October 23, 2013 / 9:46 AM / 4 years ago

RPT-Fitch Affirms Standard Chartered at 'AA-'; Outlook Stable

Oct 23 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has affirmed Standard Chartered PLC's (SC) and its subsidiary Standard Chartered Bank's (SCB) Long-Term Issuer Default Ratings (IDR) at 'AA-' with Stable Outlook. A full list of rating actions is provided at the end of this comment.

This action formed part of a broader review of highly rated Asia-Pacific financial institutions.

RATING ACTION RATIONALE

The rating affirmations reflect SC's stringently managed, diversified and generally well-performing operations. Robust liquidity, tight risk management and adequate capital should protect the bank against any unforeseen sharp deterioration in operating conditions and the ensuing asset quality deterioration the bank would face. Offsetting these positive factors are the greater risks generated by being present in more markets compared with other 'AA-' rated peers.

KEY RATING DRIVERS - VR AND IDRs

SC's and SCB's VRs and IDRs capture the group's extensive network as a strength. It enables the group to compete with global banks of significantly larger size for internationally operating clients. Fitch considers the inherent complexity in its globally diversified operations as being adequately managed even though its widespread presence renders the bank susceptible to external shocks, including compliance, conduct, reputational and geopolitical risk.

Convertibility and transferability of foreign currencies is a key risk for SC, although this is somewhat moderated by the short-term nature of the exposure. At end-H113 around two-thirds of cross-border exposures had a maturity less than one year. China cross-border risk has been growing fast, representing the highest individual risk. Total cross-border risk amounted to about five times equity at end-H113. Fitch estimates SC's China exposures at USD76bn, or 1.8x equity. The estimate is derived from publicly stated China cross-border risk (USD46bn at end-H113) and the total assets employed with Chinese customers (USD30bn) and as such double counts for onshore foreign-currency exposures.

SC's liquidity is strong with deposits in its key markets significantly exceeding loans. Unencumbered cash and balances of USD48bn and other liquid assets of USD115bn at end-H113 provide a solid degree of flexibility even though the majority of those assets will likely not be portable across jurisdictions in case of stress. The group's fully loaded Basel III Common Equity Tier 1 ratio of 10.6% and leverage ratio of 4.6% are above peers' and strong, notwithstanding that repatriation of capital has become more difficult. There is no double leverage; equity investments in subsidiaries, while increasing, amounted to about 70% of holding company equity at end-H113.

Fitch assesses SC's largest exposures as concentrated relative to equity but the bank's oversight is tight. SC's loan performance is likely to remain weaker than similarly rated peers' due to deterioration in higher-risk sub-portfolios. Despite the growth in unsecured lending, 81% of loans to individuals and SMEs benefitted from collateral at end-H113. The costly turnaround of its South Korean activities has yet to prove successful as loan impairments for lending to sub-prime borrowers remain on the rise.

RATING SENSITIVITIES - VR AND IDRs

SC's ratings could be downgraded if the group shows continued rapid growth in unsecured lending, increased concentration risk, declining group resources and increasing interconnectedness between China and other markets. SC's ratings are unlikely to be upgraded even if the performance in its South Korean operations improved as they capture through-the-cycle diversification benefits.

In addition, the VR and IDRs of SC are sensitive to an adverse change in relevant factors affecting holding company notching, including high double leverage (above 120%), less prudent liquidity management, more complex group structures or regulatory/legal risk specific to the holding company. SC's VR and IDRs are currently equalised with those of its main operating entity, SCB.

KEY RATING DRIVERS AND SENSITIVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR (SRF)

SCB's Support Rating and SRF reflect Fitch's view that the probability that the UK authorities will provide it with support in case of need remains extremely likely, given its international systemic importance, notably to international trade and USD clearing.

However, Fitch believes that the propensity of the UK authorities to provide support for systemically important banks is following a downward trend. Fitch has outlined the way it plans to address the issue of support in "Bank Support: Likely Rating Paths" and "The Evolving Dynamics of Support for Banks", both published in September 2013 and available on www.fitchratings.com.

SC's Support Rating of '5' and SRF of 'No floor' reflect Fitch's opinion that UK sovereign support cannot be relied upon for a holding company.

KEY RATING DRIVERS AND SENSITIVITIES - SUBORDINATED DEBT AND HYBRID SECURITIES

Subordinated debt and other hybrid regulatory capital securities issued by SC and SCB are notched down from their common VRs to reflect varying degrees of loss severity and incremental non- performance risk under Fitch's "Assessing and Rating Bank Subordinated and Hybrid Securities" criteria. They are primarily sensitive to any change in their VRs.

The rating actions are as follows:

Standard Chartered PLC

Long-Term IDR: affirmed at 'AA-'; Outlook Stable

Short-Term IDR and debt: affirmed at 'F1+'

Viability Rating: affirmed at 'aa-'

Support Rating: affirmed at '5'

Support Rating Floor: affirmed at 'No Floor'

Senior unsecured debt: affirmed at 'AA-'

Dated subordinated debt: affirmed at 'A+'

Capital securities (US853254AC43, US853254AB69, US853254AA86, USG84228AT58, XS0365481935): affirmed at 'BBB'

Standard Chartered Bank

Long-Term IDR: affirmed at 'AA-'; Outlook Stable

Short-Term IDR and debt: affirmed at 'F1+'

Viability Rating: affirmed at 'aa-'

Support Rating: affirmed at '1'

Support Rating Floor: affirmed at 'A-'

Senior unsecured debt: affirmed at 'AA-' and 'F1+'

Dated subordinated debt: affirmed at 'A+'

Upper Tier 2 notes (XS0222434200, XS0119816402) affirmed at 'A-'

Capital securities (XS0347919457, XS0129229141): affirmed at 'BBB+'

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