DBRS Downgrades HSBC Holdings to AA, Stable Trend

DBRS Ratings Limited (DBRS) has today downgraded the Issuer and Long-Term debt ratings of HSBC Holdings plc (HSBC or the Group) to AA from AA (high). The Short Term rating was downgraded to R-1 (mid) from R-1 (high) and the Intrinsic Assessment to AA (low) from AA. The outlook on all ratings is Stable. As a result of today’s actions the ratings have been removed from Under Review with Negative Implications, where they were placed on 20 July 2012.

The downgrade takes into account HSBC’s recent fines and customer redress costs (including anti money laundering in the US and Payment Protection Insurance (PPI) in the UK), which demonstrate a weaker operational risk profile than is commensurate with the prior rating level. Moreover, DBRS expects the process for HSBC to raise compliance standards across the Group to be a lengthy and costly process. DBRS notes that HSBC already made major organisational changes to its structure in 2011, whereby control has been more centralised within the global businesses and functions rather than spread across multiple geographies, and that these changes should underpin the ongoing reforms. However, in DBRS’s view it is a significant challenge to successfully reform procedures and strengthen controls in large, complex banking organisations, such as HSBC.

HSBC appeared before the US Senate Permanent Committee on Investigations in July 2012 due to extensive failures in its compliance procedures for anti-money laundering and Office of Foreign Assets Control (OFAC) and subsequently agreed to make payments of USD 1.92 billion in December 2012. In the UK, the Group has set aside approximately USD 2.6 billion since the beginning of 2011 for customer redress primarily for PPI, and DBRS notes that HSBC is also part of the ongoing FSA review of SME interest rate hedging products.

In response to these failures, the Group has increased its spending on anti-money laundering, remedial measures, and an overhaul of controls and procedures, and intends to bring all controls globally to its highest global standard. DBRS considers that it is difficult to assess the full cost and revenue impact of meeting these higher standards, but expects it to be a drag on profitability. Moreover, the challenge of reforming the control culture of such a geographically widespread organisation as HSBC is significant.

Mitigating the above challenges, DBRS recognises that any further fines and provisions are unlikely to be large enough to undermine the Group’s financial stability. Moreover, HSBC remains one of DBRS’ highest rated banking groups and the Group’s AA ratings are underpinned by its strong diversity by geography and business line, as well as its solid financial position.

The rating outlook is stable reflecting the Group’s significant earnings and capital buffers, which have historically allowed it to absorb even problems as large as its exposure to US subprime. However, deterioration in franchise strength or asset quality across multiple jurisdictions could lead to negative ratings pressure. In addition, further evidence of its inability to meet global regulatory requirements could also lead to downward pressure on its ratings. Upward ratings pressure is unlikely given the high level of the current ratings.

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

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organizations. Other applicable methodologies used include the DBRS Criteria – Intrinsic and Support Assessments; DBRS Criteria: Rating Bank Subordinated Debt and Hybrid Instruments with Discretionary Payments; and DBRS Criteria: Rating Bank Preferred Shares & Equivalent Hybrids. These can be found at: http://www.dbrs.com/about/methodologies

[Amended on July 30, 2014, to reflect actual methodologies used.]

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

Ratings assigned by DBRS Ratings Limited are subject to EU regulation only.

Lead Analyst: Elisabeth Rudman
Rating Committee Chair: Alan G. Reid
Initial Rating Date: 16 May 2001
Most Recent Rating Update: 20 July 2012

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