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

DBRS Limited (DBRS) has today confirmed HSBC Bank Canada’s (HSBC Canada or the Bank) Long-Term Deposits and Senior Debt rating at A (high), its Short-Term Instruments rating at R-1 (middle), its Subordinated Debt rating at “A” and its Non-Cumulative Preferred Shares Class I rating at Pfd-2. The trend on all ratings is Stable. The rating confirmations follow a detailed review of the Bank’s operating results, financial fundamentals and future prospects.

Given HSBC Canada’s position in the global franchise of HSBC Holdings plc (the Group; rated AA (low) with a Stable trend), DBRS has assigned an SA1 designation to the Bank, which implies strong and predictable support from the Group, should it be required. As a supported rating, HSBC Canada’s rating will likely move in tandem with the Group’s rating. Accordingly, HSBC Canada’s senior debt rating is notched down by one notch from HSBC Holdings plc’s rating of AA (low).

In confirming the rating, DBRS acknowledges HSBC Canada’s relationship with the Group and the probability of support from the parent. The ratings also consider HSBC Canada’s established relationships with commercial and multinationals, its affluent retail client base and its relatively good operating efficiency. These positive attributes are offset by the Bank’s high dividend payout to the Group, the geographic concentration of loans in Western Canada, including high exposures to the real estate and energy sectors, and relatively low market shares in retail banking and wealth management.

HSBC Canada is Canada’s seventh-largest bank, with assets of $95.2 billion at the end of Q3 2016. With Canada being a priority market for the Group, HSBC Canada benefits from the strength of the Group, particularly its international scope and broad-based capabilities. The Bank continues to execute on its strategy of growing its Commercial Banking and its Global Banking and Markets segments where it derives its competitive advantage from banking multinationals and local affiliates of global companies. At the same time, HSBC Canada continues to try to gain market share in the Retail Banking and Wealth Management segment, in particular targeting its globally affluent customers, but has yet to make significant strides.

The Bank enjoys a steady stream of non-interest income, which made up around 46% of total operating revenues for the first nine months of 2016 (9M 2016). Moreover, HSBC Canada has one of the best efficiency ratios among its peers because of its effective cost management and scale, which it can achieve as a result of its position within the Group. Overall, net income fell by 29% to $336 million in 9M 2016, as the Bank’s provisions for credit losses more than doubled to $168 million, reflecting deterioration within its oil & gas exposure.

With its commercial focus, HSBC Canada has significant sectoral exposure and geographic concentration. Supportive of the Group’s overall client base, HSBC Canada may take on larger exposures than an independent bank of its size. As a result, HSBC Canada’s exposure to commercial real estate and energy lending are higher in relative terms versus the larger Canadian banks. As of Q3 2016, HSBC Canada reported having $9.2 billion and $7.2 billion of total exposure to commercial real estate and energy, respectively. This equates to about 21% of corporate exposure in real estate and another 16% in energy. The Bank has taken strong provisions for its energy portfolio, but DBRS is cautious that stress in the real estate market in Western Canada could pose a significant risk to HSBC Canada’s commercial real estate exposure, especially given the concentration of the portfolio in British Columbia, where real estate prices have risen dramatically in recent years.

Deposits are HSBC Canada’s primary source of funding. The Bank has access to other sources of funding, including the debt and securitization markets. New Basel liquidity frameworks have been determined at the Group level, and HSBC Canada posted a very strong liquidity coverage ratio of 150% for Q3 2016, well above the minimum required by the Office of the Superintendent of Financial Institutions.

The Bank’s capital ratios are in line with large Canadian banks and above regulatory minimums, providing an ample cushion to absorb any unexpected major losses. Specifically, HSBC Canada’s CET1 ratio stood at a healthy 10.7% at the end of Q3 2016.

RATING DRIVERS
Positive rating pressure would likely be linked to improvement in HSBC Holdings plc’s long-term debt ratings. Alternatively, a downgrade of the Group’s ratings would also likely negatively affect HSBC Canada’s ratings.

Any indication of a reduction of support from HSBC Holdings plc could affect DBRS’s support assessment and potentially have a negative impact on the Bank’s ratings.

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 on the issuer page at www.dbrs.com.

The applicable methodologies are Global Methodology for Rating Banks and Banking Organizations (July 2016), Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2016) and DBRS Criteria: Support Assessments for Banks and Banking Organisations (March 2016), which can be found on the DBRS website under Methodologies.

Lead Analyst: Maria-Gabriella Khoury
Rating Committee Chair: Roger Lister

For more information on this credit or on this industry, visit www.dbrs.com.