Dominion Bond Rating Service has upgraded the long-term debt ratings of HSBC Bank Canada, along with its affiliates HSBC Finance Corp. and HSBC Holdings plc.

DBRS says the rating actions on HSBC Bank Canada and HSBC Finance reflects the concurrent rating actions on parent company HSBC Holdings.

In the case of HSNC Bank Canada, DBRS says it considers the bank’s efficient productivity, favourable credit quality despite some geographic and industry concentrations, and ongoing strength in providing customer service as contributing positively to the ratings on a stand-alone basis.

DBRS says it believes the bank has shown some progress over the past 18 months in executing its five-year strategic plan of “Managing for Growth”. Revenue growth strategies include leveraging the HSBC Finance platform, strengthening IT infrastructure to invest in sales and service, and growing the distribution network to better cross-sell, it reports. The bank is offering auto financing to a full spectrum of customers based on HSBC Finance’s platform. And, it’s moving its credit cards onto HSBC Finance’s platform, which should give it better control of its customer base and ability to service these customers, the rating agency says.

“The bank’s ability to leverage HSBC Group IT solutions is unique vis-à-vis other Canadian banks, which should translate into better delivery of service and sales,” DBRS adds. “The distribution network was expanded in Ontario with the acquisition of Intesa Bank Canada and an agreement to allow HSBC’s customers to use the Bank of Montreal’s bank machines without surcharges. The former directly increases retail customers while the latter should help win retail business from its existing Ontario commercial clients.”

On HSBC Finance, DBRS says that the credit strength of HSBC Finance is meaningfully supported by HSBC Holdings. “Following its acquisition by HSBC Holdings, HSBC Finance has continued to benefit from lower funding costs and enhanced financial flexibility, and opportunities exist to expand operations into other countries currently served by HSBC Holdings,” it says. “In addition, there have been benefits in the integration of administrative, IT, and certain credit card processes. The lack of any direct guarantee from HSBC Holdings prevents a full flow-through of the ultimate parent’s rating to HSBC Finance.”

The rating action on the parent company reflects its successful efforts, over an extended period of time, in improving the breadth and potential of its operations, the rating agency says. “Over the past several years, HSBC has negotiated the Asian crisis, generated organic growth, and successfully integrated numerous acquisitions, including Household International, Inc. (now HSBC Finance), actions that substantially improved both geographic and business segment diversification. While current credit conditions are effectively as good as they can be, HSBC, as it is now structured, is strongly positioned to weather future difficult issues through the next cycle and beyond. HSBC unquestionably stands out among its peers with respect to geographic diversification, and its business segments are weighted toward traditionally less volatile businesses,” it says.

The integration of HSBC Finance is complete, DBRS reports, “The consumer finance business generates high but predictable credit costs. While negative surprises may be forthcoming under a difficult consumer credit environment, these costs are expected to be manageable. Consumer lending is seen as a major growth area for the Group, with countries such as China, India, Mexico, and Turkey seen as prime areas for longer term expansion.”

It adds that the bank’s emerging markets exposure continues to have both positive and negative aspects, with the potential for higher profitability and growth rates offset by higher economic and geopolitical risks. “While HSBC has not generated a particularly high return on equity in recent years, profitability has been more stable than that of some of its peers, an aspect of the Group that may also be attributed to diversification. HSBC also enjoys the benefits (particularly in terms of branding and cost efficiency) of being one of the largest financial services companies in the world,” it concludes.