Fitch Places HSBC's Panamanian Subsidiaries on Rating Watch Negative

Fitch Ratings has placed the following HSBC Panamanian subsidiaries' ratings on Rating Watch Negative (see the full list of ratings affected at the end of this RAC):

--HSBC Bank (Panama), S.A.'s Issuer Default Ratings (IDRs), Support rating, and National ratings;
--HSBC Seguros (Panama), S.A. y Subsidiarias' Long-Term National Insurer Financial Strength (IFS) rating.

RATING DRIVERS

The ratings were placed on Negative Watch following the announcement of HSBC's agreement to sell these operations to the Colombian Bancolombia, S.A. (Bancolombia) for a total consideration of US$2.1 billion. The transaction is subject to regulatory and other approvals and is expected to be completed in the third quarter of 2013.

A Negative Rating Watch indicates that there is a heightened probability of a potential downgrade once the transaction is completed. The Negative Watch reflects that after the transaction is completed, the sold entities would no longer receive potential support from its current ultimate parent (HSBC Holding plc, rated 'AA-' with a Stable Outlook by Fitch). The Rating Watch will be resolved once the transaction is completed and Fitch assesses the potential support that Bancolombia could provide to its future subsidiaries and the individual strengths of the Panamanian entities.

RATING SENSITIVITIES

HSBC BANK (PANAMA), S.A.

Once the transaction is completed, HSBC Panama's IDRs could be downgraded to the level of its Viability Rating (VR, currently at 'bbb'). In addition, Fitch expects this bank to be considered core for Bancolombia; therefore, it is unlikely that HSBC Panama's IDRs would eventually be downgraded below Bancolombia's IDRs. In turn, the bank's Support rating will likely be downgraded, as Bancolombia's ability to support its subsidiaries is in Fitch's view relatively weaker than HSBC's, and it could be downgraded to '2' upon completion of the transaction. The bank's national ratings are also likely to be downgraded. Fitch expects that the resulting long-term National rating would be in the 'AA' category and the short-term National rating in the 'F1' category.

HSBC Panama's VR was affirmed. It reflects the bank's strong market position, ample funding and liquidity, and good asset quality. Fitch's view of HSBC Panama's intrinsic creditworthiness is tempered by the bank's moderate performance and lower than average capital/reserves cushion.

HSBC Panama's VR could be pressured if performance declines, asset quality deteriorates, reserve coverage weakens, or capital ratios deteriorate. More specifically, HSBC Panama's VR could be downgraded if its Fitch Core Capital to Weighted Assets and/or Tangible Common Equity to Tangible Assets ratios fall below 10% or 8%, respectively; and/or if operating ROAA is less than 0.7%. There is limited upside potential in the near future for HSBC Panama's VR.

HSBC SEGUROS (PANAMA), S.A. y Subsidiarias

After the sale completion, Fitch considers that the company would no longer count on the support of its current ultimate shareholder. This would have an impact on the company's actual rating, which would no longer be considered with a 'group' approach and will be based on its standalone financial strength. Fitch expects that the resulting long-term national IFS would be in the 'AA' category.

HSBC Seguros (Panama) ratings reflect the good performance and adequate liquidity and capitalization position that have been recorded in recent years, which are the result of its outstanding capacity to generate internal capital and the conservative practices related to dividend distribution. In addition, the agency considers the extensive reinsurance protection, which limits the company's exposure per individual risk and per catastrophic event. The latter factors will likely determine the final ratings of the entity upon conclusion of its sale to Bancolombia.

Fitch has placed the following ratings on Rating Watch Negative:

HSBC Bank (Panama), S.A.
--Long-term IDR 'A';
--Short-term IDR 'F1';
--Support Rating '1'.

--Long-Term National Rating 'AAA(pan)';
--Short-Term National Rating 'F1+(pan)'.

HSBC Seguros (Panama), S.A. y Subsidiarias
--Long-Term National IFS 'AAA(pan)'.

Fitch has affirmed the following rating:

HSBC Bank (Panama), S.A.
--VR at 'bbb'.

Additional information is available on www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable criteria and Related Research:
--'Global Financial Institutions Rating Criteria' (Aug. 15, 2012);
--'National Ratings Criteria' (Jan. 19, 2011);
--'Insurance Rating Methodology' (Jan. 11, 2013).

Applicable Criteria and Related Research
Insurance Rating Methodology -- Amended
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=698731
National Ratings Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=595885
Global Financial Institutions Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686181

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