DBRS Morningstar Confirms HSBC Holdings at AA (low), Changes the Trend to Stable

DBRS Ratings Limited (DBRS Morningstar) 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. The trend on the Group’s long-term ratings has been changed to Stable from Negative. The Intrinsic Assessment (IA) for HSBC remains AA (low), whilst the support assessment is SA3.

KEY RATING CONSIDERATIONS

The change in the Long-Term rating trend to Stable from Negative reflects the progress the Group is making towards de-risking and cost restructuring as well as a lower than initially anticipated impact on asset quality from the pandemic and Brexit. The confirmation of the ratings takes into account the strength of the Group’s global franchise and leading position in its home markets in the UK and Hong Kong, the Group’s solid capital base and the robust funding and liquidity position and sound asset quality. However, the ratings continue to reflect the challenges the Group is facing to improve profitability under the low interest rate environment in its two main markets, the UK and Hong Kong, which remain major contributors to the Group’s revenues.

RATING DRIVERS

The Long-Term ratings would be upgraded if the Group shows a consistent track record of improved profitability across all geographies, whilst maintaining sound asset quality and robust capitalization.

A downgrade of the Long-Term ratings would arise if the Group's asset quality and profitability is materially affected by the challenging operating environment.

RATING RATIONALE

Franchise Combined Building Block (BB) Assessment: Very Strong/Strong

HSBC is one of the largest and most diversified banks globally. The Group has a strong presence in the UK and Hong Kong, and an extensive global network. DBRS Morningstar considers the Group is making good progress towards the strategic initiatives announced in 2019, which is reflected in a reduction of risk weighted assets and execution of cost initiatives. HSBC announced some refinements to its strategic initiatives in Q1 2021 including a strengthening of its Asian franchise, ‘Pivot to Asia’, where the Group aims to grow Wealth Management and Global Banking, by allocating excess capital to these businesses. Asia is the main profitability contributor representing around 57% of the Group’s adjusted Profit Before Taxes (PBT) in 9M 2021.

Earnings Combined Building Block (BB) Assessment: Good/Moderate

HSBC’s profitability is supported by its well-established retail and wholesale franchises across Asia, the Middle East and the UK. Profitability was negatively impacted in 2020 by interest rate cuts and significant loan loss provisions. However. profitability improved YoY in 9M 2021, reverting to near-2019 profitability levels. HSBC’s reported PBT increased to USD 16.2 billion in 9M 2021 from USD 7.4 billion in 9M 2020, largely supported by significant loan loss reversals driven by the update of improved macroeconomic assumptions in its credit models. The Group recorded a net credit reversal of USD 1.4 billion against the ECL of USD 7.6 billion in 9M 2020. However, revenues remained under pressure from the low interest rate environment although the Group seems to be offsetting this pressure by growing fees and commissions. In 9M 2021 HSBC’s operating revenues remained affected by the low interest rate environment, in addition to a comparatively lower amount of income from the GBM business which had recorded a strong performance in 2020. Adjusted NII was down 9% in 9M 2021 YoY, although it showed some stabilisation in recent quarters, helped by loan volume growth. Adjusted fees and commissions grew circa 9% YoY, with growth across all businesses and all products. Adjusted costs remained fairly stable and only went up 2% YoY in 9M 2021, reflecting higher variable compensation. The Return on Average Tangible Equity improved to 9.1% in 9M 2021 up from 3.5% in 9M 2020.

Risk Combined Building Block (BB) Assessment: Strong

The Group has a conservative risk profile which benefits from good geographical diversification. Under the challenging global economic environment, HSBC's asset quality has remained strong despite some signs of deterioration since end-2019. The Group's stage 3 loans represented 1.8% of total gross loans at amortised cost at end-9M 2021, flat from end-2020 but up from 1.3% at end-2019. Total stage 2 loans (classified as those that have experienced a significant increase in credit risk but are not defaulted) accounted for 14% of gross loans at end-Q3 2021, compared to 8% at end-2019. However, at end-Q3 2021, stage 2 loans were 9% lower than at end-2020 reflecting some asset quality improvement on the back of improved macro-economic conditions.

Funding and Liquidity Combined Building Block (BB) Assessment: Very Strong/Strong

DBRS Morningstar considers HSBC’s funding and liquidity profile as a core strength of the Group, reflecting its strong position in retail savings in Asia and the UK. The Group’s loan-to-deposit ratio was a low 62% at end-Q3 2021, reflecting the strong levels of customer deposits. HSBC has a very strong liquidity position with High Quality Liquid Assets of USD 664 billion at end-Q3 2021. The Liquidity Coverage Ratio was 136% at end-Q3 2021.

Capitalisation Combined Building Block (BB) Assessment: Strong/Good

HSBC has a strong capital position supported by solid internal capital generation and good access to capital markets. At end-Q3 2021, HSBC’s Common Equity Tier 1 (CET1) ratio was 15.9%, in line with end-2020 and improved from 15.6% at end-Q3 2020. In the medium-term, HSBC aims to maintain its CET1 ratio in a range of 14-14.5%. DBRS Morningstar also considers that the Group is well placed to meet its future loss-absorption requirements. At end-H1 2021, the Group’s eligible capital and HoldCo senior debt resources were equivalent to 30.6% of RWAs, comfortably meeting the 2021 minimum regulatory requirement of 28%, representing the indicative sum of the Group’s local subsidiaries MREL/TLAC requirements.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/389668

ESG CONSIDERATIONS

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Notes:
All figures are in USD unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (19 July 2021)
https://www.dbrsmorningstar.com/research/381742/global-methodology-for-rating-banks-and-banking-organisations
Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (3 February 2021)
https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings

The sources of information used for this rating include Company Documents, HSBC 2015-2020 Annual Reports, HSBC H1 2021 & 9M 2021 Interim Reports, HSBC H1 2021 & 9M 2021 Press Releases and S&P Global Market Intelligence. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, this is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer.

With Rated Entity or Related Third-Party Participation: YES
With Access to Internal Documents: NO
With Access to Management: NO

DBRS Morningstar 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 12-month period. DBRS Morningstar's outlooks and ratings are under regular surveillance.

For further information on DBRS Morningstar 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. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/389665

This rating is endorsed by DBRS Ratings GmbH for use in the European Union.

Lead Analyst: Maria Rivas, Senior Vice President, Global FIG
Rating Committee Chair: Elisabeth Rudman, Managing Director, Global FIG
Initial Rating Date: May 16, 2001
Last Rating Date: December 18, 2020

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