London, 08 March 2021 -- Moody's Investors Service (Moody's) today placed on review
for downgrade the A2 senior unsecured debt rating and the a2 notional
Baseline Credit Assessment (BCA) of HSBC Holdings plc (HSBCH).
The rating agency also placed on review for downgrade HSBCH's A3
subordinated debt rating and the Baa2(hyb) preferred stock non-cumulative
rating of the perpetual securities issued by HSBC Capital Funding (Dollar
1) L.P. and guaranteed by HSBCH. Finally, Moody's
affirmed the Baa3(hyb) preferred stock non-cumulative rating of
HSBCH's 'high-trigger' Additional Tier 1 (AT1)
notes.
A full list of affected ratings can be found at the end of this press
release.
RATINGS RATIONALE
-- NOTIONAL BCA
The review for downgrade on HSBCH's a2 notional BCA, which
represents Moody's view of the group's standalone creditworthiness,
reflects HSBCH's weaker profitability compared with other banks
with the same BCA, and the challenges that the group faces to improve
its profitability.
During the review period, Moody's will assess the extent to
which these challenges will likely extend the time required to improve
profitability to levels close to its peers, while continuing to
take into account HSBCH's strengths: strong retail and wholesale
franchises, strong capital and liquidity, and stable retail
deposits, especially in Asia.
In February 2021, HSBCH published a strategic update. In
the next three to four years the group will continue to grow in the Asian
market, invest in fee-generating businesses (in particular
wealth management), reduce "business as usual" costs,
increase investments in technology and exit underperforming businesses
in Europe and the US.
HSBCH expects its plan to lead to a return on tangible equity of at least
10% over the next three to four years, from the 3.1%
[1] in 2020 indicated by the group. HSBCH expects to achieve
its target via a combination of lower provisions for expected credit losses
as the operating environment normalises post-pandemic, through
management actions including improved cost efficiency and revenue growth,
in particular in wealth management and Asia.
HSBCH is targeting a reduction in capitalisation, with the Common
Equity Tier 1 (CET1) ratio falling to a range between 14% and 14.5%
[1] in three to four years from 15.9% [2] as at
December 2020. The group is also aiming at lowering its capital
sensitivity to a stress scenario.
HSBCH had previously targeted a 10%-12% return on
tangible equity in 2022, and to maintain a CET1 ratio in a range
between 14% and 15% [3].
Moody's believes that HSBCH's revised plan to improve its
profitability will be credit positive but challenging to achieve.
Provisions for expected credit losses will likely decline with time,
but HSBCH's targeted cost-cutting and revenue growth will
require an extensive repositioning of the group's business model,
including achieving strong growth in highly competitive markets while
also completing the disposal of the mass-market retail operations
in the US and France. This must all be achieved against a backdrop
of low interest rates and economies that in many cases are just beginning
to recover, reducing HSBCH's ability to generate profits,
with the ongoing tensions between the US/UK and China adding to the execution
challenges facing the group.
-- SENIOR UNSECURED AND SUBORDINATED DEBT RATINGS
The review for downgrade on HSBCH's A2 senior unsecured debt rating
and A3 subordinate debt rating reflects the review for downgrade on HSBCH's
a2 notional BCA. Moody's advanced Loss Given Failure analysis
for HSBCH continues to indicate that HSBCH's senior unsecured and subordinated
debt are likely to face moderate and high loss-given-failure
respectively, leading to senior unsecured debt ratings in line with
HSBCH's notional BCA, and subordinated debt ratings one notch
below HSBCH's notional BCA.
-- PERPETUAL CAPITAL SECURITIES
The review for downgrade on the Baa2(hyb) preferred stock non-cumulative
rating related to the non-cumulative step-up perpetual preferred
securities issued by HSBC Capital Funding (Dollar 1) L.P.
and guaranteed by HSBCH also reflects the review for downgrade on HSBCH's
a2 notional BCA. In addition to the abovementioned high loss-given-failure
for subordinated instruments, Moody's continues to incorporate
two additional negative notches for preference share instruments,
reflecting coupon features.
Moody's affirmed the Baa3(hyb) preferred stock non-cumulative
ratings of HSBCH's high-trigger AT1 notes, reflecting
the group's substantial headroom above the conversion trigger.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
An upgrade is unlikely given the current review for downgrade.
HSBCH's a2 notional BCA could be confirmed if Moody's deems
that HSBCH will be able to rapidly close the profitability gap with its
peers while maintaining the currently strong asset quality, liquidity
and capital levels. A confirmation of HSBCH's notional BCA would
lead to a confirmation of all the long-term ratings and assessments
currently on review for downgrade.
HSBCH's A2 senior unsecured debt ratings could also be confirmed in case
of a downgrade of the a2 notional BCA if, other factors being equal,
the group substantially increases the volume of loss-absorbing
capital beyond what the group has publicly announced, creating greater
protection for HSBCH's senior bondholders.
Conversely, the a2 notional BCA of HSBCH could be downgraded if
Moody's believes that HSBCH will not be able to materially improve
its profitability as a percentage of the group's tangible assets
to levels close of those of HSBCH's peers.
HSBCH's A2 senior unsecured debt ratings could also be downgraded in case
of a confirmation of the a2 notional BCA if, other factors being
equal, HSBCH issues less senior unsecured holding company debt than
it currently plans.
LIST OF AFFECTED RATINGS
Issuer: HSBC Holdings plc
..Placed on Review for Downgrade:
....Baseline Credit Assessment, currently
a2
....Adjusted Baseline Credit Assessment,
currently a2
....Senior Unsecured Regular Bond/Debenture,
currently A2, outlook changed to Rating Under Review from Negative
....Senior Unsecured Medium-Term Note
Program, currently (P)A2
....Subordinate Regular Bond/Debenture,
currently A3
....Subordinate Medium-Term Note Program,
currently (P)A3
....Other Short Term, currently (P)P-1
..Affirmations:
....Preferred Stock Non-cumulative,
affirmed Baa3(hyb)
..Outlook Action:
....Outlook changed to Rating Under Review
from Negative
Issuer: HSBC Capital Funding (Dollar 1) L.P.
..Placed on Review for Downgrade:
....Backed Preferred Stock Non-cumulative,
currently Baa2(hyb)
..Outlook Action:
....Outlook changed to Rating Under Review
from No Outlook
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Banks Methodology
published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1147865.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
ratings in accordance with Moody's rating practices. For ratings
issued on a support provider, this announcement provides certain
regulatory disclosures in relation to the credit rating action on the
support provider and in relation to each particular credit rating action
for securities that derive their credit ratings from the support provider's
credit rating. For provisional ratings, this announcement
provides certain regulatory disclosures in relation to the provisional
rating assigned, and in relation to a definitive rating that may
be assigned subsequent to the final issuance of the debt, in each
case where the transaction structure and terms have not changed prior
to the assignment of the definitive rating in a manner that would have
affected the rating. For further information please see the ratings
tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated
agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
am Main 60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
office that issued the credit rating is available on www.moodys.com.
REFERENCES/CITATIONS
[1] HSBC Holdings plc 4Q20 Results 23-Feb-2021.
[2] Public Audited Financial Statements 31-Dec-2020.
[3] HSBC Holdings plc Business Update and Results 18-Feb-2020.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Edoardo Calandro
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Ana Arsov
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Releasing Office:
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