(The following statement was released by the rating agency)
HONG KONG/LONDON, September 02 (Fitch) Fitch Ratings has
assigned HSBC Holdings
plc's (AA-/Stable/F1+/aa-) upcoming issue of perpetual
convertible securities (CCS) an expected rating of 'BBB(EXP)'.
The final rating assignment is contingent on the receipt of
conforming to information already received.
KEY RATING DRIVERS
The CCS are additional Tier 1 (AT1) instruments with fully
interest payments and are subject to conversion into HSBC
Holdings plc ordinary
shares on breach of a consolidated 7% CRD IV common equity Tier
1 (CET1) ratio,
which is calculated on a 'fully loaded' basis.
The rating of the securities is five notches below HSBC Holding
Viability Rating (VR), in line with Fitch's criteria, for
assigning ratings to
hybrid instruments. The securities are notched twice for loss
reflect the conversion into common shares on a breach of the 7%
CET1 ratio trigger, and three times for non-performance risk.
The notching for non-performance risk reflects the instruments'
discretionary coupons, which Fitch considers the most easily
activated form of
loss absorption. Under the terms of the securities, the issuer
will be subject
to restrictions on interest payments if it has insufficient
(which were substantial at end-2013 at USD49bn). Restrictions on
payments under 'maximum distributable amount' rules will also be
should HSBC breach its combined buffer requirement that will be
phased in from
2016. Interest payments could also be at risk from a breach of
ratio, if, for example, a new leverage ratio framework, which is
subject to consultation in the UK, results in buffer concepts
similar to those
being phased in under the risk-weighted framework.
Based on current known rules, HSBC's indicative minimum CET1
(including combined buffer) from 1 January 2019 is 10.4%, made
up of 4.5% CET1
requirement under Pillar 1, 0.9% under Pillar 2A (as guided by
HSBC), a capital
conservation buffer of 2.5% and a 2.5% G-SIB buffer. This means
non-performance by way of non-payment of interest is likely to
occur well before
HSBC breaches the 7% CET1 conversion trigger in the notes.
HSBC's capitalisation has been strengthening. At end-1H14, its
end-point CET1 ratio reached 11.3%, resulting in a 90bp (or
relative to the indicative 10.4% 1 January 2019 requirement.
Prudential Regulatory Authority buffer rules are still to be
additional non-performance risk stems from the possibility that
buffer requirements for HSBC could change over time, and that
buffers, for instance in the form of counter-cyclical buffers or
capital requirements could be introduced.
In the absence of a clearly articulated minimum capital target,
that HSBC's conservative overall risk appetite (including in
respect of managing
its balance sheet ), as well as its robust profitability and an
retention target of 50%, should help it to meet evolving
Fitch has assigned 100% equity credit to the securities, which
full coupon flexibility, their ability to be converted into
common equity well
before the group would become non-viable, their permanent nature
subordination to all senior creditors.
The long-term rating of the securities is primarily sensitive to
any change to
the group's consolidated strength, as reflected in HSBC Holdings
plc's VR. This
rating takes into consideration the intrinsic profiles of HSBC's
subsidiaries - The Hongkong and Shanghai Banking Corporation
Limited (VR 'aa-'),
HSBC Bank plc (VR 'a+') and HSBC USA Inc (VR 'a-') - with
at the holdings level and operational support through group
The rating could be downgraded if locally held resources were
allow HSBC's main entities to be mutually supportive in periods
of stress. In
addition double leverage significantly exceeding 120% over a
prolonged period, a
change in the role of the holding company or how it manages its
result in wider notching of the holding company's VR from the
and hence a downgrade of the securities.
Changes in the notching differential could arise if Fitch
changes its assessment
of the probability of their non-performance relative to the risk
HSBC Holdings plc's VR. This could arise due to a change in
of HSBC's conservative approach to capital management, reducing
flexibility to service the securities or an unexpected shift in
buffer requirements, for example.
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Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153,
Additional information is available on www.fitchratings.com
Applicable criteria, "Global Financial Institutions Rating
Criteria", dated 31
January 2014, and "Assessing and Rating Bank Subordinated and
Securities", dated 31 January 2014 are available at
Applicable Criteria and Related Research:
Global Financial Institutions Rating Criteria
Assessing and Rating Bank Subordinated and Hybrid Securities
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