Fitch Affirms HSBC Uruguay's FC IDR at 'BBB+' & VR at 'b+'; Outlook Stable

MONTERREY, Mexico & SANTIAGO, Chile--()--Fitch Ratings has affirmed HSBC Bank (Uruguay) S.A.'s long-term foreign currency (FC) Issuer Default Rating (IDR) at 'BBB+' and its long-term local currency (LC) IDR at 'A-'. Simultaneously, Fitch has affirmed the bank's Support Rating (SR) at '2' and its Viability Rating (VR) at 'b+'. A full list of rating actions follows at the end of this press release.

KEY RATING DRIVERS - IDRS & SUPPORT RATING

HSBC Uruguay's LC and FC 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. HSBC Uruguay's FC IDR of 'BBB+' is at the Country Ceiling, while its LC IDR of 'A-' is two notches above that of the Uruguayan sovereign rating.

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 above also is supported by the decision of HSBC to maintain its operations in Uruguay.

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 2015, HSBC Uruguay's performance continued this trend, driven by rising activity levels that generated higher operating income and positive revenues derived from the depreciation of the exchange rate on the bank's dollar position that offset negative inflation adjustments.

The bank's loan quality indicators have historically been sound, underpinned by its corporate nature, accelerated growth and the favorable 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 December 2015, 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.

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. Fitch anticipates that capital ratios will remain thin over the medium term as credit continues to expand. However, the agency believes that the bank will finance its expansion with its growing profits and, should this not be enough, it will continue to receive the capital it needs to finance its expansion and maintain its regulatory capital at the minimum level required. As of Dec. 31, 2015, HSBC Uruguay's Fitch Core Capital (FCC) ratio was 7.67% and tangible equity to tangible assets was 5.65%. These metrics have gradually declined due to strong loan growth, which was partly offset by improved profitability and capital contributions made by the group until 2012.

The bank's main source of funding is deposits from the non-financial sector, which accounted for 73.31% of assets at year-end 2015 (YE15) and has expanded considerably in recent years. The bank's liquidity is ample, but declining as a result of the strong loan growth. At YE15, liquid assets (cash and equivalents and loans to the financial sector) represented 37.9% of deposits and short-term funds.

The bank's assets and liabilities, like the financial system, are highly dollarized (74.3% and 72.0%, respectively). While declining, Fitch believes that dollarization will remain high over the long term due to the Uruguayan economy and the type of clientele HSBC Uruguay serves. While HSBC Uruguay's open foreign exchange positions are commonly high, resulting in volatile earnings, it is shareholder policy to hold the bank's equity in U.S. dollars.

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 considered unlikely in the short term.

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

RATING SENSITIVITIES - VR

HSBC Uruguay's VR could eventually be upgraded if the bank achieves and maintains a FCC ratio of at least 10% 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 and FCC ratio.

Fitch has affirmed the following rating:

HSBC Uruguay:

--Long-term foreign currency IDR at 'BBB+'; Outlook Stable;

--Long-term local currency IDR at 'A-'; Outlook Stable;

--Support Rating at '2';

--Viability Rating at 'b+'.

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

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1002996

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1002996

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Alejandro Tapia, +52 81 8399 9156
Director
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
Santiago Gallo, +56 2 2499 3320
Director
or
Committee Chairperson
Theresa Paiz Fredel, +1-212-908-0534
Senior Director
or
Media Relations
Alyssa Castelli, New York, +1-212-908-0540
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Alejandro Tapia, +52 81 8399 9156
Director
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
Santiago Gallo, +56 2 2499 3320
Director
or
Committee Chairperson
Theresa Paiz Fredel, +1-212-908-0534
Senior Director
or
Media Relations
Alyssa Castelli, New York, +1-212-908-0540
alyssa.castelli@fitchratings.com