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'