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Fitch Revises Standard Chartered's Outlook to Negative; Affirms IDR 'AA-'
October 1, 2014 / 3:48 PM / 3 years ago

Fitch Revises Standard Chartered's Outlook to Negative; Affirms IDR 'AA-'

(The following statement was released by the rating agency) HONG KONG/LONDON, October 01 (Fitch) Fitch Ratings has revised the Outlook on Standard Chartered PLC (SC) and its subsidiary Standard Chartered Bank (SCB) to Negative from Stable, while affirming their Long-Term Issuer Default Ratings (IDR) at 'AA-'. A full list of rating actions is provided at the end of this commentary. The support-driven ratings of SC's other subsidiaries will be reviewed separately in due course. KEY RATING DRIVERS The Outlook revision follows Fitch's assessment of the group's capital profile and our expectations for capital relative to the risks attached to its operations in higher-risk markets, including mainland China. Weaker earnings and internal capital generation capacity relative to the bank's risk exposure and compared with our expectation for the bank's peers are also key considerations. We view SC as more susceptible to shocks than similarly rated peers as its cross-jurisdictional business model exposes it to a higher share of non-credit related risks and environments where purely commercial considerations are not always applicable. We believe there is pressure on capital from potentially weaker income generation as structural factors limit growth prospects. In addition, higher costs associated with regulation through macro-prudential measures, regulatory intervention or costs to address weaknesses in governance and systems are likely to affect profitability. Being regulated in the UK but conducting minimal business in this market may affect SC's competitiveness. Nevertheless, the group is managed according to a consolidated minimum capital requirement, set at a low 8.7% on an end-point basis, which implies that locally held capital becomes fungible even though profit and capital repatriation is often restricted. SC maintains a buffer above this low consolidated minimum. This is why Fitch believes that SC's capitalisation is weaker than indicated by its reported end point CET1 ratio of 10.7% at end-1H14, a level which is also below peers'. SC books a material portion of its international activities on the UK balance sheet. Today's rating affirmation reflects that the bank's other credit metrics remain broadly in line with peers', in particular liquidity and funding, which stand out for their strength due to the bank's shorter-term assets. Impaired loan ratios remain above peers' but volatility is low as a result of early identification and robust diversification across industries, customers and products. KEY RATING DRIVERS - VR AND IDRs Fitch considers the inherent complexity of SC's globally diversified operations is adequately managed although its widespread presence renders the bank susceptible to external shocks, including compliance, conduct, reputational and geopolitical risks and we believe these risks have an increased potential to cause disruption to the bank than previously assessed. Cyclical loan deterioration is expected and this will add to pressure on earnings. Fitch assesses SC's largest exposures as concentrated relative to equity but the bank's oversight is tight. Increasing correlations between its key markets will, in Fitch's view, continue to diminish the geographical diversification benefits of SC's strong franchise. Fitch estimates SC's China exposure was USD95bn at end-1H14 (1H13: USD76bn), which represented 2.35x FCC (1H13: 2.1x FCC). The estimate is derived from publicly stated China cross-border risk (USD58.2bn) and total assets employed with Chinese customers (USD36.8bn). It double counts for onshore foreign-currency exposures. The ratings reflect Fitch's view that SC should be well placed to execute its strategic repositioning. Giving smaller businesses' international activities more attention should help make better use of the bank's widespread presence. The bank's smaller size than peers, however, makes earnings generation more difficult as the bank competes to a large extent on the basis of its far-reaching network. There is a risk that SC will fall behind if its competitors draw relative strength from their larger local presence. SC's largest local deposit market shares are in Hong Kong and Singapore and South Korea. At around 50% of its total assets, SC's risk-weighted assets (RWAs) remain broadly in line with peers'. The composition of SC's RWAs differs from peers, due to a greater exposure to unsecured consumer credit, financial institutions and higher sovereign risk. SC has a strong capital generation track record with retained earnings over the last 10 years contributing an average of 101bps per annum to the capital ratio. Net income before dividend payouts averaged 161bps per annum over the same period. There is no double leverage; equity investments in subsidiaries, while increasing, amounted to about 93% of holding company equity at end-2013 (2012: 70%). RATING SENSITIVITIES - VR AND IDRs SC's ratings are likely to be downgraded over the next one to two years should Fitch conclude that its capital position relative to its risks and to peers has weakened. The ratings are sensitive to the bank maintaining capital flexibility, which we consider a key attribute for highly rated banks as it helps instill confidence and enables them to stay competitive via strategic growth. Weaker earnings capacity and less diversification may limit the bank's ability to offset risks attached to the environments it operates in. Increasing concentrations and high reliance on collateral would also be considerations for a downgrade. In addition, the VR and IDRs of SC are sensitive to an adverse change in relevant factors affecting holding company notching , including high double leverage (above 120%), less prudent liquidity management, more complex group structures or regulatory/legal risk specific to the holding company. SC's VR and IDRs are currently equalised with those of its main operating entity, SCB. KEY RATING DRIVERS AND SENSITIVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR (SRF) SCB's Support Rating and SRF reflect Fitch's view that the probability that the UK authorities will provide it with support in case of need remains extremely likely, given its international systemic importance, notably to international trade and USD clearing. However, there is a clear regulatory intention ultimately to reduce implicit state support for financial institutions in the UK, as demonstrated by a series of legislative, regulatory and policy initiatives, which are following the changing regulatory and legal framework in the EU. We therefore believe that the SRF is sensitive to progress made in implementing the UK's resolution framework and expect to revise SCB's SRF to 'No Floor' in 2H14 or in 1H15. SC's Support Rating of '5' and SRF of 'No floor' reflect Fitch's opinion that UK sovereign support cannot be relied upon for a holding company. KEY RATING DRIVERS AND SENSITIVITIES - SUBORDINATED DEBT AND HYBRID SECURITIES Subordinated debt and other hybrid regulatory capital securities issued by SC and SCB are notched down from their VRs. The ratings on SC's capital securities are notched five times, reflecting two notches for loss severity and three notches for non-performance risk. The ratings on SCB's capital securities are notched four times, reflecting two notches for loss severity and two notches for non-performance risk. Subordinated debt is notched once from the respective banks' VRs. The securities are assessed using Fitch's "Assessing and Rating Bank Subordinated and Hybrid Securities" criteria. They are primarily sensitive to a change in their VRs. Today's rating actions are as follows: Standard Chartered PLC Long-Term IDR: affirmed at 'AA-'; Outlook revised to Negative from 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 unsecured debt: affirmed at 'AA-'/'F1+' Dated subordinated debt: affirmed at 'A+' Capital securities (US853254AC43, US853254AB69, US853254AA86, USG84228AT58,): affirmed at 'BBB' Standard Chartered Bank Long-Term IDR: affirmed at 'AA-'; Outlook revised to Negative from Stable Short-Term IDR and debt: affirmed at 'F1+' Viability Rating: affirmed at 'aa-' Support Rating: affirmed at '1' Support Rating Floor: affirmed at 'A-' Senior unsecured debt: affirmed at 'AA-'/'F1+' Dated subordinated debt: affirmed at 'A+' Upper Tier 2 notes (XS0222434200, XS0119816402) affirmed at 'A-' Capital securities (XS0347919457, XS0129229141): affirmed at 'BBB+' Contact: Primary Analyst Sabine Bauer Senior Director +8522639966 Fitch (Hong Kong) Limited. 2801, Tower Two, Lippo Centre 89 Queensway Hong Kong SAR Secondary Analyst Alan Milne Associate Director +44 203 5301491 Committee Chairperson Gordon Scott Managing Director +442035301075 Media Relations: Christian Giesen, Frankfurt am Main, Tel: +49 69 768076 232, Email: christian.giesen@fitchratings.com. Additional information is available on www.ftichratings.com. 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 www.fitchratings.com. 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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