Fitch downgrades HSBC ME

Cites weakened asset quality and exposure to GREs

Fitch Ratings on Wednesday downgraded HSBC Bank Middle East's (HBME) due to weakening asset quality.

The bank is a subsidiary of HSBC Holdings.

It was Individual Rating was downgraded to 'C' and removed it from Rating Watch Negative (RWN). The agency has also affirmed the bank's Long-term Issuer Default Rating (IDR) at 'AA-', Short-term IDR at 'F1+' and Support Rating at '1' as well as the senior unsecured notes at 'AA-'. The Outlook on the Long-term IDR is Stable.

The removal of the Individual Rating from RWN follows Fitch's assessment of the impact of the debt restructuring of major Dubai government-related entities on the bank's risk and financial profile.

HBME's Long- and Short-term IDRs reflect Fitch's belief that there is an extremely high probability that support would be provided by the parent, HSBC Holdings. The bank's Individual Rating reflects its weakened asset quality, exposure to government and related entities and the stressed real estate sector, as well as the elevated political risk in the region, which may affect some of its operations.

Although asset quality appears to have stabilised, in Fitch's opinion, the risks and potential volatility inherent in operating in the region are more consistent with a 'C' Individual Rating.

The rating also reflects HBME's regional franchise, strong liquidity position and the benefits of being part of the HSBC group.

Fitch expects earnings growth to be challenging for HBME in 2011, due to fewer lending opportunities in the UAE and the unrest in the Middle East and North Africa (Mena) region. The agency believes that given the bank's adequate level of provisioning, at current levels, core earnings continue to provide the bank with good loss absorption capacity against further possible increases in non-performing loans (NPLs).

Asset quality weakened further in 2010, partly due to the classification of certain government-related entities as impaired. In Fitch's opinion, NPLs have probably peaked, but asset quality could remain pressured in 2011.

Fitch believes that liquidity is managed more conservatively than at peers. The bank has one of the lowest loans/deposits ratios in the UAE.

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