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Rating Action:

Moody's changes the outlook on HSBC Holdings plc's and HSBC Bank plc's ratings to negative from stable

18 Dec 2019

NOTE: On January 24, 2020, the press release was corrected as follows: At the end of the press release, the second contact was changed to Ana Arsov, MD - Financial Institutions. Revised release follows.

London, 18 December 2019 -- Moody's Investors Service, ('Moody's') today changed the outlook on the ratings of HSBC Holdings plc (HSBC Holdings) and HSBC Bank plc (HSBC Bank) to negative from stable and affirmed the long-term senior unsecured debt ratings of HSBC Holdings (the group holding company) at A2 and the long-term deposit and senior unsecured debt ratings of HSBC Bank(the non-ring-fenced bank) at Aa3.

"The negative outlook on HSBC Holdings' ratings is driven by the execution risk attached to the planned repositioning of HSBC Bank and of the group's US business, and our expectation of subdued profitability in 2020 and 2021. It also reflects pressures on asset quality and profitability in Asia due to a more difficult operating environment in Hong Kong and the rest of the region" said Alessandro Roccati, Senior Vice President at Moody's.

The negative outlook on HSBC Bank's long-term deposit and senior unsecured debt ratings reflects Moody's expectation that the repositioning of HSBC Bank, in particular of its European Global Banking and Markets and its French retail franchises, will entail substantial restructuring costs and net income losses over the outlook period and will increase execution risk.

Long-term, and if appropriately executed, the business repositioning will lead to a more focused and leaner group, with more efficient capital allocation and higher profitability.

Please see at the bottom of the press release for the List of Affected Credit Ratings.

HSBC Holdings

Moody's affirmation of HSBC Holdings' long-term senior unsecured debt ratings at A2 is supported by: 1) the group's extensive global footprint and strong retail and commercial franchises in its largest markets of Hong Kong and the UK; 2) its conservative risk appetite; 3) its strong capital base; and 4) its conservative funding and liquidity profiles. The group's BCA is however constrained by: 5) its weak profitability due to losses in its US retail business and subdued earnings in its French retail and European wholesale activities; and 6) its sizeable mostly plain-vanilla capital markets activities, which create interconnectedness and expose the group to potential earnings volatility and tail risk.

RATINGS OUTLOOK

The negative outlook reflects Moody's view of the greater risk to which HSBC Holdings' creditors will be exposed during 2020 and 2021 due to the announced repositioning in Europe and in the US.

The two businesses subject to repositioning - the UK non-ring-fenced bank and the US business - account together for around $280 billion risk-weighted assets, or 32% of group total. In the first half of 2019, the French retail business division broke-even due to pressures on margins and weak operating efficiency; and the Continental European Global Banking and Markets business reported pre-tax losses due to the shrinking capital markets wallet, low rates, weak corporate demand due to Brexit and an insufficiently-focused capital markets business. The US retail business also reported pre-tax losses due to low operating efficiency. The group has a profitable retail and commercial business in the UK, which, however, is subject to Brexit uncertainties.

The operating performance in Asia - accounting for around 80% of the group profit before tax in the first half of 2019 - is strong across all divisions, with a high level of efficiency, low cost of credit risk and high levels of profitability. The Hongkong and Shanghai Banking Corp. Ltd (HBAP; Aa2 negative; a1) shows sound asset quality, a track record of prudent risk management, strong capitalization and very good liquidity. Nevertheless, the negative outlook on HBAP's ratings takes into account a more difficult operating environment in Hong Kong and the rest of the region amid a slowdown in economic growth. Recurring protests in Hong Kong are 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.

The Middle East North African (MENA) region - accounting for around 14% of the group profit before tax at the same time - reported high levels of profitability, supported by the large corporate business.

Corporate governance is highly relevant for HSBC Holdings, as it is for all banks. HSBC Holdings' BCA incorporates a one-notch downward adjustment to reflect the credit risk associated with the opacity and complexity of its global operations including its sizeable capital markets franchise. Like its global investment bank peers, it has a complex legal structure, and its global footprint and extensive capital market activities increase management and governance challenges. Further, the abrupt departure of the CEO without the appointment of a successor indicates some corporate governance weaknesses. However, HSBC Holdings' governance frameworks and related controls and processes have materially improved since the financial crisis. Nonetheless, corporate governance remains a key credit consideration given new emerging risks and continues to be a subject of Moody's ongoing monitoring.

Social considerations are relevant for HSBC Holdings. The firm, like other UK banks, is subject to regular investigations by the UK Financial Conduct Authority (FCA) on customer protection and fair treatment. Since the financial crisis, HSBC group has made large provisions for conduct related to Payment Protection Insurance (PPI). Investigations and related fines imposed by regulators represent significant reputational risk for banks.

WHAT COULD MOVE THE RATINGS UP OR DOWN

HSBC Holdings' ratings are on negative outlook and thus an upgrade is unlikely over the outlook period.

An upgrade of the BCA could occur if HSBC Holdings' weighted Macro Profile were to increase and asset risk and profitability were to materially improve on a sustainable basis, while capital and liquidity were maintained at a high level. An upgrade of the BCA would positively affect all ratings. HSBC Holdings' long-term senior unsecured debt rating could be upgraded, other factors being equal, if the group substantially increases the volume of loss-absorbing capital to a level beyond our expectations, creating greater protection for its creditors.

HSBC Holdings' BCA and its ratings could be downgraded in case of a substantial and sustained decrease in profitability due to the upcoming repositioning of the bank, increased restructuring related execution risks, a significant deterioration in the operating environment, potentially driven by heightened China-US trade disputes and a reduction in global trade flows, a material increase in risk appetite or a large risk management failure, or a substantial deterioration in the liquidity or capital positions. The ratings could also be downgraded if the group's tangible banking assets increased or if the amount of loss absorbing liabilities was materially reduced resulting in increased risk of loss to creditors of the holding company.

HSBC Bank

Moody's affirmation of HSBC Bank's long-term deposit and senior unsecured debt ratings at Aa3 is supported by: (1) good levels of capitalisation; (2) a funding profile underpinned by large corporate deposits and internal TLAC; and (3) ample liquidity. However, its credit profile is constrained by (4) high concentration on riskier capital markets activities and other wholesale banking activities; and (5) weak profitability, negatively impacted by weak revenues in European capital markets activities, French retail banking and uncertainties related to Brexit.

RATINGS OUTLOOK

The negative outlook on HSBC Bank's senior unsecured debt and deposit ratings reflects Moody's view of the greater risk to which its creditors will be exposed due to the announced repositioning and pressures on profitability arising from: 1) likely loss of revenues and losses from non-core assets; 2) potential write-down of intangibles in France; 3) profitability pressures from a shrinking wallet in capital markets; and 4) lower demand for credit due to Brexit-related uncertainties.

WHAT COULD MOVE THE RATINGS UP OR DOWN

HSBC Bank's ratings are on negative outlook and thus an upgrade is unlikely over the outlook period.

An upgrade of HSBC Bank's deposits and senior unsecured debt ratings is unlikely: a one notch upgrade of the bank's BCA, an increase in the volume of debt or deposits, a higher stock of more junior bail-in-able liabilities, or a reduction in the tangible banking assets would not result in an upgrade of the bank's ratings, due to the loss which would occur of the current one notch of UK government support.

HSBC Bank's deposits' and senior unsecured debt's ratings would be downgraded in any of the following cases: 1) a lower stock of more junior bail-in-able liabilities that would provide smaller protection to senior creditors; (2) a lower assumption of affiliate support than is presently incorporated; (3) an assumption of "low" government support.

A downgrade of the bank's BCA could derive, amongst others, from: 1) increased execution risks deriving from the repositioning of the bank; 2) a substantial and sustained decrease in profitability; 3) a significant deterioration in the operating environment; 4) a material increase in risk appetite or a large risk management failure; or 5) a substantial deterioration in the liquidity or capital positions. A one notch downgrade of the bank's BCA would not result in a downgrade of its senior ratings, due to HSBC Holdings' parental support increasing by one notch. However, if HSBC Holdings' BCA were to be decreased to a3 (from a2), a downgrade of HSBC Bank's BCA would result in a downgrade by one notch of its senior unsecured debt and deposit ratings.

LIST OF AFFECTED RATINGS

..Issuer: HSBC Bank plc

Affirmations:

.... Adjusted Baseline Credit Assessment, Affirmed a3

.... Baseline Credit Assessment, Affirmed baa2

.... Senior Unsecured Commercial Paper, Affirmed P-1

.... 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

.... Long-term Issuer Rating, Affirmed Aa3, Outlook changed to Negative from Stable

.... Senior Unsecured MTN Program, Affirmed (P)Aa3

.... Junior Subordinate MTN Program, Affirmed (P)Baa2

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

.... Senior Unsecured Regular Bond/Debenture, Affirmed Aa3, Outlook changed to Negative from Stable

.... Junior Subordinated Regular Bond/Debenture, Affirmed Baa2 (hyb)

.... Subordinate Regular Bond/Debenture, Affirmed Baa1

.... 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

..Issuer: HSBC Bank Capital Funding (Sterling 1) LP

Affirmations:

....BACKED Preferred Stock Non-cumulative, Affirmed Baa3 (hyb)

Outlook Action:

.... No Outlook

..Issuer: HSBC Bank Capital Funding (Sterling 2) LP

Affirmations:

....BACKED Preferred Stock Non-cumulative, Affirmed Baa3 (hyb)

Outlook Action:

.... No Outlook

..Issuer: HSBC Bank plc, Sydney Branch

Affirmations:

.... 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

.... 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

..Issuer: HSBC Holdings plc

Affirmations:

.... Adjusted Baseline Credit Assessment, Affirmed a2

.... Baseline Credit Assessment, Affirmed a2

.... Senior Unsecured MTN Program, Affirmed (P)A2

.... Subordinate MTN Program, Affirmed (P)A3

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

.... Preferred Stock Non-cumulative (Local Currency), Affirmed Baa3(hyb)

.... Preferred Stock Non-cumulative (Foreign Currency), Affirmed Baa2(hyb)/Baa3(hyb)

.... Senior Unsecured Regular Bond/Debenture, Affirmed A2, Outlook changed to Negative from Stable

.... Subordinate Regular Bond/Debenture, Affirmed A3

.... Preferred shelf Non-cumulative, Affirmed (P)Baa2

.... Senior Unsecured Shelf, Affirmed (P)A2

.... Subordinate Shelf, Affirmed (P)A3

Outlook Action:

....Outlook, Changed To Negative From Stable

..Issuer: HSBC Capital Funding (Dollar 1) L.P.

Affirmations:

.... BACKED Preferred Stock Non-cumulative, Affirmed Baa2(hyb)

Outlook Action:

.... No Outlook

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.

Alessandro Roccati
Senior Vice President
Financial Institutions Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Ana Arsov
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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