Fitch Ratings has today affirmed The Hong Kong and Shanghai Banking Corporation Limited's (HKSB) Long-Term Issuer Default Rating (IDR) at 'AA-' with a Stable Outlook and its Viability Rating (VR) at 'aa-'. A full list of rating actions is available at the end of this commentary.
The rating affirmations have been taken in conjunction with Fitch's periodic review of HKSB's parent HSBC Holdings plc as part of the Global Trading and Universal Banks (GTUBs) peer group. HSBC and its other material subsidiaries HSBC Bank plc and HSBC USA, Inc. will be covered in separate rating action commentaries.
HKSB's IDRs, VR and senior debt ratings have been affirmed, and the Outlook remains Stable because Fitch expects HKSB, a 100% indirectly owned subsidiary of HSBC, to maintain its strong credit profile despite the weaker Hong Kong operating environment. This is because of its moderate risk profile, regionally diverse operations and operational benefits from the integration with HSBC.
KEY RATING DRIVERS
IDRS, VR AND SENIOR DEBT
HKSB's IDRs and VR reflect the competitive advantage it enjoys as part of HSBC, which is manifested in the bank's market leadership in Hong Kong, sound profitability, solid capitalisation, and robust funding and liquidity profiles. HKSB is HSBC's regional bank for Asia-Pacific and its strong company profile has a high influence on the ratings.
HSBC's global network significantly supports HKSB's profit as it generates business referrals from outside of Asia and Asia-Pacific customers seek financial services beyond the region. Other benefits from being part of HSBC include management oversight with globally operated business lines and tightly integrated support functions.
We expect that organic China-related growth on-shore and through cross-border activities will continue to drive HKSB's risk profile, in particular as HSBC enhances its presence in southern China and grows its unsecured personal lending through credit cards across China. HKSB's China-related exposure stood at USD149bn at end-1H16, or 2.4x of HKSB's Fitch Core Capital (FCC) (end-2015: USD158bn or 2.8x of FCC). The exposure includes the China activities of HKSB's 62%-owned subsidiary, Hang Seng Bank Limited (A+/Stable/a+), which comprise 24% of HKSB's total China exposure as per regulatory disclosure.
We currently view the bank's risk appetite as low, with the nature of its existing exposure unlikely to yield significant losses even as China's growth further slows.
The ratings reflect Fitch's view that HKSB will continue to generate reliable earnings, a significant portion of which it will upstream to the parent in line with HSBC's group policies.
HKSB and its subsidiaries are well capitalised. Its consolidated FCC ratio was a high 18.7% at end-1H16, but this level may overstate its capital strength as capital may not be fully fungible on a timely basis and as property revaluation reserves may be volatile. Fitch estimates that about half of the capital sits on its subsidiaries' balance sheets while HKSB's foreign branches rely on the Hong Kong balance sheet. The difference from the consolidated end-point CET1 ratio of 14.8% is mainly regulatory deductions for property revaluation reserves (2.1% of risk-weighted assets) and a general loss reserve (1% of RWA). HKSB's Basel III leverage ratio on end-point Tier 1 capital remained sound at 5.7% at end-1H16 (end-2015: 5.5%).
The Stable Outlook captures Fitch's expectation that HKSB will maintain sound underwriting standards even if it accelerates business growth in the Asia-Pacific region. It also reflects our expectation that risks from property-related lending and single-borrower concentrations will remained contained. Furthermore, it reflects the Stable Outlook on HSBC as HSBC's IDR provides a floor to HKSB's IDR.
HKSB's senior debt is rated at the same level as its Long-Term IDR as they constitute unsecured and unsubordinated obligations of the bank.
SUPPORT RATING
We have affirmed HKSB's SR at '1' to reflect our opinion that there is an extremely high likelihood of extraordinary support from its parent HSBC should this be required. The SR reflects Fitch's view that HSBC has a very strong propensity to support HKSB and would be able to do so, as indicated by its rating. We believe that HSBC would have the capacity to source the amount of any likely solvency support that would be required either from other parts of the organisation or by issuing new capital. Our view that the parent's propensity to extend support is very strong is mainly based on HKSB's integral role in the group, the huge implications for the wider group should the bank default and our view that the disposal of HKSB is very hard to conceive.
RATING SENSITIVITIES
IDRS, VR AND SENIOR DEBT
Fitch's assessment of the operating environment constrains an upgrade of the VR, as it is rare for a VR to be assigned significantly above the operating environment assessment, however strong its financial profile otherwise is. Deterioration in the operating environment is likely to manifest itself in a weaker financial position and lower prospects for growth.
Fitch would downgrade HKSB's VR if we saw pressure on its financial profile, in particular from concentration risk.
A material increase in risk appetite would be negative for the ratings, which could be indicated through HSBC's rapid expansion in China, weaker quality of such new exposure and their size relative to the bank's capitalisation and earnings.
A downgrade of HKSB's VR could lead to a downgrade of its IDR and senior debt ratings if, at the same time, HSBC's VR is also downgraded. This is because institutional support from its parent HSBC provides a floor at the same rating level due to HKSB's core role. While a downgrade of HKSB could trigger a downgrade of HSBC given the entities' relative sizes, there is no automatic link as HSBC's wider diversification and financial flexibility are mitigants. The ability of HSBC to provide support is indicated by its VR.
Diminishing cohesiveness between HKSB and its subsidiaries as well as between HKSB and HSBC could be other considerations for a negative rating action.
We consider it unlikely that HKSB's IDR would in the future benefit from the build-up of a sustainable junior debt buffer as the VR already takes operational support from HSBC into account. While we expect HKSB's senior creditors will, over time, benefit from loss-absorbing debt, our ratings already reflect strong integration with HSBC. We would likely not rate HKSB any higher even if those buffers were provided in the form of equity.
The senior debt ratings will move in tandem with the Long-Term IDR.
SUPPORT RATING
The SR is sensitive to significant changes to the parent's ability to support HKSB, which could be indicated by a change to the parent's rating or could relate to a change in the size of HKSB relative to HSBC. It is also sensitive to any negative changes to Fitch's view of the parent's propensity to provide support.
The rating actions are as follows:
The Hongkong and Shanghai Banking Corporation Limited
Long-Term IDR affirmed at 'AA-'; Outlook Stable
Short-Term IDR affirmed at 'F1+'
Viability Rating affirmed at 'aa-'
Support rating affirmed at '1'
Senior unsecured debt affirmed at 'AA-'
Additional information is available on www.fitchratings.com
Applicable Criteria
Global Bank Rating Criteria (pub. 25 Nov 2016)
https://www.fitchratings.com/site/re/891051
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