Fitch Affirms HSBC Mexico's IDR at 'A' & VR at 'bbb'; Outlook Stable

MONTERREY, Mexico--()--Fitch Ratings has affirmed HSBC Mexico, S.A.'s (HSBCM) Viability Rating (VR) at 'bbb' and its local and foreign currency Issuer Default Ratings (IDRs) at 'A+' and 'A', respectively.

Simultaneously, Fitch has affirmed the national scale ratings of HSBCM and HSBC Casa de Bolsa, S.A. de C.V. (HSBCCB) at 'AAA(mex)' and 'F1+(mex)'. A full list of the rating actions follows at the end of this press release.

The Rating Outlook is Stable.

KEY RATING DRIVERS - IDRs and Support Rating

HSBCM's local and foreign currency IDRs, as well as its Support Rating (SR) are driven by the strong propensity of its ultimate parent; HSBC Holdings plc (HSBC) to provide support to HSBCM, if it would be required. Mexico is an important market for HSBC so in Fitch's opinion HSBCM is a strategically important subsidiary, which explains why HSBCM's local currency IDR of 'A+' is the highest among the Mexican banks rated by Fitch. HSBCM's foreign currency IDR of 'A' is capped by Mexico's Country Ceiling. The Stable Outlook on the IDRs reflects the cushion arising from the relatively high rating of the parent of HSBCM.

Given Fitch's perception of HSBCM's strategic importance to the group and the current rating criteria, HSBCM's local currency IDR is one notch down from HSBC's IDR, although HSBCM's IDRs are also limited by sovereign and/or country ceiling considerations.

KEY RATING DRIVERS - VR

HSBCM's VR has been affirmed as the bank has sustained its major strength, namely its sound funding and liquidity profile, its robust franchise and good and stable capital metrics. However, the VR also considers bank's low profitability and deteriorated asset quality.

HSBCM is the fifth largest bank in Mexico by total assets and loans and has one of the largest and most stable customer deposits base, accounting for roughly 8.8% of the banking system's core deposits. The bank has one of the strongest liquidity profiles among major banks. HSBCM's loan to deposits ratio as of June 2014 was a sound 78% and almost 60% of total deposits were in the form of core demand accounts.

HSBCM's operating profits are weak compared to the largest Mexican banks and international peers in the 'bbb' category. The profitability in 2013 was affected by higher loan loss provisions due to resumption in consumer lending and the negative implications on its exposure to the troubled homebuilder industry. Although HSBCM's profitability in 2014 shows signs of recovery, it sustainability would be dependent mostly on the ability of the bank to keep its credit costs at bay.

Despite weak earnings, capital metrics have remained stable in view of moderate loan growth and some capital injections. A capital injection in January 2013 helped to strengthen HSBCM's capitalization levels. The expected increase on lending activity may help HSBCM to recover its profitability and enhance its internal capital generation capacity; although, as mentioned before this will depend on lower credits costs.

HSBCM's asset quality shows a significant deterioration, mainly due to its credit exposure to large homebuilders and its consumer portfolio. Loan loss reserve coverage runs below the average of the larger bank peers and below the median for the 'bbb' rated banks. In Fitch's opinion, the greatest challenge of HSBCM is to lower and stabilize its impaired loans.

KEY RATING DRIVERS - NATIONAL RATINGS AND SENIOR DEBT

HSBCM's national scale ratings were affirmed since its IDRs are above those of the sovereign, and national scale ratings are relative rankings of creditworthiness within a certain jurisdiction.

HSBCCB's national scale ratings were also affirmed since it's perceived by Fitch as a strategically important affiliate of HCBCM and fully integrated into its operations and franchise. Also, the local holding company of both operating entities, Grupo Financiero HSBC, is legally enforced to provide support to its subsidiaries. Therefore, the national scale ratings of the brokerage unit are aligned with the bank's ratings.

The ratings of HSBCM's subordinated debt reflect Fitch's opinion that support from HSBC, if needed, would extend to any outstanding debt in the local market, in order to prevent negative effects on its reputational risk and overall funding costs. Coupled with the relatively high IDR of HSBC, the subordinated debt ratings are equal to that of HSBCM senior unsecured debt.

RATING SENSITIVITIES - IDRs and Support Rating

There is limited upside potential on HSBCM's local currency IDR, since this is already one notch below HSBC's IDR. It could only be upgraded by the confluence of upgrades in both the parent and the sovereign ratings. Similarly, the foreign currency IDR could only be upgraded in the event of a similar action on Mexico's country ceiling.

RATING SENSITIVITIES - VR

HSBCM's VR could be upgraded if the bank achieves and sustains operating ROAA ratios higher than 1.5% and an adjusted impairment ratio consistently below to 6%.

In turn, HSBCM's VR could be negatively affected if the bank fails to improve its profitability metrics, operating ROAs below 1%, and FCC ratios below 10%. Also, a further deterioration of asset quality could be negatively affects the VR.

RATING SENSITIVITIES - NATIONAL RATINGS AND SENIOR DEBT

HSBCM and HSBCCB's national scale ratings could only be negatively affected by a multi-notch downgrade of HSBC's IDRs, or a change in their propensity to support these affiliates.

Given Fitch's criteria for ranking bank hybrids and non-performance risk of these securities, the subordinated debt could be affected by a downgrade of HSBC's VR, even before such downgrade could affect the national scale issuer and senior unsecured debt ratings, and IDRs of HSBCM.

RATING SENSITIVITIES - SUPPORT RATING

HSBCM's SR could be affected if Fitch changes its view of HSBC Holdings' ability or willingness to support the Mexican bank.

Fitch has affirmed the following ratings:

HSBCM

--Foreign currency long-term IDR at 'A'; Outlook Stable;

--Foreign currency short-term IDR at 'F1';

--Local currency long-term IDR at 'A+'; Outlook Stable;

--Local currency short-term IDR at 'F1';

--Viability Rating at 'bbb';

--Support Rating at '1';

--Long-term national scale rating at 'AAA(mex)'; Outlook Stable;

--Short-term national scale rating at 'F1+(mex)';

--Long-term national scale rating for local senior debt issuances at 'AAA(mex)';

--Long-term national scale rating for local subordinated debt issuances at 'AAA(mex)'.

HSBCCB

--Long-term national scale rating at 'AAA(mex)'; Outlook Stable;

--Short-term national scale rating at 'F1+(mex)'.

Additional information is available on www.fitchratings.com.

Applicable Criteria and Related Research:

-- Global Financial Institutions Rating Criteria (Jan 31, 2014);

-- Rating Financial Institutions Above the Sovereign (Dec. 12, 2012);

-- Securities Firm Criteria (Jan. 31, 2014);

-- Rating FI Subsidiaries and Holding Companies (Aug. 10, 2012);

-- National Scale Ratings Criteria (Oct. 30, 2013).

Applicable Criteria and Related Research:

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732397

Rating Financial Institutions Above the Sovereign

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=696373

Securities Firms Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732556

Rating FI Subsidiaries and Holding Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=679209

National Scale Ratings Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=720082

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=850515

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Contacts

Fitch Ratings
Primary Analyst
Alejandro Tapia
Director
+52 81 8399 9156
Fitch Mexico SA de CV
Prol. Alfonso Reyes 2612, Edificio Connexity Piso 8
Col. Del Paseo Residencial
64920 Monterrey, N.L., Mexico
or
Secondary Analyst
Alejandro Garcia
Senior Director
+52 81 8399 9146
or
Committee Chairperson
Franklin Santarelli
Managing Director
+1-212-908-0739
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Alejandro Tapia
Director
+52 81 8399 9156
Fitch Mexico SA de CV
Prol. Alfonso Reyes 2612, Edificio Connexity Piso 8
Col. Del Paseo Residencial
64920 Monterrey, N.L., Mexico
or
Secondary Analyst
Alejandro Garcia
Senior Director
+52 81 8399 9146
or
Committee Chairperson
Franklin Santarelli
Managing Director
+1-212-908-0739
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com