DBRS Confirms Ratings on HSBC Bank Canada at A (high)/R-1 (middle), Stable Trends

DBRS Limited (DBRS) confirmed the Long-Term Issuer Rating as well as the Long-Term Deposits and Long-Term Senior Debt ratings of HSBC Bank Canada (HSBC Canada or the Bank) at A (high). DBRS also confirmed the Bank’s Short-Term Issuer Rating and Short-Term Instruments rating at R-1 (middle) as well as its Subordinated Debt and Non-Cumulative Preferred Shares Class I ratings at “A” and Pfd-2, respectively. All trends are Stable.

KEY RATING CONSIDERATIONS
Given HSBC Canada’s important position in the global franchise of its parent, HSBC Holdings plc (the Group; rated AA (low) with a Stable trend by DBRS), DBRS assigned an support assessment (SA) of SA1 to the Bank, which implies strong and predictable support from the Group, if required. With this support, HSBC Canada’s rating will likely move in tandem with the Group’s rating. Accordingly, HSBC Canada’s long-term ratings are one notch below the Group’s rating of AA (low), reflecting that it operates in a different jurisdiction than its parent.

On an intrinsic basis, HSBC Canada’s local franchise has well-established relationships with multinationals, benefiting from both the capabilities and geographic breadth of the Group, a predominantly affluent retail client base and relatively good operating efficiency. These positive attributes are offset by the Bank’s high dividend payout to the Group and the concentration of loans both geographically in Western Canada and in certain sectors, such as real estate.

RATING DRIVERS
Positive rating pressure would likely be linked to improvement in the Group’s long-term debt ratings. Alternatively, a downgrade of the Group’s ratings would also likely negatively affect HSBC Canada’s ratings. In addition, any indication that potential support from the Group has been reduced or is not sufficiently reliable could affect DBRS’s SA and potentially have a negative impact on the Bank’s ratings.

RATING RATIONALE
HSBC Canada benefits from the support and brand recognition of its parent as Canada is a strategic priority market for the Group; this allows the Bank to leverage broad-based capabilities that are international in scope versus some of its Canadian peers. HSBC Canada is Canada’s seventh-largest bank (and the largest Schedule II bank) with assets of $108 billion as at Q1 2019. The Bank maintains a special focus on its Commercial Banking (CMB) and its Global Banking and Markets (GBM) segments, partly because of HSBC Canada’s ability to use its parent’s broader network to bank multinationals and local affiliates of global companies. Meanwhile, the Bank’s third segment, Retail Banking and Wealth Management (RBWM), has traditionally catered to globally affluent clients or clients with international businesses; however, over the last few years, HSBC Canada has successfully attracted new RBWM clients in eastern Canada, particularly in Ontario, by introducing products and technologies that are competitive with those of the large Canadian banks, among other initiatives.

HSBC Canada enjoys a steady base of non-interest income, mainly consisting of fee and trading incomes from its CMB and GBM segments, which typically account for more than 40% of revenue. In addition, the Bank has the advantage of using its parent’s scale and capabilities to effectively manage its costs, which translates into an efficiency ratio commensurate with the large Canadian banks. In light of the Group’s strategic plans following a long restructuring period, HSBC Canada has been able to improve profitability over the last few years with return on average equity climbing to 12.7% in 2018 from 8.5% in 2015.

The Bank’s exposure to commercial real estate is higher relative to the larger Canadian banks. Of the $57.0 billion in loans and advances to customers at Q1 2019, 13% was to the commercial real estate and construction sectors. DBRS considers HSBC Canada’s wholesale risk profile to be good, owing to the robust adjudication process and the strong profile of its clients; nevertheless, the Bank’s substantial exposure to British Columbia, which accounted for 30% of the wholesale loan portfolio in FY2018, could pose a risk in the event of a real estate market correction.

HSBC Canada is having some success capturing market share in the RBWM segment, partly because of several campaigns to attract more client deposits. Consequently, customer accounts reached $59.0 billion as of March 31, 2019, up 6% from the previous year. In addition, the Bank achieves funding diversification through debt issuances, securitizations and a Canadian registered covered bond program, which it launched in 2018. Liquidity levels remain strong with a liquidity coverage ratio of 138% for Q1 2019, well above the minimum required by the Office of the Superintendent of Financial Institutions.

The Bank’s Common Equity Tier 1 ratio stood at 11.3% as of March 31, 2019, in line with the large Canadian banks and significantly above regulatory minimums. The Bank has historically maintained a high dividend payout to its parent; however, given its capital buffer of approximately $1.8 billion, DBRS considers HSBC Canada’s capitalization levels to be strong.

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

The applicable methodology is Global Methodology for Rating Banks and Banking Organisations (June 2019), which can be found on our website under Methodologies & Criteria.

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 rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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

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