TEXT - Fitch cuts HSBC Holdings plc

Fri Dec 7, 2012 12:06pm EST

Dec 7 - Fitch Ratings has today downgraded the Long-term Issuer Default
Rating (IDR) of HSBC Holdings plc (HSBC or HSBC Group) to 'AA-' from
'AA' following the agency's periodic review of the group. The Rating Outlook is
revised to Stable from Negative. Fitch has taken similar actions on the
Long-term IDRs of HSBC Bank Plc (HSBC Bank), The Hongkong and Shanghai Banking
Corporation Limited (HKSB) and HSBC Latin America Holdings (UK) Limited 
(HSBC Latam). At the same time, Fitch has affirmed Hang Seng Bank Limited's 
(HSB) Long-term IDR at 'A+'. A full list of rating actions for HSBC Holdings, 
HSBC Bank, HKSB, HSB and HSBC Latam is at the end of this rating action 
commentary (RAC).

RATING ACTION RATIONALE

The equalised IDRs of HSBC Holdings and its 'core' subsidiaries HSBC Bank and 
HKSB reflect Fitch's view that they share a common overall risk profile due 
primarily to operational and strategic integration and management along four 
global business lines. Additionally, although capital and liquidity are subject 
to local supervisory oversight and regulatory restrictions, Fitch believes the 
group retains a sufficient degree of flexibility to redeploy capital within the 
group. At the HSBC Holdings level, the equalisation additionally reflects 
Fitch's opinion that structural subordination is mitigated by its prudent 
liquidity management and Fitch's expectation that adjusted common equity double 
leverage as calculated by Fitch, although rising, is likely to remain below 
120%.

The Long-term IDR and VR of HSBC Holdings and the Long-term IDRs of HSBC Bank 
and HKSB have been downgraded as Fitch considers the risks attached to the 
group's expansion into higher-risk markets, including mainland China and 
intensifying competition in Hong Kong, which were the key drivers behind the 
downgrade of HKSB's VR to 'aa-' from 'aa' in March 2012, are no longer 
sufficiently mitigated at the HSBC Group level. 

The agency anticipates that the benefit previously awarded to diversification of
businesses and geographies will be neutralized by the group's increasing cost of
managing its diverse operations. The latter include legal fees, provisions for 
litigation and customer redress, expenses to ensure consistent adherence to 
compliance and governance standards as well as business conduct, and most 
importantly, complying with numerous and higher regulatory requirements. 

Fitch has today also downgraded the VR of HSBC Bank to 'a+' from 'aa-' and this 
too has contributed to the IDR downgrades (see also 'HSBC BANK PLC' subsection 
of this RAC).

HSBC HOLDINGS

RATING DRIVERS & SENSITIVITIES - VR & IDRs

The VR and IDRs capture HSBC Group's resilient intrinsic strength, characterised
by good liquidity and strong franchise in its core markets UK, Hong Kong and US 
and a low overall risk appetite. The group's earnings generation, which benefits
from robust growth in Hong Kong and Asia, remained strong and allowed it to 
absorb material one-off charges for allegations of regulatory non-compliance in 
the US and mis-selling in the UK. The ratings of the group also reflect 
conservative liquidity and funding positions of the group's local franchises. 
Capitalisation is solid.

Fitch continues to view the group's global reach as a key strength. It enforces 
the HSBC franchise and is a competitive advantage for business generation. 
However, managing the network's inherent complexity demands exceptional 
oversight and risk discipline. In addition, complying with more stringent 
requirements of multiple authorities may increasingly restrict the fungibility 
of capital and liquidity and can ultimately affect profit, franchise, reputation
and investor confidence.

The agency views management's progress in selling non-core businesses to 
simplify the group and manage capital efficiency positively. Even so, refocusing
the group is necessary for staying competitive and consistent with the 
restructuring efforts of other large global trading and universal banks.

Fitch believes that the capital benefits from the sale of HSBC's stake in Ping 
An (50bps for the core Tier 1 ratio and 100bps for the total capital ratio) may 
be temporary as the transaction is unlikely to reduce the group's long-term 
focus and exposure to China. Fitch remains concerned about the build-up of risk 
from the bank's expansion into higher-risk markets such as China and India to 
the extent that growth may be rapid or excessive. However, Fitch takes a 
positive view on the bank substituting exposure in associates with organically 
growing on-shore as it increases HSBC's control over the risk it undertakes. 
Fitch estimates that the group's mainland China exposures more than doubled 
since 2010 to about USD115bn or 4% of assets at end-June 2012.

Additionally, the VRs and IDRs reflect prudent liquidity management and moderate
holding company double leverage. Fitch expects that HSBC will upstream most of 
the gains generated at HKSB from the sale of its stake in Ping An.

HSBC's capitalisation remains a relative strength if compared with peers' 
following various significant disposals in 2012 (including the US cards 
business, certain US branches, investments in India and China). This could, 
however, change if exposure to riskier markets continues to rise. At end-H112, 
HSBC's consolidated core capital ratio according to Fitch's definitions stood at
10.3%, tangible common equity/tangible assets at 5.0% (2011: 9.3% and 4.8% 
respectively). Including Hong Kong, Asia's share in RWAs increased to around 37%
at end-September 2012 compared with 32% at end-2011 while North America's 
declined to 23% from 28% and the other geographies' remained stable.

HKSB's and HSBC Bank's access to deposit funding in the group's main markets 
Hong Kong and UK is a key ratings strength which it shares with many regionally 
operating banks rated in the 'AA' category. The group's low loan-to-deposit 
ratio of 76.3% at end-September 2012 differentiates it from its lower rated 
global trading and universal bank peers. Fitch considers HSBC well placed to 
maintain this strength; however, defending its dominant deposit market share in 
Hong Kong may weigh on profitability. Operating profit over average assets has 
shown an improving trend since 2009 but, at 0.98% in 9M12 as calculated by 
Fitch, it remains below that of other 'AA-' - rated banks.

The VR and IDRs of HSBC Holdings are sensitive to changes in the VRs of HSBC 
Bank and HKSB and more broadly the intrinsic strength of other entities within 
the HSBC Group. The Long-term IDR of HSBC is likely to be constrained at the 
level of the VR of highest rated operating entity unless the group maintains 
substantial capital surplus at the holding level. Downside risks stem from 
greater-than-cyclical asset deterioration and sustained falls in earnings as a 
result of persisting macroeconomic pressures in Europe and UK, increasing 
concentrations (sector/geography) or a larger-than-expected impact from a 
material slowdown in China. The ratings are also sensitive to any damage to and 
eroding confidence in the HSBC franchise as the latter is essential to 
preserving access to core funding and offering international connectivity. 

The VR and IDRs of HSBC Holdings are also sensitive to a change in relevant 
factors affecting holding company notching. For example, a sustained increase in
double leverage above 120% could lead to a 1 notch downgrade of the holding 
company.

RATING DRIVERS - SUPPORT RATING & SRF

 

HSBC Group's Support Rating of 5 and Support Rating Floor (SRF) of 'No floor' 
reflect Fitch's opinion that UK sovereign support cannot be relied upon for a 
holding company. 

SUBORDINATED DEBT & OTHER HYBRID SECURITIES

Subordinated debt and other hybrid regulatory capital securities issued by the 
holding company are notched down from its VR to reflect varying degrees of loss 
severity and incremental non- performance risk under Fitch's "Assessing and 
Rating Bank Subordinated and Hybrid Securities" criteria, dated 5 December 2012.
They are primarily sensitive to any change in HSBC's VR. 

SUBSIDIARY & AFFILIATED COMPANY RATING DRIVERS & SENSITIVITIES

HSBC Bank Plc

Fitch Ratings has downgraded HSBC Bank's Long-term IDR to 'AA-' from 'AA' and 
its VR to 'a+' from 'aa-'. The Short-term IDR, Support Rating and SRF have been 
affirmed at 'F1+', '1', and 'A', respectively. The outlook is revised to Stable 
from Negative. 

RATING DRIVERS & SENSITIVITIES - VR 

HSBC Bank's VR reflects its strong core UK retail and commercial banking 
franchise, its sound liquidity and strong funding profile, with little reliance 
on the wholesale markets. 

The downgrade to 'a+' considers the headwinds facing it in terms of conduct and 
regulatory risk, particularly in terms of performance, as well as the focus of 
its business in the UK and the Eurozone, both of which continue to suffer from 
negative macroeconomic pressures. The impact on the bank from high unemployment 
in the region as well as falling asset prices has been mitigated by the low 
interest rate environment, which has boosted affordability thus far, as well as 
a relatively conservative appetite for risk. Nonetheless, it is Fitch's view 
that given the expected prolonged negative pressures, asset quality and 
performance are likely to deteriorate or at best stay muted for longer than 
previously anticipated over the medium-term.

Fitch also notes that HSBC Bank has a disproportionately large exposure to 
global markets and international corporate business, whether booked in the UK or
in France, which has rendered its performance volatile. While this volatility 
has recently been caused by the Eurozone crisis, volatility will remain as long 
as such a large portion of the Global Banking and Markets business of the HSBC 
Group is booked at the bank, irrespective of any resolution in the current 
Eurozone uncertainties.

Despite the downgrade, the bank's VR remains amongst the highest in Europe, 
reflecting, the sound liquidity profile of the bank and its strong funding 
franchise, which has kept the loans to deposit ratios in most of the countries 
it and its subsidiaries operate in, below 100%.

Downside risk to the bank's VR would most likely be a consequence of adverse 
external factors as an increase in risk appetite is improbable. It would be most
likely to arise due to a sharper and more drawn-out than anticipated 
deterioration in the economic and operating environment and the ensuing asset 
quality deterioration the bank would face. A particularly disruptive or 
expensive and extended reputational or litigation event (the bank is exposed to 
PPI, and potentially IRS mis-selling and LIBOR-related fines and litigation) 
could also create downside risks.

RATING DRIVERS & SENSITIVITIES - Support Rating, SRF, IDRs & Senior Debt 

HSBC Bank's IDRs, and senior debt are in line with those of its parent, HSBC, 
whose Long-term IDR has been downgraded (see above). Apart from specific holding
company considerations, they are sensitive to the same factors as HSBC's IDRs. 

Although HSBC Bank is expected to first look to its parent for support in case 
of need, its Support Rating and SRF reflect the bank's systemic importance to 
the UK, which implies a strong probability that ultimately, support from the UK 
authorities would likely be forthcoming if needed. Although on a weakening 
trend, Fitch expects the UK authorities' propensity to support HSBC to remain 
high until measures designed to weaken the implicit support for banks, both 
UK-specific and at an EU level, can be practically implemented.

The Support Rating and the SRF are sensitive to a change in Fitch's assumptions 
around the ability or propensity of the UK government to provide extraordinary 
support to HSBC Bank if needed.

SUBORDINATED DEBT & OTHER HYBRID SECURITIES

Subordinated and other Hybrid debt issued by HSBC Bank is notched down from the 
VR of HSBC in accordance with Fitch's criteria for rating hybrid debt within 
groups. Their ratings are primarily sensitive to any change in HSBC Holding's 
VR.

The Hongkong and Shanghai Banking Corporation Limited

Fitch downgraded Hong Kong-based HKSB's Long-Term IDR to 'AA-'. The Outlook is 
revised to Stable from Negative. The agency affirmed the Short-term IDR at 
'F1+', VR at 'aa-', the Support Rating at '1' and the SRF at 'A-'. The rating 
action is a consequence of the downgrade of HSBC's Long-term IDR.

RATING DRIVERS & SENSITIVITIES - VR 

HKSB's VR reflects the bank's robust liquidity, strong franchise and prudent 
risk control. Weaknesses in light of the high rating are increasing 
concentration on China and satisfactory capital. Fitch believes that benefits 
from spreading risk across HKSB's wide geographic reach is offset by increasing 
demands to adhere to different regulatory regimes.

The agency views the current level of capital and the reliance on the parent for
capital restructuring as a weakness for a bank relative to its high rating. 
Fitch gives full equity credit to HKSB's preference shares which are held by 
HSBC group entities (HKD95bn or 22% of Fitch eligible capital at end-H112). This
is based on the expectation that HSBC would convert them into ordinary shares or
other Basel III compliant instruments over time, subject to future retained 
earnings.

A downgrade of the VR may result from severe asset deterioration to levels 
greater-than-cyclical as a result of greater concentrations (sector/geography) 
or a larger-than-expected impact from a material slowdown in China.

Sustainably strong and above trend profit and earnings retention could become a 
positive rating driver if HKSB maintains market leadership in Hong Kong, low 
risk appetite, simplifies its network and enhances its competitive position in 
key markets.

RATING DRIVERS & SENSITIVITIES - Support Rating, SRF & IDRs 

The IDRs are in line with those of HSBC Group. They are underpinned by the 
bank's intrinsic financial strength as Fitch views HKSB as the strongest entity 
within the HSBC Group. A downgrade in HKSB's VR would likely result in a 
downgrade of its IDRs. 

The Support Rating of '1' reflects an extremely high probability of support, in 
case of need, from HSBC. The SRF of 'A-' mirrors Fitch's view that the Hong Kong
authorities would also provide support, in case of need. This is because HKSB is
systemically important to Hong Kong ('AA+'/Stable). 

The SRF is sensitive to a change in Fitch's assumptions around the ability or 
propensity of the Hong Kong government to provide support to HKSB if needed.

Hang Seng Bank Limited

Fitch Ratings has affirmed HSB's Long-Term IDR at 'A+' and the Short-term IDR at
'F1'. The Outlook is Stable. In addition, the agency has affirmed the VR at 'a+'
and the Support Rating at '1'.

RATING DRIVERS & SENSITIVITIES - VR & IDRs

HSB is well positioned to maintain sound liquidity and strong profitability. Its
stable margins benefit from the bank's treasury activities and its expansion to 
mainland China. Lending follows strict underwriting standards, and reserves and 
collateral are maintained at high levels, notwithstanding that collateral 
coverage for loans used outside of Hong Kong has more than halved since 
end-2008. 

The bank's capitalisation is lower than that of peers, which Fitch considers a 
weakness relative both to the current rating level and to its concentrated 
exposures to China and the domestic property market. 

HSB's VR and IDRs could come under pressure if its capital is no longer 
commensurate with the risks it takes, including if it were to loosen 
underwriting standards for its China exposures. Fitch considers HSB's capital 
base vulnerable to declines in property values as revaluation gains amounted to 
19% of Fitch Core Capital at end-June 2012. In addition there is the risk that 
risk-weighted assets may increase as borrower quality weakens in an economic 
downturn. 

The IDR would not fall below 'A' unless Fitch is of the opinion that the ability
and likelihood of HSBC, the bank's ultimate 62% owner, to support HSB has 
declined.

RATING DRIVERS & SENSITIVITIES - Support Rating 

Fitch classifies HSB as 'strategically important' to the HSBC Group to reflect 
HSB's retained autonomy which results in limited integration and brand 
recognition. The supported Long-term IDR of HSB would be two notches lower than 
that of HSBC Group. 

HSBC Latin America Holdings (UK) Limited

Fitch downgraded UK-based HSBC Latam to 'AA-'. The Outlook is revised to Stable 
from Negative. The agency affirmed the Support Rating at '1'. The rating action 
is a consequence of the downgrade of HSBC's Long-term IDR.

RATING DRIVERS & SENSITIVITIES 

HSBC Latam is an intermediate holding company owning HSBC's Latin American 
subsidiaries. Its IDR is equalised to that of HSBC. Its Support Rating of 1 
reflects the extremely high likelihood of support being provided to this holding
company by HSBC in case of need. Its IDR is sensitive to movements in HSBC's IDR
(excluding any movements relating to specific holding company factors).

The rating actions are as follows: 

HSBC Holdings plc

Long-term IDR: downgraded to 'AA-' from 'AA'; Outlook revised to Stable from 
Negative

Short-term IDR and debt: affirmed at 'F1+'

Viability Rating: downgraded to 'aa-' from 'aa'

Support Rating: affirmed at '5'

Support Rating Floor: affirmed at 'No Floor'

Senior debt: downgraded to 'AA-' from 'AA'

Lower tier 2 subordinated debt: downgraded to 'A+' from 'AA-'

Preference shares (US4042806046): downgraded to 'BBB' from 'BBB+'

Other preference shares and capital securities (XS0110560835, XS0110560165, 
USG4637HAB45, US40427LAB09, XS0178404793, US4042807036, US4042808026, 
US40429Q2003, XS0188853526, USG463802037): downgraded to 'BBB+' from 'A-'

HSBC Bank plc

Long-term IDR: downgraded to 'AA-' from 'AA'; Outlook revised to Stable from 
Negative

Short-term IDR and debt: affirmed at 'F1+'

Viability Rating: downgraded to 'a+' from 'aa-'

Support Rating: affirmed at '1'

Support Rating Floor: affirmed at 'A'

Senior debt: downgraded to 'AA-' from 'AA'

Market linked securities: downgraded to 'AA-emr' from 'AAemr'

Subordinated debt: downgraded to 'A+' from 'AA-'

Upper Tier 2 notes (GB0005902332) downgraded to 'A-' from 'A'

Other capital securities (XS0189704140, XS0179407910) downgraded to 'BBB+' from 
'A-'

The Hongkong and Shanghai Banking Corporation Limited

Long-term IDR: downgraded to 'AA-' from 'AA'; Outlook revised to Stable from 
Negative

Short-Term IDR affirmed at 'F1+' 

Viability Rating affirmed at 'aa-'  

Support Rating affirmed at '1'

Support Rating Floor affirmed at 'A-'

Hang Seng Bank Limited

Long-Term IDR: affirmed at 'A+'; Outlook Stable 

Short-Term IDR: affirmed at 'F1'

Viability Rating affirmed at 'a+'

Support Rating: affirmed at '1'

HSBC Latin America Holdings (UK) Limited

Long-term IDR: downgraded to 'AA-' from 'AA'; Outlook revised to Stable from 
Negative

Support Rating: affirmed at '1'
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