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Rating Action:

Moody's upgrades HSBC Mexico's ratings; outlook changed to positive

 The document has been translated in other languages

22 Jun 2018

Mexico, June 22, 2018 -- Moody's de Mexico S.A. de C.V. upgraded today HSBC Mexico, S.A. (HSBC Mexico)'s global long-term local and foreign currency deposit and local currency senior unsecured debt ratings to Baa1 from Baa2. The outlook on these ratings has been changed to positive from stable.

In addition, the bank's long-term Mexican National Scale deposit and senior unsecured debt ratings were upgraded to Aa1.mx from Aa2.mx. The rating agency also upgraded HSBC Mexico's standalone baseline credit assessment (BCA) to ba2 from ba3, its adjusted BCA to baa2 from baa3, and its long-term counterparty risk assessment (CR Assessment) to A3(cr) from Baa1(cr).

At the same time, Moody's upgraded HSBC Casa de Bolsa, S.A. de C.V. (HSBC Casa de Bolsa)'s global long and short-term issuer ratings to Baa2/Prime-2 from Baa3/Prime-3, and its long-term Mexican National Scale issuer rating to Aa2.mx from Aa3.mx. The outlook on the long-term global rating has been changed to positive from stable.

Moody's affirmed HSBC Mexico's short-term deposit ratings as well as the bank's short-term CR Assessment. HSBC Casa de Bolsa's short-term Mexican National scale issuer rating of MX-1 was also affirmed.

The following ratings and assessments were upgraded:

HSBC Mexico, S.A. (6700)

Baseline credit assessment, to ba2 from ba3

Adjusted baseline credit assessment, to baa2 from baa3

Global long-term local and foreign currency deposit ratings, to Baa1 from Baa2, outlook changed to positive from stable

Long-term Mexican national scale deposit rating, to Aa1.mx from Aa2.mx

Long-term counterparty risk assessment, to A3(cr) from Baa1(cr)

Global long-term local currency senior unsecured debt rating, to Baa1 from Baa2, outlook changed to positive from stable

Long-term Mexican national scale senior unsecured debt rating to Aa1.mx from Aa2.mx

.MXN2.3 billion CERTIFICADOS BURSÁTILES due 2018 (HSBC 13)

Long-term Mexican national scale senior unsecured debt rating, to Aa1.mx from Aa2.mx

.MXN2.3 billion CERTIFICADOS BURSÁTILES due 2018 (HSBC 13)

Global long-term local currency senior unsecured debt rating, to Baa1 from Baa2, outlook changed to positive from stable

.MXN2.7 billion CERTIFICADOS BURSÁTILES due 2023 (HSBC 13-2)

Long-term Mexican national scale senior unsecured debt rating, to Aa1.mx from Aa2.mx

.MXN2.7 billion CERTIFICADOS BURSÁTILES due 2023 (HSBC 13-2)

Global long-term local currency senior unsecured debt rating, to Baa1 from Baa2, outlook changed to positive from stable

.MXN2.5 billion CERTIFICADOS BURSÁTILES due 2020 (HSBC 17)

Long-term Mexican national scale senior unsecured debt rating, to Aa1.mx from Aa2.mx

.MXN2.5 billion CERTIFICADOS BURSÁTILES due 2020 (HSBC 17)

Global long-term local currency senior unsecured debt rating, to Baa1 from Baa2, outlook changed to positive from stable

.MXN2.5 billion CERTIFICADOS BURSÁTILES due 2027 (HSBC 17-2)

Long-term Mexican national scale senior unsecured debt rating, to Aa1.mx from Aa2.mx

.MXN2.5 billion CERTIFICADOS BURSÁTILES due 2027 (HSBC 17-2)

Global long-term local currency senior unsecured debt rating, to Baa1 from Baa2, outlook changed to positive from stable

HSBC Casa de Bolsa, S.A. de C.V. (821608741)

Global long term issuer rating, to Baa2 from Baa3, outlook changed to positive from stable

Global short term issuer rating, to Prime-2 from Prime-3

Long-term Mexican national scale issuer rating to Aa2.mx from Aa3.mx

The following ratings and assessments were affirmed:

HSBC Mexico, S.A. (6700)

Global local and foreign currency short term deposit ratings at Prime-2

Global short-term counterparty risk assessment at Prime-2(cr)

Short-term Mexican national scale deposit rating at MX-1

HSBC Casa de Bolsa, S.A. de C.V. (821608741)

Short-term Mexican national scale issuer rating at MX-1

Outlook actions:

HSBC Mexico, S.A. (6700)

Outlook changed to positive from stable

HSBC Casa de Bolsa, S.A. de C.V. (821608741)

Outlook changed to positive from stable

RATINGS RATIONALE

The upgrade in HSBC Mexico's ratings considers the recent improvement in the bank's asset quality and profitability, together with the bank's ability to maintain core capitalization at higher levels than in the past despite rapid loan growth and still modest earnings. The positive outlook considers Moody's expectation that the bank's financial fundamentals will continue to improve given the success of the measures taken by the current management team in stabilizing the bank's franchise, while improving controls and risk management.

Despite loan growth averaging about a hefty 15% annually since 2016, nonperforming loans (NPLs) declined to 2.3% of gross loans as of March 2018, in line with the systemic average, from 5.2% as of year-end 2015, largely due to increased recoveries and hefty average annual charge-offs. At the same time, the reserve coverage of NPLs rose to 163% from 121%, providing the bank with solid buffers to absorb expected losses.

Though it remains well below the system average, HSBC Mexico's profitability has steadily increased since 2015, when the bank registered a net loss. Net income improved to 0.7% of total assets during the first three months of 2018 on an annualized basis, up from 0.2% in calendar year 2016. Earnings generation benefited from widening net interest margins, as lending rates rose in line with tightening monetary policy in Mexico while funding costs remained more stable, reflecting the strength of the bank's deposit funding base.

Profitability was also boosted by an improving efficiency, with operating expenses falling to 3.3% of total assets during the first three months of 2018 (annualized), from 3.6% by year-end 2016, as well as a decline in credit costs to 2.2% of gross loans from 3% by year-end 2016, in line with the strengthening of asset quality. With efficiency anticipated to continue to improve and credit costs expected to moderately decline further, Moody's expects that profitability will continue to gradually improve even once Mexico's benchmark interest rate starts to decline.

The bank's tangible common equity, Moody's preferred measure of capitalization, rose to about 11.8% of adjusted risk-weighted assets as of March 2018, up from 9.8% as of year-end 2015. The improvement was driven by a MXN5.55 billion capital injection in late 2016 together with the bank's decision to reinvest 100% of its earnings in recent years. Going forward, recovering earnings generation and a conservative dividend payout policy will sustain capital at current levels despite rapid capital consumption driven by continued strong loan growth .

HSBC México's deposit and senior debt ratings of Baa1 consider the very high likelihood that the bank will benefit from extraordinary financial support from its parent, HSBC Holdings plc (BCA of a2), in an event of stress given the strategic importance of the Mexican operations. The rating also considers the high likelihood that the bank will receive support from the Mexican government. This reflects the bank's significant 8% market share of the system's deposits and the risks to the stability of the system that an unsupported failure of the bank could represent.

The upgrade of the ratings of HSBC Casa de Bolsa considers Moody's view of the brokerage house as highly integrated and harmonized (HIH) with HSBC Mexico due to the strong linkages between the two in terms of infrastructure, risk management practices and customer base. Consequently, HSBC Casa de Bolsa's issuer ratings are aligned with the bank's baa2 adjusted BCA, which incorporates affiliate but not public support.

WHAT COULD CHANGE THE RATINGS UP/DOWN

The bank's ratings could be upgraded again if HSBC Mexico's profitability continues to improve and asset quality and capital remains stable. On the other hand, the ratings could be stabilized if earnings generation does not recover as expected, and/or if asset quality or capital deteriorate significantly.

The principal methodology used in rating HSBC Mexico, S.A. was Banks published in April 2018. The principal methodology used in rating HSBC Casa de Bolsa, S.A. de C.V. was Securities Industry Market Makers published in September 2017. Please see the Rating 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.'s ratings is between 1 January 2013 and 31 March 2018 (source: Moody's and issuer's financial statements).

The period of time covered in the financial information used to determine HSBC Casa de Bolsa, S.A. de C.V.'s ratings is between 1 January 2013 and 31 March 2018 (source: Moody's and issuer's financial statements).

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_1113601.

REGULATORY DISCLOSURES

Information sources used to prepare the rating are the following: parties involved in the ratings, 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 for HSBC Mexico, S.A. was 15 June 2018.

The date of the last Credit Rating Action for HSBC Casa de Bolsa, S.A. de C.V. was 30 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 credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit 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 credit rating action, and whose ratings may change as a result of this credit 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 credit 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.

Georges Hatcherian
Asst Vice President - Analyst
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: 1 888 779 5833
Client Service: 1 212 553 1653

M. Celina Vansetti-Hutchins
MD - Banking
Financial Institutions Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 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: 1 888 779 5833
Client Service: 1 212 553 1653

No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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