September 28, 2017 / 8:45 PM / 9 months ago

Fitch Affirms HSBC at 'AA-'; Outlook Stable

(The following statement was released by the rating agency) HONG KONG/LONDON, September 28 (Fitch) Fitch Ratings has affirmed HSBC Holdings plc's Long-Term Issuer Default Rating (IDR) at 'AA-' with a Stable Outlook and its Viability Rating at 'aa-'. A full list of rating actions is available at the end of this commentary. KEY RATING DRIVERS IDRS, VIABILITY RATING AND SENIOR DEBT Fitch rates HSBC - a non-operating holding company subject to consolidated supervision in the UK - based on the financial strength of its operating banks and on HSBC's ability to set strategy, redistribute resources and manage its international network. HSBC's strong franchise and solid funding and liquidity positions remain key rating drivers. HSBC has deep access to financial markets, while its major subsidiaries have stable deposits and ample high-quality securities. The ratings also reflect HSBC's low risk appetite, solid capitalisation and reliable earnings over economic cycles. The ratings are not notched down for holding company considerations. Fitch sees HSBC's global trade-finance network, strong retail franchises in the UK and Hong Kong as well as its leading position as a foreign bank in China as key strengths. Its company profile has a high influence on its IDRs and Viability Rating. We expect HSBC's competitive position and financial profile to continue benefiting from its high level of diversification and for the company's global client coverage and business collaboration to benefit the intrinsic strength of its subsidiaries. These strengths should help the company withstand economic and competitive headwinds. The exceptionally strong and stable funding and liquidity profiles of HSBC and its major banks are a secondary rating driver. Strong global capital market access provides flexibility to the holding company, which complements its ability to source funding and liquidity from solid subsidiary balance sheets. HSBC's strong access to retail deposits in its two home markets 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 those of peers and the group's wholesale funding is well managed. We expect HSBC to accelerate growth in a disciplined manner and believe the bank is well positioned to mitigate risks associated with its expanding China-related exposure by avoiding certain high-risk sectors and targeting different client segments from Chinese banks. Asset quality has improved, as indicated by a consolidated non-performing loan ratio of 1.7% at end-1H17 (2016: 2.1%). We expect HSBC to maintain the ratio close to the peer median of about 1.5%. We see its capitalisation as sound and its reliable ability to generate earnings, which it can allocate across subsidiaries, supports our capital assessment. The company's strong consolidated capital ratios suggest that it should be well positioned to meet potential increases in required capital due to regulatory or accounting (eg IFRS9) reasons. The need to issue loss absorbing debt and capital for regulatory purposes increases the pressure on HSBC to deploy its already abundant liquidity. The Stable Outlook reflects our expectation that HSBC will apply disciplined underwriting standards and maintain a high-level of diversification in its operations. Fitch expects HSBC's earnings to remain steady and strong as it completes its five-year restructuring programme by end-2017, from which it is about to emerge as a better capitalised and less risky bank. Fitch believes that HSBC will continue to manage its liquidity well. We expect HSBC's unconsolidated balance sheet to further expand as the holding company issues loss absorbing debt and capital to allocate to its subsidiary banks. The double leverage of HSBC and the group of holding companies 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 it constitutes its 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 UK sovereign 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 Viability Rating 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 Viability Rating 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, VIABILITY RATING AND SENIOR DEBT HSBC's Viability Rating and IDRs are sensitive to the financial performance of HSBC and its subsidiaries. Fitch could downgrade HSBC's ratings if its financial flexibility declines due to weaker capital market access or if HSBC was unable to effectively redistribute capital. Outsized growth in any one sector or country, an unexpected widespread credit event or subdued earning prospects could be negative for the ratings. Steadily increasing China risk could lead to a downgrade if the portfolio's size and composition became misaligned with HSBC's ability to manage the risks. Any damage to HSBC's reputation or restrictions on its ability to conduct businesses, which could be due to the US authorities' decision to revoke the bank's deferred prosecution agreement, would pressure its ratings. Fitch's assessment of the operating environment constrains an upgrade of HSBC's ratings. The ratings could be affected by a significant change in the operating environment, including a sharp slowdown in China and the UK. Fitch could notch HSBC's IDRs and Viability Rating down from its consolidated assessment if, for example, double leverage exceeds 120% over a prolonged period or if holding company liquidity or liquidity management 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 Support Rating and Support Rating Floor 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 Viability Rating. HSBC's AT1 securities are also sensitive to a change in Fitch's assessment of their non-performance probability relative to the risk captured in HSBC's Viability Rating. 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. Full list of rating action: 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 James Longsdon Managing Director +44 20 3530 1076 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email:; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: Additional information is available on Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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