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Fitch Affirms HSBC France at 'AA-'; Upgrades VR to 'a-'
October 11, 2017 / 4:52 PM / in 13 days

Fitch Affirms HSBC France at 'AA-'; Upgrades VR to 'a-'

(The following statement was released by the rating agency) PARIS, October 11 (Fitch) Fitch Ratings has affirmed HSBC France's Long-Term Issuer Default Rating (IDR) at 'AA-' with a Stable Outlook and upgraded the bank's Viability Rating (VR) to 'a-' from 'bbb+'. Its Short-Term IDR has been affirmed at 'F1+'. The upgrade of HSBC France's VR reflects Fitch's view that HSBC France's franchise benefits from the bank's increasingly close integration within the HSBC group. This should ultimately help the bank improve its profitability. The bank's funding and capitalisation also benefit from ordinary support from the parent. Fitch has assigned a 'AA-(dcr)' Derivative Counterparty Rating (DCR) to HSBC France, which is a notable derivative counterparty within the HSBC group, as part of its rollout of DCRs to significant derivative counterparties in western Europe and the US. A full list of rating actions is available at the end of this rating action commentary. KEY RATING DRIVERS IDRS, PREFERRED SENIOR DEBT AND DCR HSBC France's IDRs and preferred senior debt ratings are equalised with those of the bank's ultimate parent, HSBC Holdings plc (HSBC; AA-/Stable/F1+) and reflect the subsidiary's role in the HSBC group. France is one of the group's priority markets and HSBC France is the group's largest subsidiary in the eurozone (about 10% of group assets). Fitch sees an extremely high probability that HSBC would support HSBC France through HSBC Bank plc (AA-/Stable/F1+), its direct parent, if required. HSBC France is HSBC group's trading and market-making platform for euro-denominated sovereign, supranational, agency (SSA) and covered bonds, as well as structured interest rate derivatives. It is also responsible for the coverage of French corporate clients. It is fully integrated within the HSBC group in terms of business, strategy, risk management as well as funding and liquidity policies. In accordance with Fitch's Global Bank Rating Criteria, HSBC France's DCR is at the same level as HSBC France's Long-Term IDR as the IDR is based on parental support and not on the bank's VR. VR HSBC France's VR reflects the bank's company profile, which combines a fairly successful corporate bank and selected capital market activities with a small retail and private banking franchise. The upgrade of the VR incorporates our view that the bank's franchise has been strengthened by further group integration, providing corporate clients with access to HSBC's global network and comprehensive product range. The rating also reflects the bank's moderate risk appetite, adequate asset quality, satisfactory capitalisation and stable liquidity and funding. Modest profitability, notably in retail banking, remains a rating weakness, as it leaves the bank vulnerable to more volatile capital market revenue. HSBC France has a fairly small franchise in retail banking, where profitability remains under pressure from low interest rates, and lower cost efficiency than the largest French retail banking groups. The bank has around a 2% market share in deposits and lending in France. Fitch believes further delivery on its cost efficiency measures for retail banking's earnings is key to meeting the bank's objectives. The strongest contributors to earnings are the corporate banking and capital market businesses. The bank's corporate banking activities benefit from the HSBC group's international presence. It mostly targets internationally active French corporates and benefits from the group's global leadership in payments and trade finance. HSBC France is also the group's centre of expertise for euro-denominated SSA and covered bonds as well as structured interest rate derivatives. HSBC France's risk profile combines a sound loan portfolio and sizeable higher-risk capital market activities. Loans to customers are fairly well spread between low-risk housing loans, SMEs and large corporates. The bank's impaired loans/gross loans ratio has improved following a reduction in the stock of impaired loans and is now below the domestic peers' average. Coverage by reserves, although adequate by international standards, is somewhat lower than most domestic peers'. A large part of the bank's balance sheet relates to trading and market-making activities. Market risks are well-managed and a reduced risk appetite in recent years has led to moderate value-at-risk metrics. They nevertheless stand at the higher end of the Global Trading and Universal Banks peer group as a percentage of Fitch Core Capital (FCC). HSBC France's risk-weighted capital ratios are satisfactory, with a FCC ratio of about 13% at end-1H17, but leverage is fairly high. The bank's phased-in total capital ratio of 14.4% at the same date compares well with a 10.625% supervisory requirement for 2017. Our assessment takes into account ordinary capital support from the HSBC group. The composition of HSBC France's capital base has been aligned with the group's standards through intra-group transactions. In 1H17, HSBC France paid an interim EUR300 million dividend and issued EUR200 million of additional Tier 1 and EUR300 million of Tier 2 instruments to HSBC Bank plc. The bank's funding profile has remained stable, with customer deposits and long-term debt largely covering customer loans. The amount of total loss absorbing capacity debt issued by HSBC and cascaded down to HSBC France stood at EUR2.8 billion at end-June 2017. HSBC France does not rely on group funding, but this reduces its need to access the market. We factor access to funding and liquidity from other HSBC group entities into our assessment of HSBC France's funding given the strength of HSBC group's funding profile. In addition, HSBC France holds a substantial buffer of liquid assets. RATING SENSITIVITIES IDRS, PREFERRED SENIOR DEBT AND DCR The Stable Outlook on HSBC France's Long-Term IDR reflects that on HSBC's. HSBC France's IDRs, preferred senior debt ratings and DCR will move in tandem with those of HSBC unless HSBC France's role and integration within the group diminish, which we do not expect. The ratings are also sensitive to evolving regulations, in particular on bank resolution, and potential related changes to the group's legal structure, which could limit capital or liquidity flows across the group. VR HSBC France's VR would benefit from stronger profitability, particularly of the bank's retail franchise, resulting in a more balanced business profile and a lower reliance on potentially volatile capital market revenue. The VR is sensitive to additional group activities that may be transferred to HSBC France in the context of Brexit. A marked weakening in asset quality as well as increased market risks would adversely affect the VR. HSBC France's VR could be withdrawn if the bank's company profile evolves further to the extent that the bank no longer has a meaningful franchise that could exist without the ownership of the parent. The rating actions are as follows: Long-Term IDR: affirmed at 'AA-'; Outlook Stable Short-Term IDR: affirmed at 'F1+' Viability Rating: upgraded to 'a-' from 'bbb+' Support Rating: affirmed at '1' DCR: assigned at 'AA-(dcr)' Preferred senior debt (including programme ratings): affirmed at 'AA-'/'F1+' Market-linked securities: affirmed at 'AA-emr' Contact: Primary Analyst Olivia Perney Guillot Senior Director +33 1 44 29 91 74 Fitch France S.A.S. 60, rue de Monceau 75008 Paris Secondary Analyst Francois-Xavier Deucher, CFA Director +33 1 44 29 92 72 Committee Chairperson Christian Scarafia Senior Director +44 203 530 1012 Media Relations: Francoise Alos, Paris, Tel: +33 1 44 29 91 22, Email: francoise.alos@fitchratings.com; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Thierry Moulonguet, independent director of Fimalac, is also a member of the board of HSBC France. 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