Fitch Affirms HSBC Bank Middle East At ‘AA-‘

Fitch Ratings has affirmed HSBC Bank Middle East’s (HBME) Long-term Issuer Default Rating (IDR) at ‘AA-‘ and downgraded the Viability Rating (VR) to ‘bbb’ from ‘bbb+’. A full list of rating actions is below.

HBME ‘s Long- and Short-term IDRs reflect Fitch’s belief that there is an extremely high probability that support would be provided by its parent, HSBC Holdings plc (‘AA’/Negative/’F1+’), if ever required. The view derives from HBME ‘s strategic importance to the group as well as the high level of integration between the parent and subsidiary. Any downgrade in HBME ‘s IDRs would take place only if Fitch believes there was a weakened ability by the parent to support its subsidiary (defined as a downgrade in the parent’s Long-term IDR) or in the strategic importance/integration of the two banks.

The Negative Outlook on HBME ‘s Long-term IDR reflects the Negative Outlook on HSBC Holdings plc’s Long-term IDR. Given its already high level and the Negative Outlook, it is unlikely that HBME ‘s Long- and Short-term IDRs will be upgraded within the next 12-18 months.

Fitch has downgraded HBME ‘s VR following updated disclosure on the asset quality of the bank, resulting in a substantial rise in renegotiated loans as well as faster than previously anticipated new non-performing loan (NPL) formation. It also reflects the bank’s high borrower concentration which exposes it to event risk and potentially high levels of losses. The rating continues to be underpinned by the bank’s solid regional franchise, diversified and good earning capabilities, strong liquidity position and the benefits of being part of the HSBC group. Fitch believes that the VR remains sensitive to a further deterioration in asset quality affecting the bank’s capitalization and profitability.

Although HBME ‘s capital is deemed weak compared to local peers (Fitch core capital of 10.5% at end-2011), it is understood that this is maintained in line with group policies and that additional capital to support growth would be provided by HSBC group, if required.

Fitch expects revenue growth to remain challenging for HBME in 2012 due to fewer lending opportunities in the UAE and regionally as well as new regulatory restrictions on retail lending in several key markets in which it operates. Net income improved in 2011 largely driven by lower impairment charges.

HBME ‘s NPL ratio remained flat at 9.6% at end-2011 mainly due to loan recoveries and the reclassification of certain large UAE-related exposures as performing. Renegotiated loans have increased substantially since 2010 indicating that asset quality remains weak and raising concerns that some of these loans could become problematic in the future. Fitch expects the bank’s NPLs to rise further in 2012, due to more prudent classification policies as well as continuing stresses in the region, but at a slower pace than previous years. This will depend on the future performance of its renegotiated loan book and the slow recovery in the UAE economy, in particular in the Dubai government related and real estate sectors.

HBME ‘s funding and liquidity position is sound. The bank is predominantly funded by customer deposits, which accounted for the majority of non-equity funding at end-2011. Its deposit base is significantly more granular compared to peers, and Fitch believes that liquidity is managed more conservatively. HBME has one of the lowest loans/deposits ratios in the UAE.

HBME is HSBC ‘s main vehicle for its Gulf/Middle Eastern operations. At end-2011, HBME ‘s network across the Middle East consisted of branches in the UAE, Bahrain, Qatar, Kuwait, Jordan, Lebanon, Pakistan, Algeria and the Palestinian autonomous area. The bank also has a representative office in Libya and a 51% owned subsidiary, HSBC Bank Oman SAOG.

The rating actions are as follows:

HBME

Long-term IDR affirmed at ‘AA-‘, Outlook Negative
Short-term IDR affirmed at ‘F1+’
Viability Rating downgraded to ‘bbb’ from ‘bbb+’
Support Rating affirmed at ‘1’
EMTN Program: Senior unsecured notes affirmed at ‘AA-‘/’F1+’
HBME Sukuk Company Limited
Trust certificate issuance program: Senior unsecured trust certificates affirmed at ‘AA-‘

Press Release