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
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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
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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
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