Fitch Affirms HSBC USA at 'AA-' and HSBC Finance at 'A+'; Outlook Remains Stable

Fitch Ratings has affirmed HSBC USA Inc.'s (HUSI) and subsidiary, HSBC Bank USA's (HBUS), Issuer Default Rating (IDR) and Viability Rating (VR) at 'AA-' and 'a-', respectively. HSBC Finance Corp.'s (HBIO) IDR has been affirmed at 'A+'. Fitch does not maintain a VR on HBIO, as it does not view the company as a stand-alone entity.

HUSI's, HBUS's and HBIO's IDRs have been affirmed in conjunction with today's affirmation of their parent company, HSBC Holdings plc (HSBC) at 'AA-'. For additional information, please see the rating action commentary 'Fitch Affirms HSBC Holdings, HSBC Bank, and HK Subsidiaries at 'AA-'; Outlook Stable', dated Nov. 24, 2014. A complete list of rating actions follows at the end of this release.

KEY RATING DRIVERS IDRs

As wholly owned subsidiaries of HSBC, HUSI's and HBIO's long- and short-term IDRs and Outlooks are linked to those of their parent company. As per Fitch's rating criteria, the difference in notching reflects Fitch's view on varying levels of operational importance and expected support. HUSI's IDR is equalized with HSBC at 'AA-', reflecting Fitch's view that its operations are core to the HSBC Group. HBIO's IDR is notched one below HSBC at 'A+', reflecting Fitch's view that HSBC would continue to provide support for reputational considerations, even though HBIO is in run-off. As supported entities, HUSI's and HBIO's IDRs will move in tandem with HSBC as long as Fitch's current views of institutional support remain in place.

RATING SENSITIVITIES IDRs

As previously mentioned, HUSI's and HBIO's IDRs are linked to those of their parent. As such, their IDRs will likely be affected by any changes to the ratings of HSBC itself. In addition, although not anticipated, any changes to their strategic importance as indicated for example through ownership, level of integration or their role in the group could also impact the ratings.

KEY RATING DRIVERS VR

HUSI's VR affirmation primarily reflects the company's superior liquidity position, strong franchise, and ample capital. Asset quality continues to improve while HUSI continues to run-off and selectively divest non-core legacy assets. These rating strengths are partially offset by the company's weak earnings profile relative to Fitch's large regional U.S. bank peer group.

As a result of its affiliation with the HSBC group, HUSI has strong brand recognition in its target market of internationally minded corporate clients. Fitch believes this has contributed to HUSI's solid core funding base, high deposit market share and low cost of deposits despite its small branch footprint.

A key rating driver for HUSI's ratings is its strong liquidity profile. Loans-to-deposits have remained below 70% since 2011, while peers average approximately 90%. HUSI's cash and securities totaled 53% of total assets as of the third quarter of 2014 (3Q'14), with the majority of investments in low risk, highly liquid securities such as treasuries, government agencies, and agency mortgage backed securities. Supporting the bank's liquidity profile further, cash and equivalents also represent a higher portion of assets than peers at 16% of total assets as of 3Q'14.

Fitch considers HUSI's capital levels to be strong with risk-based capital metrics well above peers, benefiting from the bank's concentration of lower risk weighted assets. HUSI has also maintained a healthy Fitch Core Capital Ratio of 10.3% of risk weighted assets, despite increased legal and regulatory expenses over the past several quarters.

Asset quality has continued to improve since Fitch's last review as the bank divests non-core assets. Nonperforming assets (NPAs) fell to 2.49% of total loans and other real estate owned for 3Q'14 from 3.23% at 4Q'13. Due to management's measured approach to divestiture and lengthy foreclosure processes in certain markets, HUSI's legacy residential portfolio continues to be a drag on the overall loan portfolio with almost 80% of nonaccrual loans in 1-4 family residential loans. Fitch expect asset quality to continue to improve, albeit at a slower pace, as selective loan sales slow and lengthy foreclosure processes in HUSI's markets continue to hinder nonaccrual resolutions.

Over the past several years, HUSI's earnings performance has been weak relative to peers. Fitch considers earnings to have a lower influence on HUSI's current VRs, reflecting Fitch's view that earnings should be considered in the context of the company's conservative balance sheet. HUSI's preference for liquidity and lower risk tolerance continue to negatively impact earning asset yields. As a result, Fitch expects HUSI's net interest margin and other profitability metrics to remain below peer averages in the near to intermediate term.

Earnings have been further pressured in recent periods by nonrecurring litigation expenses and elevated compliance costs. Fitch's ratings incorporate HUSI's recent legal and regulatory issues. Fitch expects compliance-related costs to continue to be an elevated component of HUSI's cost base going forward.

HSBC North American Holdings' (HNAH), HUSI's holding company, Comprehensive Capital Analysis and Review (CCAR) submission was rejected by the Federal Reserve in March 2014. HNAH will be required to resubmit its capital plan incorporating enhancements to its processes by Jan. 5, 2015. Fitch notes that the failure highlighted some weakness in HUSI's capital planning process. However, Fitch believes HUSI and subsidiaries are appropriately capitalized, particularly given its conservative balance sheet profile, to manage through an economic downturn.

RATING SENSITIVITIES VR

Fitch believes HUSI's current VR is solidly situated at 'a-', and upward movement is limited. However, HUSI's ratings are sensitive to the bank maintaining a relatively conservative risk appetite and ample levels of capital and liquidity. Aggressive commercial loan growth or a reversal of asset quality trends that would suggest a weakening of underwriting standards may pressure ratings negatively.

As discussed, Fitch's current ratings incorporate HUSI's recent and on-going compliance issues. However, negative ratings pressure would likely occur if unexpected concern arises regarding HUSI's ability to meet existing regulatory mandates, including but not limited to material deficiencies identified in HNAH's CCAR resubmission.

KEY RATING DRIVERS SUPPORT RATING AND SUPPORT RATING FLOOR

Fitch considers HUSI to be a core operating entity of the HSBC Group, and as such, considers the likelihood of institutional support from its ultimate parent to be extremely high. In determining HUSI's importance, Fitch viewed HUSI's strategic initiatives to be in line with those of its parent, potential for disposal from its parent to be extremely limited, and reputational risk to HSBC resulting from default by HUSI to be high.

Despite the entity being in run-off, Fitch views HBIO as strategically important to the overall HSBC franchise and considers the probability of institutional support to be high. This view is underpinned by the high level of reputation risk to HSBC in the event default and precedent of support already established.

RATING SENSITIVITIES SUPPORT RATING AND SUPPORT RATING FLOOR

As discussed, HUSI's and HBIO's Support Ratings reflect Fitch's views on the probability of support from the parent company, HSBC. Therefore, any changes to HUSI's or HBIO's strategic importance as indicated for example through ownership, level of integration, or their role under HSBC would prompt a review of the ratings.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

Subordinated debt and hybrid capital instruments issued by HUSI are notched down from the IDR. The ratings of subordinated debt and hybrid securities are typically sensitive to any change in the bank's VR. However, given the high level of institutional support, issue ratings are notched from HUSI's IDR as support from the parent is presumed.

Subordinated debt and hybrid capital instruments issued by HSBC Finance are notched down from the IDR. Fitch does not maintain a VR on the unit as Fitch does not view the company as a stand-alone entity.

HOLDING COMPANY RATING DRIVERS

HBUS is a wholly owned subsidiary of the bank holding company (BHC), HUSI. HUSI's and HBUS's IDRs and VRs are equalized, reflecting the mandate in the U.S. for BHC's to act as a source of strength for its bank subsidiaries.

Fitch has taken the following rating actions:

HSBC USA Inc.

--Long-term IDR affirmed at 'AA-'; Outlook Stable;

--Short-term IDR affirmed at 'F1+';

--Viability Rating affirmed at 'a-'.

--Support Rating affirmed at '1';

--Commercial paper affirmed at 'F1+'

--Preferred stock affirmed at 'BBB+';

--Senior debt affirmed at 'AA-';

--Subordinated debt affirmed at 'A+'.

HSBC Bank USA, National Association

--Long-term IDR affirmed at 'AA-'; Outlook Stable;

--Short-term IDR affirmed at 'F1+';

--Viability Rating affirmed at 'a-'.

--Support Rating affirmed at '1';

--Long-term deposits affirmed at 'AA';

--Market linked deposits affirmed 'AAemr';

--Senior debt affirmed at 'AA-';

--Short-term deposits affirmed at 'F1+';

--Subordinated debt affirmed at 'A+'.

HSBC Capital Trust I

--Preferred stock affirmed at 'BBB+'.

HSBC Capital Trust II

--Preferred stock affirmed at 'BBB+'.

HSBC Capital Trust III

--Preferred stock affirmed at 'BBB+'.

HSBC Finance Corporation

--Long-term IDR affirmed at 'A+'; Outlook Stable;

--Short-term IDR affirmed at 'F1';

--Support Rating affirmed at '1';

--Commercial paper affirmed at 'F1';

--Senior debt affirmed at 'A+';

--Subordinated debt affirmed at 'A'.

Beneficial Corporation

--Senior debt affirmed at 'A+'.

HSBC Finance Capital Trust IX

--Preferred stock affirmed at 'BBB'.

HFC Bank Limited

--Long-term IDR affirmed at 'A+'; Outlook Stable

--Short-term IDR affirmed at 'F1'

--Support Rating affirmed at '1';

--Senior debt affirmed at 'A+';

--Senior debt E-medium-term notes affirmed at 'A+';

--Senior debt medium-term notes affirmed at 'A+'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Global Financial Institutions Rating Criteria' (Jan. 31 2014);

--'Rating FI Subsidiaries and Holding Companies' (Aug. 10, 2014);

--'Assessing and Rating Bank Subordinated and Hybrid Securities' (Jan. 31. 2014);

--'Bank Support: Likely Rating Paths' (Sept. 11, 2013);

--'The Evolving Dynamics of Support for Banks' (Sept. 11, 2013).

Applicable Criteria and Related Research:

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732397

Rating FI Subsidiaries and Holding Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=679209

Assessing and Rating Bank Subordinated and Hybrid Securities Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732137

Bank Support: Likely Rating Paths

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715001

The Evolving Dynamics of Support for Banks

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715000

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=935155

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. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts:

Fitch Ratings
Primary Analyst:
Ryan Doyle, [phone]
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst:
Christopher Wolfe, [phone]
Managing Director
or
Committee Chairperson:
Nathan Flanders, [phone]
Managing Director
or
Brian Bertsch, [phone]
Media Relations, New York
[e-mail]