Fitch affirms HSBC Bank Middle East at 'AA-'; outlook stable

The outlook is stable.

HBME's IDRs and Support rating reflect the extremely high probability that the bank would be supported by its parent HSBC Holdings plc (rated 'AA'/'F1+'/Stable Outlook).

The Individual rating reflects the strength of its regional franchise, consistent profitability, sound asset quality, liquidity and capitalisation, as well as the benefits of being part of the HSBC Group where HBME has access to group-wide treasury and risk management systems and expertise. The Individual rating also reflects reliance on the relatively small UAE market for a significant share of its profits.

HBME's operating profits have consistently increased in recent years, benefiting from its position as the leading international bank in the region. Operating profits grew 27% in 2006, driven by rising net interest and fee income from loan growth and increasing business volumes, modest impairment charges, and stable cost efficiency.

Credit and market risk management is prudent and in line with HSBC Group policy. Despite robust loan growth (2006: 20%), asset quality is sound; impaired loans were a modest 2.4% of gross loans at end-2006 with adequate reserves coverage of 66%. Direct exposure to stock markets in the region is negligible and regional property exposure is well controlled. Liquidity is sound, supported by substantial interbank placements and liquid debt securities. Funding is stable and diversified. Capitalisation is sound, considering HBME's risk profile, with a Fitch eligible capital ratio of 8.7% at end-2006.

HBME is wholly-owned by HSBC Holdings plc. Known as the British Bank of the Middle East (BBME) until 1999, it was acquired by HSBC Holdings plc in 1959. HBME has eight branches in the UAE; branches in Bahrain, Jordan, Kuwait, Lebanon, Oman, Qatar, the Palestinian Autonomous Area; and an office in Iran. Business is organised around three principal business groups: Commercial Banking; Corporate, Investment Banking and Markets; and Personal Financial Services.