DBRS Morningstar Confirms HSBC Holdings Long-Term 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 RATING CONSIDERATIONS

The confirmation of the ratings takes into account the Group’s diversified global franchise with leading retail and business positions in its home markets in the UK and Hong Kong, its robust funding and liquidity and sound asset quality and capitalisation. However, the ratings continue to reflect that the Group’s profitability remains at the lower end of the peer Group.

The ratings also take into account that the Group continues to make progress simplifying the group structure by exiting markets where the Group’s domestic market shares were small and profitability was low, which has been largely achieved through the announcement of various business sales, including the US mass market business, the French retail business, and more recently HSBC Canada. Post transactions, HSBC will be largely concentrated in Mainland China, Hong Kong and the UK with lower revenues and geographic diversification, making the Group more vulnerable than before to any economic and geopolitical developments in those geographies.

RATING DRIVERS

The ratings would be upgraded if the Group demonstrates consistent track record of improved profitability across all geographies whilst maintaining sound cost control, sound asset quality and robust capitalisation.

A downgrade of the ratings would arise if the Group's asset quality materially deteriorates in its main markets of the United Kingdom, China and Hong Kong, negatively impacting capital. 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.

RATING RATIONALE

Franchise Combined Building Block (BB) Assessment: Very Strong/Strong
HSBC is one of the largest and most diversified banks globally. The Group has a strong presence in the UK and Hong Kong, and has competitive advantages to serve retail and business clients with international needs, particularly related to global trade. As part of its Asian franchise refocus, the Group announced a number of significant businesses disposals, including the exit of the US mass market completed in Q1 2022, the sale of the French retail business and the sale of HSBC Canada, both of which are expected to be completed after regulatory approvals by end-2023.

Earnings Combined Building Block (BB) Assessment: Good
HSBC has consistently generated robust earnings, supported by its well-established retail and wholesale franchises across Asia, the Middle East and the UK. HSBC reported profit before tax (PBT) of USD 12.3 billion in 9M 2022, significantly lower than USD 16.2 billion in 9M 2021. The decline in PBT was largely driven by lower revenues year-on-year (YoY) as a result of a USD 2.4 billion loss due to the classification of the French retail businesses as held for sale, negative FX movements and the adverse impact of insurance revenues from negative market performance. The Group’s adjusted Profit Before Taxes (PBT), however, was USD 17.2 billion in 9M 2022, up from USD 17.0 billion in 9M 2021, largely supported by strong growth of net interest income (NII, up 16.9% YoY) on the back of rising interest rates. NII growth offset lower fees and commissions, driven by lower client activity and weaker revenues from advisory and underwriting, and much higher loan loss provisions YoY after a significant reversal the year before. Operating expenses on an adjusted basis (which largely excludes restructuring costs) remained contained, despite inflationary pressures. The strong growth in revenues resulted in an improvement in the underlying cost to income ratio to 57% in 9M 2022 down from 62% the year before. The return on average tangible equity (ROTE) was 9.2% in 9M 2022, which DBRS Morningstar considers is at the lower end of its global peer group.

Risk Combined Building Block (BB) Assessment: Strong
The Group has a conservative risk profile that generally benefits from geographical diversification. HSBC’s gross lending portfolio to customers and banks is largely concentrated in Asia (51% of total, including 31% of total to Hong Kong) and the UK (26% of the total) at end-September 2022 (excluding the French retail business). HSBC’s asset quality is robust, supported by generally 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). At end-September 2022, impaired loans totalled USD 17,391 million or 1.8% of total gross loans stable from end-FY21, although still above end-2019. The deterioration in the operating environment, first driven by the pandemic and followed by supply chain issues, inflationary pressures, the Russia- Ukraine conflict, as well as a weakening commercial real estate market in China and Hong Kong have contributed to an increase in the share of Stage 2 loans (classified as those that have experienced a significant increase of credit risk but are not defaulted). Total Stage 2 loans accounted for a significant 14% of gross loans at end-September 2022.

Funding and Liquidity Combined Building Block (BB) Assessment: Very Strong/Strong
HSBC’s funding and liquidity position is very strong reflecting its leading position in retail and business savings in Asia and the UK. The Group’s loan-to-deposit ratio was a low 62% at end-September 2022, and loans were funded by customer deposits in all geographies. The Group's customer deposits decreased by 8% at end-September 2022 from end-2021, largely explained by the USD 21 billion of French business customer deposits classified as held for sale and lower deposits in Hong Kong, largely reflecting movements to the Wealth Management Businesses. Customer deposits in Hong Kong represented 32% of the Group’s overall customer deposits at end-September 2022, followed by the UK at 20% of the total. HSBC has a very strong liquidity position with High Quality Liquid Assets of USD 605.5 billion and a Liquidity Coverage Ratio of 127% at end-September 2022.

Capitalisation Combined Building Block (BB) Assessment: Strong/Good
HSBC has generally reported strong capital levels largely supported by it solid internal capital generation. At end-September 2022, HSBC’s Common Equity Tier 1 (CET1) ratio was 13.4%, down from15.8% at end-2021 and 15.9% at end-2020. The significant decline in the CET1 ratio was largely explained by a negative impact from the UK’s implementation of new regulatory requirements, a USD 5.8 billion post-tax decline in the value of some securities at fair value and the classification of the French business as held for sale. The Basel 3 end-point leverage ratio was strong at 5.4% at end-September 2022. At end-H1 2022, the Group’s eligible capital and HoldCo senior debt resources were equivalent to 28.7% of RWAs, comfortably meeting the 2021 minimum regulatory requirement of 26.0%, representing the indicative sum of the Group’s local subsidiaries MREL/TLAC requirements.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/407304

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

There were no Environmental/ Social/ Governance factors 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 at https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings. (17 May 2022)

Notes:

All figures are in USD unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations https://www.dbrsmorningstar.com/research/398692/global-methodology-for-rating-banks-and-banking-organisations (23 June 2022). 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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (17 May 2022) in its consideration of ESG factors.

The sources of information used for this rating include Morningstar Inc. and Company Documents, HSBC Annual Reports and Accounts 2021, HSBC Fixed Income Investor Presentation 2021, HSBC Pillar 3 Disclosures 2021, HSBC Data Pack 4Q 2021 – 3Q 2022, HSBC Earnings Release 1Q-3Q 2022, HSBC Presentation to Investors and Analysts 1Q-3Q 2022. DBRS Morningstar considers the information available to it for the purposes of providing this 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 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 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://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/407305

This 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 2021

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