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May 8 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings says HSBC Holdings PLC's latest results highlight the benefits of its global operations. The group's concentration on faster growing markets helped it to gain market share and counterbalance missing revenues from sold businesses as well as margin compression in a low interest rate environment.
Fitch believes that the group's profitability will rely on volume growth, cost containment and moderate loan impairment charges over the next 12-18 months. Further restructuring in the US and Europe and the accelerated wind-down of its considerable legacy assets (about 14% of total risk weighted assets at end-March 2013) will continue to dent profit but this should ultimately lead to a more robust performance. Competition, sizeable holdings of liquid assets and reinvestments at lower interest rates will remain headwinds.
Financial market-related revenues held up well on solid equity performance in Hong Kong and other parts of Asia-Pacific against lower balance sheet management gains. Contributions from areas which Fitch believes to be less volatile such as foreign exchange, securities and transaction services and payment and cash management activities, however, declined to 32% (2012: 40%).
Fitch expects HSBC to continuously draw strength from its operations in Hong Kong experiencing strong momentum in financing cross-border trade with China and steady growth in domestic mortgage loans. Hong Kong and the rest of Asia-Pacific contributed 65% to Q113 pre-tax profit. The group's European activities rebounded on significantly reduced customer redress provisions, adding 21%, following two consecutive quarters of losses.
HSBC's US operations should improve in 2013 following the anticipated sale of up to USD2.7bn defaulted property loans and the restructuring of the remaining commercial banking operations in HSBC Bank USA. Loans in arrears for more than 60 days in HSBC Finance's legacy consumer and mortgage loan portfolio remain elevated at 18.6% at end-March 2013 (2012: 19.4%) and the entity continues to run-off these assets through sales and managed charge-offs. HSBC remains exposed to litigation risk but Fitch does not expect a re-emergence of the corporate governance issues settled in 2012. Fitch expects a more normalised earnings profile in 2014-2015, notwithstanding that compliance with the deferred prosecution agreement will continue to require management attention and capital and drive up costs.
HSBC's common equity Tier 1 ratio would be 9.7% at end-March 2013 (2012: 9%) if Basel 3 was already implemented without taking any mitigating actions. The improvement largely reflects retained earnings from the completed sale of Chinese insurer Ping An and a smaller stake in Industrial Bank. Fitchviews this level as acceptable, taking into account a potential increase by the bank of another 40bps to mitigate capital deductions for individually immaterial investments. Fitch's core capital relative Basel 3 risk weighted assets was about 12% at end-March 2013.
