MONTERREY, Mexico--(BUSINESS WIRE)--Fitch Ratings has affirmed HSBC Mexico, S.A.'s (HSBC Mexico) 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 HSBC Mexico and HSBC Casa de Bolsa, S.A. de C.V. (HSBCCB) at 'AAA(mex)' and 'F1+(mex)'. A full list of rating actions follows at the end of this press release.
KEY RATING DRIVERS
IDRS AND SUPPORT RATING
HSBC Mexico'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, rated 'AA-'/Stable Outlook by Fitch; VR 'aa-') to provide support to HSBC Mexico, if it would be required.
Recently, HSBC has redefined new strategies for its Mexican subsidiary and confirmed that Mexico is a priority market due to its ample business scale in the country so in Fitch's opinion HSBC Mexico continues as a strategically important subsidiary, which explains why HSBC Mexico's local currency IDR of 'A+' is the highest among the Mexican banks rated by Fitch. HSBC Mexico'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 HSBC Mexico.
Given Fitch's perception of HSBC Mexico's strategic importance to the group and the current rating criteria, HSBC Mexico's local currency IDR is one notch down from HSBC's IDR, although the Mexican bank's IDRs are also limited by sovereign and/or country ceiling considerations.
VR
HSBC Mexico'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 despite the weak earnings registered in recent years. However, the VR also considers bank's low profitability, weak asset quality and the ambitious challenges in terms of profitability posed by its holding company in order to continue to operate in Mexico.
In Fitch's opinion, HSBC Mexico has been able to maintain its strong franchise. HSBC Mexico continues as 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 8.3% of the banking system's core deposits. The bank has one of the strongest liquidity profiles among major banks. HSBC Mexico's loan to deposits ratio as of June 2015 was a sound 78% and almost 60% of total deposits were in the form of core demand accounts. As expected, regulatory LCR (under Basel III and the local regulator rules) is beyond the legal requirement of 60% for 2015. As of June 2015, HSBC Mexico's LCR stood at sound 246%.
Despite weak earnings, HSBC Mexico's capital metrics have remained stable in view of moderate loan growth and some capital injections in the past. A capital injection in January 2013 helped to strengthen HSBC Mexico's capitalization levels. The bank's FCC ratios have remained in an average of 10% in the last six years, levels that Fitch considers reasonable and aligned to those showed by its closest peers. The expected increase on lending activity may help HSBC Mexico to recover its profitability and enhance its internal capital generation capacity, but this will depend on the bank's ability to lower its credits costs and improve operating efficiency.
HSBC Mexico's operating profits are weak compared to the largest Mexican banks and international peers in the 'bbb' category. The profitability in 2014 was affected by less operating revenues but mainly by fewer revenues from trading activities. Also, extra expenses related to the implementation of Global Standards and extraordinary revenues in 2013 explain the lower results in 2014. Profitability in 2013 was affected by higher loan loss provisions due to the homebuilder credit exposure.
HSBC Mexico's profitability in 2015 shows some signs of recovery due to the resumption of the credit activity, increased revenues from the insurance business, lower loan loss reserves and significant revenues from the liberation of excess of credit reserves. However, Fitch believes that the challenge of the bank is to strengthen and stabilize its core earnings mainly those of the credit activity.
Fitch expects that the upward trend in most performance metrics should further improve although it will remain below those of larger peers. Under the baseline scenario, Fitch expects the bank's operating ROAA to approximate 1% in the medium term. However, HSBC has set goals for the Mexican subsidiary that will have to be met by 2017 in order to keep its operations in the country, which are summarized in improving profitability and gaining business scale. Specifically, such targets are to deliver profits, before taxes, of USD600 million and contribute to more than 10% of the group's profitability in 2017; a target Fitch's consider ambitious.
HSBC Mexico's asset quality was affected again in 2014; albeit mainly due to its credit exposure to large homebuilders (almost 50% of the bank's impaired loans). The bank has the highest delinquency ratios among the large Mexican banks. As of June 2015, the total nonperforming loan (NPLs) portfolio accounted for MXN12.9 billion or 5.7% of total loans, showing a slight decrease compared with the same period last year. HSBC Mexico begins to show a positive trend in asset quality, mainly in its retail portfolios due to improvement of the bank's scoring models and credit processes made in previous years. Loan loss reserve coverage runs below the average of the larger bank peers and below the median for the 'bbb' rated banks in Latin America. In Fitch's opinion, the greatest challenge of HSBC Mexico is to lower and stabilize its impaired loans.
NATIONAL RATINGS, SENIOR DEBT AND SUBORDINATED DEBT
HSBC Mexico'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 HCBC Mexico 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 HSBC Mexico'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 HSBC Mexico senior unsecured debt.
RATING SENSITIVITIES
IDRS AND SUPPORT RATING
There is limited upside potential on HSBC Mexico'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. Any change on Fitch's perception towards the strategic importance of HSBC Mexico to its parent may trigger a review of its Support rating and IDRs.
VR
HSBC Mexico's VR could be upgraded if the bank achieves an orderly growth in the light of the ambitious targets imposed by its parent company. Specifically, this growth must be accompanied by improvements in asset quality (adjusted impairment ratio, NPLs plus charge-offs, consistently below to 6%) and profitability, as well as maintaining its current sound franchise, liquidity profile and adequate capital metrics.
In turn, HSBC Mexico's VR could be negatively affected if the bank fails to improve its asset quality metrics and shows FCC ratios below 10%. Also, a deterioration of the liquidity profile could be negatively affects the VR.
NATIONAL RATINGS AND SENIOR DEBT
HSBC Mexico 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 HSBC Mexico.
Fitch has affirmed the ratings as follows:
HSBC Mexico
--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
Global Bank Rating Criteria (pub. 20 Mar 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=863501
Global Non-Bank Financial Institutions Rating Criteria (pub. 28 Apr 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=865351
National Scale Ratings Criteria (pub. 30 Oct 2013)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=720082
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=989452
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=989452
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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