Fitch Ratings-New York-March 02: Fitch Ratings has assigned a Long-Term Issuer Default Rating (IDR) of 'AA-', Short-Term IDR of 'F1+' and Support Rating of '1' to HSBC Bank Canada (HBCA). T
he Rating Outlook is Stable.
Fitch has also assigned HBCA a Viability Rating (VR) of 'a+'. A full list of rating actions is at the end of this release.
HBCA's Long- and Short-Term IDRs are linked to those of its ultimate parent company, HSBC Holdings (LON:HSBA) plc (HSBC). For additional information, please see the press release "Fitch Affirms HSBC at 'AA-'; Outlook Stable", dated Sept. 28, 2017. KEY RATING DRIVERS IDRS, SENIOR DEBTHBCA's Long- and Short-term IDR is equalized with HSBC's Long- and Short-Term IDR at 'AA-/F1+', reflecting Fitch's strong view of institutional support, both in terms of propensity and ability should the need arise. HBCA's IDRs benefit from the "higher of" its supported ratings relative to its VR of 'a+'. SUPPORT RATINGFitch has assigned a Support Rating of '1' to HBCA reflecting the agency's opinion that HBCA is a core operating entity of the HSBC Group, and as such, believes institutional support from its ultimate parent is highly likely. HSBC publicly designates Canada as a priority market for the group. Canada's geographical location facilitates significant international trade volume both in the NAFTA corridor as well as with China. Fitch believes this feature closely aligns with HSBC's group-wide strategy, which is focused on international connectivity across major trade routes as it looks to serve its customers globally. HBCA shares the group HSBC brand. In Fitch's opinion, a default by HBCA would pose significant reputational risk to HSBC and would likely be damaging to the group franchise. This further strengthens our positive view of HSBC's propensity to provide both ordinary and extraordinary support to HBCA should the need arise.While HBCA is a strong performer from an earnings standpoint and mostly self-funded, HBCA benefits from operational integration with HSBC. Fitch is of the view that this integration is a significant driver of HBCA's domestic franchise value in Canada and therefore this feature somewhat diminishes the value of the franchise outside of the HSBC group. In turn, we believe this reduces the potential for a divestment of HBCA by HSBC.Fitch believes HBCA is also an important source of outbound revenue generation for the group. The significant presence of multinationals and global-minded individuals in Canada with international banking needs is a feature that further strengthens the importance of this market to HSBC. Finally, HBCA has less than 5% of HSBC's total assets and therefore, Fitch considers HSBC's ability to support HBCA to be high. VRHBCA's 'a+' VR reflects its established franchise, experienced management team and solid funding and liquidity. Somewhat offsetting these strengths is HBCA's relatively large exposure to commercial lending when compared to its Canadian banking peers that results in a higher overall asset density. This higher commercial lending exposure was also the driver of greater earnings variability and asset quality performance over the last two years. Fitch believes HBCA has a competitive advantage in its growing customer segment comprising individuals with cross-border banking needs and multinational companies domiciled in Canada. HSBC has the largest Canadian presence of the international banks and we believe the bank's international reach and breadth of offerings surpasses the large domestic banks, making it a strong competitor in this niche. Among the foreign banks and foreign bank branches operating in Canada, HBCA has a dominant market position with 48% share of total deposits.Fitch views HBCA's revenue diversity as a ratings strength, with only 60% of total revenues being derived from net interest income. Relative to domestic banking peers, HBCA has relatively low exposure to more volatile capital markets revenue. The bank is also geographically diversified with its largest exposure to a single province accounting for only 28% of the overall corporate credit exposure, a further rating strength. HBCA's asset quality remains weaker than its peers. Fitch attributes this to the bank's higher proportion of commercial lending exposure that is not sheltered from impairment to the same extent as insured and low-LTV uninsured residential mortgages that dominate the loan portfolios of the domestic banks. HBCA has managed its total drawn energy exposure to 56% of common equity tier 1 (CET 1) capital, down from 68% as of fourth quarter 2016 (4Q16). However, this ratio remains higher than that of its peers and leaves the bank vulnerable to further energy market volatility. Fitch also views HBCA's significant exposure to the Vancouver commercial real estate development cautiously given significant property price appreciation experienced in that market in recent years.Approximately 91% of HBCA's residential mortgage portfolio is composed of uninsured mortgages as of 3Q17. This is high compared to domestic banks, which typically run in the 40%-50% range. While Fitch believes these mortgages are prudently underwritten at comparatively low LTVs, Fitch views the continued growth of this portfolio cautiously, especially given that much of the growth occurred in the relatively heated Vancouver and Toronto markets. Fitch notes positively that HBCA has reported significant asset quality improvement over the last year, as the bank has successfully weathered challenging economic conditions associated with weak commodity and energy prices. At 3Q17, gross impaired loans (GILs) to gross loans stood at 0.9% compared to 1.41% at the end of 2016. This improvement did not come at the expense of elevated chargeoffs in 2017. While this is a significant improvement over the last year, the impaired loan ratio remains high relative to domestic banking peers.
With a Fitch Core Capital (FCC) ratio of 10.8% as of 3Q17, Fitch views the bank's level of capital as commensurate with its risk appetite and supports the assigned rating level. While the FCC ratio is currently modestly lower than that of its peers, HBCA's ownership structure affords it more flexibility with respect to dividends and distributions to its shareholder, which Fitch considers a relative rating strength. Finally, HBCA maintains a strong funding profile that is less reliant on wholesale funding than its peers and is a rating strength. With a loan/deposit ratio of 89% and a liquidity coverage ratio (LCR) of 137% as of 3Q17, HBCA has one of the strongest liquidity profiles in Canada. SUBORDINATED DEBTHBCA's subordinated debt is rated one notch down from its IDR, at 'A+'. While hybrid securities are typically notched from the bank's VR, Fitch believes that the high level of institutional support from HSBC will neutralize the non-performance risk of HBCA's subordinated debt. Therefore, the subordinated debt rating is notched once from HBCA's IDR, with the notching reflecting only relative loss severity.RATING SENSITIVITIESIDRS AND SENIOR DEBTHBCA's Long- and Short-Term IDRs are linked to HSBC's IDRs. As such, the IDRs will likely be affected by any changes to the ratings of HSBC itself. In addition and as discussed below, any changes to our view of support could also prompt a review of the ratings.VR Fitch views HBCA's IDRs as solidly situated over the Outlook horizon. Over time, should HBCA diversify the business into a more balanced mix of retail and commercial exposure, all while maintaining good asset quality, positive ratings momentum may develop.Fitch notes that HBCA's borrowing base is somewhat reliant on trade activity in the NAFTA region. Adverse changes to the agreement such that it triggers financial distress for HBCA's borrowers may prompt a review of the ratings.Fitch also notes that HBCA has significant exposure to the Vancouver housing market, both in its CRE portfolio and in its residential mortgage portfolio. Accordingly, Fitch views HBCA's VR as being vulnerable to deterioration in local economic conditions, the financial health of the Vancouver consumer and the Vancouver housing market. Fitch would review the ratings should any of the aforementioned scenarios materialize.
SUPPORT RATING HBCA's Support Ratings reflect Fitch's views on the ability and propensity of HSBC to support HBCA in a time of need.Although not currently anticipated, any changes to HBCA's strategic importance indicated, for example, in ownership, level of integration, or their role under HSBC would prompt a review of the ratings.SUBORDINATED DEBT AND OTHER HYBRID SECURITIESHBCAs subordinated debt ratings are notched off its IDR. Accordingly, the ratings are sensitive to changes in HBCA's IDR as well as any change in Fitch's view of support.Fitch has assigned the following ratings: HSBC Bank Canada--Long-Term IDR at 'AA-'; Outlook Stable; --Short-Term IDR at 'F1+'; --Viability Rating at 'a+'; --Support Rating at '1'; --Senior debt at 'AA-'; --Subordinated debt at 'A+'.Contact: Primary AnalystJohannes Moller Associate Director+1-646-582-4954Fitch Ratings, Inc.33 Whitehall StreetNew York, NY 10004Secondary AnalystDoriana GamboaSenior Director+1-212-908-0865 Committee ChairpersonChristopher WolfeManaging Director+1-212-908-0771Media Relations: Hannah James, New York, Tel: + 1 646 582 4947, Email: hannah.james@fitchratings.com; Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com.Additional information is available on www.fitchratings.comApplicable Criteria Exposure Draft: Bank Rating Criteria (pub. 12 Dec 2017)https://www.fitchratings.com/site/re/904081Additional Disclosures Dodd-Frank Rating Information Disclosure Form https://www.fitchratings.com/site/dodd-frank-disclosure/10022066Solicitation Status https://www.fitchratings.com/site/pr/10022066#solicitationEndorsement Policy https://www.fitchratings.com/regulatoryALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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