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Fitch Affirms HSBC and its UK and HK subsidiaries at 'AA-'; Outlook Stable
March 26, 2014 / 7:12 PM / 3 years ago

Fitch Affirms HSBC and its UK and HK subsidiaries at 'AA-'; Outlook Stable

(The following statement was released by the rating agency) HONG KONG/LONDON, March 26 (Fitch) Fitch Ratings has today affirmed the Long-Term Issuer Default Rating (IDR) of HSBC Holdings plc (HSBC or HSBC Group) at 'AA-' with a Stable Outlook and its Viability Rating at 'aa-'. At the same time, Fitch has affirmed the ratings of HSBC's key subsidiaries: HSBC Bank Plc (HSBC Bank, AA-/a+), The Hongkong and Shanghai Banking Corporation Limited (HKSB, AA-/aa-), Hang Seng Bank (HSB, A+, a+) and HSBC Latin America Holdings (UK) Limited (AA-/Stable). A full list of the rating actions is at the end of this commentary. Fitch has also affirmed the ratings of HSBC USA Inc (AA-/Stable) and HSBC Finance Corp (A+/Stable) as per a separate press release. The rating actions have been taken in conjunction with a review of support for banks globally and also as part of a periodic review of the Global Trading and Universal Banks (GTUBs), which comprise 12 large and globally active banking groups. Fitch's outlook for the sector is stable on balance. Earnings pressure in securities businesses and continued conduct and regulatory risks in the GTUBs are offset by stronger balance sheets as capitalisation and liquidity remain sound. Fitch forecasts stronger GDP growth in most economies, which should contribute to a more balanced operating environment, but the operating environment is likely to remain challenging in 2014. KEY RATING DRIVERS - IDRs and VRs HSBC Holdings The affirmation of HSBC's IDRs and VR reflects the continuous strength of the group's global operations despite increasing pressure on the financial profile of HKSB and elevated double leverage. The ratings capture the intrinsic profiles of HSBC's principal subsidiaries HSBC Bank, HKSB and HSBC USA with operational support through group functions and financial resources at holdings level. Key characteristics are strong funding and liquidity positions, a sound global franchise and a conservative appetite for risk. HSBC group's sound funding profile anchored on HKSB's and HSBC Bank's access to retail deposits is the most critical positive ratings attribute. Centrally and locally held liquidity portfolios, most in the form of government bonds, compare well with peers' and the group's limited wholesale funding is well spread. Securities which are of high quality in the jurisdiction they are held stood at around USD466bn or 17% of total assets at end-2013. Of this USD145bn were held outside HSBC Bank, HKSB and HSBC USA. Making effective use of its global network to generate revenues amidst competition from more regionally focused groups will remain a prime challenge. Fitch expects HSBC to compete on quality instead of price as purely volume-driven growth could place too much strain on capitalisation. Focused organic expansion in higher-risk markets, in particular China and Brazil will be crucial to boost revenues as legacy assets (RWAs: USD105bn at end-2013) are further wound-down. Management's initiatives to reinforce compliance functions and reduce non-core operations are meaningful but obligatory for globally operating banking groups like HSBC as regulators' resolution agendas require more stringent management and enhanced cross-border coordination. Regulatory requirements invariably differ in the many countries where HSBC operates but Fitch believes that the group retains flexibility such that its entities can continue to be mutually supportive in periods of stress. HSBC's fully loaded common equity Tier 1 (CET1) of 10.6% at end-2013, which has been adjusted for expected increases of regulatory risk weights, is within the GTUB peer group range but below global 'AA'-rated peers, all of which are less complex. Surplus resources are kept in the US for domestic growth and at holdings level for redistribution to the network. The Stable Outlook captures Fitch's expectation that HSBC will continue to execute its strategy successfully and that the group would not compromise in risk appetite in favour of earnings growth. In addition it reflects Fitch's expectation that HSBC's capitalisation will remain in line with lower rated global peers. HSBC Bank HSBC Bank's IDRs are equalised with those of HSBC group, reflecting the core nature of this business for the HSBC group being a leading UK bank and the consolidating entity for HSBC's European subsidiaries. The VR captures a low appetite for risk and a stable funding and liquidity profile. The bank's risk profile has remained low despite some increased competition in mortgage lending due to the group's overall conservative underwriting standards, risk controls and measured growth. Capitalisation is kept moderate but Fitch considers the flexibility of HSBC group's capital. HSBC ensures that all its subsidiaries are self-funded, mainly through retail deposits. Liquidity is also managed on a conservative basis ensuring adequate high quality reserves. Underlying performance has shown some variability. Fitch expects performance to remain broadly robust but constrained as long as the economic outlook remains weak. In addition, UK retail banking will likely continue to suffer from provisions against payment protection insurance and the sale of interest rate products. Fewer fee generating deals, low interest rates, high restructuring and conduct charges are expected in the short term. Impaired loans represent a small amount of total risk, there was a moderate increase in 2013 but Fitch expects NPL ratios to remain in line with historic levels. The bank focuses on expanding its portfolio of well-performing, low-risk UK mortgages. Commercial lending focuses on international connectivity and has performed better than average. However, the operating environment in the UK and Europe has led to moderately higher impairments and loan impairment charges that may continue in the medium term. HKSB HKSB's IDRs are VR driven. They are in line with those of HSBC group, reflecting the core nature of this business for the HSBC group being the leading Hong Kong bank and the consolidating entity for HSBC's subsidiaries in Asia-Pacific. HKSB's IDRs and VR capture its domestic market leadership, sound profitability, good liquidity and operational support provided by its 100% parent, HSBC. The latter includes access to financial resources, management oversight and the group's global network which mitigate increasing concentration risks from implementing the group-wide China strategy and property exposure in Hong Kong and Asia. Fitch believes that HKSB's pricing power across almost all business lines has been declining as Chinese and other strong regional entities compete for deposits and trade finance. Profit relies on loan growth which in turn strains HKSB's loans to deposit ratio. China remains an important growth market for HSBC and cross-border activities will continue to drive HKSB's risk profile ahead of property-related lending and single-borrower concentrations. Fitch expects HKSB to monitor the group's China exposure (USD270bn at end-1H13 as disclosed in the recent EBA transparency exercise, including the proportional consolidation of Bank of Communications) more closely as it refocuses on organic growth. Capitalisation, which Fitch views as lower than peers', has remained adequate with a reported 10.4% fully loaded CET1 ratio at end-2013, given low risk weights and concentrations. Fitch's eligible capital ratio stood at 12.1% at end-2013. It is a highly relevant measure for HKSB as, in contrast to the above CET1 ratio, it captures certain preference shares provided by the HSBC group. HSB HSB's IDRs and VR capture its sound financial profile which benefits from stable retail deposit funding. Profitability remains healthy with volume growth as key driver while margins are recovering due to HSB's growing China activities. HSB is more vulnerable to the property market than peers' but its capital is adequate. The ratings also capture operational support from being part of HSBC Group. HSB's exposures to China (estimated by Fitch to be 23% of total assets at end-2013) will likely continue to grow and Fitch expects them to exceed property-related lending (24%) in 2014. Growth was driven by organic expansion through HSB's China subsidiary and claims on mainland banks. HSB's China exposures add scale and diversification to HKSB as HSB's customer base is more granular and includes fewer multinationals. HSB's 11% stake in Industrial Bank (BB+/Stable) and 15% stake in smaller Yantai Bank support HSB's profit and provide an additional layer to HSBC's on-shore China exposure. In Fitch's view, related risks are material as HSB has insufficient influence over the entities' rapid growth. Fitch expects HSB's profitability to remain adequate with operating return on average assets (ROAA) of 1.7% and net interest margin of 1.9% in 2013. HSB's liquidity and funding profiles are centred on deposits which comfortably support its loan expansion and sizeable security holdings. HSB's Fitch Core Capital ratio remains satisfactory at 11.2% end-2013. HSBC LATIN AMERICA HOLDINGS The Long-Term IDR is equalised with that of HSBC. The entity is an intermediate holding consolidation all of HSBC's operations in Latin America and Fitch views it as core. RATING SENSITIVITIES - IDRs and VRs HSBC Holdings The VR and IDRs are sensitive to changes in the VRs of HSBC's principal subsidiaries, in particular to that of HKSB, and the intrinsic strength of other HSBC group entities. Any damage to HSBC's reputation from legal, compliance and conduct charges would be negative as its franchise is essential for profit, access to core funding and offering international connectivity. Additional downside risks stems from greater-than-cyclical asset deterioration caused by growing concentration risk and sustained falls in earnings. Strong funding and liquidity could justify higher ratings if HSBC were to materially lift its capitalisation, supported by strong earnings contributions from its diversified global network, while maintaining a measured appetite for risk. Additional ratings downside stems from holding company considerations (see below). HSBC Bank HSBC Bank's IDRs are sensitive to any movement in the group's VR and changes to its flexibility such that the group's entities were no longer able to be mutually supportive in periods of stress. Negative pressure on HSBC Bank's VR stems from excessive trading volatility out of global banking and markets (GB&M), faster-than-envisaged growth in its German commercial banking activities or a disproportionate increase in its risks in Turkey. Additional risks arise from the UK in terms of conduct or unexpected rises in capital requirements. HKSB HKSB's IDRs are driven by its VR. In addition they are underpinned by HSBC's IDR as Fitch considers HKSB a core subsidiary. A downgrade of HKSB's VR could lead to a downgrade of its IDR if, at the same time, HSBC's VR was downgraded. Fitch would consider downgrading HKSB's VR if the bank proves unable to generate superior profitability from its leading market position to compensate for underwritten risks and potential capital erosion from targeted growth. Increasing risk concentrations, especially related to China, and heightened vulnerability to worse-than-cyclical asset deterioration will also hurt the VR, as would diminishing operational support. HSB HSB's VR could come under pressure if it were to increase its risk appetite, especially for its China exposures in the absence of any mitigating measures. In addition, a significant decline in the bank's capital and earnings will be negative for the ratings. A downgrade in HSB's VR would only trigger a downgrade of its IDR if HKSB's (and ultimately HSBC's) IDRs or their propensity to support were to weaken. A downgrade of HSBC's and HKSB's IDRs would not weaken HSB's IDR as long as HSB maintains its VR at the current level. HSBC LATIN AMERICA HOLDINGS The Long-Term IDR is sensitive to any changes in HSBC's VR. KEY RATING DRIVERS AND SENSITIVITIES - SUPPORT AND SUPPORT RATING FLOORS HSBC Holdings Fitch does not factor in any sovereign support for HSBC Holdings at the holding company level. Changes to HSBC's SR of '5' and SRF of 'No floor' are unlikely as Fitch is of the opinion that, while possible, support for the group holding company cannot be relied upon. HSBC Bank and HKSB The SRs of '1' reflect that Fitch views HSBC Bank and HKSB as core subsidiaries to HSBC which results in common IDRs. The SRs are sensitive to changes in the ability and propensity of HSBC group to provide support. HSBC Bank's SRF of 'A' and HKSB's SRF of 'A-' reflect an extremely high likelihood of sovereign support by the authorities in the UK and Hong Kong respectively, should support not be provided by HSBC Holdings. These expectations reflect the UK's and Hong Kong's extremely high ability to support their banks especially given their strong financial flexibility. Our view is that these authorities would have a high propensity to provide support given these banks' systemic importance, their global interconnectedness given their size and operations in cross-border banking, significant deposit market shares in the UK and Hong Kong and their positions as key providers of financial services to their respective economies. However, there is a clear intention ultimately to reduce implicit state support for financial institutions in the UK and Hong Kong, as demonstrated by a series of legislative, regulatory and policy initiatives which are following the changing regulatory and legal framework in the EU. We believe therefore that these banks' SRFs are sensitive to progress made in implementing the UK's and Hong Kong's resolution frameworks. Therefore, Fitch expects to revise HSBC Bank's and HKSB's SRFs to 'No Floor' within the next one to two years, likely in late 2014 or in 1H15. The topic of bank resolution is explored in more detail in a Special Report entitled 'Sovereign Support for Banks: Rating Path Expectations', which will be published shortly on A revision of the SRF to 'No Floor' would not impact the IDRs. HSB A high probability of extraordinary parental support leads to an IDR floor of 'A+', one notch below HSBC's IDR. Factors that prevent Fitch from equalising HSB's IDRs with those of its parent include different brand identity and the existence of material minority shareholders. Back-office integration between the entities is strong and activities are complementary, but HSB retains autonomy in its business decisions. The SR is sensitive to changes in the ability and propensity of HSBC group support. HSBC LATIN AMERICA HOLDINGS The SR reflects an extremely high likelihood that HSBC would provide institutional support. The SR is sensitive to changes in the ability and propensity of HSBC group to provide support. KEY RATING DRIVERS AND SENSITIVITIES: HOLDING COMPANY Fitch considers holding company liquidity and structural subordination as being prudently managed. While double leverage is elevated, and we believe it will continue to be so given the investments into subsidiaries through hybrid capital (for some of which Fitch gives full equity credit), does not result in a widening of notching between the holding company and the operating subsidiaries. The VR and IDRs of HSBC Holdings are sensitive to prudent liquidity management and any movement in the financial strength of the consolidated HSBC group. Fitch could notch the holding company's IDRs and VR below the level of the consolidated group if double leverage were to significantly exceed 120% over a prolonged period of time or if the role of the holding company changed. KEY RATING DRIVERS AND SENSITIVITIES: SUBORDINATED DEBT AND HYBRID SECURITIES Subordinated debt and other hybrid capital securities issued by HSBC Holdings 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 31 January 2014. As such Fitch applied three notches from the VR to HSBC's Upper Tier 2 securities, four notches to Tier 1 securities and five notches where HSBC has full discretion for coupon omission. HSBC Bank's hybrids are notched from HSBC Bank's supported IDR. The issue ratings are primarily sensitive to any change in their anchor ratings. Fitch will hold a teleconference to discuss sovereign support for banks and give an update on rating paths on Friday, March 28 at 15:00 GMT. Callers must register in advance using the link below and are requested to dial in early: here DA40C4B1FED21 The rating actions are as follows: HSBC Holdings plc Long-Term IDR: affirmed at 'AA-'; Outlook Stable Short-Term IDR and debt: affirmed at 'F1+' Viability Rating: affirmed at 'aa-' Support Rating: affirmed at '5' Support Rating Floor: affirmed at 'No Floor' Senior debt: affirmed at 'AA-' Lower tier 2 subordinated debt: affirmed at 'A+' Preference shares (US4042806046): affirmed at 'BBB' Other preference shares and capital securities (XS0110560835, XS0110560165, USG4637HAB45, US40427LAB09, US4042807036, US4042808026, XS0188853526): affirmed at 'BBB+' HSBC Bank plc Long-Term IDR: affirmed at 'AA-'; Outlook Stable Short-Term IDR and debt: affirmed at 'F1+' Viability Rating: affirmed at 'a+' Support Rating: affirmed at '1' Support Rating Floor: affirmed at 'A' Senior debt: affirmed at 'AA-' Market linked securities: affirmed at 'AA-emr' Subordinated debt: affirmed at 'A+' Upper Tier 2 notes (GB0005902332) affirmed at 'A-' Other capital securities (XS0189704140, XS0179407910) affirmed at 'BBB+' HSBC Latin America Holdings (UK) Limited Long-Term IDR: affirmed at 'AA-'; Outlook Stable Support Rating: affirmed at '1' The Hongkong and Shanghai Banking Corporation Limited Long-Term IDR: affirmed at 'AA-'; Outlook Stable 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' Contact: Primary Analysts Sabine Bauer (HSBC Holdings plc, The Hongkong and Shanghai Banking Corporation Limited, Hang Seng Bank Limited) Senior Director +852 2263 9966 Fitch (Hong Kong) Limited 2801, Tower Two, Lippo Centre 89 Queensway, Hong Kong Claudia Nelson (HSBC Bank plc, HSBC Latin America Holdings (UK) Limited) Senior Director +44 20 3530 1191 Secondary Analysts Alan Milne (HSBC Bank plc, Latin America Holdings (UK) Limited) Associate Director +44 20 3530 1491 Claudia Nelson (HSBC Holdings plc) Senior Director +44 20 3530 1191 Jin Hur (The Hongkong and Shanghai Banking Corporation Limited, Hang Seng Bank Limited) Analyst +852 2263 9944 Committee Chairperson Gordon Scott Managing Director +44 20 3530 1075 Media Relations: Hannah Huntly, London, Tel: +44 20 3530 1153, Email:; Leslie Tan, Singapore, Tel: +65 67 96 7234, Email:; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: Additional information is available on Applicable criteria, "Global Financial Institutions Rating Criteria", dated 31 January 2014, "Assessing and Rating Bank Subordinated and Hybrid Securities", dated 31 January 2014, and "Rating FI Subsidiaries and Holding Companies", dated 10 August 2012, are available at Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria here Assessing and Rating Bank Subordinated and Hybrid Securities Criteria here Rating FI Subsidiaries and Holding Companies here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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