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Fitch Affirms Standard Chartered at 'A+'; Outlook Revised to Stable
October 14, 2016 / 10:12 AM / a year ago

Fitch Affirms Standard Chartered at 'A+'; Outlook Revised to Stable

(The following statement was released by the rating agency) HONG KONG/LONDON, October 14 (Fitch) Fitch Ratings has affirmed Standard Chartered PLC's (SC) and Standard Chartered Bank's (SCB) Long-Term Issuer Default Ratings (IDRs) at 'A+' and downgraded their Viability Ratings to 'a' from 'a+'. The Outlook on the banks' Long-Term IDRs has been revised to Stable from Negative. A full list of rating actions is at the end of this commentary. The downgrade of the banks' Viability Ratings reflects the consolidated group's weakened intrinsic strength, characterised by a high level of non-performing loans (NPLs) and a softer outlook for capital generation. The banks' Long-Term IDR is affirmed at one notch above the Viability Rating to reflect the presence of a significant buffer of qualifying junior debt, which Fitch expects to be maintained and sees as sufficient to protect senior obligations from default in case of failure. KEY RATING DRIVERS IDRS AND SENIOR DEBT SC's and SCB's Long-Term IDRs and senior debt ratings are one notch above their Viability Ratings because we believe the risk of default on senior obligations, as measured by the Long-Term IDR, is lower than the risk of the entities failing, as measured by the Viability Rating. The one-notch uplift is based on the presence of a significant junior debt buffer, which could be made available to protect senior obligations from default in case of failure, either under a resolution process or as part of a private-sector solution, such as a distressed debt exchange, to avoid a resolution action. Without such a private-sector solution, we would expect a resolution action to be taken on SC when it breaches minimum capital requirements. SC's known capital requirement from the UK's Prudential Regulation Authority is a common equity Tier 1 ratio (CET1) of 9.2%. The qualifying junior debt buffer at end-1H16 was around 8.8% of risk-weighted assets, which, in our opinion, should be sufficient to restore the group's viability without hitting senior creditors. This is based on an assumed intervention point of around 6.5% of risk-weighted assets. We have also assumed the bank will replace maturing instruments and raise the proportion of its junior debt to 9.5% of risk-weighted assets by end-2017. The Short-Term IDR of 'F1' maps to the lower of the two options at the 'A+' Long-Term IDR level. While Fitch believes the banks' funding and liquidity are solid, the Short-Term IDR does not benefit from an uplift above the Viability Rating. VIABILITY RATINGS We assign the same Viability Rating to SC and its main operating entity, SCB, as their risk profiles are aligned and liquidity at the top holding company is adequately managed. The equalisation of Viability Rating also considers the holding company's low double leverage. The Viability Rating captures the group's unique global network, although it does increase organisational complexity above that of peers. The rating considers SC's tightened strategic direction, as well as the expected disciplined execution of its restructure. The Viability Rating also reflects what Fitch believes to be a weaker financial profile, characterised by a high NPL ratio and revenue challenges. Liquidity remains sound, although Fitch believes there are downside risks to capital. SC is facing a difficult operating environment and increased regulatory challenges, but we see the bank as being determined to execute on its tighter risk guidelines. We believe the organisational complexity inherent in SC's business model leads to higher operational risk and increases its confidence sensitivity compared with highly rated peers, as the bank does not have a dominant home market. It also has a more fragmented capital position. However, its strong franchise enables it to compete for cross-border finance despite its relatively small size. We believe SC's risk appetite is generally moderate, with robust risk and reporting tools and the introduction of more conservative limits and improved controls. However, we have adjusted downward our assessment of this factor, as the organisation's operational risks are significant due to its wide-ranging network and products. Further reduction of its high industry concentrations should help to render its performance less volatile. SC's high stock of NPLs significantly surpasses peers'. Although our base-case is that NPLs have peaked, they could stay elevated due to headwinds in selling-off the liquidation book. Our assessment also addresses SC's short loan tenor profile, which we believe could be misleading, as exiting relationships may need to be extended and take longer to transform into cash under challenging conditions than indicated by contractual tenors. We believe SC's access to capital remains sound and the bank retains a sufficient degree of flexibility to redistribute resources. This is notwithstanding that about 30% of its equity is held by subsidiaries, resulting in a relatively low unconsolidated CET1 ratio for SCB of 9.8% at end-2015. We have calculated that raising reserves against NPLs to 100% would reduce capital ratios by 210bps, lowering SC's consolidated Fitch Core Capital ratio to 11.2% at end-1H16. Leverage remains low compared with large, internationally active peers. There is continuous earnings pressure from low interest-rates, high regulatory costs, slower growth and potentially higher impairment charges. We believe management's corrective actions can help SC return to a path of steady earnings generation. However, it is too early to tell, for example, whether impairment charges peaked in 2015 at 1.7% of gross loans. The introduction of International Financial Reporting Standard 9 by the International Accounting Standards Board in 2018 could lead to additional charges. Liquidity is sound. Deposits in key markets significantly exceed loans. Unencumbered cash, balances and other liquid assets provide flexibility, the majority of which should be portable across jurisdictions in case of stress. SUPPORT RATING AND SUPPORT RATING FLOOR SC's and SCB's Support Rating of '5' and Support Rating Floor of 'No floor' reflect Fitch's opinion that senior creditors cannot rely on receiving full extraordinary support from the UK government if the group becomes non-viable. In our opinion, the UK has implemented legislation and regulations that are sufficiently progressed to provide a framework that is likely to require senior creditors to participate in losses for resolving even large banking groups. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Subordinated debt and other hybrid regulatory capital securities issued by SC and SCB are notched down from their Viability Ratings. The ratings on SC's capital securities are notched down five times, reflecting two notches for loss severity and three notches for non-performance risk. SCB's legacy upper Tier 2 securities are notched down three times, with one notch for loss severity and two notches for non-performance. Subordinated debt is notched down once from the respective entity's Viability Rating. RATING SENSITIVITIES IDRS AND SENIOR DEBT The banks' Long-Term IDRs and senior debt ratings are notched up from their Viability Ratings, making them sensitive to a change in the Viability Rating. The Long-Term IDR and senior debt ratings are also sensitive to a reduction in the size of the qualifying junior debt buffer relative to risk-weighted assets. This could be caused by growth or if maturing or called Tier 1 or Tier 2 instruments are not replaced. Our base case is that the ratio will increase and remain at around 9.5% to be able to afford protection to senior creditors. The notching is sensitive to changes in assumptions on resolution intervention point, post-resolution capital needs and the development of resolution planning more generally. VIABILITY RATINGS The banks' Viability Ratings may be downgraded if SC's financial position weakens, in particular, if further large loans or earning deterioration undermines its capital strength. Outsized fines or significant business restrictions from litigation or conduct-related charges could also lead to a downgrade. SC's and SCB's Viability Ratings may be upgraded if their financial profiles improve significantly, in particular, if SC successfully enhances its risk control and if its NPL ratio falls closer to the historic average of 2%, while demonstrating stable capital generation. SC's Viability Rating and IDR are also sensitive to adverse changes to factors that affect the holding company's notching, including high double leverage of above 120%, less prudent liquidity management, a more complex group structure or regulatory and legal risks specific to the holding company. SUPPORT RATING AND SUPPORT RATING FLOOR The Support Rating is sensitive to changes in assumptions around the propensity or ability of the UK sovereign to provide timely support. An upgrade to SC's and SCB's Support Rating and upward revision of their Support Rating Floor would be contingent on a positive change in the sovereign's propensity to support its banks, which is highly unlikely in Fitch's view. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES The securities' ratings are primarily sensitive to changes in the Viability Ratings. SC's additional tier 1 securities are also sensitive to changes in Fitch's assessment of the probability of their non-performance relative to the risk captured in SC's Viability Rating. This could arise due to a change in Fitch's assessment of SC's conservative approach to capital management, reducing its flexibility to service the securities, or an unexpected shift in regulatory buffer requirements. The rating actions are as follows: Standard Chartered PLC Long-Term IDR affirmed at 'A+', Outlook Revised to Stable from Negative Short-Term IDR affirmed at 'F1' Viability Rating downgraded to 'a' from 'a+' Support Rating affirmed at '5' Support Rating Floor affirmed at 'No Floor' Long-term senior unsecured debt affirmed at 'A+' Short-term senior debt affirmed at 'F1' Dated subordinated debt downgraded to 'A-' from 'A' Capital securities (US853254AC43, US853254AB69, US853254AA86, USGB84228AT58) downgraded to 'BB+' from 'BBB-' Contingent convertible securities (USG84228CE61, US853254AT77, US853254BA77, USG84228CQ91) downgraded to 'BB+' from 'BBB-' Standard Chartered Bank Long-Term IDR affirmed at 'A+'; Outlook revised to Stable from Negative Short-Term IDR affirmed at 'F1' Viability Rating downgraded to 'a' from 'a+' Support Rating affirmed at '5' Support Rating Floor affirmed at 'No Floor' Senior unsecured debt affirmed at 'A+'/'F1' Dated subordinated debt downgraded to 'A-' from 'A' Upper tier 2 notes (XS0222434200, XS0119816402) downgraded to 'BBB' from '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 SAR Secondary Analyst Claudia Nelson Senior Director +44 20 3530 1191 Committee Chairperson Mark Young Managing Director +65 6796 7229 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email:; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: Additional information is available on Applicable Criteria Global Bank Rating Criteria (pub. 15 Jul 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1013126 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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