DBRS Confirms HSBC’s Ratings Following the Implementation of the Ring Fencing Transfer Scheme

DBRS Ratings Limited (DBRS) has confirmed the ratings of HSBC Holdings plc (HSBC or the Group), including its AA (low) Long-Term Issuer Rating and R-1 (middle) Short-Term Issuer Rating. This follows the implementation of the Ring-Fencing Transfer Scheme (RFTS), completed on 1 July 2018. As part of the RFTS, HSBC created a separate ring-fenced entity, HSBC UK Bank plc (HSBC UK), which includes the Group’s personal and commercial customers in the UK, as well as private bank clients. The ongoing reorganisation of the Group’s legal entity structure and business model is required as part of the UK’s ring fencing requirements. This has led to the splitting of the Group’s UK activities between ring-fenced and non ring-fenced entities ahead of the 1 January 2019 deadline. The Group’s Intrinsic Assessment (IA) was maintained at AA (low) and the Support Assessment was maintained at SA3. The trend on all ratings is Stable.

KEY RATING CONSIDERATIONS
The AA (low) IA of HSBC reflects the strength of HSBC’s global franchise with leading positions in the Group’s home markets in the UK and Hong Kong, its solid capital base, sound quality of the loan book, and robust liquidity and funding. DBRS views positively the major improvement in the Group’s statutory profitability in 2017, driven by healthy underlying performance as well as the non-recurrence of some significant items from 2016. While the drag on earnings from legacy conduct issues reduced during 2017, these remain an important challenge facing HSBC. Despite significant progress made to date, the Group remains focused on strengthening its compliance controls.

RATING DRIVERS
Upward pressure on the ratings could result from further substantial progress in addressing legacy conduct issues, including a satisfactory track record of low litigation and conduct-related expenses. The ratings could also move higher if the Group were to deliver a further material improvement in profitability while maintaining its strong credit profile.
The ratings could come under downward pressure in case of a major deterioration in asset quality. Emergence of new litigation or conduct issues could also pressure the ratings, especially if DBRS perceives these issues to be causing damage to the Group’s strong franchise.

RATING RATIONALE
HSBC is one of the largest and most diversified banks globally, although its profitability is heavily weighted towards Asia. The Group has a strong presence in the UK and Hong Kong, and an extensive global network, which represents a competitive advantage in servicing businesses and individuals with international needs. DBRS views the RFTS as credit neutral for the holding company, despite legal separation and regulatory restrictions on capital and funding flows between the ring-fenced and non ring-fenced entities as a result of the UK ring-fencing regulation requirements.

HSBC’s new structure also includes an intermediate holding company for its UK business, HSBC UK Holdings Limited, which will be a direct subsidiary of the Group and the parent of both the ring-fenced HSBC UK and the non ring-fenced HSBC Bank plc.

The Grid Summary Grades for HSBC are as follows: Franchise Strength – Very Strong/Strong; Earnings Power – Strong; Risk Profile – Strong; Funding & Liquidity – Very Strong; Capitalisation – Very Strong/Strong.

Notes:
All figures are in GBP unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (May 2017). This can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include Prudential Regulation Authority, SNL Financial and company documents. DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

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

This rating included participation by the rated entity or any related third party. DBRS had no access to relevant internal documents for the rated entity or a related third party.

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 historical default rates published by the European Securities and Markets Authority (“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 and US regulations only.

Lead Analyst: Tomasz Walkowicz, Vice President, Global FIG
Rating Committee Chair: Ross Abercromby, Managing Director, Global FIG
Initial Rating Date: October 27, 2004
Last Rating Date: March 5, 2018

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