Toronto, December 18, 2019 -- Moody's Investors Service ("Moody's") has 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 currency short-term deposit ratings
at Prime-2. The outlook on the ratings remains stable,
reflecting Moody's view that the benefits from the bank's improving credit
fundamentals are offset by a weakening in affiliate support from HBC's
ultimate parent HSBC Holdings plc (HSBCH), whose ratings outlook
was changed to negative from stable on 18 December 2019.
RATINGS RATIONALE
The affirmation of HBC's ratings reflects Moody's improving assessment
of the bank's standalone credit profile, as expressed by its baa3
BCA, supported by its national retail lending and branch franchise
and broadly diversified wholesale portfolio. Moody's believes
HBC's loan portfolio has benefited from real estate price stability
in its core Vancouver and Toronto residential lending markets, which
has been the result of effective policy initiatives on the part of national
and provincial governments. HBC's reduction of its oil and
gas risk exposures is also credit positive to the assessment of its asset
quality.
HBC's credit strengths are partly offset by large concentrations
in commercial real estate as compared to its capital base, which
was 1.4 times HBC's common equity tier 1 (CET1) capital as of 30
September 2019, as well as by the risks resulting from 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.
The bank's capitalization has been stable in recent quarters with a CET1
ratio of 11.2% at 30 September 2019. 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, Moody's 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 (HSBCH,
senior unsecured rating of A2 negative), to reflect HBC's role as
a strategically important subsidiary for HSBCH's global franchise.
This assessment currently results in a three-notch uplift incorporated
in HBC's a3 adjusted BCA, from its baa3 BCA. In the event
of a reduction in HSBCH's BCA, the affiliate support uplift
would likely reduce to two notches.
Moody's considers HBC as a deposit-taking institution not subject
to an Operational Resolution Regime (ORR). As such, Moody's
believes its 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 positions 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.
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, remains 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 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 declines materially. 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 the Canadian subsidiary of HSBC Holdings plc and is based in Vancouver,
British Columbia, Canada with assets of CAD112 billion as at 30
September 2019.
The principal methodology used in these ratings was Banks Methodology
published in November 2019. 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, 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.
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
