OREANDA-NEWS. Fitch Ratings has today affirmed HSBC Holdings plc's (HSBC) 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.

HSBC's main subsidiaries HSBC Bank plc, The Hongkong and Shanghai Banking Corporation Limited (HKSB) and HSBC USA Inc are covered in separate rating action comments.

The rating actions have been taken in conjunction with Fitch's periodic review of the Global Trading and Universal Banks (GTUB), which comprises 12 large and globally active banking groups. Fitch's outlook for the GTUBs is stable as we expect the stable outlook for the groups' commercial banking and wealth and asset management businesses in 2016 to mitigate pressure on earnings from capital markets activities, particularly in fixed income trading.

As globally active universal banks, the 12 GTUBs are among the most affected by evolving regulation, which is bringing capital and resource constraints to some businesses. This means that business models are being adjusted. Specific changes and their timing vary by bank. In the medium term, we believe that the GTUBs with the strongest franchises in their core businesses, sound business models and clear strategies are best placed in this environment, and these company profiles are an important rating factor for many of the GTUBs.


HSBC's company profile has a high influence on its IDRs and VR. Our assessment is underpinned by the group's leading franchise in multiple business segments (retail, commercial, global banking and markets), with very strong presences in its key domestic markets Hong Kong and the United Kingdom and a strong focus on serving its clients' international banking needs with a network that spans over 70 countries.

The ratings also reflect the exceptionally strong and stable funding and liquidity profiles of its major banking subsidiaries. Strong capital market access provides additional flexibility to the holding company, which complements HSBC's ability to distribute funding and liquidity from solid local balance sheets in material markets across the group.

The ratings also capture HSBC's low risk appetite, solid capitalisation and reliable earnings that are only moderately variable over economic cycles.

We expect that HSBC's refocusing of its business model on global trade and investment flows will continue to provide the group with a competitive advantage over peers, which in turn will benefit the intrinsic strength of its key subsidiaries. Management's stringent implementation of the group's strategic repositioning, which started in May 2011 and was updated this year, has by now yielded meaningful improvements in collaboration, client coverage and governance. These advancements support our view of management's abilities, as we believe they will improve HSBC's ability to reach its targets.

Asset quality is sound and benefits from manageable single-name concentrations and geographical diversification. Fitch expects that the group's asset quality will remain resilient as further progress on winding down legacy assets and restructuring of underperforming retail activities, and overall better controls should mitigate the likely moderate loan deterioration resulting from a slowing Chinese economy.

HSBC's strong access to retail deposits in Hong Kong and the UK is supported by the capacity to issue securities in various markets. Centrally and locally held liquidity portfolios, mostly in the form of government bonds, compare well with peers', and the group's limited wholesale funding is well spread. The group's reliable ability to generate earnings, which it can allocate within the group, supports our capital assessment. Its sound consolidated Fitch-core capital (FCC) ratio was 12.5% at end-September 2015.

The Stable Outlook captures Fitch's expectation that HSBC will continue to maintain a conservative appetite for risk and low overall risk profile.

Holding company double leverage does not negatively affect HSBC's ratings and Fitch considers holding company liquidity as being prudently managed.

The senior debt is rated at the same level as HSBC's Long-Term IDR as they constitute unsecured and unsubordinated obligations.

HSBC's Support Rating of '5' and Support Rating Floor of 'No Floor' reflect Fitch's view that support for a holding company is unlikely.

Subordinated debt and other hybrid capital securities issued by HSBC are notched down from its VR to reflect varying degrees of loss severity (up to two notches) and incremental non-performance risk (up to three notches). As such, Fitch applied one notch from the VR to HSBC's Tier 2 securities (for loss severity), three notches from the VR to HSBC's Upper Tier 2 securities (one for loss severity and two for incremental non-performance risk), four notches to certain 'legacy' Tier 1 securities (two for loss severity and two for incremental non-performance risk), and five notches where HSBC has full discretion over coupon omission, including its Additional Tier 1 (AT1) securities (two for loss severity and three for incremental non-performance risk).


HSBC Holdings' VR and IDRs could be downgraded if the group's financial flexibility declines. This may be the result of weaker access to capital markets or if a substantial amount of excess capital is trapped in subsidiaries and thus not available for redistribution within the group. Fitch assumes that the bulk of HSBC's excess resources have been and will continue to be up-streamed through the group of intermediate holding companies. The exception is the US where HSBC has been expanding its activities to make use of excess capital.

The ratings are sensitive to HSBC's financial performance, in particular the ability to generate fungible capital and the ability of HSBC's subsidiaries to pay dividends up to the holding company. Material damage to HSBC's reputation would be negative as a leading franchise is essential for offering international connectivity.

Downside risk could stem from greater-than-cyclical asset deterioration or more aggressive risk- taking, for example from outsized growth in any particular geography. Steadily increasing China risk is not a downward trigger in itself, unless concentration risk or the portfolio's expected changing composition becomes misaligned with capital and returns. HSBC's China risk increased slightly faster than its FCC in the six months to end-1H15 to USD173bn, or 1.2x FCC (2014: USD161bn, 1.1x); or up to 1.3x FCC if on-shore claims to Chinese banks in local currency were included. Fitch's calculation is based on HKSB's regulatory disclosure.

Any restrictions on HSBC's ability to conduct businesses, which could be the result of the US authorities' decision to revoke the bank's deferred prosecution agreement, would put pressure on the bank's ratings.

An upgrade of HSBC's ratings is unlikely given Fitch's assessment of the operating environment.

Fitch could notch the holding company's IDRs and VR down from its assessment of the consolidated group's risk profile if, for example, double leverage significantly exceeds 120% over a prolonged period of time or if holding company liquidity or liquidity management were to become less prudent.

The senior debt ratings will likely move in tandem with the Long-Term IDR.

Changes to HSBC's SR and SRF are not foreseen as Fitch does not expect external support being made available to the group's top holding company.

The issue ratings are primarily sensitive to changes in HSBC's VR. HSBC's AT1 securities are also sensitive to a change in Fitch's assessment of the probability of their non-performance relative to the risk captured in HSBC's VR. This could arise due to a change in Fitch's assessment of HSBC's conservative approach to capital management, reducing HSBC's flexibility to service the securities, or an unexpected shift in regulatory buffer requirements, for example.

The rating actions are as follows:

HSBC Holdings plc
Long-Term IDR affirmed at 'AA-'; Outlook Stable
Short-Term IDR and debt affirmed at 'F1+'
Viability Rating affirmed at 'aa-'
Support Rating affirmed at '5'
Support Rating Floor affirmed at 'No Floor'
Senior unsecured debt affirmed at 'AA-'
Lower tier 2 subordinated debt affirmed at 'A+'
Contingent convertible securities (US404280AS86, US404280AR04, XS1111123987, US404280AT69, XS1298431104) affirmed at 'BBB'
Preference shares (US4042806046) affirmed at 'BBB'
Other preference shares and capital securities (USG4637HAB45, US40427LAB09, US4042807036, US4042808026, XS0188853526) affirmed at 'BBB+'