HSBC Bank plc's long-term deposit and senior unsecured debt ratings downgraded to Aa3; HSBC France's long-term senior unsecured debt and deposit ratings upgraded to Aa3
London, 27 September 2017 -- Moody's Investors Service, ('Moody's') today
downgraded the long-term senior unsecured debt ratings of HSBC
Holdings plc (HSBCH, the group holding company) to A2 from A1 and
the long-term deposit and senior unsecured debt ratings of HSBC
Bank plc (HBEU) to Aa3 from Aa2. Concurrently, Moody's
upgraded HSBC France (HBFR) long-term senior unsecured debt rating
to Aa3 from A2 and long-term deposit ratings to Aa3 from A1.
Moody's maintained its negative outlook on HSBCH and HBEU's
ratings, while the rating agency changed the outlook on HBFR's
ratings to stable from negative.
"The downgrade of HSBC Holdings plc's long-term senior
unsecured ratings by one notch to A2 is driven by a deterioration in the
operating environments in key markets in which HSBC operates, including
the U.K., Hong Kong, as well as strategic markets
such as China, Mexico, Canada and the Middle East,"
said Alessandro Roccati, Senior Vice President at Moody's.
HSBC Bank plc's long-term deposit and senior unsecured debt
ratings were downgraded to Aa3 from Aa2 reflecting its weakened credit
profile, due to the less supportive UK operating environment as
well as volatile profitability which has been only partly offset by a
stronger asset risk profile. The negative outlook on HBEU's
ratings reflects the likely deterioration in its credit profile once the
entity becomes the non-ring fenced bank in order to comply with
the requirements of structural reform.
HBFR's long-term senior unsecured debt and deposit ratings
were upgraded to Aa3 to reflect both higher expected support from other
HSBC group entities and lower loss-given-failure.
These factors more than offset the downgrade of HBFR's BCA to baa3
from baa2, which captures the recent deterioration of the bank's
capital and profitability, its reliance on market funding,
sizeable capital markets activities and low and volatile profitability.
The long-term Counterparty Risk Assessment (CRA) of HBEU was downgraded
to Aa2(cr) from Aa1(cr) and the CRA of HBFR was affirmed at Aa2(cr).
The Prime-1 short-term deposits ratings of HBEU and HBFR
and the (P)Prime-1 short-term programme ratings of HSBCH,
HBEU and HBFR were affirmed.
The rating actions incorporate changes made to Moody's advanced
Loss Given Failure (LGF) analysis, which has been revised under
an update to the Banks methodology, published on 26 September 2017,
and which can be accessed via the following link: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1065675.
Moody's now considers a longer time horizon for the LGF analysis,
taking account of future requirements to increase loss-absorbing
capital under Total Loss Absorbing Capital (TLAC) rules applied to globally
systemically important banks including HSBC and implemented via the UK's
framework for establishing Minimum Requirements for Eligible Liabilities
and own Funds (MREL). In the case of HSBCH and HBFR, Moody's
has assessed future loss absorbency over a longer horizon, looking
at the budgeted net debt issuance relative to the group's MREL requirements,
which Moody's estimates at around $70 billion.
In addition, Moody's now considers in its LGF analysis on
HBEU and HBFR internal total loss absorbing capital (iMREL) effectively
down-streamed from HSBCH to these subsidiaries. Previously,
Moody's assumed that HBEU creditors were the only beneficiaries
of part of HSBCH's externally-issued senior unsecured debt
and subordinated debt.
Please click on this link http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_197521
for the List of Affected Credit Ratings. This list is an integral
part of this Press Release and identifies each affected issuer.
RATINGS RATIONALE
Please click on this link http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_197521
for the List of Affected Credit Ratings. This list is an integral
part of this Press Release and provides, for each of the credit
ratings covered, Moody's disclosures on the following items:
• Principal Methodology
HSBCH
Moody's downgrade of HSBCH's long-term senior unsecured
debt ratings by one notch to A2 was driven by a deterioration in the operating
environments (reflected in reductions in Moody's Macro Profiles)
over the last eighteen months in key markets in which the group operates
including the United Kingdom (UK, Aa2 stable) and Hong Kong (Aa2
stable), and in other strategic markets such as China, Mexico,
Canada and the Middle East. This deterioration resulted in assignment
of an a2 notional group Baseline Credit Assessment (BCA) and adjusted
BCA relative to the previous a1 intrinsic financial strength assessment.
The action also recognizes the group's healthy asset risk profile,
as well as its strengthened capital position, and good funding profile.
The rating agency maintained the negative outlook on HSBCH's long-term
senior unsecured ratings, reflecting the increased likelihood that
losses following any failure of HBAP would be passed to HSBCH, under
Moody's Loss Given Failure analysis, following the implementation
of Hong Kong's new banking resolution framework.
BCA
The notional group BCA of a2 is a standalone assessment of the group's
consolidated financial strength as if it were a single banking entity
and considers diversification benefits across the group entities,
as well as excess capital and liquidity held at the group level.
Previously, Moody's had assessed the group intrinsic financial
strength based on the weighted average BCAs of HBEU and the Hong Kong
and Shanghai Banking Corp. Ltd (HBAP, LT deposit Aa3 stable/
LT senior unsecured debt Aa3 stable; BCA a1), HSBCH's
two main operating companies. However, these entities only
account for around 70% of risk-weighted assets and around
80% of assets.
Loss Given Failure
Moody's also changed the resolution scope for the determination
of the "at failure" balance sheet of the group's by
using HSBCH's Tangible Banking Assets (TBAs), excluding the
TBAs of the group's subsidiaries in countries in Asia, Mexico
and the Middle East. These countries have not, or not yet,
implemented Operational Resolution Regimes (ORR). Previously,
Moody's used the resolution scope and the Tangible Banking Assets
of HBEU unconsolidated (i.e. net of HBFR and European subsidiaries).
This approach change has had the effect of increasing the relevant amount
of TBAs and the loss amount absorbed by the holding company's eligible
liabilities at failure and therefore the risk to its creditors.
Senior unsecured ratings
The A2 long-term senior unsecured debt rating of HSBCH, reflects
the lower notional BCA of the group, as well as the greater risk
to which its creditors are exposed, as reflected in the changes
in the calculation approach under LGF, leading to zero notches of
uplift.
The negative outlook on HSBCH's senior unsecured debt ratings reflects
Moody's view of the greater risk to which its creditors will be
exposed once the rating agency considers Hong Kong an ORR. Moody's
applies advanced Loss Given Failure Analysis to banks in regimes it considers
to be an ORR. A regime is considered an ORR if it has specific
legislation which enables the orderly resolution of a failed balance,
and there is reasonably clear understanding of the impact of a bank failure
and resolution on depositors and creditors. During the outlook
period, Moody's will assess whether Hong Kong will become
a fully-compliant ORR and the potential impact on the group's
overall resolution perimeter, as well as how HSBCH will meet its
group and subsidiary level MREL requirements.
Debt specific considerations
HSBCH's Subordinate ratings were downgraded by one notch to A3 from
A2. HSBC's preference stock ratings, excluding high
trigger Additional Tier 1 securities, were downgraded by one notch
to Baa2 (hyb) from Baa1(hyb). The Baa3 (hyb) rating for high trigger
Additional Tier 1 securities, which are rated to the lower of three
notches below the group notional BCA and the four notches model-implied
outcome, was affirmed. This reflects the improved Common
Equity Tier 1 ratio, which has narrowed the model-implied
notching to four notches despite the lower group anchor point (a2 notional
group BCA).
Government support
For HSBCH, Moody's continues to expect a low probability of
government support in the event of need for senior unsecured and subordinated
creditors. This reflects the role of holding company's liabilities
to absorb losses emanating from its subsidiaries in a resolution scenario,
resulting in no notch uplift.
Ratings outlook
HSBCH's ratings are on negative outlook and thus an upgrade is unlikely
over the outlook period.
What could move the ratings up or down
An upgrade could occur if HSBCH's weighted Macro Profile were to
increase and asset risk and profitability were to materially improve,
while capital and liquidity were maintained at a high level. An
upgrade of the BCA would positively affect all ratings. Further,
an upgrade of HSBCH's senior unsecured debt ratings could occur
if there were further increases in the volume of loss-absorbing
capital beyond Moody's expectations.
HSBCH's long-term ratings and short-term ratings could be
downgraded in the case of major risk management failures, or if
there were a further weakening in its major operating environments,
leading to additional asset risk and profitability pressures. The
long-term ratings and short-term 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.
HBEU
HBEU's long-term deposit and senior unsecured debt ratings
were downgraded to Aa3 from Aa2, reflecting the downgrade of its
BCA to baa1 from a3, a reduction in its adjusted BCA to a2 from
a1, and no government support uplift to the ratings due to the proximity
of the supported ratings to the recently downgraded rating of the UK to
Aa2 with a stable outlook https://www.moodys.com/research/--PR_372649.
The subordinate ratings were downgraded by one notch to A3 from A2 and
junior subordinate ratings were downgraded by one notch to Baa1(hyb) from
A3(hyb), reflecting HBEU's downgraded adjusted BCA.
HBEU's short-term deposit and short-term programme
ratings were affirmed at Prime-1.
The negative outlooks on HBEU's long-term deposit and senior
unsecured debt ratings were maintained and reflects Moody's expectations
of a deterioration in the credit profile of the bank, once legal
transfers have been completed, following the statutory requirement
in the United Kingdom (Aa2 stable) for the country's biggest banks
to separate their retail lending operations into independently governed
and funded entities, so-called "ring-fencing",
which will come into effect from 1 January 2019.
BCA
The one notch downgrade of HBEU's BCA to baa1 from a3 reflects a
less supportive operating environment and modest, as well as volatile,
profitability levels which have been only partly offset by a stronger
asset risk profile, following the internal transfer of HSBC Bank
A.S. (Turkey) (LT deposits Ba3 Negative, BCA b2) to
HSBC Bank Middle East Limited (LT deposits A2 negative, BCA baa2).
The baa1 BCA downgraded by Moody's continues to recognize HBEU's
strong franchise in UK retail and corporate banking, as well as
the role it plays for the group as a centre of excellence for the provision
of capital markets and transaction banking services to global corporates.
Adjusted BCA
The downgrade in HBEU's adjusted BCA to a2 from a1 reflects the
lower anchor point of the group's notional BCA of a2 (one notch
lower than HSBCH's previous a1 intrinsic financial strength).
Moody's maintained its assessment of a "Very High" dependency
on- and "Very High" level of support from -
support provider HSBCH.
Loss Given Failure
The long-term deposit and long-term senior unsecured ratings
of HBEU continue to benefit from two notches of loss-given-failure
uplift under Moody's LGF analysis, as the rating agency applied
a forward-looking view of HBEU's and HSBCH's planned
as well as the regulatory required issuance of loss-absorbing debt.
Moody's also considered the actual and budgeted issuance of iMREL
which HBEU receives for its own balance sheet. The LGF assessment
for HBEU's Subordinated ratings (1 negative LGF notch) and Junior
Subordinated ratings (2 negative LGF notches) showed no change,
as both instruments continue to face a high loss-given failure.
Government support
For HBEU, Moody's continues to expect a moderate probability
of government support for deposits and senior unsecured creditors.
However, HBEU's deposits and senior unsecured debt ratings
do not benefit from government support uplift given the proximity of ratings
to the recently downgraded UK government rating (Aa2 stable). For
subordinated and junior securities, Moody's continues to believe
that the probability of government support in the event of need is low,
resulting in no rating uplift.
The long-term Counterparty Risk Assessment (CRA) of HBEU was downgraded
to Aa2(cr). The short-term counterparty risk assessment
of Prime-1(cr) was affirmed.
Ratings outlook
HBEU's negative outlook incorporates the rating agency's view
that over the outlook period HBEU will execute organizational and legal
entity changes in order to comply with the requirements of UK structural
reform ("ring-fencing") by January 2019. During
2018, UK retail, commercial banking (excluding most large
corporate and financial institutions business), and UK private banking
will be transferred from HBEU to HSBC Bank UK plc (unrated), the
newly formed ring-fenced bank (RFB). At the same time,
HBEU will become the UK's non-ring-fenced bank (NRFB)
and will operate under a UK intermediate holding company.
As a result of the planned asset and liability transfers, Moody's
considers that HBEU will likely show a weaker fundamental credit profile
reflecting its greater reliance on corporate services and capital markets
activities, which are subject to higher earnings volatility,
as well as its relatively higher exposure to wholesale funding.
These credit factors lead to negative pressures on the BCA of HBEU which
result in pressure on its ratings unless these are offset by higher support
or LGF assumptions.
What could move the ratings up or down
An upgrade of HBEU's long-term deposit and senior unsecured debt
ratings could occur if there were material reductions in its tangible
banking assets or further increases in the volume of loss-absorbing
capital providing further protection to its creditors. There is
currently no public disclosure on the liability structure of HBEU under
ring-fencing.
A downgrade of HBEU's long-term ratings could occur in the case
of major risk management failures, or further weakening in the UK
operating environment, which could occur as a result of Brexit,
leading to additional asset risk and profitability pressures. A
reduction in HBEU's long term ratings could also arise if there
were a deterioration of its credit profile due to the implementation of
ring-fencing, not be offset by Moody's assessment of
higher affiliate support. A rating downgrade of HBEU's long-term
deposit and senior unsecured debt ratings could also arise if there were
a material increase in its tangible banking assets or a sizeable reduction
in the outstanding liabilities that could be bailed-in.
There is currently no public disclosure on the liability structure of
HBEU under ring-fencing.
HBFR
HBFR's long-term deposit ratings were upgraded by one notch
to Aa3 and long-term senior unsecured ratings were upgraded by
two notches to Aa3. The upgrades reflect greater protection to
its creditors as reflected by higher loss-given-failure
uplift and higher affiliate support uplift, which more than offset
the downgrade of HBFR's BCA to baa3 from baa2. The stable
outlook on long-term deposits and senior unsecured debt ratings
of HBFR reflects Moody's expectation that HBFR's strong liquidity
and the Strong+ Macro Profile should help balance a possibly higher
asset risk profile from operations HBFR may receive from HBEU, as
a result of Brexit. HBFR's short-term deposit and
short-term programme ratings were affirmed at Prime-1.
BCA
The one notch downgrade of HBFR's BCA to baa3 reflects the recent
deterioration of the bank's capital and profitability, its
large use of market funding, sizeable capital markets activities
and low and volatile profitability. French retail and commercial
banking activities have recorded volatile earnings, negatively affected
by volatile insurance results and a sharp reduction in net interest income.
These factors are partly balanced by HBFR's strong liquidity position
and good asset risk profile. Moody's expects that Brexit
will lead to the shift of some wholesale operations and activities to
HBFR from the parent HBEU; however the nature and size of these activities
is not currently known and are not presently reflected in HBFR's
BCA.
Adjusted BCA
The affirmation of HBFR's adjusted BCA at a2 reflects a higher affiliate
support uplift of four notches (from three), which balances HBFR's
lower BCA. The increased affiliate support reflects the strategic
importance of HSBC France to the group, as it operates as the group's
principal euro clearing entity and is expected to be the recipient of
HBEU's wholesale activities with European clients, should
passporting rights be lost following the UK's exit from the European
Union (EU).
Loss Given Failure
Moody's upgrade of HBFR's long-term deposit rating
to Aa3 from A1 and upgrade of senior unsecured debt ratings to Aa3 from
A2 were prompted by higher level of iMREL received from HSBCH and by the
rating agency's expectation that HBFR will increase the stock of
loss-absorbing capital in response to forthcoming regulatory requirements:
the higher volume of loss absorbing debt reduces loss severity for senior
unsecured debt and deposits resulting in one additional notch of uplift
for long-term deposit ratings and two additional notches for long-term
senior unsecured ratings versus Moody's previous assessment.
There were no changes to the LGF uplift assessment for HBFR's Subordinated
MTN program rating, which continues to face a high loss-given
failure (one negative LGF notch).
Government support
For HBFR, Moody's also continues to expect a low probability
of support from the French government (Aa2 stable), 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.
What could move the ratings up or down
HBFR's ratings would unlikely be upgraded, following an upgrade
of its BCA, given the very high level of affiliate support.
An upgrade of HBFR's long-term deposit and senior unsecured debt
ratings could occur with further increases in the volume of loss-absorbing
capital.
HBFR's long-term ratings could 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 activities it could receive
from HBEU as a result of Brexit, and in case there is not offset
by improved capital and profitability. A rating downgrade of HBFR's
long-term deposit and senior unsecured debt ratings could also
materialise as a result of a material increase in its tangible banking
assets or by a sizeable reduction in the outstanding liabilities that
could be bailed-in.
REGULATORY DISCLOSURES
Please click on this link http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_197521
for the List of Affected Credit Ratings. This list is an integral
part of this Press Release and provides, for each of the credit
ratings covered, Moody's disclosures on the following items:
• Lead Analyst
• Releasing Office
• Person Approving the Credit Rating
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt 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: 1 212 553 0376
Client Service: 1 212 553 1653
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
