Rating action follows change in outlook on HSBC Holdings plc's A2 senior debt ratings to negative
Paris, December 18, 2019 -- Moody's Investors Service, ('Moody's') today
affirmed the Aa3 long-term senior unsecured debt ratings and deposit
ratings of HSBC France (HBFR) as well as its Aa2 Counterparty Risk Ratings,
baa3 Baseline Credit Assessment (BCA) and a2 adjusted BCA. Moody's
also affirmed the bank's short-term ratings and assessments.
Concurrently, Moody's changed the outlook on the long-term
deposit and senior unsecured ratings to negative from stable.
This action follows Moody's affirmation on 18 December 2019 of HSBC
Holdings plc's (HSBCH) A2 senior unsecured long-term debt
ratings and change in outlook to negative from stable. This change
in outlook reflects additional risks and costs attached in the short-term
to a material repositioning of HSBC bank in Europe, including France,
and in the group's businesses in the US, details of which
should be unveiled in February 2020.
For full details please visit the following link: https://www.moodys.com/research/Moodys-changes-the-outlook-on-HSBC-Holdings-plcs-and-HSBC--PR_414595
A list of affected ratings can be found at the end of this press release.
RATINGS RATIONALE
AFFIRMATION
HBFR's long-term deposit and senior-unsecured debt
ratings were affirmed at Aa3.
The affirmation of the BCA of baa3 reflects the bank's weak underlying
profitability stemming from its narrow retail and SME franchises and HBFR'
substantial global banking and capital markets activities, which
we consider as inherently risky and confidence-sensitive,
leading to a high degree of earnings volatility. The BCA affirmation
also reflects stabilised capital and leverage ratios and sound liquidity.
Moody's said that corporate governance is highly relevant for HBFR,
as it is for all banks. Despite HBFR's sound risk management,
Moody's considers that capital markets activities, whose scale
and proportion could materially increase with the recent consolidation
of all HSBC's European branches with HBFR (around 10% of
HBFR's balance-sheet as of June 2019) and post-Brexit,
are characterized by complexity and opacity, increasing governance
challenges. This is reflected in a one-notch downward adjustment.
The weak profitability, stemming in particular from the French retail
business, remains a key challenge that HSBC Holdings management
announced in October 2019 it plans to address through a material repositioning
of activities in continental Europe, most of them consolidated in
HBFR, and a redeployment of capital away from low-return
businesses. Although further details on the specific plans for
HBFR are expected to be disclosed in February 2020, Moody's
does not expect improvements in profitability to materialise at HBFR in
the next two years, as the bank will likely face both revenue losses
and additional restructuring costs.
The affirmation of HBFR's adjusted BCA of a2, which incorporates
four notches of affiliate support uplift from the HSBC group, reflects
Moody's assessment of the strategic importance of HSBC France to
the group . The bank operates as the group's principal entity
for euro denominated capital markets business and is expected to be the
recipient of the group's wholesale activities with European clients,
in the likely event UK passporting rights will be lost, following
Brexit.
The affirmation of the Aa3 senior unsecured debt and deposit ratings also
incorporates Moody's Advanced Loss Given Failure (LGF) analysis,
taking into consideration the high level of internal MREL down-streamed
from HSBCH and our expectation that HBFR will increase the stock of loss-absorbing
capital in response to MREL requirements, resulting in two notches
of uplift for long-term deposit and senior unsecured debt ratings,
reflecting very low loss-given failure.
For HBFR, Moody's also continues to expect a low probability
of support from the French government (Aa2 positive), and,
as such, Moody's includes no Government Support uplift in
the bank's long-term deposit, senior unsecured debt ratings
and subordinate MTN program ratings.
OUTLOOK
The outlook on HBFR's senior unsecured debt and long-term
deposit ratings has been changed to negative from stable, in line
with the outlook change to negative for HSBCH.
The negative outlook reflects Moody's view that the parent entity's
capacity to provide support to HBFR when needed, as indicated by
HSBCH' a2 notional BCA, is likely to reduce, even if
willingness to provide support remains very high.
The negative outlook also reflects the potential negative credit implications
for HSBC France of a material repositioning of HSBC Bank, in particular
its European Global Banking and Markets and its French Retail franchises,
which will be unveiled in February 2020. Such material strategic
repositioning will entail substantial restructuring costs and net income
losses and will increase execution risks for HBFR in 2020 and 2021.
WHAT COULD MOVE THE RATINGS UP OR DOWN
An upgrade is unlikely considering the outlook is negative. An
upgrade of HBFR's BCA would unlikely result in an upgrade of HBFR's
ratings, given the very high level of affiliate support which brings
HBFR's a2 Aadjusted BCA in line with the a2 notional BCA of HSBCH.
An upgrade of HBFR's long-term deposit and senior unsecured
debt ratings could occur if HSBCH ratings stabilise or improve and if
a higher amount of long-term subordinated debt or junior instruments
provide greater protection to senior bondholders and depositors in the
event of HBFR's failure.
In line with the rationale for Moody's change in outlook,
HBFR's ratings could be downgraded in case of a downgrade in HSBCH's
notional BCA, reflecting a reduced capacity from HSBC group to support
HBFR in case of need. HBFR's long-term ratings could also
be downgraded in case of major risk management failures or if HBFR's
asset risk and or funding profile materially deteriorates as a result
of riskier or more concentrated activities it could receive from HSBC
Bank plc as a result of Brexit or strategic repositioning, and in
case this is not offset by improved capital and profitability.
A rating downgrade of HBFR's long-term deposit and senior
unsecured debt ratings could also stem from a material increase in its
tangible banking assets or from a sizeable reduction in the outstanding
liabilities that could be bailed-in.
LIST OF AFFECTED RATINGS
..Issuer: HSBC France
Affirmations:
.... Adjusted Baseline Credit Assessment,
Affirmed a2
.... Baseline Credit Assessment, Affirmed
baa3
.... Long-term Counterparty Risk Assessment,
Affirmed Aa2(cr)
.... Short-term Counterparty Risk Assessment,
Affirmed P-1(cr)
.... Long-term Counterparty Risk Ratings,
Affirmed Aa2
.... Short-term Counterparty Risk Ratings,
Affirmed P-1
.... Deposit Note/CD Program, Affirmed
P-1
.... Commercial Paper, Affirmed P-1
.... Senior Unsecured MTN Program, Affirmed
(P)Aa3
.... Other Short Term, Affirmed (P)P-1
.... Senior Unsecured Regular Bond/Debenture,
Affirmed Aa3, Outlook changed to Negative from Stable
.... Long-term Bank Deposit Ratings,
Affirmed Aa3, Outlook changed to Negative from Stable
.... Short-term Bank Deposit Ratings,
Affirmed P-1
Outlook Action:
....Outlook, Changed To Negative From
Stable
PRINCIPAL METHODOLOGY
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.
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.
Olivier Panis
VP - Senior Credit Officer
Financial Institutions Group
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
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:
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454