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Fitch Rates HSBC Holdings' Contingent Convertible Securities 'BBB(EXP)'
September 2, 2014 / 3:47 PM / 3 years ago

Fitch Rates HSBC Holdings' Contingent Convertible Securities 'BBB(EXP)'

(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 subordinated contingent convertible securities (CCS) an expected rating of 'BBB(EXP)'. The final rating assignment is contingent on the receipt of final documentation conforming to information already received. KEY RATING DRIVERS The CCS are additional Tier 1 (AT1) instruments with fully discretionary 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 plc's 'aa-' Viability Rating (VR), in line with Fitch's criteria, for assigning ratings to hybrid instruments. The securities are notched twice for loss severity to reflect the conversion into common shares on a breach of the 7% fully loaded CET1 ratio trigger, and three times for non-performance risk. The notching for non-performance risk reflects the instruments' fully 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 distributable items (which were substantial at end-2013 at USD49bn). Restrictions on interest payments under 'maximum distributable amount' rules will also be triggered 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 the leverage ratio, if, for example, a new leverage ratio framework, which is currently 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 requirement (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 CCS 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 consolidated end-point CET1 ratio reached 11.3%, resulting in a 90bp (or USD11bn) buffer relative to the indicative 10.4% 1 January 2019 requirement. However, final Prudential Regulatory Authority buffer rules are still to be determined and additional non-performance risk stems from the possibility that the combined buffer requirements for HSBC could change over time, and that additional buffers, for instance in the form of counter-cyclical buffers or sectoral capital requirements could be introduced. In the absence of a clearly articulated minimum capital target, Fitch believes that HSBC's conservative overall risk appetite (including in respect of managing its balance sheet ), as well as its robust profitability and an earnings retention target of 50%, should help it to meet evolving regulatory expectations. Fitch has assigned 100% equity credit to the securities, which reflects their full coupon flexibility, their ability to be converted into common equity well before the group would become non-viable, their permanent nature and their subordination to all senior creditors. RATING SENSITIVITIES 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 principal subsidiaries - The Hongkong and Shanghai Banking Corporation Limited (VR 'aa-'), HSBC Bank plc (VR 'a+') and HSBC USA Inc (VR 'a-') - with financial flexibility at the holdings level and operational support through group functions. The rating could be downgraded if locally held resources were unavailable to 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 liquidity could result in wider notching of the holding company's VR from the consolidated group 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 captured in HSBC Holdings plc's VR. This could arise due to a change in Fitch's assessment of HSBC's conservative approach to capital management, reducing the group's flexibility to service the securities or an unexpected shift in regulatory buffer requirements, for example. Contact: Primary Analyst Sabine Bauer Senior Director +852 2263 9966 Fitch (Hong Kong) Limited. 2801, Tower Two, Lippo Centre 89 Queensway Hong Kong SAR Secondary Analyst Claudia Nelson Senior Director +44 20 3530 1191 Committee Chairperson Gordon Scott Managing Director +44 20 3530 1075 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: Additional information is available on Applicable criteria, "Global Financial Institutions Rating Criteria", dated 31 January 2014, and "Assessing and Rating Bank Subordinated and Hybrid Securities", dated 31 January 2014 are available at Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria here Assessing and Rating Bank Subordinated and Hybrid Securities Criteria 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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