Fitch affirms HSBC Bank Middle East at 'AA-'; Downgrades Individual to 'B/C'

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'/Negative Outlook), in case of need. The Negative Outlook reflects that on HSBC Holdings' Long-term IDR.

The downgrade of the Individual rating reflects the impact of the deteriorating operating environment, specifically in Dubai, on HBME's profitability and asset quality. The Individual rating remains on RWN due to the continuing uncertainty in the Dubai economy following Dubai World's (DW) request on 25 November 2009 to postpone debt repayments. HBME has exposure to DW and to other Dubai government-related entities, and the extent to which this might translate into higher impairments is as yet unclear given the lack of transparency surrounding DW's restructuring.

Profitability has been pressured over the past year by higher impairment charges (although from a low base). Loan quality deteriorated substantially during H109 with stresses most evident in the personal lending portfolio, but also for commercial and corporate exposures where loan impairment charges rose with the deterioration in the economy.

In addition there were a few individually significant loan impairment charges recorded on exposures to large regional business groups in financial difficulty. Fitch expects ongoing asset quality problems and further impairment costs to impact the bank's FY09 profitability and impairment charges are likely to remain elevated into 2010.

Liquidity remains sound and is managed more conservatively than that of most of the bank's peers. The bank monitors liquidity against regulatory requirements and the more stringent requirements of the HSBC Group. It has one of the lowest loan/deposit ratios in the UAE market and is one of the few with a ratio well below 100%. Capitalisation is adequate especially given HBME's position as part of the HSBC Group, its access to group funds if needed and the HSBC Group's ability to provide capital when required.

HBME is wholly-owned by HSBC Holdings plc and is HSBC Group's main vehicle for its Gulf/Middle Eastern operations. HBME's network across the Middle East consists of 46 branches in the UAE, Oman, Bahrain, Qatar, Kuwait, Jordan, Lebanon, Pakistan, Algeria and the Palestinian Territories. The bank also has representative offices in Iran and Libya.

In Fitch's rating criteria, a bank's standalone risk is reflected in Fitch's Individual ratings and the prospect of external support is reflected in Fitch's Support ratings. Collectively these ratings drive Fitch's Long- and Short-term IDRs.