Rating action follows affirmation of the parent's ratings; standalone baseline credit assessment placed on review for upgrade due to improving credit fundamentals
Toronto, March 10, 2020 -- 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 placed HBC's baa3 standalone
baseline credit assessment (BCA) on review for upgrade. Moody's
has also affirmed 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, the 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, senior unsecured rating of A2, negative),
whose ratings were affirmed with a negative outlook on 10 March 2020:
https://www.moodys.com/research/Moodys-affirms-the-ratings-of-HSBC-Holdings-plc-senior-debt--PR_419474.
RATINGS RATIONALE
The affirmation of HBC's ratings, which currently include
a three-notch affiliate support uplift, follows the affirmation
of the ratings for its parent company.
The initiation of the review for upgrade on the baa3 BCA reflects Moody's
improving assessment of the bank's standalone credit profile, which
is 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 is the result
of effective policy initiatives on the part of national and provincial
governments. HBC's reduction of its oil and gas risk exposures
has also improved its asset quality.
During the review, Moody's will assess the extent to which
the bank's standalone credit profile has benefited from improved
asset quality and higher capital levels in recent years. However,
a higher BCA following the completion of the review is unlikely to result
in an upgrade of the bank's ratings because HBC's a3 adjusted BCA,
which is positioned three notches above its current BCA, is driven
by the a2 standalone baseline credit assessment of HSBCH under Moody's
Joint-Default Analysis.
HBC's credit strengths are partly offset by its concentration in
commercial real estate as compared to its capital base, which was
1.8 times HBC's common equity tier 1 (CET1) capital as of 31 December
2019, as well as by risks resulting from significant growth in wholesale
lending of over 12% between 2018 and 2019. In addition,
HBC's profitability has been typically lower than its large Canadian
peers not been a source of credit strength.
The bank's capitalization has remained stable in the past several years
with a CET1 ratio of 11.3% at 31 December 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, it believes capital levels could decline over
the next 12-18 months. During its review, Moody's
will assess the capital plans of the bank and in light of the bank's
lending growth.
HBC's ratings incorporate Moody's assumption of a very high probability
of support from HSBCH, which reflects HBC's role as a strategically
important subsidiary for the parent's global franchise. This
assessment currently results in three-notches of affiliate support
rating uplift, which is reflected in HBC's a3 adjusted BCA from
its baa3 BCA. In the event of a deterioration in HSBCH's
credit strength as reflected in its BCA, Moody's assumptions
of affiliate support would likely fall.
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 the senior unsecured
deposit ratings, reflecting its view that the bank's probability
of default is lower than the probability of failure.
HBC's exposures to environmental and social risks are low and moderate,
respectively, consistent with our general assessment for the global
banking sector. We do not have any particular concerns with HBC's
governance. The company shows an appropriate risk management framework
commensurate with its risk appetite. The following actions ratings
were taken:
Review for Upgrade:
Issuer: HSBC Bank Canada
. Baseline Credit Assessment, currently baa3
Affirmation:
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.
. Adjusted Baseline Credit Assessment of a3
. Local currency 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: (1) Moody's were to assess
lower concentration risks in energy and commercial real estate,
and/or (2) the bank maintains higher levels of capital. Further
diversification of its banking franchise resulting in a higher level of
profitability and reduced earnings volatility will also be positive for
the ratings. As noted, however, an upgrade of the BCA
is unlikely to result in a higher adjusted BCA and ratings because HBC's
adjusted BCA is driven 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 improvement
in HSBCH's credit profile or Moody's assessment of stronger affiliate
support that would increase the current support uplift included in its
ratings.
Factors That Could Lead to a Downgrade
A downgrade of the BCA is unlikely given that it is currently on review
for upgrade. The 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 based in Vancouver, British
Columbia, Canada with assets of CAD107 billion as at 31 December
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
Vice President - 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
