DBRS Confirms HSBC Holding ratings at AA, Trend Stable

DBRS Ratings Limited (DBRS) has today confirmed the ratings of HSBC Holdings plc (“HSBC” or “Group”) including its AA Long-Term issuer rating and R-1 (middle) Short-term issuer rating. The Trend on all ratings is Stable. The Intrinsic Assessment (IA) for HSBC is AA (low). DBRS views the Group as systemically important within the UK (categorising the Group as SA-2) and the final ratings incorporate a one notch uplift from the IA for systemic support.
The confirmation of the ratings reflects the strength and breadth of HSBC’s franchise across developed and emerging markets, underpinning the Group’s position as one of the financially strongest banks globally. HSBC has demonstrated the resilience of the franchise since the financial crisis by maintaining strong underlying earnings, a solid capital base and robust liquidity. Moreover, in DBRS’s view HSBC has improved its strategic focus over the past 2 – 3 years by examining its businesses through 6 key filters, which has led to the announcement of over 54 disposals or exits since 2011 (as of 1H13). The Stable trend reflects the strength of the Group’s credit fundamentals that generate the underlying earnings to cope with any renewed stress in the environment, the declining burden of its legacy issues, and the progress it is making in tackling its challenges.

DBRS considers the most significant challenges faced by HSBC to be implementing the necessary changes to the structure as well as the culture of the compliance function globally, following the Group’s anti-money laundering problems in the US, and continuing to adapt to the evolving global regulatory framework. Cost management also remains a challenge, but DBRS notes that HSBC has set itself tough cost reduction targets and has executed ahead of plan to date. DBRS also has concerns about the weakening economic outlook for some of the emerging markets where HSBC operates, but considers that the Group’s strong diversification will enable it to weather this.

HSBC is one of the largest and most diversified banks globally, with home markets in the UK and Hong Kong, and international activities across Asia Pacific, Europe, North America, Middle East and North Africa and Latin America underpinned by its very strong trade and commercial banking franchise. The resilient earnings power of the Group (underlying profit before tax of USD 18.1 billion in 9M13) has enabled it to overcome both the asset quality and operational risk issues it has faced over recent years.

Due to strong underlying earnings, the Group has been able to absorb significant write-downs from its US consumer businesses since the financial crisis, and the tail risks from this business are now receding. Reported impairment charges decreased to USD 4.7 billion in 9M13, from USD 6.5 billion in 9M12, largely as a result of lower impairment charges in the US, although there was an uptick in impairment charges in Mexico and Brazil.

In December 2012 the significant weakness in HSBC’s anti-money laundering controls led to USD 1.92 billion payments to US authorities and a 5 year Deferred Prosecution Agreement with the Department of Justice and a related undertaking with the Financial Conduct Authority. As a result of this, the Group has embarked on a global programme of overhauling standards and controls, which has had both cost implications and broader business implications. However, DBRS views this process as essential to underpin the Group’s current high rating level, particularly given the breadth of its activities in multiple jurisdictions.

Through its cost reduction programme, HSBC has implemented USD 4.5 billion sustainable cost savings (as of end-September 2013) since the start of 2011. The Group has focused on simplifying and centralising Group-wide activities. These cost savings are crucial for the Group to meet its shareholder return target of 12 – 15% (HSBC posted 12% in 1H13). Underlying revenue growth remains largely resilient (underlying revenues up 2.4% y-o-y in 9M13), and although there is some slowdown in GDP growth in a number of emerging markets, the growth is still higher than in most developed markets.

HSBC has a very strong funding profile, resulting from the Group’s discipline in ensuring loans are funded by customer deposits across its markets. The Group had a strong loan-deposit ratio of 73.6% at the end of 9M13 and the Group’s principal entities held around USD 528 billion unencumbered liquid assets.

HSBC continues to generate capital internally and post strong capital ratios. The Group’s Core Tier 1 ratio at the end-September 2013 was 13.3% and the estimated fully-loaded CRD4 Common Equity Tier 1 ratio was 10.6%. The Group’s leverage compares favourably to peers with an estimated fully loaded leverage ratio of 4.2%. However, regulatory capital will remain a constraint for the Group, given that the final requirements of UK regulators, including the impact of ring-fencing certain activities in the UK, still remain uncertain.

HSBC’s ratings are unlikely to see upward rating pressure given their already high level. The ratings could come under downward pressure if an economic downturn affects a number of the Group’s key markets at the same time; if the Group increases its appetite for market risk in the Global Banking & Markets division and increases its focus on more volatile capital market activities; or if there is evidence of further significant weaknesses in controls and operational risk in its geographically dispersed franchise.

Notes:
All figures are in USD unless otherwise noted.

The principal methodology applicable is: the Global Methodology for Rating Banks and Banking Organizations. Other methodologies used include the DBRS Criteria:Support Assessment for Banks and Banking Organisations. These can be found can be found at: http://www.dbrs.com/about/methodologies

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

This is an unsolicited rating. This credit rating was not initiated at the request of the issuer.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period. DBRS’s outlooks and ratings are under regular surveillance

For further information on DBRS historic default rates published by the European Securities and Markets Administration (“ESMA”) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

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

Lead Analyst: Elisabeth Rudman
Rating Committee Chair: Alan G. Reid
Initial Rating Date: May 16, 2001
Most Recent Rating Update: February 8, 2013

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