MONTERREY, Mexico--(BUSINESS WIRE)--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
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.