Long-term rating for HSBC Bank Middle East Limited upgraded to 'A+'

HSBC's subordinated debt and preferred securities have been upgraded to 'AA-' (AA minus) from 'A+'. HSBC's other ratings have been affirmed at Short-term 'F1+', Individual 'A/B' and Support '5'. Details of rating changes to other HSBC group companies are detailed below.

"The upgrade reflects the resilience, stability and improved diversification of the group's earnings, both in terms of geography and by business line. It also reflects the successful integration of Household International Inc. (Household), which is now largely complete," said James Longsdon, Director in Fitch's Financial Institutions Group. HSBC's other major strengths, which underpin its Long-term, Short-term and Individual ratings, include its size and franchise, its good management, the very strong funding and liquidity of its major banking subsidiaries and the group's solid capitalisation.

The scale and diversity of HSBC's earnings has helped the group produce a robust earnings profile, as underlined by strong H104, pre-tax earnings of USD9.4billion, generating a healthy ROE of almost 16%. Underlying earnings growth (i.e. adjusting for acquisitions, goodwill amortisation and exchange rate movements) was a factor both of operating growth of c.USD900 million and almost a USD1bn lower provision charge.

Like all banks, asset quality and other performance indicators are geared to the health of HSBC's main operating economies. In general, the global economic outlook has improved and, consequently, provisioning levels fell sharply in H104 to a level that is likely to be below a through-the-cycle average. Even so, HSBC's management has demonstrated an ability to control risk and produce resilient earnings in more difficult economic times. This has been demonstrated in particular by the group's major banking subsidiary in Hong Kong, HongKong and Shanghai Banking Corporation (HKB) which, despite five very difficult years before the recent economic upturn, has produced consistently excellent results. While the group's global footprint leaves it vulnerable to local shocks, the most recent being Argentina in 2001, the strength and quality of the main operating subsidiaries suggest that any localised problems should be manageable.

HSBC's appetite for market risk has been low. Potentially volatile trading gains are largely customer-driven and are not a major revenue source (5% of H104 revenues, despite strong growth). Recent investment in its global markets and investment banking businesses signals a moderate increase in risk appetite and was one of the reasons behind the 8% increase in underlying costs in H104, but Fitch expects market risk to remain well-controlled.

While the Household acquisition changed the risk profile of the group, exposing it to lower quality consumer finance business mainly in the US, the business is well-remunerated, provides a platform for future growth (both in the US and in other markets) and brings systems and know-how benefits to the consumer finance businesses of the group's banking subsidiaries.

As a consequence of the rating action, and reflecting the depth of their integration within the HSBC group, the following rating actions have also been taken (Short-term, Individual and Support ratings are affirmed):
HSBC Bank USA: Long-term debt and Senior deposit ratings upgraded to 'AA' from 'AA-' (AA minus); Outlook Stable
HSBC USA Inc: Long-term debt and Senior deposit ratings upgraded to 'AA' from 'AA-' (AA minus); Outlook Stable. Subordinated debt upgraded to 'AA-' (AA minus) from 'A+'
CCF: Long-term rating upgraded to 'AA' from 'AA-' (AA minus); Outlook Stable. Subordinated debt upgraded to 'AA-' (AA minus) from 'A+'.
HSBC Private Banking Holdings (Suisse) SA: Long-term rating upgraded to 'AA' from 'AA-' (AA minus); Outlook Stable.
HSBC Bank - Middle East: Long-term rating upgraded to 'A+' from 'A'; Outlook Stable

At the same time, Fitch has upgraded Household's Long-term rating to 'A+' from 'A' and affirmed the 'F1' commercial paper rating; the rating Outlook remains Positive. With continued support of HSBC, the Long-term rating of Household could become closer aligned with that of HSBC. Any upward movement in the Long-term rating of Household will be driven by the completion of the planned transfer of credit card receivables in 2004 to HSBC Bank USA and the resulting capital plans for Household, in conjunction with HSBC. For a full list of rating actions in respect of Household and its subsidiaries, please see the foot of this press release.

Finally, the agency has affirmed the ratings of HSBC's 73.5%-owned subsidiary HSBC Trinkaus & Burkhardt (TuB) at Long-term 'A+', Short-term 'F1', Individual 'B/C' and Support '1'. The Outlook on the Long-term rating remains Stable. TuB's Long-term and Short-term ratings are based on the support available from HSBC Holdings plc. TuB actively co-operates with other HSBC group companies in international business, investment banking and equity research, but it has remained essentially a German private/investment bank.