Morningstar DBRS Confirms the Long-Term Issuer Rating of HSBC Holdings plc at AA (low), Stable Trend

DBRS Ratings Limited (Morningstar DBRS) confirmed the Long-Term Issuer Rating of HSBC Holdings plc (HSBC or the Group) at AA (low) and its Short-Term Issuer Rating at R-1 (middle). The trends on both credit ratings are Stable. HSBC's Intrinsic Assessment (IA) remains at AA (low) while its Support Assessment is SA3.

KEY CREDIT RATING CONSIDERATIONS
The credit rating confirmations reflect HSBC's robust funding and liquidity, and its strong capital position supported by solid earnings generation that continues to benefit from the high interest-rate environments of the Group's main markets. The credit ratings also consider that HSBC's asset quality, although still sound, has shown some deterioration, largely driven by higher Stage 3 loans related to commercial real estate (CRE) exposures in Hong Kong that, in Morningstar DBRS' view, could deteriorate further and require additional provisions, potentially adding pressure to profitability.

Morningstar DBRS' assessment of HSBC's franchise continues to be supported by the Group's strength in serving customers with global trading needs. However, Morningstar DBRS considers HSBC's geographic and revenue diversification to have been reduced following the completion of business sales in the U.S., Canada, and France. As a result, HSBC is now more concentrated in Hong Kong and China where the Group has around 48% of its revenues and gross loans, which, in Morningstar DBRS' view, makes it vulnerable to economic and geopolitical developments in these geographies.

CREDIT RATING DRIVERS
Over the medium term, an upgrade of the credit ratings would require a sustained improvement in profitability while maintaining a low-risk profile and sound asset quality in all geographies.

A downgrade of the credit ratings could be driven by a significant weakening of the Group's profitability or sustained material weakening of its risk profile a, particularly in Hong Kong. The holding company rating could also be downgraded to reflect structural subordination in line with Morningstar DBRS' typical notching of holding companies, if the Group's level of diversification no longer supports the holding company rating being positioned in line with the IA.

CREDIT RATING RATIONALE
Franchise Combined Building Block (BB) Assessment: Very Strong / Strong
HSBC is one of the largest banks globally, with a strong presence in the UK and Hong Kong where it holds leading positions in retail and corporate, particularly in serving clients with global trade needs. The Group significantly simplified its businesses in recent years to refocus on its franchises in the UK and Asia, having exited the U.S. mass market in 2022, the sale of its French retail business in January 2023 and the sale of HSBC Canada in Q1 2024. In these businesses, HSBC had either very small domestic market shares or low profitability, or its business model was not leveraging the Group's franchise strength in its global trade and transaction business. Since mid-July 2024, HSBC has a new Chief Executive Officer, Georges Elhedery, following the retirement of Noel Quinn, who had been in the role since 2020. Mr. Elhedery was already involved in the management team that set the current strategy and had been the Group Financial Officer since January 2023 as well as having held various leading responsibilities within the Group since 2005, so major changes in strategic direction are not anticipated.

Earnings Combined Building Block (BB) Assessment: Strong / Good
HSBC has strong earnings generation that benefits from its well-established global retail and wholesale franchise, largely distributed across Asia, the Middle East, and the UK. In H1 2024, HSBC reported net attributable income of USD 16.6 billion, down from USD 17.0 billion in H1 2023. HSBC's profit before tax was USD 21.6 billion in H1 2024, similar to the USD 21.7 billion reported in H1 2023, as the Group's revenues continued to benefit from the higher interest-rate environment and slightly lower loan loss provisions that offset increases in operating expenses largely driven by IT costs and variable remuneration. Results also benefitted from significant positive one-offs. In H1 2024, the Group recorded a capital gain of USD 4.8 billion on the sale of its Canada business as well as USD 1.2 billion impairment from the planned sale of its Argentina business. The reported return on average tangible equity was 21.4% in H1 2024, down from 22.4% in H1 2023. Net interest income (NII), however, was down 7.4% year over year (YOY) in H1 2024, largely reflecting lower revenues as a result of the Canada and France sales and the higher cost of deposits. NII grew 3% YOY in H1 2024 in the UK Ring Fenced Bank but declined by 16% YOY in Hong Kong. The net interest margin (NIM) showed pressure and fell to 1.62% in H1 2024 from 1.70% in H1 2023. On a statutory basis, the cost to income ratio was 44% in H1 2024 compared with 42% the year before. Loan loss provisions totalled USD 1.1 billion in H1 2024, were down 21% from USD 1.3 billion in H1 2023. The reduction was largely driven by lower provisions related to CRE in China as well as some releases of provisions related to one single borrower that was classified as Stage 3 in the Global banking division.

Risk Combined Building Block (BB) Assessment: Strong / Good
The Group has a generally low-risk profile and a well-diversified loan portfolio. Geographically, the Group's gross loans are largely concentrated in Asia and the UK, with Asia representing 40% of the total exposures while Hong Kong represented 29% and the UK 33% at end-H1 2024. At the Group level, HSBC maintains low levels of impaired loans although there has been some deterioration of asset quality in H1 2024, largely driven by deterioration of its CRE portfolio in Hong Kong. At end-H1 2024, Stage 3 loans (plus POCI) totalled USD 22,744 million, up 18% from end-F2023 and up 16% from end-F2022, which is significant. As a result, the Group's Stage 3 loans represented 2.4% of total gross customer loans at amortised cost at end-H1 2024, higher than 2.1% at both end-F2023 and F2022. At end-H1 2024, Stage 2 loans reduced by 11% to USD 108.1 billion from end-F2023 to represent 11.4% of gross loans at end-H1 2024. The CRE portfolio in Hong Kong is largely skewed towards non-Chinese borrowers and this portfolio has shown a significant deterioration in the past 18 months. The Stage 3 loan ratio in the Hong Kong CRE portfolio deteriorated to 13.9% at end-H1 2024 from 7.6% at end-F2023 and 6.1% at end-F2022. Morningstar DBRS also notes that HSBC's level of provisions in this portfolio is relatively low at 8% of Stage 3 loans, although the Group has collateral on 60% of the portfolio at end-H1 2024. Morningstar DBRS will continue to monitor the Group's asset quality, particularly in the CRE portfolio in Hong Kong.

Funding and Liquidity Combined Building Block (BB) Assessment: Very Strong / Strong
HSBC has robust funding and liquidity that benefits from a large and stable customer deposit base supported by its leading position in retail and business savings in Asia and the UK where the Group had 50% and 21% of total deposits, respectively, at end-H1 2024. HSBC's loan-to-deposit ratio wasa very strong 59% at end-H1 2024, and loans were fully funded by customer deposits in all geographies. The Group's customer deposits slightly decreased by 1% YOY in H1 2024, partly reflecting the sale of the Canada business. Excluding this, customer deposits grew in Asia (excluding Hong Kong). HSBC's wholesale funding profile is well diversified by product and currency (largely USD, GBP, EUR, and JPY). The Group has manageable refinancing maturities from H2 2024 and onward. The Group also had a strong liquidity position at end-H1 2024 with high-quality liquid assets of USD 46.1 billion, representing 22% of total group assets, and a liquidity coverage ratio of 137%.

Capitalisation Combined Building Block (BB) Assessment: Strong
HSBC has a strong capital position supported by its solid earnings generation and good access to capital markets. Capital ratios also benefitted from the significant de-risking after the sale of several businesses, most of which are now completed. At end-H1 2024, HSBC's Common Equity Tier 1 (CET1) ratio was 15%, slightly up from 14.8% at end-F2023 and improved from 14.2% at end-F2022. The improvement in H1 2024 CET1 ratio included increases of 170 basis points (bps) in earnings generation and 80 bps from the sale of the Canada business, which fully offset the reductions of 60 bps from the buyback and 60 bps from foreign exchange and growth in risk-weighted assets (RWAs). At end-H1 2024, the Group had eligible capital and holding company senior debt resources equivalent to 31.4% of RWAs, above the minimum regulatory requirement of 26.4%.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://dbrs.morningstar.com/research/440955.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
Governance (G) Factors
The Bribery, Corruption, and Political Risks factor is relevant to the credit rating of HSBC but does not affect the overall credit ratings or trends assigned to the Group. This is reflected in the Risk Grid's building block and largely reflects geopolitical risks from the People's Republic of China (China) where Morningstar DBRS sees a significant Governance factor.

There were no Environmental and Social factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (13 August 2024) https://dbrs.morningstar.com/research/437781

Notes:
All figures are in USD unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (4 June 2024), https://dbrs.morningstar.com/research/433881. In addition, Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (13 August 2024) https://dbrs.morningstar.com/research/437781 in its consideration of ESG factors.

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

The sources of information used for these credit ratings include Morningstar Inc. and company documents, HSBC Annual Reports and Accounts 2023-18, HSBC Fixed Income Investor Presentation 2023 and H1 2024, HSBC Pillar 3 Disclosures 2023, HSBC Data Pack 4Q 2023 - 2Q 2024, HSBC Earnings Release 1Q-2Q 2024 and HSBC Presentation to Investors and Analysts 1Q-2Q 2024. Morningstar DBRS considers the information available to it for the purposes of providing these credit ratings to be of satisfactory quality.

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, these are unsolicited credit ratings. These credit ratings were 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

Morningstar DBRS 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. Morningstar DBRS's outlooks and credit ratings are under regular surveillance.

For further information on Morningstar DBRS 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 Morningstar DBRS 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://dbrs.morningstar.com/research/440953.

These credit ratings are endorsed by DBRS Ratings GmbH for use in the European Union.

Lead Analyst: Maria Rivas, Senior Vice President, Sector Lead - European Financial Institution Ratings
Rating Committee Chair: Elisabeth Rudman, Managing Director - Global Financial Institution Ratings
Initial Rating Date: May 16, 2001
Last Rating Date: October 11, 2023

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