December 13, 2016 / 10:39 PM / a year ago

Fitch Affirms HSBC Bank and HSBC Latin America Holdings

(The following statement was released by the rating agency) LONDON, December 13 (Fitch) Fitch Ratings has affirmed the ratings of HSBC Holdings plc's (HSBC) key subsidiaries: HSBC Bank plc (HSBC Bank, AA-/Stable, a+), and HSBC Latin America Holdings (UK) Limited (AA-/Stable). In addition, Fitch has assigned a Derivative Counterparty Rating (DCR) to HSBC Bank as part of its roll-out of DCRs to significant derivative counterparties in western Europe and the US. DCRs are issuer ratings and express Fitch's view of banks' relative vulnerability to default under derivative contracts with third-party, non-government counterparties. The rating affirmations have been taken in conjunction with Fitch's periodic review of HSBC Bank's parent HSBC (AA-/Stable/aa-) as part of the review of the Global Trading and Universal Banks (GTUBs) peer group. A full list of rating actions is available at the end of this rating action commentary. KEY RATING DRIVERS HSBC Bank IDRS, DERIVATIVE COUNTERPARTY RATING, DEBT AND SUPPORT RATINGS HSBC Bank is a 100% directly owned subsidiary of HSBC. Its IDRs and debt ratings are aligned with HSBC's equivalent ratings primarily because we view HSBC Bank as a key and integral part of the group's business and we believe there to be an extremely high probability its parent will provide extraordinary support, in case of need, on a timely basis. HSBC Bank is a leading UK bank and the parent of HSBC's European subsidiaries. Factors which we consider of high importance are the key role HSBC Bank plays in the group's international connectivity as well as the assumption that a default by it would constitute huge reputational risk to the parent and wider group. We also believe that the UK regulator, the Prudential Regulation Authority, would favour the provision of support from HSBC to its UK subsidiary in case of need. We believe HSBC will have the ability to support its European operations, despite the relatively large size of HSBC Bank. These considerations result in a Support Rating of '1'. A DCR has been assigned to HSBC Bank because they have significant derivatives activity. The DCR is at the same level as the Long-Term IDR because derivative counterparties have no definitive preferential status over other senior obligations in a resolution scenario. The ratings of HSBC Bank's senior debt are aligned with the bank's IDRs. 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. VIABILITY RATING 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 its major UK bank peers', by geography and product. We believe it benefits from being part of a large international group, particularly in its ability to service large and international corporate clients. We view HSBC Bank's exposure to global banking & markets (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. This factor contributes to the bank's VR being one notch below that of HSBC. 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 within the group and culturally integrated. 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. HSBC Bank also remains exposed to around GBP11bn of legacy asset-backed securities, whose performance has been improving and which the bank has gradually been reducing. Our assessment of capital incorporates the flexibility of HSBC and factors in ordinary support from the parent. We expect HSBC Bank's standalone capital ratios to improve over the medium-term. 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. Regulatory considerations include its role within HSBC's recovery and resolution planning and the structural reform (ring-fencing) it has to implement in the UK. HSBC Bank is funded mainly with retail deposits. The parent holding company has started to issue senior debt to be down-streamed to the operating banks in preparation for TLAC requirements. HSBC Bank's funding and liquidity are strong, with the latter benefitting from prudent management. Performance has been affected in recent years by high conduct charges, markets volatility in its GB&M business as well as 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. Not all its European markets have reached targeted efficiency levels and some additional restructuring and costs are placing efficiency under pressure in the short- to medium-term. 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 because Fitch views it as core to HSBC. 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 the parent. RATING SENSITIVITIES HSBC Bank and HSBC Latin America Holdings IDRS, DERIVATIVE COUNTERPARTY RATING, DEBT AND SUPPORT RATINGS HSBC Bank's IDRs, debt, Derivative Counterparty and Support Ratings 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 bank to HSBC or HSBC's ability to support it. We expect HSBC Bank to remain core to the HSBC group after the spin-off of a large part of domestic retail operations into a newly established ring-fenced bank that will become operational in 2018. We consider 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. HSBC Bank VR Negative pressure on HSBC Bank's VR could 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. Upside for the VR is constrained by the high proportion of markets business booked on HSBC Bank's balance sheet relative to capital. 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. HSBC Bank's VR is sensitive to changes to asset composition and the business model. The bank's structure is evolving as it will be required to spin off certain businesses into a separately capitalised and ring-fenced legal entity by January 2019. HSBC Bank's VR 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. 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: assigned 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 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 Gordon Scott Managing Director +44 20 3530 1075 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, 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 _id=1016439 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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