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Rating Action:

Moody's affirms The Hongkong and Shanghai Banking Corp. and Hang Seng Bank's deposit ratings at Aa2/P-1; outlook changed to negative

17 Dec 2019

Hong Kong, December 17, 2019 -- Moody's Investors Service has affirmed The Hongkong and Shanghai Banking Corp. Ltd's (HSBC HK) and Hang Seng Bank Limited's deposit ratings at Aa2/P-1.

At the same time, Moody's has affirmed HSBC HK's Baseline Credit Assessment (BCA) and Adjusted BCA at a1, and affirmed all of the bank's other ratings and assessments. Moody's has also affirmed all ratings and assessments of The Hongkong and Shanghai Banking Corp. Ltd. (Sydney), The Hongkong and Shanghai Banking Corp. Ltd.(Singapore), and The Hongkong and Shanghai Banking Corp. Ltd (NZ).

Moody's has also affirmed Hang Seng Bank's BCA and Adjusted BCA at a1, deposit note/CD program rating at (P)Aa3, Counterparty Risk Ratings at Aa1/P-1, and Counterparty Risk Assessment at Aa1(cr)/P-1(cr).

The outlooks on HSBC HK, The Hongkong and Shanghai Banking Corp. Ltd (Sydney), The Hongkong and Shanghai Banking Corp. Ltd (Singapore), The Hongkong and Shanghai Banking Corp. Ltd (NZ) and Hang Seng Bank have been changed to negative, given pressure on the banks' standalone credit profiles.

A full list of affected ratings and assessments is shown at the end of the press release.

RATINGS RATIONALE

— BCA and Adjusted BCA

The affirmation of HSBC HK's a1 BCA and adjusted BCA takes into account its sound asset quality, track record of prudent risk management, strong capitalization and very good liquidity. Nevertheless, the change in the bank's outlook to negative from stable(m) takes into account a more difficult operating environment in Hong Kong and the rest of the region amid a slowdown in economic growth. Recurring protest in Hong Kong is undermining consumption and inbound tourism. Meanwhile, elevated trade tensions between the US and mainland China have led to increased economic uncertainty in the region. Both developments will put pressure on the bank's asset quality and profitability, and weigh negatively on Moody's assessment of the bank's BCA.

The affirmation of Hang Seng Bank's a1 BCA and adjusted BCA takes into account its well-established market position, sound capitalization, good asset quality, above-peer profitability and strong deposit-gathering franchise. The change in Hang Seng Bank's outlook to negative from stable(m) also takes into account the more difficult operating environment amid the slowdown in economic growth in Hong Kong, and the expected impact on the bank's asset quality and profitability.

That said, both HSBC HK and Hang Seng Bank retain exceptionally strong asset quality metrics. HKBC HK and Hang Seng Bank reported problem loan ratios of 0.5% and 0.2% respectively as of end-June 2019. Lending to the small and medium sized enterprises in the retail, restaurant and hospitality sectors, which are most impacted by the protests, account for a relatively modest proportion of the two banks' overall lending in Hong Kong. The Hong Kong government's relief measures, which include credit insurance on small and medium enterprise (SME) lending, will partially mitigate the pressure on the banks' asset quality.

More than half of both HSBC HK and Hang Seng Bank's overall Hong Kong lending are to the real estate sector, and credit risks on such lending are low due to conservative loan-to-value ratios and good credit profile of borrowers. Outside of Hong Kong, the highly geographically diversified nature of HSBC HK's lending renders its asset quality less susceptible to deterioration in any particular market.

HSBC HK's dominant deposit franchise in Hong Kong underpins its very strong liquidity and funding. The bank's franchise is supported by its extensive network and its status as one of the three note-issuing banks in the territory. Hong Kong accounted for more than two-thirds of HSBC HK's customer deposits as of the end of June 2019. The bank had around 30% share of the local deposit market in Hong Kong on a consolidated basis. HSBC HK has been a beneficiary of depositor flight to quality during times of stress. The bank maintains a deposit-led strategy across the region, under which customer lending in each country is largely funded by local customer deposits.

Hang Seng Bank's well-established market position in Hong Kong and its loyal retail customer base also bolster its liquidity profile. The bank is primarily funded by customer deposits, which accounted for 82% of total liabilities at end-June 2019. The bank's liquid assets are well in excess of its market-based funding.

Rising interest rates contributed to HSBC HK and Hang Seng Bank's profitability in recent years. Both banks' profitability benefits from strong contributions from fee-based income and low credit costs. However, Moody's expects declining net interest margins and rising credit costs to weigh on the banks' profitability in 2020. HSBC HK's return on average assets was fairly stable at 1.4% in the first half of 2019, while that of Hang Seng Bank was 1.7%.

HSBC HK's capitalization remains broadly stable, with a Common Equity Tier 1 ratio of 16.6% as of the end of June 2019. Hang Seng Bank also maintained very strong capitalization, with Common Equity Tier 1 ratio of 16.4% at end-June 2019. Moody's expects the banks to maintain solid capitalization in the next 12-18 months.

— Deposit and senior unsecured ratings

HSBC HK and Hang Seng Bank are subject to Hong Kong's Financial Institutions (Resolution) Ordinance and Moody's considers Hong Kong an operational resolution regime.

Moody's expects the Hong Kong bank regulator to designate HSBC HK and Hang Seng Bank as belonging to the same resolution group. As such, Moody's has performed the Advanced Loss Given Failure (LGF) analysis for the two banks on a combined basis, and applied the same LGF notching outcome to both banks.

HSBC HK and Hang Seng Bank's deposit ratings are positioned at Aa2, two notches above their respective Adjusted BCAs. Meanwhile, HSBC HK's senior unsecured and issuer ratings are positioned at Aa3, one notch above its Adjusted BCA. The uplifts in the banks' deposit and senior unsecured ratings take into account Moody's Advanced Loss Given Failure (LGF) analysis, reflecting Moody's expectation of very low loss-given-failure for depositors and low loss-given-failure for senior unsecured creditors. Under Moody's Advanced LGF analysis, the banks' senior non-preferred debt and capital instruments are likely to absorb losses before their junior depositors and senior unsecured creditors, which lowers the loss given failure for depositors and senior unsecured creditors in the event of failure.

The banks' deposit and senior unsecured ratings also take into consideration moderate likelihood of support from the Hong Kong Government. The support assumption takes into account the banks' systemic importance, despite the government's intention to bail-in creditors and refrain from using public funds in the event of bank failure. The moderate government support assumption leads to no government support uplift in the banks' deposit and senior unsecured ratings.

— CR Assessments and CRRs

The banks' CR Assessment is positioned at Aa1(cr), three notches above their respective adjusted BCAs under Moody's Advanced LGF analysis. Under Moody's Advanced LGF analysis, the banks' junior deposits, senior unsecured debts, and loss-absorbing capacity instruments are likely to first bear losses in the event of failure before obligations represented by CR Assessments would be subject to losses. As such, the large volume of junior liabilities lead to three notches of uplift for their CR Assessments.

The banks' CRRs are positioned at Aa1, three notches above their respective adjusted BCA under Moody's Advanced LGF analysis, reflecting Moody's view of extremely low loss-given-failure, given the subordination of the their junior deposits, senior unsecured debts, and loss-absorbing capacity instruments.

— Junior subordinated note

The A2(hyb) junior subordinated notes for HSBC HK rating reflects: (1) its Adjusted BCA of a1; (2) Moody's Advanced LGF analysis, resulting in a rating one notch below the bank's Adjusted BCA.

WHAT COULD CHANGE THE RATINGS UP AND DOWN -- HSBC HK

Given the negative outlook on HSBC HK's deposit and senior unsecured ratings, they are unlikely to be upgraded. Moody's could revise the bank's rating outlook to stable if it maintains its strong asset quality and profitability amid the economic downturn in Hong Kong and uncertain economic outlook in the rest of the region in the coming 12 to 18 months.

Moody's could downgrade the banks' foreign currency deposit ratings if the Hong Kong government's rating is downgraded, due to a change in the foreign currency deposit ceiling.

Moody's could downgrade the bank's BCA and deposit ratings if sustained deterioration in operating conditions in Hong Kong and the rest of the region lead to a weakening in the bank's asset quality metrics and profitability.

WHAT COULD CHANGE THE RATINGS UP AND DOWN -- HANG SENG BANK

Given the negative outlook on Hang Seng Bank's deposit ratings, they are unlikely to be upgraded. Moody's could revise the bank's ratings outlook to stable if macroeconomic conditions improve and the bank maintains its strong asset quality and profitability.

Moody's could downgrade the banks' foreign currency deposit ratings if the Hong Kong government's rating is downgraded, due to a change in the foreign currency deposit ceiling.

Moody's could downgrade the bank's BCA and deposit ratings if sustained deterioration in operating conditions in Hong Kong lead to a weakening in the bank's asset quality metrics and profitability.

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.

The Hongkong and Shanghai Banking Corp. Ltd reported total assets of HKD8.07 trillion on 30 June 2019.

Hang Seng Bank Limited, with its headquarters in Hong Kong, reported total assets of HKD1.66 trillion on 30 June 2019.

LIST OF AFFECTED RATINGS:

Issuer: Hongkong and Shanghai Banking Corp. Ltd (The)

.... Baseline Credit Assessment, Affirmed at a1

.... Adjusted Baseline Credit Assessment, Affirmed at a1

.... Long-term/short-term Counterparty Risk Assessment affirmed at Aa1(cr)/P-1(cr)

.... Long-term/short-term Counterparty Risk Rating affirmed at Aa1/P-1

.... Long-term Deposit Rating (Foreign Currency) affirmed at Aa2; outlook negative

.... Long-term Deposit Rating (Local Currency) affirmed at Aa2; outlook changed to negative from stable

.... Short-term Deposit Ratings (Foreign and Local Currency) affirmed at P-1

.... Long-term Issuer Rating affirmed at Aa3; outlook changed to negative from stable

.... Senior Unsecured Regular Bond/Debenture affirmed at Aa3; outlook changed to negative from stable

.... Senior Unsecured Medium-Term Note Program affirmed at (P)Aa3

.... Long-term Deposit Note/CD Program affirmed at (P)Aa3

.... Commercial Paper affirmed at P-1

.... Other Short Term, Affirmed at (P)P-1

.... Junior Subordinated Regular Bond/Debenture affirmed at A2(hyb)

Outlook changed to Negative from Stable(m)

Issuer: Hongkong & Shanghai Banking Corp.(Singapore)

.... Long-term/short-term Counterparty Risk Assessment, Affirmed at Aa1(cr)/P-1(cr)

.... Long-term/short-term Counterparty Risk Rating affirmed at Aa1/P-1

.... Senior Unsecured Regular Bond/Debenture affirmed at Aa3; outlook changed to negative from stable

.... Senior Unsecured Medium-Term Note Program affirmed at (P)Aa3

.... Other Short Term affirmed at (P)P-1

Outlook changed to Negative from Stable

Issuer: Hongkong & Shanghai Bank.Corp. (Sydney)

.... Long-term/short-term Counterparty Risk Assessment affirmed at Aa1(cr)/P-1(cr)

.... Long-term/short-term Counterparty Risk Rating affirmed Aa1/P-1

.... Long-term Deposit Rating affirmed Aa2; outlook changed to negative from stable

.... Short-term Deposit Rating affirmed P-1

.... Long-term Issuer Rating affirmed Aa3; outlook changed to negative from stable

.... Short-term Issuer Rating affirmed P-1

.... Senior Unsecured Medium-Term Note Program (Local Currency) affirmed (P)Aa3

Outlook changed to Negative from Stable

Issuer: Hongkong and Shanghai Banking Corp Ltd (NZ)

.... Long-term/short-term Counterparty Risk Assessment, Affirmed at Aa1(cr)/P-1(cr)

.... Long-term/Short-term Counterparty Risk Rating affirmed at Aa1/P-1

.... Senior Unsecured Regular Bond/Debenture affirmed at Aa3; outlook changed to negative from stable

.... Senior Unsecured Medium-Term Note Program affirmed at (P)Aa3

Outlook changed to Negative from Stable

Issuer: Hang Seng Bank Limited

.... Baseline Credit Assessment affirmed at a1

.... Adjusted Baseline Credit Assessment affirmed at a1

.... Long-term/short-term Counterparty Risk Assessment affirmed at Aa1(cr)/P-1(cr)

.... Long-term/short-term Counterparty Risk Rating affirmed at Aa1/P-1

.... Long-term Deposit Rating (Foreign Currency) affirmed at Aa2, outlook negative

.... Long-term Deposit Rating (Local Currency) affirmed at Aa2, outlook changed to negative from stable

.... Short-term Deposit Rating (Foreign and Local Currency) affirmed at P-1

.... Long-term Deposit Note/CD Program (Local Currency) affirmed at (P)Aa3

Outlook changed to Negative from Stable(m)

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.

Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entities are participating and the rated entities or their agent(s) generally provide Moody's with information for the purposes of its ratings process. Please refer to www.moodys.com for the Regulatory Disclosures for each credit rating action under the ratings tab on the issuer/entity page and for details of Moody's Policy for Designating Non-Participating Rated Entities.

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.

The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.

Sonny Hsu, CFA
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Minyan Liu, CFA
Associate Managing Director
Financial Institutions Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

No Related Data.
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