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