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Rating Action:

Moody's downgrades HSBC Holdings' senior unsecured debt rating to A3 from A2

08 Jun 2021

Action concludes review for downgrade, outlook is now stable

London, 08 June 2021 -- Moody's Investors Service (Moody's) today downgraded the senior unsecured debt rating of HSBC Holdings plc (HSBCH) to A3 from A2; the outlook on HSBCH's senior unsecured debt rating has been changed to stable from ratings under review.

The rating agency also downgraded HSBCH's notional Baseline Credit Assessment (BCA) to a3 from a2, the subordinated debt rating to Baa1 from A3, and the preferred stock non-cumulative rating of the perpetual securities issued by HSBC Capital Funding (Dollar 1) L.P. and guaranteed by HSBCH to Baa3(hyb) from Baa2(hyb). Finally, Moody's affirmed the Baa3(hyb) preferred stock non-cumulative rating of HSBCH's 'high-trigger' Additional Tier 1 (AT1) notes.

A full list of affected ratings can be found at the end of this press release. This action concludes the review for downgrade initiated on 8 March 2021; see press release entitled "Moody's places HSBC Holdings' A2 senior unsecured debt ratings on review for downgrade" (https://www.moodys.com/research/--PR_441600).

RATINGS RATIONALE

-- NOTIONAL BCA

The downgrade of HSBCH's notional BCA reflects the challenges the group will face in restoring profitability on a sustainable basis to levels in line with its main peers in the next 12-18 months, said Moody's.

According to the rating agency, HSBCH has strong capital and liquidity, and a stable deposit base, particularly in Asia; HSBCH's footprint across Hong Kong, China, the UK, Europe and the US, and a strong retail and commercial franchise in Hong Kong and the UK, also puts the group at a commercial advantage compared with other global banks.

At the same time HSBCH, which was more resilient than many other global banks to the global financial crisis, took fewer measures than its peers to reposition its business model in the following ten years despite material increases in the cost of doing business. On the back of increased capital and leverage requirements and in the context of lower rates, the group's higher dependence on interest income and the more limited contribution of capital markets to its overall earnings, without a commensurate reduction in costs, has meant that HSBCH's pre-provision profitability has declined more than many of its peers.

The profitability challenges resulted in management's decision to announce a strategic repositioning for HSBCH. In the next three to four years the group plans to continue to grow in the Asian market, invest in fee-generating businesses (in particular wealth management), exit commercial client relationships that do not generate a sufficient return, reduce "business as usual" costs, increase investments in technology and exit underperforming mass-market retail operations in Europe and the US. HSBCH is also targeting a reduction in capitalisation and a reduction of capital sensitivity to a stress scenario at the same time.

Moody's believes that HSBCH's revised plan to improve its profitability will be credit positive, but challenging; even in a more benign environment, it will likely take a minimum of two to three years before HSBCH fully captures the benefit of the plan and pre-provision profitability materially improves. During the repositioning, HSBCH will compete against several peers that are also heavily investing in technology and in Asia, in a still low interest rate environment, and in economies with an uncertain recovery; the ongoing tensions between the US/UK and China add to the execution challenges facing the group, reducing HSBCH's ability to generate profits.

-- SENIOR UNSECURED AND SUBORDINATED DEBT RATINGS

The one-notch downgrade on HSBCH's senior unsecured and subordinate debt ratings reflects the one-notch downgrade of HSBCH's notional BCA.

Moody's advanced Loss Given Failure analysis for HSBCH continues to indicate that HSBCH's senior unsecured and subordinated debt are likely to face moderate and high loss-given-failure respectively. This continues to result in senior unsecured debt ratings in line with HSBCH's notional BCA, and subordinated debt ratings one notch below HSBCH's notional BCA.

-- PERPETUAL CAPITAL SECURITIES

The one-notch downgrade of the preferred stock non-cumulative rating related to the non-cumulative step-up perpetual preferred securities issued by HSBC Capital Funding (Dollar 1) L.P. and guaranteed by HSBCH also reflects the downgrade of HSBCH's notional BCA.

In addition to the abovementioned high loss-given-failure for subordinated instruments, Moody's continues to incorporate two additional negative notches for preference share instruments, reflecting coupon features.

The affirmation of the preferred stock non-cumulative rating of HSBCH's high-trigger AT1 notes reflects high-loss-given-failure for subordinated instruments, two additional negative notches for preference share instruments, and HSBCH's substantial headroom above the conversion trigger.

OUTLOOK

The outlook on HSBCH's senior unsecured debt rating is stable. The outlook reflects the challenges that HSBCH will face to improve its profitability against the group's strong capital and liquidity buffers.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

HSBCH's senior unsecured debt rating could be upgraded following an upgrade of the notional BCA, or via the issuance of loss-absorbing capital beyond what the group has publicly announced, creating greater protection for HSBCH's senior bondholders. The notional BCA could be upgraded following a rapid and sustainable increase in HSBCH's profitability to levels in line with its peers, while maintaining the currently strong asset quality, liquidity and capital levels.

Conversely, the senior unsecured debt rating could be downgraded following a downgrade of the notional BCA, or if HSBCH issues less unsecured company debt than it currently plans. The notional BCA of HSBCH could be downgraded if asset quality materially reduces, or in case of a material reduction in capital levels or liquidity buffers.

LIST OF AFFECTED RATINGS

Issuer: HSBC Holdings plc

..Downgrades:

....Baseline Credit Assessment, downgraded to a3 from a2

....Adjusted Baseline Credit Assessment, downgraded to a3 from a2

....Senior Unsecured Regular Bond/Debenture, downgraded to A3 from A2, outlook changed to Stable from Ratings under Review

....Senior Unsecured Medium-Term Note Program, downgraded to (P)A3 from (P)A2

....Subordinate Regular Bond/Debenture, downgraded to Baa1 from A3

....Subordinate Medium-Term Note Program, downgraded to (P)Baa1 from (P)A3

....Other Short Term, downgraded to (P)P-2 from (P)P-1

..Affirmations:

....Preferred Stock Non-cumulative, affirmed Baa3(hyb)

..Outlook Action:

....Outlook changed to Stable from Rating under Review

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

..Downgrade:

....Backed Preferred Stock Non-cumulative, downgraded to Baa3(hyb) from Baa2(hyb)

..Outlook Action:

....Outlook changed to No Outlook from Rating under Review

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks Methodology published in March 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1261354. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

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.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1263068.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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.

Edoardo Calandro
Vice President - Senior Analyst
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

No Related Data.
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