DBRS Morningstar Comments on SVB UK’s Resolution and Acquisition by HSBC

Today HSBC UK bank plc (HSBC UK), the UK ring-fenced subsidiary of Holdings plc (HSBC or the Group), announced that it has acquired Silicon Valley Bank UK Limited (SVB UK), the UK subsidiary of US Silicon Valley Bank for GBP 1. This follows the failure of SVB Financial Group (SVB; unrated by DBRS Morningstar) on Friday, the first bank failure in the U.S. since 2020 and the largest failure since the 2008–09 financial crisis (see <a href="https://www.dbrsmorningstar.com/research/410782"> SVB's Failure Sparks Sharp Sell-Off in the Sector as Banks Face Increased Scrutiny of Unrealized Balance Sheet Losses,</a> dated March 13, 2023). We consider the acquisition to have no impact on HSBC Holdings’ Long-Term Issuer rating (AA (low), Stable trend), given its very small size compared to the size of HSBC UK and the scale of the Group. SVB had total loans of GBP 5.5 billion and GBP 6.7 billion of deposits on 10th March 2023. SVB”s loans and deposits represent a small 2.7% and 2.4% of HSBC UK’s respectively, and an even lower proportion of the Group’s total loans and deposits of around 0.7% and 0.5% respectively. SVB reported a profit before taxes of GBP 88 million in 2022 compared to GBP 3.6 billion for HSBC UK and GBP 19.9 billion for the Group.

The acquisition announcement follows the decision taken by the Bank of England (BOE), in consultation with the Prudential Regulation Authority (PRA), HM Treasury (HMT) and the Financial Conduct Authority (FCA), to apply its resolution powers to SVB. The BOE as the UK resolution authority, has chosen the resolution option of sale of business for SVB. We consider this was a swift action to preserve financial stability without using taxpayers’ money, and minimising contagion impact to the UK technology sector. In addition, we note that SVB UK is the first bank resolution that has taken place in the UK since 2011. The resolution of SVB was carried out to safeguard the depositors, including uninsured deposits and ensuring that SVB’s clients continue to have access to banking services, which has been achieved through the sale to HSBC. SVB’s clients are from today part of HSBC and can continue to operate normally without disruption.

We consider the acquisition of SVB UK by HSBC whilst very small, should reinforce the franchise of the Group in the UK in niche areas such as start-up technological companies in the UK, where we see there is significant growth potential. Given the small size of SVB and its business model, we do not expect any challenges in integration given the Group’s long track record of acquisitions. The acquisition is likely to have a positive impact on P&L though a capital gain in Q1. SVB UK’s tangible equity is expected to be around GBP 1.4 billion.

As part of the resolution, the BOE announced the transfer of SVB’s shares to HSBC, after they were reduced to zero, as well as the exercise of write-down powers and conversion of capital instruments prior to the transfer of SVB to HSBC UK. As a result of this exercise, shareholders and investors in SVB’s Additional Tier 1 instruments and Tier 2 debt will absorb losses prior to the transfer to HSBC UK. This includes investors holding GBP 322 million of perpetual subordinated notes and GBP 33 million subordinated debt notes due 2032 issued by SVB.