-- We believe that the Canadian banking sector is
encountering incremental pressure from headwinds facing the
Canadian economy, which is heightening economic risk in the
-- We also believe that industry risk for the Canadian
banking sector is increasing. We expect that intensifying
competition for loans and deposits will lead to pressure on
profitability growth, especially in banks' retail businesses.
-- We are affirming our 'AA-/A-1+' long- and short-term
issuer credit ratings and our 'AA-' senior unsecured debt rating
on HSBC Bank Canada, which reflects those on its parent (HSBC
Holdings PLC) as a result of its "core" subsidiary status.
-- The negative outlook reflects that on its parent.
On Dec. 13, 2012, Standard & Poor's Ratings Services
affirmed its 'AA-' long- and 'A-1+' short-term issuer credit
ratings on HSBC Bank Canada (HSBC Canada). The outlook is
negative. The ratings and outlook reflect those on its parent,
HSBC Holdings PLC (HSBC: A+/Negative/A-1) and the group as a
result of its "core" status. We lowered the stand-alone credit
profile (SACP) on HSBC Canada to 'bbb+' from 'a-'.
The rating action follows our review of banking sector
industry and economic risks in Canada, taking into account the
headwinds facing the Canadian economy, high debt levels of
Canadian consumers, expectations of decelerating loan demand and
continued pressure on margins, particularly in the Canadian
retail sector, and areas of continuing weakness in the global
economy and financial system.
We believe banks operating in Canada are vulnerable to an
expanding set of potential stresses arising from competitive
pressure on growth and margins, while asset quality is
potentially vulnerable--in light of high consumer
indebtedness--to developments that may trigger general economic
deterioration in Canada.
Consequently, we lowered our anchor stand-alone credit
profile (SACP), which is the starting point for our ratings on
financial institutions operating primarily in Canada, to 'a-'
This is reflected in our revision of the Banking Industry
Country Risk Assessment (BICRA) for Canada to group '2' from '1'
and our revision of the industry risk score, a component of the
BICRA, to '2' from '1' (see "Various Rating Actions Taken On
Canadian Financial Institutions Due To Rising Industry and
Economic Risks," published Dec. 13, 2012, on RatingsDirect on
the Global Credit Portal).
We believe that the banks and credit unions are under
incremental pressure from the headwinds facing the Canadian
economy. The acceleration of household debt to record levels has
increased Canadian households' vulnerability to sudden shocks in
incomes, employment, or a spike in interest rates.
Exposure to the consumer sector accounts for nearly
three-fifths of total bank loans, and losses on banks' uninsured
loan portfolios--although recent performance levels have
generally been strong--may be driven higher in the event of a
substantial shock to household creditworthiness, though we
expect effective regulatory supervision to remain a positive
influence on Canadian bank credit quality.
Although we expect ongoing intensification of competitive
dynamics in the Canadian banking sector, we note that overall
Canada still remains positioned favorably vis-a-vis most of its
However, a slowing economy risks exacerbating the
already-intense competition between banks for loan and deposit
share and puts further pressure on the margin and profitability
of the Canadian financial institutions' retail and commercial
lending businesses, the cornerstone of Canadian banking and
largest contributor to revenues.
We also believe that Canadian financial institutions' risk
tolerances may increase to compensate for lower profitability by
reaching for yield through investments, more aggressive lending
in higher yielding loans such as personal loans and credit
cards, or potentially a pick-up in mergers and acquisitions
Furthermore, we expect that continuing industry conditions
will test banks' operational capabilities. Relative performance
in areas such as service standards, cost control, operational
effectiveness, underwriting discipline, and ability to integrate
acquisitions will likely contribute to changes in market
position and financial performance, and will have an impact on
the relative credit standing among industry participants.
Standard & Poor's ratings reflect our view that HSBC Canada
is core to its ultimate parent, HSBC, due to its meaningful
enough size in a group context, strong operating performance,
and most importantly, integral role within HSBC's growth
strategy in North America.
As a result of the group relationship, we equalize the
long-term issuer credit rating on HSBC Canada with the 'AA-'
ratings on the group's other core operating entities.
Standard & Poor's bases its SACP on HSBC Canada on its
"moderate" business position given its limited geographical
reach in Canada (operating mostly in the province of British
Columbia), "adequate" capital and earnings, based on Standard &
Poor's projected risk-adjusted capital ratio of 9.8%-10.2% by
year-end 2012, adequate" risk position with similar credit
quality metrics to its Canadian peers, "average" funding and
"adequate" liquidity scores, as well as group support.
The SACP on HSBC Canada is 'bbb+'.
The negative outlook reflects that on HSBC and the HSBC
group. We expect that the ratings on HSBC Canada will move in
line with the ratings on its parent. We could lower the ratings
on HSBC Canada if we no longer consider the bank to be "core" to
HSBC under our group methodology criteria. This could result
from a period of sustained weak operating performance or
evidence that HSBC Canada's activities are of diminishing
importance to the group. An outlook revision to stable from
negative would only follow a similar outlook revision to HSBC.