects the ownership by, and our expectation of a high degree of support for these entities should it be needed from the ultimate holding company, HSBC Holdings plc.

Moody's said the ratings of HSBC Holdings plc are based upon both the intrinsic financial strength of each of its various subsidiaries and the broad geographic diversification among these subsidiaries. The holding company's ratings also reflect the structural subordination of holding company creditors, who are dependent on the holding company's equity investments in its subsidiaries, including subsidiary dividends, to service the holding company's debt obligations.

In light of HSBC's announcement to assist in the restructuring of two Structured Investment Vehicles (SIVs), Asscher Finance Limited and Cullinan Finance Limited, Moody's added that it will monitor the bank's activities to support its managed conduits and SIVs (please see Moody's Press Release of 27 November). While the quality of the assets in the two SIVs is currently reported as strong (average rating of the assets is Aa1) and with no downgrades in the underlying assets to date, Moody's will track the on-going credit quality of these assets in combination with HSBC's managed conduits and SIV exposure. Moody's said that a significant deterioration in these exposures could trigger negative rating action if the associated write-downs were to have a material impact on HSBC's financial fundamentals.

Commenting further, Moody's said that HSBC's profitability for the nine months ended 30 September 2007 remains ahead of the same period for 2006. This performance came despite a rapid escalation in credit costs. Reflecting the group's strong diversification, these charges were more than offset by the strong earnings contributions of Asia, the Middle East, Europe, and most of Latin America. Moody's noted that the results would have been lower, although still up on the prior year, had the group not benefited from the positive impact of a US$1.3 billion mark-to-market gain on the group's own debt as a result of credit spread widening.

Furthermore, as is frequently the case in periods of market turbulence, HSBC is a beneficiary of "flight- to- quality" which assures a strong liquidity position. The group has further disclosed that its capital position as of the end of September remained in line with those announced with its half-year interims (Tier 1 of 9.3%).

Moody's said that its ratings and outlook on HSBC Finance Corporation (senior at Aa3; "HFC") are based on its expectation that this subsidiary, which is currently loss-making, will continue to benefit from the substantial support of its parent. HFC's ratings reflect the extent to which HFC has been integrated within the Group, and the degree to which HSBC represents a source of strength for HFC, including its capacity, economic motivation and willingness to provide liquidity and capital support to HFC in a stress situation. Moody's notes that this support was most recently evidenced by the $750 million capital contribution that the unit received in November, following its YTD 2007 loss of US$332 million.

Reflecting its assessment of and expectations for HFC's operating profitability and sub prime mortgage exposures, Moody's said that HFC's intrinsic credit profile has weakened from a solid A level, to a weak A. HFC's asset quality, particularly in the wholesale mortgage book, continues to erode and this leads to continuing negative pressure on HFC's intrinsic credit standing. Delinquencies have also increased across most of the company's asset types, including branch-based real estate secured and unsecured personal loans, and loss expectations have increased for both branch-based and wholesale-originated real estate secured loans. Moody's expects that HFC's credit costs are likely to remain elevated through 2008 given weak housing markets and the company's need to work through its wholesale mortgage book, posing a material drag on HFC's operating profitability. Despite these challenges, HFC generated a YTD annualized $8.8 billion of pre-provision operating profits (excluding one-offs) through September 30, which provides a substantial earnings cushion to absorb elevated credit costs.

In affirming the HSBC Holdings plc's Aa2/P-1 ratings Moody's said the Group's excellent diversification, its strong financial fundamentals, and its conservative risk profile underpin the Group's ratings at their current levels. Moody's regards diversification as very strong both in terms of geographic presence, and through the breadth of its customer base, product lines and activities. HSBC's recurring earnings power, as measured by pre-provision operating income and excluding results from subsidiaries and associates to average risk-weighted assets, stood at a healthy 3.8 % for the first half of 2007, against 3.6 % for the year 2006. This underscores and attests to the strength of the group's diversified and robust earnings profile, the rating agency said.

Moody's said that the stable outlook is predicated on its expectation that the group will continue to be profitable due to the positive contributions from its non-US operations. Reduced earnings from these operations could place pressure on the ratings as could a significant write-down related to exposure to structured credit as well as its managed conduits and SIV exposures. Moody's added that a key sensitivity in its stable rating outlook is the extent to which the group's other operations (Latin America, Asia, and Middle East) do not suffer from contagion. Second-order effects from an extension of the credit crisis to these markets would further pressure the group's earnings and, if material, could pressure earnings. Moody's added however this needs to be put against the group's robust pre-provision profits (US$32 billion in FY2006 and US$20 billion in 1H2007).

Moody's said that recovery in the profitability of the group's US operations coupled with continued strong contributions from other group operations such that its financial profile is in line with more highly rated institutions could lead to a positive revision of the outlook over time. While the group displays satisfactory risk management practices, positive rating actions would need to be accompanied by a further strengthening of the group's risk management processes.

Conversely, further signs of relative weakness in the group's risk management processes, or a material weakening in the group's very strong financial fundamentals could put negative pressure on the ratings.

The following companies had the rating outlook on their long-term debt ratings revised to stable from positive:

HSBC Holdings plc

HSBC Private Banking Holdings (Suisse) SA

HSBC Capital Funding (Sterling 1) L.P.

HSBC Capital Funding (Dollar 1) L.P.

HSBC Capital Funding (Dollar 2) L.P.

HSBC Capital Funding (Euro 1) L.P.

HSBC Capital Funding (Euro 3) L.P.

HSBC Finance Corporation

HFC Bank plc

HSBC Financial Corporation Limited

Household Finance Corporation

Beneficial Corporation

Household Global Funding Inc.

Household International Netherlands B. V.

Household Capital Trust II

HSBC Finance Capital Trust IX

HSBC USA Inc

HSBC Bank USA N.A.

Republic National Bank of New York

Republic New York Corporation

Republic New York Capital I

Republic New York Capital II

HSBC USA Capital Trust V

HSBC USA Capital Trust VI

HSBC Americas Capital Trust I

The following company had the rating outlook on its long-term global local currency deposit rating revised to stable from positive:

HSBC Mexico S.A.

Based in London, HSBC Holdings plc reported total consolidated assets of USD 2,150 billion as of 30 June 2007.

London
Lynn Exton
Senior Vice President
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
Adel Satel
Managing Director
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

No Related Data.
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