RPT-Fitch affirms HSBC Trinkaus at 'AA-'; outlook stable
Dec 6 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed Germany-based HSBC Trinkaus & Burkhardt AG's Long-term Issuer Default Rating (IDR) at 'AA-' with Stable Outlook and its Viability Rating (VR) at 'a'. A full list of rating actions is provided at the end of this comment.
The IDRs of the bank are aligned with those of its ultimate parent's, HSBC Holdings plc (HSBCH, AA-/Stable/F1+). This reflects HSBC Trinkaus's status as a highly integrated, core entity of HSBC Group. Accordingly, the Support Rating of '1' expresses Fitch's view that HSBCH's institutional support would be extremely likely, if needed. HSBCH has repeatedly and publicly emphasised its commitment to support the growth of its 80.6%-owned German subsidiary by injecting capital, if necessary.
The affirmation of the VR reflects HSBC Trinkaus's resilient business model and solid financial profile based on diversified sources of revenues. At the same time, we consider that the bank's fairly ambitious corporate lending growth plans reflect an increased risk appetite, although we expect it to be executed with restraint.
KEY RATING DRIVERS AND SENSITIVITIES - IDRs and Support Rating
HSBC Trinkaus's core status within the group is increasingly driven by its relationships with large German export-driven and, increasingly, with Mittelstand corporate clients, which the bank provides with core HSBC products. The group's revenues from these clients largely exceed those booked by HSBC Trinkaus. A capital injection to back HSBC Trinkaus's rapidly rising lending exposure to these clients is increasingly likely in the near- to medium-term. The bank largely fulfils the group's main strategic targets as it notably benefits from the strong international connectivity and economic development of Germany, which is a priority growth market for the group. A shared brand name, HSBC Trinkaus's deep integration within the group's systems and regular cooperation with the group's European entities also contribute to the high propensity of group support.
Having generated an average return on equity (RoE) of 16% since the start of the financial crisis, HSBC Trinkaus is likely to remain a valuable investment for the group in the Basel III environment, even though profit distribution will remain modest in absolute terms due to the bank's size. We do not expect performance to remain at its strong historical level in a structurally more challenging operating environment. However, it should continue to outperform the overall wholesale banking sector.
HSBC Trinkaus's IDRs will continue to move in line with HSBCH's as we believe that the group's propensity to provide support is unlikely to diminish in light of the above.
KEY RATING DRIVERS AND SENSITIVITIES - VR
The bank's growing focus on mid-sized corporates could increase earnings cyclicality and imbalances, compounded by high fixed costs and recurring subdued earnings in private banking. It also signals a moderately rising risk appetite, adding to the bank's high single-name concentration, although this remains adequately mitigated by its focus on German assets.
Given the structurally strong competition in German corporate lending, the growth in mid-sized corporate lending could moderately erode the bank's strong risk/return profile. However, we expect the bank to maintain its strict pricing discipline and cautious approach to risk when making use of its increased limits on speculative-grade lending.
In addition, the growth in mid-sized corporate lending will increase the bank's average asset maturity and already large undrawn loan commitments, thus somewhat reducing its balance sheet's hitherto high flexibility. However, it will retain a short-term asset base overall which, while predominantly wholesale-funded, results in modest liquidity risk.
The bank's solid capitalisation and steady internal capital generation are sufficient to absorb Basel III-related incremental regulatory market-risk charges, which should be moderate. While this also offers some flexibility to absorb limited additional corporate lending, the ambitious growth plans make a capital injection form HSBCH increasingly likely, in our view. The VR factors in the availability of such regular operational support.
Downward VR pressure would most probably result from uncontrolled risks resulting from the expansion of mid-sized corporate lending. The VR could also suffer from large single-event trading losses revealing unexpected structural weaknesses in market risk management, or a transformational acquisition. Even a materially improving financial profile would be unlikely to warrant an upgrade of the VR due to the bank's rising credit risk, wholesale focus and tail risk from its trading activities.
The rating actions are as follows:
Long-term IDR: affirmed at 'AA-'; Outlook Stable
Short-term IDR: affirmed at 'F1+'
Viability Rating: affirmed at 'a'
Support Rating: affirmed at '1'
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