DBRS Confirms HSBC Bank Canada at A (high), Trend Stable

DBRS Limited (DBRS) has today confirmed all the ratings of HSBC Bank Canada (HSBC Canada or the Bank) including the Bank’s Long-Term Deposits and Senior Debt at A (high) and the Short-Term Instruments at R-1 (middle). All trends are Stable. Additionally, DBRS discontinued the rating of HSBC Canada Asset Trust (HaTS HSBC Bank Canada’s innovative Tier 1 capital instruments) following repayment of the final instrument.

Earlier this year, on September 29, 2015, DBRS downgraded the Long-Term Deposits and Senior Debt, and Subordinated Debt ratings of HSBC Canada following the conclusion of a review of government support at HSBC Holdings plc, the indirect parent entity of HSBC Canada. The changes reflect DBRS’s view that developments in European regulation and legislation mean that there is less certainty about the likelihood of timely systemic support. Given HSBC Canada’s position in the global franchise of HSBC Group (the Group), DBRS has assigned an SA1 designation to the bank under “DBRS Criteria: Support Assessments for Banks and Banking Organisations,” which implies strong and predictable support from the Group, should it be required. As a result, HSBC Canada’s rating generally moves in tandem with HSBC Holdings plc’s rating. Accordingly, HSBC Canada’s senior debt rating is notched down by one notch from HSBC Holdings plc’s rating of AA (low).

With Canada being a priority market for the Group, HSBC Canada benefits from the strength of the Group, particularly its international scope and capabilities as one of the largest global banking groups. HSBC Canada has good intrinsic strengths, including its low cost-to-income ratio and customer service model, somewhat offset by geographic and industry concentrations, a higher interest-rate risk tolerance and some scale challenges in its retail banking and wealth management businesses.

HSBC Canada’s overall risk profile is acceptable, although it has some significant sectoral exposures. Most importantly, given the current pressures on energy prices, DBRS notes that HSBC Canada has the highest levels of exposure in relative terms to the energy sector (primarily oil and gas) amongst the larger Canadian banks. As of Q3 2015, HSBC Canada reported having $8.9 billion of total exposure to energy, which equates to about 18% of corporate exposure, or 8.4% of total loan exposure. While provisions on the energy portfolio are likely to increase in the current environment, DBRS notes the Bank’s stress tests of the oil and gas portfolio produce acceptable results. DBRS also takes into account the fact that as a subsidiary of the larger HSBC Group and supporting the relationship objectives of the Group, the Bank is likely to take on larger exposures than an independent bank of its size.

Like its Canadian peers, the Bank has exposure to the Canadian residential mortgage market and other real estate lending. A slowdown in these markets may slow earnings generation, while a downturn in the residential mortgage or commercial real estate markets could hurt asset quality and ultimately have an impact on provisioning levels.

HSBC Canada continues to be challenged to significantly improve its position in the Canadian retail banking and wealth management sectors. Given HSBC Canada’s smaller branch and ATM network compared with those of the five largest Canadian banks, the Bank’s strategy to grow by targeting internationally minded clients has yet to deliver long-term growth. Future growth in wealth management is expected to be achieved primarily in retail asset management.

The Bank continues to execute on its strategy of growing its Commercial Banking and its Global Banking and Markets segments. At the same time, HSBC Canada has made strides in increasing its presence with the introduction of credit cards, and a bigger push into wealth management and mortgages, particularly with its globally affluent customers. Earnings have continued to be good with return on equity in the mid-teens and strong risk metrics, although the risk indicators have been somewhat volatile due to the higher proportions of commercial and wholesale lending.

Significant changes to the Bank’s business, which took place a couple of years ago, are complete, allowing the Bank to concentrate on executing its strategy, although implementing and adhering to HSBC Group wide improvements in compliance, risk controls and a new technology platform continue to occupy management attention.

Some factors that may improve HSBC Canada’s overall credit strength include reductions in geographic and/or sector loan concentrations, or a successful growth of retail wealth management. On the other hand, any significant increase in provisions (particularly related to energy sector lending), evidence of compliance failings or a change in DBRS’s assessment of likely support from the HSBC Group could put negative pressure on the rating assessment.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodologies are Global Methodology for Rating Banks and Banking Organisations (December 2015); Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2015) and DBRS Criteria: Support Assessments for Banks and Banking Organisations (December 2015), which can be found on our website under Methodologies.

These ratings are endorsed by DBRS Ratings Limited for use in the European Union.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.