December 13, 2016 / 9:30 PM / 8 months ago

Fitch Affirms HSBC at 'AA-'; Outlook Stable

(The following statement was released by the rating agency) HONG KONG/LONDON, December 13 (Fitch) Fitch Ratings has today affirmed HSBC Holdings plc's (HSBC) Long-Term Issuer Default Rating (IDR) at 'AA-' with a Stable Outlook and its Viability Rating (VR) at 'aa-'. A full list of rating actions is available at the end of this commentary. HSBC's main subsidiaries HSBC Bank plc, The Hongkong and Shanghai Banking Corporation Limited (HKSB) and HSBC USA, Inc. are covered in separate rating action comments. The rating affirmations have been taken in conjunction with Fitch's periodic review of the Global Trading and Universal Banks (GTUBs). The ratings and the Stable Outlook reflect our expectation that HSBC will continue to maintain a conservative appetite for risk and low overall risk profile. We believe that its intrinsic strength will remain resilient amid more difficult economic environments in the UK and Hong Kong, and the slowing Chinese economy. Fitch expects HSBC to maintain sound profitability commensurate with the rating level as robust controls on cost and capital efficiency help mitigate revenue headwinds. Our ratings for HSBC - a listed, non-operating holding company - reflect its consolidated profile, financial flexibility and access to capital markets, which complement each other. Our view of HSBC as a coherent group is reinforced by HSBC's issuance of loss-absorbing debt and distribution of the proceeds across its subsidiary banks. The ratings are not notched down for holding company considerations as HSBC manages its liquidity and double leverage prudently. KEY RATING DRIVERS IDRS, VR AND SENIOR DEBT HSBC's company profile has a high influence on its IDRs, which are driven by its VR. Our assessment is underpinned by the group's leading franchise in multiple business segments (retail, commercial, global banking and markets), with very strong presences in its key domestic markets Hong Kong and the UK and a strong focus on serving its clients' international banking needs through its global network. We expect that HSBC's competitive position and financial profile will continue to benefit from its focus on global trade and investment flows, as well as on business unit collaboration, client coverage and governance. This will also ultimately solidify the intrinsic strength of its key subsidiaries - notwithstanding strong economic and competitive challenges. The exceptionally strong and stable funding and liquidity profiles of HSBC and its major banking subsidiaries are a secondary key rating driver, underpinning the VR. Strong global capital-market access provides additional flexibility to the holding company, which complements its ability to distribute funding and liquidity from solid local balance sheets across the group. HSBC's strong access to retail deposits in Hong Kong and the UK is supported by its capacity to issue securities in various markets. Centrally and locally held liquidity portfolios, mostly in the form of government bonds, compare well with peers', and the group's limited wholesale funding is well spread. The group's ability to generate reliable earnings, which it can allocate within the group, supports our capital assessment. HSBC's low risk appetite and reliable earnings support the rating as they have proven to be only moderately variable over economic cycles. Fitch's assessment reflects the expectation that HSBC's low overall risk profile will continue to benefit from global diversification. Asset quality is sound and single-name concentrations are manageable. We expect HSBC's above-peers' consolidated non-performing loan ratio, which we view as elevated relative to its ratings and the environment it operates in, to continue to improve. The underperformance still largely relates to legacy as well as commodities-related non-performing loans in the US, weaker performance in Latin America and the Middle East. NPLs in Europe overall are satisfactory while we expect that asset quality in the Asia-Pacific will continue to perform well, notwithstanding a likely cyclical weakening and HSBC's concentration in China. We view HSBC's capitalisation as sound overall. Our analysis focuses on the capital generation capacity of its operating subsidiaries and on how HSBC allocates capital across its entities, business lines and customers, rather than focus on the consolidated ratio itself. We expect Europe-focused HSBC Bank plc (VR: a+) to further strengthen its capital ratios and HKSB (VR: aa-) to maintain its ratios at comfortable levels. Furthermore capital definitions and risk weights differ from what local regulators require. Holding company common equity double leverage (below 110%) does not negatively affect HSBC's ratings and Fitch considers holding company liquidity as being prudently managed. The senior debt is rated at the same level as HSBC's Long-Term IDR as they constitute unsecured and unsubordinated obligations. SUPPORT RATING AND SUPPORT RATING FLOOR HSBC's Support Rating of '5' and Support Rating Floor of 'No Floor' reflect Fitch's view that support for a holding company is unlikely. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Subordinated debt and other hybrid capital securities issued by HSBC are notched down from its VR to reflect varying degrees of loss severity (up to two notches) and incremental non-performance risk (up to three notches). As such, Fitch applied one notch from the VR to HSBC's Tier 2 securities (for loss severity), four notches to certain 'legacy' Tier 1 securities (two for loss severity and two for incremental non-performance risk), and five notches where HSBC has full discretion over coupon omission, including its Additional Tier 1 (AT1) securities (two for loss severity and three for incremental non-performance risk). RATING SENSITIVITIES IDRS, VR AND SENIOR DEBT Fitch's assessment of the operating environment constrains an upgrade of the ratings. HSBC's ratings could be affected by a significant deterioration in its operating environment, including a sharp slowdown in China and the UK. HSBC's VR and IDRs are sensitive to its financial performance, in particular the ability to generate fungible capital and the ability of HSBC's subsidiaries to pay dividends up to the holding company. Fitch could downgrade HSBC's ratings if its financial flexibility declines. This may be the result of weaker access to capital markets or if HSBC was unable to effectively redistribute capital. Outsized growth in any one region could be negative to the ratings. HSBC's ratings are sensitive to its China risk (USD146bn at end-9M16 as reported by HSBC), in particular if the degree of the concentration or changes in the portfolio's composition became misaligned with HSBC's capital and returns. An increase in risk appetite that increased the potential for deterioration in asset quality and impairment losses could be negative for the ratings. Any damage to HSBC's reputation or restrictions on its ability to conduct businesses, which could result from the US authorities' decision to revoke the bank's deferred prosecution agreement, would put pressure on the bank's ratings. Any unforeseen outsized legal-related charges or an unexpected large operational event that calls into question Fitch's assessment of HSBC's risk management framework could have adverse rating implications for HSBC. Fitch could notch HSBC's IDRs and VR down from its consolidated assessment if, for example, double leverage significantly exceeds 120% over a prolonged period or if holding-company liquidity or liquidity management were to become less prudent. The senior debt ratings will likely move in tandem with the Long-Term IDR. SUPPORT RATING AND SUPPORT RATING FLOOR Changes to HSBC's SR and SRF are not foreseen as Fitch does not expect external support being made available to the group's top holding company. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES The issue ratings are primarily sensitive to changes in HSBC's VR. HSBC's AT1 securities are also sensitive to a change in Fitch's assessment of the probability of their non-performance relative to the risk captured in HSBC's VR. This could arise due to a change in Fitch's assessment of HSBC's conservative approach to capital management, reducing HSBC's flexibility to service the securities, or an unexpected shift in regulatory buffer requirements, for example. The rating actions are as follows: HSBC Holdings plc Long-Term IDR affirmed at 'AA-'; Outlook Stable Short-Term IDR affirmed at 'F1+' Viability Rating affirmed at 'aa-' Support rating affirmed at '5' Support rating floor affirmed at 'No Floor' Senior unsecured long-term debt affirmed at 'AA-' Senior unsecured short-term debt affirmed at 'F1+' Subordinated debt affirmed at 'A+' Contingent convertible securities and preference shares affirmed at 'BBB' Other preference shares and capital securities affirmed at 'BBB+' Contact: Primary Analyst Sabine Bauer Senior Director +852 2263 9966 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road, Central Hong Kong Secondary Analyst Christian Scarafia Senior Director +44 20 3530 1012 Committee Chairperson Gordon Scott Managing Director +44 20 3530 1075 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. 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