S&P: HSBC Mexico 'BBB+/A-2' Ratings Affirmed On Strategic Importance; Outlook Still Stable
The issuer credit ratings on HSBC Mexico reflect our view of its adequate business position, given that it's one of the top lenders in Mexico and has a diversified business. The capital and earnings assessment on the bank remains adequate due to our projected risk-adjusted capital (RAC) ratio of about 7.2% for the next 12-18 months. Also, our moderate risk position assessment continues to reflect HSBC Mexico's higher nonperforming assets (NPAs) and credit losses than those of its domestic competitors. The ratings also incorporate an average funding and adequate liquidity, as well as our opinion of the bank's status as a strategically important subsidiary for HSBC Holdings PLC (HSBC; A/Negative/A-1). The bank's 'bbb-' stand-alone credit profile (SACP) remains unchanged.
HSBC Mexico's long-term global scale rating is currently two notches above its SACP. We continue to view HSBC Mexico as a strategically important subsidiary for HSBC. The group continues citing the favorable prospects for Mexico's economy and benefits from NAFTA's major trade flows. Therefore, we believe HSBC Mexico will remain an important part of HSBC's overall strategy. Additionally, the bank shares the group's brand and exploits the brand's broad recognition. As such, if necessary, we believe the parent would support the subsidiary through capital injections, as it has in the past.
Although we expect the bank's performance to improve significantly in the next 18 months, we believe HSBC Mexico will be challenged to align profitability with its parent's expectations. HSBC announced that it expects its Mexican subsidiary to generate about $600 million in pretax earnings in 2017 (incorporating a foreign exchange rate defined at the time of the announcement), which would be a significant improvement from $130 million as of June 2016. HSBC Mexico has recently focused on reducing risk on its balance sheet and strengthening compliance, while improving its revenue. In particular, the bank is targeting the energy sector and NAFTA-related trade flows, while performance of its retail banking division is improving. Given high competition, we view the $600 million earnings goal as ambitious. Although the target is 18 months away, we will be closely monitoring progress to assess whether there are potential implications for HSBC Mexico's group status.
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