HSBC Mexico S.A. ABOVE AVERAGE Residential Servicer Ranking Outlook Stable

Stocks and Financial Services Press Releases Thursday September 7, 2017 09:19
NEW YORK--7 Sep--S&P Global Ratings
NEW YORK (S&P Global Ratings) Sept. 6, 2017--S&P Global Ratings today affirmed its ABOVE AVERAGE ranking on HSBC Mexico S.A. (HSBC) as a residential servicer for the Mexican market.

The outlook is stable. HSBC is a commercial bank that is part of Grupo Financiero HSBC S.A. de C.V., which is a subsidiary of HSBC Holdings PLC. As of April 2017, HSBC's residential loan portfolio had 50,879 loans (in-balance-sheet and securitized), representing 36.198 million Mexican pesos (MXN) compared with 46,262 loans and MXN29.704 million in September 2015.

The overall ranking reflects our opinion of the bank's STRONG management and organization subranking, which continues to be supported by an experienced management team, a solid organizational structure that supports the residential servicing operations, a complete training program, a highly automated information technology platform, sound contingency plans, and stringent internal controls. Since our last review (see "HSBC Mexico S.A. ABOVE AVERAGE Ranking As A Residential Servicer Affirmed; Outlook Stable," published Nov. 24, 2015), the mortgage management team established a strategic plan to strengthen its origination and collections procedures and subsequently reactivate the growth trend of its portfolio.

This strategy has remained in place, specifically through higher participation of third-party sales (brokers), which have resulted in steady double-digit growth in loans originated. Given the performance of these recently originated loans, we continue to believe the bank has adequate servicing capabilities that can withstand rapid, consistent growth in its portfolio.

The bank also updated its model to calculate the net realizable value (NRV) for each loan, (i.e., the minimum amount it's willing to accept, taking into account all fees and expenses related to the administration of the loan, including all legal costs).

We believe this model has allowed the servicing team to improve overall collection practices, especially through robust and well-informed restructuring schemes for clients. Actions were also taken to attend to the bank's legal structure. The objective was to reduce the risk of handling documentation and ensure faster legal process time.

Since our last review, the number of external attorneys has fallen to 52 from 112, with a continued goal of 24 external attorneys by year's end.
On the other hand, 23 internal attorneys manage the external attorneys with a goal of one internal attorney for each external attorney.

We believe this will make the bank's default management and recovery measures more efficient. The ranking also is based on HSBC's residential loan servicer capabilities, which remain consistent with our ABOVE AVERAGE loan administration subranking. HSBC has proficient standards for loan boarding, document tracking, payment processing, investor reporting, and customer service.

The performance of the on-balance-sheet portfolio improved in 2016 compared with 2015, reflecting HSBC's collection efforts and better origination practices. We expect to see a recovered trend by the end of 2017.

Outlook The bank has also made the following changes since our last review: As of April 2017, the residential portfolio's number of delinquencies and nonperforming loans (in-balance-sheet and securitized) were significantly reduced to 5.07% and 1.58%, respectively, from 7.33% and 2.08% since our last review as of September 2015.Third-party sales (channel by broker) increased significantly, resulting in higher origination numbers since our last review.

Nine departments report to the head of collections, compared to the previous seven, which we believe will allow the servicer to continue having efficient control over the collection's area-specific responsibilities.

Blended training has been reinforced, as all field agents continue to perform multiproduct collections, and there are no longer specialized field collectors in residential collections. This, given the portfolio characteristics, has proven to be effective.

The properties' sale value slightly improved to 81% from 74%. However, the percentage of properties sold continues to be significantly lower than in previous years.
To reverse this trend, brokers now have access to the entire inventory whereas during our last review brokers were assigned properties based on location.

This, we believe, will create more competition and potentially increase sales.A new customer service call model was implemented for specialized collection units, which better monitors all calls with customers to enhance their experience.

They expect to finalize the roll-out of the system before the end of the year.Despite the strengths mentioned above, the bank does exhibit the following weaknesses: The bank continues to restructure its internal organization, leading to high employee turnover compared with peers; andA lack of significant strategies to recover a non-performing portfolio in one of HSBC's securitizations.

The outlook is stable though. We expect that over the next 12 to 18 months, HSBC will continue to enhance its servicing capabilities and display improved performance in its securitized residential portfolio.

We believe that HSBC's reactivation of its mortgage product has led to the implementation of several projects that could allow it to continue strengthening its overall servicing capabilities, and we will continue monitoring the bank's efforts with respect to these projects.

The financial position is SUFFICIENT.

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