September 28, 2017 / 8:52 PM / a year ago

Fitch Affirms HSBC Bank; Assigns Expected Ratings to HSBC UK

(The following statement was released by the rating agency) LONDON, September 28 (Fitch) Fitch Ratings has affirmed the ratings of HSBC Holdings plc's (HSBC) subsidiaries HSBC Bank plc (HSBC Bank, AA-/Stable, a+), and HSBC Latin America Holdings (UK) Limited (AA-/Stable). At the same time Fitch has assigned expected ratings to HSBC UK Bank plc (HSBC UK), the new UK-based ring-fenced bank, of 'AA-(EXP)'. The expected ratings assigned to HSBC UK reflect the planned ring-fencing restructuring for HSBC Bank. As part of the restructuring UK retail banking & wealth management (RBWM) and commercial banking (CMB) businesses will be transferred to the new bank HSBC UK. HSBC Bank will focus on global banking & markets (GB&M) - reflecting its role as a European service centre for international HSBC clients - as well as banking activities in France and other European countries. Fitch expects that HSBC UK and HSBC Bank will be sister companies, to be held by a UK-based intermediate holding company. Fitch expects to assign final ratings to HSBC UK once the bank becomes operational, on the implementation of the ring-fencing restructuring. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS HSBC Bank and HSBC UK IDRS, DERIVATIVE COUNTERPARTY RATING, DEBT AND SUPPORT RATINGS HSBC Bank's IDRs and debt ratings, and HSBC UK's expected IDRs, are aligned with those of their 100% ultimate parent, HSBC (AA-/Stable/F1+/aa-) and are based on our assessment of the likelihood that each would receive extraordinary support from HSBC, if needed. Factors that we consider of high importance are the assumption that a default of either bank would constitute huge reputational risk to the parent and wider group; for HSBC Bank we also consider the bank's key role in the group's international connectivity. In the case of HSBC UK we believe that the UK regulator would favour the provision of support from HSBC to its UK subsidiaries in case of need. We believe HSBC will have the ability to support its European operations, despite the large size of HSBC Bank in particular, given the financial strength of the group as a whole. These considerations result in a Support Rating of '1'/'1(EXP)'. The ratings of HSBC Bank's senior debt are aligned with the bank's IDRs. HSBC Bank's DCR is likewise at the same level as the bank's Long-Term IDR because derivative counterparties have no definitive preferential status over other senior obligations in a resolution. HSBC Bank VIABILITY RATING (VR) HSBC Bank's company profile is a factor of high importance in our assessment of the bank's VR. The bank's franchise is more diversified than most of major UK bank peers', by geography and product. We expect that the transfer of the UK retail franchise to HSBC UK will be mitigated by the benefits of being part of a large international group, particularly in its ability to service large and international corporate clients. We believe that HSBC Bank's role as a key component in HSBC's global footprint business following the restructuring will support the strength of the bank's company profile. We view HSBC Bank's exposure to GB&M activities relative to the bank's capital base as high, because the group books a large portion of this business at HSBC Bank in London and France, exposing the bank to volatile earnings. Nonetheless, we view HSBC Bank's risk appetite as conservative and well-defined, and in line with HSBC's. Underwriting standards are conservative and growth targets measured. The bank's management and strategy is in line with those of the group as a whole, reflecting well-articulated and stable strategic directives. Management is generally appointed from, and culturally integrated within, the group. Impaired loans have stabilised as the bank continues to benefit from a continued low-risk business model and benign economic conditions in its core UK market. As the consolidating entity of a number of European markets, the bank has exposures to some higher-risk loans and geographies, including exposure to oil and gas and commodities, although these remain low relative to the bank's equity. Our assessment of capital incorporates the flexibility of HSBC and ordinary support from the parent. Achieving the capitalisation target of HSBC Bank will depend partly on its deleveraging pace for its GB&M business and we expect the bank would also benefit from support from the group, which could come through the down-streaming of CET1 capital. HSBC Bank's funding and liquidity are strong, with the latter benefitting from prudent management. The bank is funded mainly with retail deposits but also has good access to the wholesale markets, and HSBC also issues senior debt to be down-streamed to the operating banks in preparation for total loss-absorbing capacity (TLAC) requirements. We expect the impact on HSBC Bank of the UK deposit base's transfer to HSBC UK will be partially offset by ongoing ordinary support from HSBC. Performance is adequate but has been affected in recent years by high conduct charges, markets volatility in its GB&M business, and low interest rates in the UK and Europe. Intensifying competition in the UK mortgage market is likely to put margins under pressure as will increased regulatory-driven legal, compliance and risk costs, although further efficiency savings are planned. HSBC UK VIABILITY RATING We view company profile as a factor of high importance for HSBC UK, and its expected VR of 'a(EXP)' is supported by a strong UK franchise in retail and commercial banking. Although the bank will lack geographic diversification, it will maintain critical mass in key operating segments and we believe that being part of HSBC is a competitive advantage for its CMB business in particular. We assess the bank's management and strategy as being in line with the current level at HSBC Bank, reflecting our expectation that HSBC's well-articulated and stable strategic directives will apply to HSBC UK, and that management will be generally appointed from and culturally integrated within HSBC. The narrower geographic focus is mitigated by HSBC UK's conservative risk appetite and underwriting standards in line with our current assessment of HSBC Bank. We expect asset quality to remain strong and stable, reflecting sound underwriting standards and a focus on lower-risk retail activities alongside its commercial lending. HSBC UK's expected revenue will be strong and diversified between retail and commercial activities, but also concentrated on the UK market and more reliant on net interest income, which increases sensitivity to sustained low interest rates. This is partly mitigated by higher-margin net interest income from the commercial book, which will support the retail business, as well as from repricing the deposit base. Group-wide measures to improve cost efficiency should also strengthen overall returns in the medium term. We expect funding and liquidity to be a notable rating strength for HSBC UK, reflecting its large, stable and granular customer deposit base, which is sufficient to fund the loan book. Our view of capitalisation reflects our expectation that capital levels will remain broadly commensurate with risk and benefits from internal capital generation as well as ordinary support available from HSBC. HSBC Bank SUBORDINATED DEBT AND OTHER HYBRID SECURITIES The anchor rating for the bank's subordinated debt is also HSBC Bank's IDR. We notch down from the IDR in accordance to our assessment of loss severity and non-performance risk: once for Tier 2 debt, for loss severity; three times for its upper tier two debt (one for loss severity and two for incremental non-performance risk) and four times for its other capital securities (two for loss severity and two for incremental non-performance risk). These debt ratings are in line with equivalent securities' ratings at HSBC. HSBC Latin America Holdings IDRS AND SUPPORT RATING HSBC Latin America Holdings is a 100% directly owned subsidiary of HSBC whose IDRs and debt ratings are aligned with HSBC's. The entity is an intermediate holding company of all of HSBC's operations in Latin America and its importance derives from its role as facilitator for HSBC's presence in Latin America. Its balance sheet is of modest size relative to that of HSBC. RATING SENSITIVITIES IDRS, DERIVATIVE COUNTERPARTY RATING, DEBT AND SUPPORT RATINGS HSBC Bank's IDRs, debt, Derivative Counterparty and Support Ratings, and HSBC UK's expected IDRs, are primarily sensitive to the same factors that might drive a change in HSBC's IDRs and equivalent debt ratings. They are also sensitive to the importance of the banks to HSBC or HSBC's ability to support them. We believe that HSBC Bank and HSBC UK will remain core to HSBC after the separation and so do not expect a change to the banks' IDRs as a result. We view it unlikely that HSBC Bank's IDR and DCR would in the future benefit from the build-up of a sustainable junior debt buffer because we would likely not rate HSBC Bank any higher even if those buffers were provided in the form of equity. HSBC Latin America's support-driven ratings are likewise sensitive to a change in our view of HSBC's ability or propensity to provide support. VIABILITY RATINGS HSBC Bank's VR is based on the expectation that the bank will reach and maintain its target capitalisation on a consolidated and stand-alone basis. Failure to reach capital targets could, in the absence of strong signs of ordinary support, result in a downgrade of the VR. Negative pressure on HSBC Bank's VR could also be caused by excessive trading volatility out of GB&M, faster-than-envisaged growth or a disproportionate increase in risk in the European subsidiaries, none of which are expected by Fitch. Additional risks arise from further UK-based conduct charges or incremental regulatory-driven compliance and risk management costs materially affecting the bank's profitability and capital generation capacity. Upside for HSBC Bank's VR is constrained by the high proportion of markets business booked on HSBC Bank's balance sheet relative to capital. However, a positive rating action could arise from a more diversified business model, while maintaining a conservative risk appetite. Any upgrade of the VR would likely require a material improvement in operating profitability. HSBC Bank's VR could be withdrawn if the bank's company profile evolves further so that it does not have a meaningful franchise that could exist without the ownership of the parent. This could become the case if HSBC Bank's business activities almost exclusively relate to markets activities in GB&M. HSBC Bank's IDRs would be unaffected by a withdrawal of the VR. An upgrade of HSBC UK's expected VR could result from evidence that HSBC UK can generate strong recurring earnings without increasing its risk appetite. Any upgrade would likely be limited to one notch because the bank's operations are concentrated in the UK and are therefore not geographically diversified. The VRs of both banks could also be affected by a material change in the operating environment, for example, in the UK if the economic effect of the UK's decision to leave the EU is particularly severe. This sensitivity is particularly the case for HSBC UK given the domestic focus of its activities. The rating actions are as follows: HSBC Bank plc Long-Term IDR: affirmed at 'AA-'; Outlook Stable Short-Term IDR and debt: affirmed at 'F1+' Viability Rating: affirmed at 'a+' Support Rating: affirmed at '1' Derivative Counterparty Rating: affirmed at 'AA-(dcr)' Senior debt, including commercial paper: affirmed at 'AA-'/ 'F1+' Market-linked securities: affirmed at 'AA-emr' Subordinated debt: affirmed at 'A+' Upper Tier 2 notes (GB0005902332) affirmed at 'A-' Other capital securities (XS0189704140, XS0179407910) affirmed at 'BBB+' HSBC UK Long-Term IDR assigned at 'AA-(EXP)'; Outlook Stable Short-Term IDR assigned at 'F1+(EXP)' Viability Rating assigned at 'a(EXP)' Support Rating assigned at '1(EXP)' HSBC Latin America Holdings (UK) Limited Long-Term IDR: affirmed at 'AA-'; Outlook Stable Support Rating: affirmed at '1' Contact: Primary Analyst Krista Davies Director +44 20 3530 1579 Fitch Ratings Limited 30 North Colonnade London E14 5GN United Kingdom Secondary Analyst Aabid Hanif Associate Director +44 20 3530 1786 Committee Chairperson James Longsdon Managing Director +44 20 3530 1076 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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