OREANDA-NEWS. Fitch Ratings has affirmed HSBC Bank (Uruguay) S.A.'s foreign currency (FC) Issuer Default Rating (IDR) at 'BBB+' and its local currency (LC) IDR at 'A-'. In addition, 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 SR 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 SR 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.

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

RATING SENSITIVITIES - IDRS & SUPPORT RATING

HSBC Uruguay's foreign currency IDR is limited by the country ceiling, while its LC 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 unlikely.

KEY RATING DRIVERS - VR

HSBC Uruguay's small franchise and low capitalization highly influence its VR. Fitch also considered the bank's low, though 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 2014, HSBC Uruguay's performance continued its growth trend, driven by rising activity levels that generated higher operating income and the revenue derived from effects of depreciation of the exchange rate on the bank's dollar position that offset negative inflation adjustments. Since 2012, ROE and ROA ratios have improved steadily from negative figures reported in 2011.

The bank's loan quality indicators have historically been sound, underpinned by its corporate nature, accelerated growth and the favourable 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 2014, 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. As of Dec. 31, 2014, the 10 largest borrowers represented 14% of total loans (1.5x the bank's Tier I equity) compared with 17% in 2013. This concentration is normal given the corporate profile of the bank's clientele, and it will probably become more diversified as loan activity expands among SMEs.

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. HSBC Holdings injected capital into the bank several times from 2008 to 2010 and took on USD17 million in subordinated debt (at a 10-year term) through several HSBC Group subsidiaries. Even in March 2014, when the bank was for sale, the group injected USD10 million of capital.

As of Dec. 31, 2014, HSBC Uruguay's Fitch Core Capital (FCC) ratio was 8.16% and tangible equity-to-tangible assets was 6.04%. These metrics have remained at those levels due to constant capital contributions made by the group. Fitch anticipates that capital ratios will decline over the medium term as credit continues to expand. However, the agency believes that the bank will continue to receive the capital it needs to finance its expansion and maintain its regulatory capital at the minimum level required.

HSBC Uruguay's funding and liquidity are generally stable, although there are material funding concentrations. The bank's main source of funding is deposits from the non-financial sector, which accounted for 77.4% of assets as of December 2014 and has expanded considerably in recent years.

The bank's liquidity is ample but declining as a result of the aggressive loan growth. As of December 2014, liquid assets (cash and equivalents and loans to the financial sector) represented 37.9% of deposits and short-term funds. While HSBC Uruguay operates with mostly short-term funding, its ample liquidity, backing from its shareholder, and the relatively short-term nature of its loan portfolio help to mitigate liquidity risk.

As in the rest of the Uruguayan financial system, the bank's assets and liabilities are highly dollarized (79.1% and 77.9%, respectively). While dollarization is on the decline (2013 levels were 81.7% and 81.5%, respectively), Fitch believes that it will remain high over the long term due to the nature of the Uruguayan economy and the type of clientele served by HSBC Uruguay. While HSBC Uruguay's open foreign exchange positions are usually high, resulting in volatile earnings, it is the shareholder's policy to hold the bank's equity in dollars.

RATING SENSITIVITIES - VR

HSBC Uruguay's VR could eventually be upgraded if the bank achieves FCC ratios of above 9% through sustainable earnings and profitability, i.e. sustains operating ROA 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, operating ROAs below 1%, and FCC ratios below 7.5%.

Fitch has affirmed the following ratings:

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+'.