Fitch Upgrades HSBC Uruguay's FC IDR to 'BBB+' & Assigns 'b+' VR; Outlook Stable

MONTERREY, Mexico--()--Fitch Ratings has upgraded HSBC Bank (Uruguay) S.A.'s foreign currency Issuer Default Rating (IDR) to 'BBB+' from 'BBB' and its local currency IDR to 'A-' from 'BBB+'. Fitch has affirmed the bank's support rating (SR) at '2'.

Simultaneously, Fitch has assigned a Viability Rating (VR) of 'b+'. A full list of rating actions follows at the end of this press release.

The IDRs have been upgraded as HSBC Holdings has decided to maintain its operations in Uruguay. Therefore, the supported IDRs by a highly rated parent now better reflect the bank's relative default risk on senior obligations, though the foreign currency IDRs are capped by the sovereign's country ceiling. HSBC Uruguay's foreign currency IDR of 'BBB+' now is at the country ceiling, while its local currency IDR of 'A-' is two notches above that of the Uruguayan sovereign rating.

KEY RATING DRIVERS - IDRS & SUPPORT RATING

HSBC Uruguay's local and foreign currency IDRs, as well as its Support Rating are driven by the strong ability and propensity of its ultimate parent; HSBC Holdings plc (HSBC, rated 'AA-'/ Stable Outlook/VR 'aa-') to provide support to HSBC Uruguay, if it would be required.

Even though the Uruguayan bank does not operate in a core market for HSBC, HSBC Uruguay's IDRs and Support Rating remain linked to those of its ultimate parent, reflecting Fitch's view that there is a high probability of support due to reputational considerations and the potential negative impact this could have on other subsidiaries. Additionally, Fitch affirmed HSBC Uruguay's Support Rating at '2' as required support would be immaterial relative to ability of parent to provide it. Given the above, it is expected that HSBC Uruguay would receive timely support from its parent, if required.

The Stable Outlook on the IDRs is in line with that of the bank's parent, HSBC Holdings.

RATING SENSITIVITIES - IDRS & SUPPORT RATING

HSBC Uruguay's foreign currency IDR is limited by the country ceiling, while its local currency IDR is two notches above the sovereign rating in local currency. Additional rating actions on HSBC Uruguay's IDRs are subject to changes in the sovereign rating. Changes in its controlling shareholder's ability or willingness to provide support would also negatively affect HSBC Uruguay's ratings, but these scenarios are unlikely.

KEY RATING DRIVERS - VR

HSBC Uruguay's small franchise and low capitalization highly influence its VR. Fitch also considered the bank's low, although improving, profitability and relatively high loan and deposits concentrations in evaluating HSBC Uruguay's intrinsic financial profile.

The bank's operating revenues have grown along with its expansion since 2008. In 2014, HSBC Uruguay's performance continued on the growth trend, driven by rising activity levels that generated higher operating income and the positive revenues derived from the depreciation of the exchange rate on the bank's dollar position that offset negative inflation adjustments. Since 2012, ROE and ROA ratios had improved constantly from negative figures reported in 2011.

The bank's loan quality indicators have historically been sound, underpinned by its corporate nature, accelerated growth and the favourable performance of the economy in recent years. The stock of non-performing loans (NPLs, credits with more than 60 days overdue) represented only 0.53% of the total portfolio at dec-2014, below the average of private sector Uruguay banks. The bank's loan loss reserve coverage has historically been very high.

The upswing in loans in recent years means that the portfolio, though still highly concentrated, has gradually become more diverse. As of Dec. 31, 2014, the 10 largest borrowers represented 14% of total loans (1.5 times the bank's Tier I equity) compared with 17% in 2013. This concentration is normal given the corporate profile of the bank's clientele, and it will probably become more diversified as loan activity expands among SMEs.

The bank's capitalization ratios are low, partly due to the HSBC Group's capital allocation policy that allows subsidiaries to work with minimal regulatory capital levels. HSBC Holdings injected capital into the bank several times from 2008 to 2010 and subscribed USD17 million in subordinated debt (at a 10-year term) through several HSBC Group subsidiaries. Even in March-2014, when the bank was for sale, the group injected USD10 million of capital.

As of Dec. 31, 2014, HSBC Uruguay's Fitch Core Capital (FCC) ratio was 8.16% and tangible equity to tangible assets was 6.04%. These metrics have remained at those levels due to constant capital contributions made by the group. Fitch anticipates that capital ratios will decline over the medium-term as credit continues to expand. However, the agency believes that the bank will continue to receive the capital it needs to finance its expansion and maintain its regulatory capital at the minimum level required.

HSBC Uruguay's funding and liquidity are generally stable, although there are material funding concentrations. The bank's main source of funding is deposits from the non-financial sector, which accounted for 77.4% of assets as of December 2014 and has expanded considerably in recent years.

The bank's liquidity is ample but declining as a result of the aggressive loan growth. As of December 2014, liquid assets (cash and equivalents and loans to the financial sector) represented 37.9% of deposits and short-term funds. While HSBC Uruguay operates on mostly short-term funding, its ample liquidity, backing from its shareholder, and the relatively short-term nature of its loan portfolio help to mitigate liquidity risk.

As in the rest of the Uruguayan financial system, the bank's assets and liabilities are highly dollarized (79.1% and 77.9%, respectively). While dollarization is on the decline (the levels of 2013 were 81.7% and 81.5%, respectively), Fitch believes that it will remain high over the long term due to the nature of the Uruguayan economy and the type of clientele served by HSBC Uruguay. While HSBC Uruguay's open foreign exchange positions are commonly high, resulting in volatile earnings, it is the shareholder's policy to hold the bank's equity in dollars.

RATING SENSITIVITIES - VR

HSBC Uruguay's VR could eventually be upgraded if the bank achieves FCC ratios of above 9% through sustainable earnings and profitability, i.e. sustains operating ROAs ratios above 1%. Better diversification of the bank's balance sheet would also be positive for creditworthiness.

In turn, the bank's VR could be negatively affected if the bank fails to sustain recent improvements in profitability metrics, operating ROAs below 1%, and FCC ratios below 7.5%.

Fitch has taken the following rating actions:

HSBC Uruguay:

--Long-term Foreign Currency IDR upgraded to 'BBB+' from 'BBB'; Outlook Stable;

--Long-term Local Currency IDR upgraded to 'A-' from 'BBB+'; Outlook Stable;

--Support rating affirmed at '2';

--Viability rating of 'b+' assigned.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Global Bank Rating Criteria' (March 20, 2015).

Applicable Criteria and Related Research:

Global Bank Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=863501

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=982528

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Contacts

Fitch Ratings
Primary Analyst
Alejandro Tapia
Director
+52 818 399 9156
Fitch Mexico, S.A. de C.V.
Prol. Alfonso Reyes 2612, Edificio Connexity Piso 8
Col. Del Paseo Residencial
64920 Monterrey, N.L., Mexico
or
Secondary Analyst
Santiago Gallo
Director
+562 24993320
or
Committee Chairperson
Theresa Paiz
Senior Director
+1 212-908-0534
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Alejandro Tapia
Director
+52 818 399 9156
Fitch Mexico, S.A. de C.V.
Prol. Alfonso Reyes 2612, Edificio Connexity Piso 8
Col. Del Paseo Residencial
64920 Monterrey, N.L., Mexico
or
Secondary Analyst
Santiago Gallo
Director
+562 24993320
or
Committee Chairperson
Theresa Paiz
Senior Director
+1 212-908-0534
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com