Fitch Affirms HSBC USA Inc's VR at 'a-'; L-T IDR and Outlook Unaffected

NEW YORK--()--Fitch Ratings has affirmed HSBC USA Inc's (HUSI) Viability Rating (VR) at 'a-'. HUSI's 'AA-' long-term Issuer Default Rating (IDR) and Stable Rating Outlook are unaffected by today's action. Fitch downgraded HUSI's IDR on Dec. 7, 2012 in conjunction with the downgrade of HSBC Holdings (HSBC). For additional information, please see the press release 'Fitch Downgrades HSBC USA Inc.'s L-T IDR to 'AA-'; Outlook Revised to Stable', dated Dec. 7, 2012. A complete list of rating actions follows at the end of this release.

SENSITIVITY/RATING DRIVERS - VRs and IDRs
HUSI's VR reflects its franchise strength, strong risk-adjusted capital levels and robust liquidity. However, the ratings are constrained by the company's asset quality and weak earnings profile.

As a result of its affiliation with the HSBC group, Fitch considers HUSI to have strong brand recognition in the niche market of internationally minded retail and commercial clients. Fitch positively views HUSI's renewed focus on this key credit strength, as the company executes on strategic initiatives that have resulted in divestiture from its credit card business and non-key markets, with a greater emphasis on clients with needs for international connectivity.

Fitch considers HUSI's capital levels to be strong. Although tangible capital levels have eroded over the last several quarters, reflecting reinvestments of sale proceeds into low risk securities, HUSI continues to maintain a Fitch Core Capital Ratio of almost 13%, as the company has been successful in de-risking its balance sheet over the last several quarters.

Fitch notes HUSI's balance sheet is flush with liquidity, with a low loan-to-deposit ratio and a fairly sizable low-risk investment portfolio. Loans-to-deposits averaged around 50%, while its agency concentrated investment portfolio made up a third of the asset base at 3Q12. Fitch considers HUSI's liquidity to be strong relative to mid-sized U.S. banks that average a loan-to-deposit ratio of 87%, with investment portfolios accounting for a fifth of the asset base.

HUSI's risk averse and liquid balance sheet has had a clear impact on the company's earning profile, which Fitch views as weak relative to other mid-sized U.S. banks. HUSI's NIM through 3Q12 was 1.31%, compared to 3.5% for the mid-sized U.S. bank peer group. Fitch believes HUSI's sub-par NIM, relative to other mid-sized U.S. banks, has potential for positive momentum as the company engages to capitalize its niche market, while growing its C&I loan book and replacing lost yield from its credit-card business divestiture.

Nonetheless, Fitch believes HUSI will record a relatively weak return on assets in the medium term due its NIM and elevated operational costs resulting from regulatory agreements. Fitch notes HUSI's YTD 3Q12 average efficiency ratio of 89% (adjusted for one-time regulatory charges) would need significant improvements before the company can make a meaningful impact to its bottom line. Fitch anticipates the company to reach a more normalized expense structure in 2014-2015.

Asset quality in HUSI's commercial loan portfolio, which accounts for approximately 70% of total loans, remains good with NPAs averaging at 2.5% and 3Q12 YTD NCOs at 12bps. HUSI's residential portfolio, however, continues to be a drag on the overall loan portfolio. Total consumer loan NPAs (including accruing TDRs) at 3Q12 stood at 9.36%, with NCOs of 1.14%. Fitch also notes that loan loss reserve coverage appeared weak at 1.04%, compared to mid-sized U.S. banks average of almost 2.0%.

Fitch believes upward movement on HUSI's VR to be limited, and any significant deterioration in earnings and/or asset quality could put further pressure on HUSI's VR.

HUSI's IDRs are supported by its parent, primarily reflecting its core operations to the HSBC Group as noted in the Fitch press release 'Fitch Downgrades HSBC USA Inc.'s L-T IDR to 'AA-'; Outlook Revised to Stable', dated Dec. 7, 2012. As such, HUSI's IDRs will move in tandem with those of HSBC.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
Subordinated debt and hybrid capital instruments issued by HUSI are notched down from the IDR. The ratings of subordinated debt and hybrid securities are typically sensitive to any change in the bank's VR. However, given the high level of institutional support, issue ratings are notched from HUSI's IDR as support from the parent is presumed.

HOLDING COMPANY SENSITIVITY/RATING DRIVERS
HUSI has a bank holding company (BHC) structure with the bank, HSBC Bank USA (HBUS), as the main subsidiary. HBUS is considered core to its parent holding company supporting equalized ratings between bank subsidiary and BHC. IDRs and VRs are equalized with those of its operating companies and banks reflecting HUSI's role as the bank holding company, which is mandated in the U.S. to act as a source of strength for its bank subsidiaries.

SUBSIDIARY & AFFILIATED COMPANY SENSITIVITY/RATING DRIVERS
HUSI and HBUS factor in a high probability of support from their respective parent institutions. Fitch considers support to be strong given the high level of integration, brand, management and financial and reputational incentives to avoid subsidiary defaults.

Fitch has taken the following rating actions:

HSBC USA Inc.
HSBC Bank USA, National Association
--Viability Rating affirmed at 'a-'.

The following ratings are unaffected by today's action:

HSBC USA Inc.
--Long-term IDR 'AA-';
--Short-term IDR 'F1+';
--Support Rating '1';
--Commercial paper 'F1+'
--Preferred stock 'BBB+';
--Senior debt 'AA-';
--Subordinated debt 'A+'.

HSBC Bank USA, National Association
--Long-term IDR 'AA-';
--Short-term IDR 'F1+';
--Support Rating '1';
--Long-term deposits 'AA';
--Market linked deposits 'AAemr';
--Senior debt 'AA-';
--Short-term deposits 'F1+';
--Subordinated debt 'A+'.

Additional information is available at www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:
--'Global Financial Institutions Rating Criteria' (Aug. 15, 2012);
--'Rating FI Subsidiaries and Holding Companies' (Aug. 10, 2012);
--'Risk Radar' (Oct. 15, 2012);
--'Treatment of Unrealized Losses in U.S. Bank Capital Rule Proposal (Pro-Cyclical Capital Policy to Create Greater Capital Volatility for Banks)' (Aug. 7, 2012);
--'Assessing and Rating Bank Subordinated and Hybrid Securities' (Dec. 5, 2012).

Applicable Criteria and Related Research:
Global Financial Institutions Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686181
Rating FI Subsidiaries and Holding Companies
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=679209
Risk Radar October 2012
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=691996
Treatment of Unrealized Losses in U.S. Bank Capital Rule Proposal (Pro-Cyclical Capital Policy to Create Greater Capital Volatility for Banks)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685638
Assessing and Rating Bank Subordinated and Hybrid Securities
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=695542

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Contacts

Fitch Ratings
Primary Analyst:
Christopher Wolfe, +1-212-908-0771
Managing Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst:
Sarim Khan, +1-312-368-5459
Associate Director
or
Committee Chairperson:
Joo-Yung Lee, +1-212-908-0560
Managing Director
or
Media Relations:
Brian Bertsch, +1-212-908-0549
brian.bertsch@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst:
Christopher Wolfe, +1-212-908-0771
Managing Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst:
Sarim Khan, +1-312-368-5459
Associate Director
or
Committee Chairperson:
Joo-Yung Lee, +1-212-908-0560
Managing Director
or
Media Relations:
Brian Bertsch, +1-212-908-0549
brian.bertsch@fitchratings.com