DBRS Confirms HSBC Holdings Ratings at AA (low), Trend Stable

DBRS Ratings Limited (DBRS) has today confirmed the ratings of HSBC Holdings plc (‘HSBC’ or ‘Group’) including its AA (low) 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), whilst the support assessment remains SA3, reflecting DBRS’s view that developments in European regulation and legislation mean that there is less certainty about the likelihood of timely systemic support. As a result, the Group’s final ratings are positioned in line with its IA.

HSBC’s ratings and Stable trend reflect the strength of HSBC’s franchise across developed and emerging markets, its solid capital base and robust liquidity. The ratings and trend also incorporate the challenges HSBC has faced in meeting key performance targets, most notably relating to cost-reductions and profitability.

HSBC’s ratings are unlikely to see upward rating pressure given their already high rating level, as well as the challenging regulatory and operating environment. The ratings could come under downward pressure if an economic downturn affects a number of the Group’s key markets at the same time.

HSBC is one of the largest and most diversified banks globally, although recent profitability is heavily weighted towards Asia. The Group has a strong presence 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. HSBC has undertaken significant reshaping of its business in recent years, including most recently the re-sizing of its Global Banking & Markets (GB&M) division, and the sale of its operations in Brazil (subject to regulatory approval). Nonetheless, HSBC continues to report resilient underlying revenues.

Costs, however, remain a key focus for the Group, with reported cost efficiency ratio of 66.5% in 2015. Even on an adjusted basis, which excludes amongst other things conduct costs, restructuring costs, gains / losses on disposal, and currency translation, costs remain elevated in 2015, up 5% YoY at USD 36.2 billion. This resulted in adjusted jaws (income growth less expense growth) of negative 3.7% in 2015, and an adjusted cost efficiency ratio of 62.6%. Given the low interest rate environment, and persistent drag of litigation related expenses as well as ongoing regulatory requirements, costs control is critical for the Group. As a result, DBRS will continue to monitor whether the restructuring efforts are able to deliver the necessary timely progress with regards the Group’s cost base.

DBRS views the Group’s overall asset quality performance as sound. The slowdown in Asia and challenges in energy markets could continue to affect the Group’s asset quality (HSBC reported USD 500 million impairment charges for the oil and gas portfolio in 2015), but are expected to remain manageable. The Non-Performing loan ratio was 2.54% at end-2015 (compared to 2.97% at end-2014) and the impairment charge was USD 3.7 billion in 2015, equivalent to 6% of net operating income. Operational risk, however, continues to be a key challenge, with the Group reporting approximately USD 2.4 billion of costs associated with regulatory and conduct issues in 2015.

HSBC has a very strong funding profile, resulting from the Group’s retail funding strength in Asia and its discipline in ensuring loans are funded by customer deposits across its markets. The Group had a strong loan-to-deposit ratio of 71.7% at the end of 2015 and the Group’s principal entities held around USD 513.5 billion of unencumbered liquid assets at the end of 2015.

HSBC continues to strengthen its capital position, through internal capital generation and a reduction in Group RWAs. In 2015 Group RWAs decreased 10% to USD 1.1 trillion, driven in part by USD 124 billion of RWA reduction initiatives, 57% of which related to GB&M. This contributed to an improvement in the Group’s end-point CRDIV Common Equity Tier (CET1) ratio to 11.9% at end-2015, up 80 basis points (bps) from end-2014, whilst the estimated end-point leverage ratio was up 20 bps, at 5.0%. This leaves the Group well placed compared to both domestic, and global peers, and close to its estimated end-point CET1 requirement of 12-13%. The regulatory landscape regarding capital requirements has also become clearer following the Financial Stability Board’s announcements in November 2015 regarding future Total Loss Absorbing Capacity (TLAC) requirements, which results in HSBC requiring TLAC debt issuance of USD 60 – 80 billion over 2016-18, whilst senior debt redemptions in the period will amount to approximately USD 51 billion.

Notes:
All figures are in USD unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (December 2015). Other methodologies used include the DBRS Criteria: Support Assessment for Banks and Banking Organisations (December 2015), and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2016). These can be found at: http://www.dbrs.com/about/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 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: Roger Lister
Initial Rating Date: May 16, 2001
Most Recent Rating Update: September 29, 2015

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