Toronto, June 13, 2019 -- Moody's Investors Service ("Moody's") has today
affirmed the A3 long-term issuer and deposit ratings of HSBC Bank
Canada (HBC). The rating agency has also affirmed HBC's standalone
baseline credit assessment (BCA) of baa3, the adjusted BCA of a3,
and the local and foreign currency long- and short-term
Counterparty Risk Ratings (CRR) of A2 and Prime-1, respectively.
In addition, Moody's has affirmed HBC's long- and short-term
Counterparty Risk Assessments (CRA) of A2(cr) and Prime-1(cr) respectively,
as well as local and foreign short-term deposit ratings at Prime-2.
The outlook remains stable.
The ratings affirmation reflects Moody's unchanged assessments of
the bank's standalone credit profile and affiliate support,
incorporated in HBC's ratings.
RATINGS RATIONALE
The affirmation of HBC's ratings reflects Moody's unchanged assessment
of the bank's baa3 BCA, supported by its national retail lending
and branch franchise and broadly diversified wholesale portfolio.
These credit strengths are partly offset by large concentrations in energy
and commercial real estate as compared to its capital base; the latter
of which was 1.4 times HBC's common equity tier 1 (CET1)
capital as at 31 March 2019. They are also offset by the bank's
focus on retail and residential construction lending in the highly competitive
Toronto and Vancouver markets and significant growth in wholesale lending
of over 13% between 2017 and 2018. In addition, the
bank's profitability is lower relative to its large Canadian banking
peers, which are incumbents within Canada's favorable industry
structure.
HBC's regulatory capitalization has improved over the last several
quarters. Although retained profits have increased capital,
the improvement has largely been because of a change in regulatory capital
rules that reduced risk weighted assets. The bank's CET1
ratio increased to 11.3% at 31 March 2019 from 10.1%
a year earlier. Although Moody's considers HBC's capitalization
as adequate to its risk profile, given recent growth in the bank's
loan portfolio and current strategic growth initiatives, it believes
capital levels could decline over the next 12-18 months.
However, Moody's expects the bank to manage its capitalization prudently.
HBC's ratings incorporate Moody's assumption of a very high probability
of support from its ultimate parent, HSBC Holdings plc (HSBC,
senior unsecured rating of A2 stable), to reflect HBC's role as
a strategically important subsidiary for HSBC's global franchise.
This assessment results in a three-notch uplift incorporate in
HBC's a3 adjusted BCA, from its baa3 BCA.
Moody's considers HBC as a deposit-taking institution not subject
to an Operational Resolution Regime (ORR). As such, Moody's
believes the senior operating obligations and other contractual commitments
are not likely to default at the same time in a bank failure and will
more likely be preserved in order to minimize banking system contagion,
minimize losses and avoid disruption of critical functions. For
this reason, Moody's assigns the CRR, prior to government
support, one notch above the adjusted BCA and above senior unsecured
and deposit ratings, reflecting its view that the bank's probability
of default is lower than the probability of failure.
Moody's has maintained a stable outlook on HBC's ratings to
reflect its expectations that that the bank's credit fundamentals
and its assessment of affiliate support will not change in the next 12
to 18 months.
The following ratings were affirmed:
Issuer: HSBC Bank Canada
. Local currency and foreign currency Long-term deposit
rating of A3, outlook stable.
. Local currency and foreign currency Short-term deposit
rating of Prime-2.
. Baseline Credit Assessment of baa3
. Adjusted Baseline Credit Assessment of a3
. Issuer rating of A3, outlook stable.
. Long-term Counterparty Risk Assessment of A2(cr).
. Short-term Counterparty Risk Assessment of Prime-1(cr).
. Local currency and foreign currency Long-term Counterparty
Risk Rating of A2.
. Local currency and foreign currency Short-term Counterparty
Risk Rating of Prime-1.
Outlook, Stable
Factors That Could Lead to an Upgrade
HBC's BCA could be upgraded if the bank (1) further diversifies its banking
franchise resulting in a higher level of profitability and reduced earnings
volatility, (2) reduces concentration risks in energy and commercial
real estate, and/or (3) maintains higher levels of capital.
That said, an upgrade of the BCA is unlikely to result in a higher
adjusted BCA and ratings because HBC's adjusted BCA is constrained
by the financial strength of its parent, currently a2, under
Moody's Joint-Default Analysis. A higher adjusted
BCA and ratings could therefore result from an increase in HSBCH's
stronger credit profile or Moody's assessment of a stronger affiliate
support assessment that would increase the current support uplift included
in its ratings.
Factors That Could Lead to a Downgrade
The bank's BCA could be downgraded if either credit quality or capital
deteriorate and/or profitability pressures increase. A downgrade
of the BCA would likely result in a downgrade of the bank's ratings under
Moody's Joint-Default Analysis. HBC's ratings could also
be downgraded following the downgrade of its affiliate support provider,
HSBCH or if Moody's reduces its assessment of affiliate support.
HBC is a bank based in Vancouver, British Columbia, Canada
with assets of CAD108 billion as at 31 March 2019.
The principal methodology used in these ratings was Banks published in
August 2018. Please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt 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.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
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.
Jason Mercer
VP - Senior Analyst
Financial Institutions Group
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
M. Celina Vansetti-Hutchins
MD - Banking
Financial Institutions Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Releasing Office:
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
