DBRS Morningstar Confirms HSBC Holdings’ LT Issuer Rating at AA (low), Stable Trend

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 all ratings is Stable. The Intrinsic Assessment (IA) for HSBC remains AA (low), whilst the support assessment is SA3.

KEY CREDIT RATING CONSIDERATIONS
The confirmation of the ratings takes into account the Group’s diversified global franchise with leading banking positions in the UK and Hong Kong, its robust funding, liquidity and capital position and generally low risk profile. The confirmation of the ratings takes into account that profitability has benefitted from the rise in interest rates on the asset side in its main markets, and that asset quality remains sound despite the challenging economic environment in the UK and Hong Kong. The Group’s simplified structure means that it could be more vulnerable than before to any economic and geopolitical developments in Mainland China, Hong Kong and the UK. In addition, the challenging operating environment is expected to add some pressure on profitability, through asset quality deterioration and increased pressure on deposit funding, however, DBRS Morningstar considers the Group is well positioned to cope with these challenges given its robust capital position.

CREDIT RATING DRIVERS
Over the medium-term, the ratings could be upgraded if the Group demonstrates a sustained improvement in profitability across all geographies, whilst maintaining a low risk profile, sound asset quality and robust capitalisation.

A downgrade of the ratings would be driven by a significant weakening of the Group’s capital position or a sustained material weakening of profitability. The holding company rating could also be downgraded to reflect structural subordination in line with our typical notching of holding companies, if the Group’s level of diversification is significantly reduced.

CREDIT RATING RATIONALE

Franchise Combined Building Block (BB) Assessment: Very Strong/Strong
HSBC is one of the largest and most diversified banks globally with strong presence in the UK and Hong Kong, and leading positions in retail and corporate, particularly in serving clients with global trade needs. As part of its strategic initiatives HSBC has continued to make progress in FY 2023 strengthening its Asian franchise by growing Wealth management and Global Banking business as well as in simplifying the Group structure largely by selling businesses where the Group’s domestic market shares were small and profitability was low. After the exit of the US mass market in 2022, the Group expects to complete the sale of HSBC Canada and the French retail business in Q1 2024.

Earnings Combined Building Block (BB) Assessment: Strong / Good
HSBC’S profitability benefits from a well-established global retail and wholesale franchise largely distributed across Asia, the Middle East and the UK, which generally generate resilient earnings. More recently, the Group’s profitability has benefitted from the higher interest rate environment. HSBC reported profits before tax (PBT) of USD 21.7 billion in H1 2023, significantly higher than USD 8.8 billion in H1 2022 largely reflecting the impact of higher interest rates as well as significant positive one offs, including USD 2.1 billion related to the partial reversal of an impairment associated with French retail and a USD 1.5 billion capital gain from the acquisition of SVB UK. The return on average tangible equity (ROTE) improved to 22.4% in H1 2023, from 10.6% the year before. Net interest income (NII) grew 36.0% Year-Over-Year (YOY) in H1 2023 largely driven by the positive impact of the increase in interest rates on the asset side. However, deposit costs, albeit low, started to add some pressure to overall NII. The Group’s operating expenses reduced by 4.2% to USD 15.5 billion in H1 2023 with the reduction largely reflecting lower restructuring costs YOY. Loan loss provisions totaled USD 1.3 billion, compared to USD 1.1 billion the year before and largely related to Stage 3 charges on commercial real estate in mainland China and the UK and UK commercial banking. However, they still represent a low 6.3% of the Group’s Income Before Provisions and Taxes.

Risk Combined Building Block (BB) Assessment: Strong / Good
The Group has a generally low risk profile and a well-diversified loan portfolio. Geographically, group gross loans are largely concentrated in Asia and the UK with Asia representing 42% of the total, of which exposures in Hong Kong were 30%, and UK 32% at end-June 2023. Despite the challenging operating environment, HSBC maintains low levels of impaired loans (as calculated by DBRS Morningstar and including Stage 3 loans plus POCI loans which are loans purchased or originated credit impaired) and asset quality is sound. At end-June 2023, Stage 3 loans (impaired loans) represented 2.1% of total gross customer loans at amortised cost at end-June 2023, flat from end-2022. The Group’s exposure to CRE represented 9% of group gross loans. The Stage 3 loan ratio of Group CRE was 6% at end-H1 2023, largely driven by mainland Hong Kong exposures. and the coverage ratio against not secured, credit impaired exposures in the most vulnerable portfolio in Hong Kong was 68% at end-H1 2023.

Funding and Liquidity Combined Building Block (BB) Assessment: Very Strong / Strong
HSBC’s funding and liquidity benefits from its leading position in retail and business savings in Asia and the UK, where the Group had 49% and 22% of total deposits at end-H1 2023 respectively. The Group’s loan-to-deposit ratio was a low 60% at that date with loans being funded by customer deposits in all geographies. The Group's customer deposits increased by USD 25.5 billion by end-June 2023 from end-2022, largely explained by the reclassification of deposits with the Group’s French retail business which were previously classified as held for sale, as well as an increase in deposits of USD 7 billion from the acquisition of SVB UK. However, excluding these, total customer deposits slightly declined in the first half of 2023 driven by reductions across all business lines, particularly reflecting corporate/SMEs needs to use their excess liquidity. HSBC has a very strong liquidity position with High Quality Liquid Assets of USD 631.2 billion at end-H1 2023 and a Liquidity Coverage Ratio of 132% at end-June 2023.

Capitalisation Combined Building Block (BB) Assessment: Strong
HSBC’s capital position is strong, supported by its improved earnings generation, progress in de-risking and good access to capital markets. At end-June 2023, HSBC’s Common Equity Tier 1 (CET1) ratio was 14.7%, up 50 basis points from 14.2% at end-FY22 and well above the minimum regulatory ratio of 11.2% from July 2023. The improvement was supported by improved internal capital generation on the back of higher interest rates, although it also benefitted from the reversal of an impairment relating to the planned sale of the French retail business and the gain on the acquisition of SVB UK. The Basel 3 end-point leverage ratio was strong at 5.8% at end-June 2023, well above the minimum requirement of 4.15%. At end-H1 2023, the Group has eligible capital and HoldCo senior debt resources equivalent to 31.2% of risk weighted assets (RWAs), above the minimum regulatory requirement of 26.4%.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/421734.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

There were no Environmental, Social or Governance factor(s) that had a significant or relevant effect on the credit analysis.

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 (4 July 2023) - https://www.dbrsmorningstar.com/research/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings

Notes:
All figures are in USD unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (22 June 2023) https://www.dbrsmorningstar.com/research/415978/global-methodology-for-rating-banks-and-banking-organisations. In addition DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://www.dbrsmorningstar.com/research/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies

The sources of information used for this credit rating include Morningstar Inc. and Company Documents, HSBC Annual Reports and Accounts 2022-18, HSBC Fixed Income Investor Presentation 2022 and H1 2023, HSBC Pillar 3 Disclosures 2022, HSBC Data Pack 4Q 2022 – 2Q 2023, HSBC Earnings Release 1Q-2Q 2023, HSBC Presentation to Investors and Analysts 1Q-2Q 2023, DBRS Morningstar considers the information available to it for the purposes of providing this credit 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 credit rating process, and it does not and cannot independently verify that information in every instance.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar's outlooks and credit 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: https://registers.esma.europa.eu/cerep-publication. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key credit rating assumptions can be found at https://www.dbrsmorningstar.com/research/421744.

This credit 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, Head of Global FIG
Initial Rating Date: 16 May 2001
Last Rating Date: 13 December 2022

DBRS Ratings Limited
1 Oliver’s Yard 55-71 City Road, 2nd Floor, London ECY 1HQ United Kingdom
Tel. +44 (0) 20 7855 6600
Registered and incorporated under the laws of England and Wales: Company No. 7139960

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