DBRS Places HSBC Holdings plc’s AA (high) Ratings Under Review with Negative Implications

DBRS, Inc. (DBRS) has placed the ratings of HSBC Holdings plc (HSBC or the Group), including its AA (high) Issuer and Long-Term debt ratings and its R-1 (high) Short-Term rating, Under Review with Negative Implications. Today’s rating actions are driven by the combination of more detailed revelations of HSBC’s historic missteps in relation to certain regulatory and legal issues, as well as the changed environment that poses greater challenges to HSBC’s franchise and credit fundamentals. While the missteps are generally in the past, they continue to have consequences for the Group and highlight the difficulties of managing large globally active, complex financial institutions in this difficult environment.

The review will focus on HSBC’s prospects for ensuring that it delivers on improved controls to prevent future missteps. The review will also consider the evolving LIBOR/EURIBOR investigations and the more negative environment for large banking organisations. Among the consequences, the Group’s organisation and credit fundamentals could be impacted through increased compliance costs, added fees, limits on pay, increased capital requirements and ring-fencing that could disrupt the efficient operation of a global universal bank. Recently, HSBC appeared before the U.S. Senate Permanent Committee on Investigations. As the hearings made more visible and the Group’s statement explained, there were mistakes in the past involving both anti money laundering and the Office of Foreign Assets Control (OFAC). In DBRS’s view, these mistakes were more pervasive than isolated incidents and indicated that inadequate controls and cultural differences were contributing factors.

DBRS recognises that the Group has taken important steps to rectify these deficiencies with new leadership appointed in 2011 implementing a more cohesive operating model including consistent global standards. Nevertheless, these changes take time to permeate an organisation as large as HSBC that was previously run in a much more decentralised manner. Given the Group’s franchise that successfully reaches into many countries around the world, these changes are critical to ensure that risk is appropriately managed and proper controls are consistently applied across the Group’s extensive operations. DBRS’s tolerance at this rating level for further problems is limited.

These events in isolation would be more manageable, but they are becoming more visible at a time when large, more complex banking organisations are under greater scrutiny and pressures for more constraining regulation are growing. Risk management stumbles at other institutions and the LIBOR/EURIBOR investigations have reinvigorated the pressure for more constraints and added uncertainty to the Group’s prospects at a time when financial markets remain fragile and weakening economic trends are more evident globally. The review will also consider the impact of the evolving environment on the Group’s prospects.

The current rating level takes into account HSBC’s resilient financial performance and overall strong fundamentals including robust liquidity, solid capitalisation, and sound internal capital generation capacity. DBRS views HSBC’s diverse global franchise and well-respected brand as key strengths supporting the ratings. The Group benefits from its broad geographic footprint. At 31 December 2011, HSBC served customers worldwide from 7,200 offices in over 85 countries and territories in Europe, Asia-Pacific, North America, the Middle East, North Africa and Latin America. HSBC has the size, scale, and knowledge gained from its vast operations. With total assets of $2.6 trillion at the end of March 2012, and around 89 million customers, HSBC is one of the largest banking and financial services organisations in the world.

The ratings also consider the depth of the Group’s operations and strong market positions across retail and corporate sectors and, its limited exposure to the more volatile investment banking businesses. DBRS considers HSBC’s strong earnings generation capability and its ability to generate earnings across products and geographic regions as key strengths of the organisation. DBRS considers the Group’s funding and liquidity profile as an important strength, which is in turn reflected in the high ratings. With $1.3 trillion of customer deposits at 31 March 2012, the Group’s substantial and geographically diverse deposit base is the anchor of a very sound funding profile. Market funding is well diversified across currency, product and investor types. HSBC benefits from a sound capital position. HSBC’s core Tier 1 ratio improved 340 basis points (bps) since year-end 2008 to 10.4% at 31 March 2012.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other methodologies used include the DBRS Criteria – Intrinsic and Support Assessments. Both can be found on the DBRS website under Methodologies.

The sources of information used for this rating include company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Roger Lister
Rating Committee Chair: Alan G. Reid
Initial Rating Date: 16 May 2001
Most Recent Rating Update: 4 July 2012

For additional information on this rating, please refer to the linking document under Related Research.