Fitch Views HSBC Mexico's Capital Injection as Positive; No Rating
MONTERREY, Mexico -- February 6, 2013
Fitch Ratings considers the recent announcement that HSBC Holdings plc (rated
'AA-' with Stable Outlook by Fitch) will inject $500 million dollars of
capital into its Mexican subsidiary, HSBC Mexico a positive action. The
capital injection will strengthen HSBC Mexico's capitalization level and
places the bank in a better position to continue growing a base of productive
assets, franchise, and business scale. Fitch believes the action does not have
a material impact on HSBC Mexico's viability rating (VR) of 'bbb', since most
of the capital will be deployed in the near future to increase risky assets
and also because the ability of HSBC Mexico's parent to enhance its capital
base is already somewhat factored in into its VR of 'bbb'.
HSBC's VR is mostly driven by its sound funding and liquidity profiles,
comfortable capital position (Fitch Core Capital to risk weighed assets of
10.2% at 3Q'12), and its robust overall franchise. However, the VR is
constrained by low profitability (net income to average total assets of 0.8%
at 9M'12) and relatively weaker and more volatile asset quality metrics in
recent years (impaired to gross loans of 2% and net charge offs to average
gross loans of 2.9% at the same date). Fitch does not expect significant
and/or immediate changes in these two rating constraints as a result of the
recently announced capitalization.
The capital injection involves two tranches. The first is a direct increase to
the bank's common equity through an issuance of common shares for an amount of
$390 million dollars, while the second tranche will be made through a
potentially convertible subordinated debt of $110 million dollars with a 10
year tenor. While the proposed notes are dated instruments, these will likely
receive a 50% equity credit during the first five years outstanding, due to
their loss absorbing features (subordination, coupon omission, and
permanence). Coupons and even principal could be deferred well before the bank
reaches a non-viability condition. This is in accordance with the relatively
stringent regulatory framework that gives loss absorbing elements, but their
features are not as robust as mandatorily convertible instruments covered by
Basel III, which will likely receive 100% equity credit by Fitch.
HSBC Mexico's support rating and Issuer Default Ratings (IDRs) reflect the
strong propensity of its ultimate parent, HSBC Holdings plc, to provide
support to HSBC Mexico, if this were needed. Mexico is a priority growth
market for HSBC Holdings, and HSBC Mexico is an strategically important
subsidiary, which explains why HSBC Mexico's 'A' rated local currency IDR is
the highest among any Mexican bank rated by Fitch in Mexico. HSBC Mexico's
'A-' foreign currency IDR is capped by Mexico's country ceiling. The Stable
Outlook on the IDRs reflects the cushion arising from the relatively high
rating of its parent.
Given Fitch's perception of HSBC Mexico's strategic importance to the group,
its IDRs could be as close as one notch below HSBC Holdings' IDR, although
HSBC Mexico's IDRs are also limited by sovereign and/or country ceiling
considerations. A potential upgrade of Mexico's sovereign rating could
positively affect HSBC Mexico's IDRs if the parent is still rated
significantly above the sovereign. Conversely, a downgrade of two or more
notches in HSBC Holding's IDRs could negatively affect HSBC Mexico's rating
and/or rating Outlook.
For further information on HSBC Mexico's ratings, please refer to Fitch's
press release entitled 'Fitch Affirms HSBC Mexico and its Brokerage Unit
Ratings' and dated Aug. 15, 2012.
Additional information is available at www.fitchratings.com
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Alejandro Garcia, CFA
+52 81 8399 9146
Fitch Mexico SA de CV
Prol. Alfonso Reyes 2612, Edificio Connexity Piso 8
Col. Del Paseo Residencial
64920 Monterrey, N.L., Mexico
+52 81 8399 9156
Elizabeth Fogerty, +1-212-908-0526 (New York)
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