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Rating Action:

Moody's upgrades HSBC México's ratings; changes outlook to negative

 The document has been translated in other languages

23 Jul 2019

Mexico, July 23, 2019 -- Moody's de México S.A. de C.V. today upgraded to A3, from Baa1, HSBC México, S.A.'s (HSBC México) long-term global local and foreign currency deposit and senior unsecured debt ratings. The rating agency also upgraded HSBC México's standalone baseline credit assessment (BCA) to ba1, from ba2, and its adjusted BCA to baa1, from baa2. HSBC México's long-term Mexican National Scale deposit and senior unsecured debt ratings were upgraded to Aaa.mx, from Aa1.mx.

The outlook on HSBC México's ratings was changed to negative, from positive, and is now in line with the negative outlook on the A3 Mexican government debt rating.

At the same time, Moody's upgraded HSBC Casa de Bolsa, S.A. de C.V.'s (HSBC Casa de Bolsa) long-term global local currency issuer rating to Baa1, from Baa2, and its long-term Mexican National Scale issuer rating to Aa1.mx, from Aa2.mx. The outlook on HSBC Casa de Bolsa's ratings has been changed to stable, from positive.

Moody's affirmed HSBC México's Prime-2 short-term deposit ratings as well as the bank's A3(cr)/Prime-2(cr) long- and short-term Counterparty Risk Assessments. HSBC Casa de Bolsa's short-term global scale and Mexican National scale issuer ratings of Prime-2 and MX-1 were also affirmed.

Moody's has also withdrawn the outlook on HSBC Casa de Bolsa's issuer rating for its own business reasons. This has no impact on the stable outlook for HSBC Casa de Bolsa. Please refer to the Moody's de México Policy for Withdrawal of Credit Ratings, available on its website, www.moodys.com.mx.

The following ratings and assessments were upgraded:

HSBC México, S.A. (6700)

- Baseline credit assessment, to ba1 from ba2

- Adjusted baseline credit assessment, to baa1 from baa2

- Long-term global local and foreign currency deposit ratings, to A3 from Baa1, outlook changed to negative from positive

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

- Long-term global local currency senior unsecured debt rating, to A3 from Baa1, outlook changed to negative from positive (HSBC 13-2, HSBC 17, HSBC 17-2, HSBC 18, HSBC 19)

- Long-term global foreign currency senior unsecured debt rating, to A3 from Baa1, outlook changed to negative from positive (HSBC 18D, HSBC 19D)

- Long-term Mexican national scale local currency senior unsecured debt rating, to Aaa.mx from Aa1.mx (HSBC 13-2, HSBC 17, HSBC 17-2, HSBC 18, HSBC 19)

- Long-term Mexican national scale foreign currency senior unsecured debt rating, to Aaa.mx from Aa1.mx (HSBC 18D, HSBC 19D)

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

- Long-term global local currency issuer rating, to Baa1 from Baa2; positive outlook withdrawn

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

The following ratings and assessments were affirmed:

HSBC México, S.A. (6700)

- Short-term global local and foreign currency deposit ratings at Prime-2

- Long- and short-term counterparty risk assessments at A3(cr)/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 global local currency issuer rating at Prime-2

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

Outlook actions:

HSBC México, S.A. (6700)

- Outlook changed to negative from positive

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

- Outlook changed to stable from positive

RATINGS RATIONALE

The upgrade of HSBC México's ratings and BCA reflects Moody's assessment that the bank has achieved a material improvement in profitability, which benefited from continuing enhancement to asset quality as it cleaned its loan book of legacy problem loans and shifted its composition toward lower-risk asset classes, reducing provisioning needs. HSBC México's ample access to core deposits ensures it has one of the lowest funding costs in the Mexican banking system, boosting margins. HSBC México's ratings also incorporate the risks posed by above-peer loan expansion amidst a low growth environment in Mexico as the bank seeks to recapture market share, and its only moderate capitalization.

HSBC México's better asset quality derives from the repositioning of its loan book, which now has an increased share of loans to large corporates, mostly originated among its existing client base, and secured retail loans; together, these lower risk asset categories represented almost 75% of loans as of March 2019, up from 64% as of year-end 2016. Importantly, the bank has also cleaned up legacy loans, following sizable write-offs, and revamped risk management and controls, measures which combined have contributed to lower its nonperforming loan (NPL) ratio to levels of 1.9% in 1Q2019, from 3% at 2016, in line with the system's average. Reserve coverage stands at a healthy 183% of NPLs, providing a solid buffer to absorb expected losses.

Notwithstanding its more diversified, lower risk loan portfolio than in the past, HSBC México's focus on large corporates has increased its single borrower concentrations, a credit negative characteristic of most rated Mexican banks. In addition, HSBC México's above average loan growth could weaken asset quality as loans season in a less favorable economic scenario, as evidenced by consecutive downward revisions to Mexico's estimated growth rates for the next two years. Management has signaled that the pace of loan growth will decelerate from the two-year average of 17% as of December 2018, which was nearly 2x higher than the system's. Moody's expects that discipline in its portfolio allocation strategy and slowing loan growth will reduce asset risk and earnings volatility over the medium-term.

HSBC México's improved profitability is the result of lower credit costs, evidenced by the continuing decline in the percentage of provisions relative to pre-provision income to 43.5% in 1Q2019, from 54% at year-end 2018 and from a high 76.3% in 2016, reflecting the successful management of asset quality so far. In addition, efficiency gains boosted earnings, with cost-to-income ratio continuing to decline to 60.5% in 2018 from 65.9% one year prior. HSBC México's net income to tangible assets was 0.7% during 1Q 2019, adjusted for a one-time gain related to the sale of a subsidiary, which is up substantially from the 0.2% profitability ratio reported in 2016.

Although the bank enjoys one of the lowest funding costs in the banking system, its net interest margin tends to be lower than that of peers, reflecting narrower credit spreads overall. In line with HSBC México's focus on large corporates and secured retail lending, which are lower risk but lower yielding loans, we expect margins to continue to lag the system's. Profitability, however, will continue to benefit from lower provisioning needs, as well as from efficiency gains, which will help offset the lower margins.

HSBC México's ratings will continue to benefit from the bank's proven capacity to attract customer deposits, supported by an extensive branch and ATM network. As of March 2019, customer deposits amounted to 55% of total assets, and almost two-thirds of total deposits comprised of relatively sticky demand deposits, reflecting its strong franchise. HSBC México's funding costs, like those of its peers, have been rising along with the general increase in interest rates over the past years. Nonetheless, even with higher funding costs and a lower net interest margin, Moody's expects HSBC México's profitability to remain healthy, a reflection of the improvement in its core operational efficiency.

HSBC México's capitalization remains moderate relative to peers and reflects the rapid growth rate, despite the improved earnings generation and conservative dividend payout. The bank's tangible common equity represented 10.9% of adjusted risk-weighted assets as of March 2019, below the 13.7% of its large bank peers in Mexico.

NEGATIVE OUTLOOK IN LINE WITH NEGATIVE OUTLOOK ON MEXICO'S GOVERNMENT RATINGS

HSBC México's ratings incorporate the very high likelihood that the bank will benefit from extraordinary financial support from its parent, HSBC Holdings plc (debt A2 stable, BCA a2), in an event of stress given the importance of the Mexican operations for the bank's North American strategy. The ratings also reflect the high likelihood that HSBC México will receive support from the Mexican government because of its systemic importance, evidenced in HSBC México's 8% share of the system's deposits, as of March 2019.

The outlook was changed to negative to reflect the negative outlook on Mexico's sovereign rating, which Moody's uses to assess the government's capacity to provide extraordinary financial support to financial institutions. HSBC México's deposit and senior unsecured debt ratings are now in line with the Mexican government's A3 bond rating.

UPGRADE OF HSBC CASA DE BOLSA'S ISSUER RATINGS

The upgrade of HSBC Casa de Bolsa's ratings incorporates Moody's view of the brokerage house as highly integrated and harmonized (HIH) with HSBC México 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 HSBC México's baa1 adjusted BCA, which incorporates three notches of uplift from the bank's standalone BCA of ba1 stemming from affiliate but not government support.

The change in outlook to stable, from positive, on HSBC Casa de Bolsa is in line with our stable views on HSBC México's standalone credit profile, as exhibited by the bank's ba1 standalone BCA.

WHAT COULD CHANGE THE RATINGS UP OR DOWN

HSBC México's negative outlook on its deposit and debt ratings, which is aligned to the outlook on Mexico's debt rating could be stabilized if (i) Mexico's sovereign rating outlook changes to stable; or if (ii) HSBC México's profitability continues to improve as the bank manages to grow its balance sheet without further pressures on asset quality and capital.

If Mexico's government bond rating faces downward pressure again in the future, HSBC México's global scale ratings would be negatively affected as well. Downward pressure on the bank's deposit and senior debt ratings could accumulate if in line with HSBC México's rapid loan growth and higher single borrower concentrations, there is a material deterioration of its asset quality or capitalization.

HSBC México's Aaa.mx national scale rating (NSR) is the sole Mexican national scale rating corresponding to its A3 global scale rating.

HSBC Casa de Bolsa's Aa1.mx national scale rating (NSR) is the sole Mexican national scale rating corresponding to its Baa1 global scale rating.

The principal methodology used in rating HSBC México, S.A. was Banks published in August 2018. The principal methodology used in rating HSBC Casa de Bolsa, S.A. de C.V. was Securities Industry Market Makers published in June 2018. 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 México, S.A.'s rating is between 01 January 2014 and 31 March 2019 (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 rating is between 01 January 2014 and 31 March 2019 (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 http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1174796.

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 México, S.A. was 09 May 2019.

The date of the last Credit Rating Action for HSBC Casa de Bolsa, S.A. de C.V. was 22 June 2018.

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.

Felipe Carvallo
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: 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.
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