Fitch Ratings-Toronto-June 07:
Fitch Ratings maintains HSBC Bank Canada's (HBCA) Long-Term Issuer Default Rating (IDR) on Rating Watch Negative.
Fitch has also affirmed the banks' other ratings. A complete list of rating actions follows at the end of this release.
The ratings remain on Rating Watch Negative where they were originally placed on March 6, 2019 following similar action on ultimate parent company, HSBC Holdings (LON:HSBA) plc (HSBC). This rating action follows Fitch's rating action on HSBC.
HBCA's Long- and Short-Term IDRs are linked to those of HSBC.
For additional information, please see the press release "Fitch Affirms HSBC's VR at 'aa-'; Long-Term IDR Remains on RWN", dated June 6, 2019.
KEY RATING DRIVERS IDRS AND SENIOR DEBT
HBCA's Long- and Short-term Issuer Default Ratings (IDRs) are 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 RATING
HBCA's Support Rating of '1' reflects Fitch's opinion that the company 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 views this integration as 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's total assets make up only approximately 6% of HSBC's total assets, and therefore Fitch considers HSBC's ability to support HBCA to be high.
VIABILITY RATING (VR)
Since assigning the VR in March 2018, HBCA has performed in line with our expectations. HBCA'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.
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 as per data from OSFI.
Fitch views HBCA's revenue diversity as a ratings strength, with around 57% 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, accounting for only 15% of total revenues. The bank's wholesale loan portfolio is also geographically diversified with its largest exposures to Ontario (33%) and its home province of British Columbia (32%). HBCA's asset quality has historically been weaker than its peers, but has improved over the last year.
Fitch attributes the bank's historically higher relative impairments to the bank's higher proportion of commercial lending exposure that is not sheltered to the same extent as insured and low-LTV uninsured residential mortgages that dominate the loan portfolios of the domestic banks. HBCA has managed down its total drawn energy exposure to approximately 40% of common equity tier 1 (CET 1) capital as of Q1 2019, down from 68% for Q4 2016.
Fitch also views HBCA's significant exposure to the Vancouver commercial real estate development cautiously given significant property price appreciation experienced in that market and more recent pricing pressures. Approximately 90% of HBCA's residential mortgage portfolio is composed of uninsured mortgages as of Q1 2019. This is high compared to domestic banks, which typically run in the 40%-50% range. Fitch however believes these mortgages are prudently underwritten at comparatively low LTVs.
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 Q1 2019, gross impaired loans (GILs) to gross loans stood at 0.42% compared to 1.41% at the end of 2016. This improvement did not come at the expense of elevated charge-offs and is similar to those of its domestic banking peers. With a Fitch Core Capital (FCC) ratio of 11.6% as of Q1 2019, Fitch views the bank's level of capital as commensurate with its risk appetite and supports the assigned rating level.
Moreover, 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 94.8% and a liquidity coverage ratio (LCR) of 138% as of Q1 2019, HBCA has one of the strongest liquidity profiles in Canada.
SUBORDINATED DEBT
HBCA'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 SENSITIVITIES IDRS AND SENIOR DEBT
HBCA'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. HSBC's Long-Term IDR is primarily sensitive to the outcome of the Brexit negotiations. The Rating Watch Negative on the Long-Term IDRs reflects the heightened probability that Fitch will revise the Outlook on HSBC's Long-Term IDRs to Negative in the event of a disruptive 'no-deal' Brexit.
The Negative Outlook would reflect risks to HSBC's ability to implement the group's strategy in a more difficult operating environment, and likely pressure on earnings, asset quality and funding profiles, which could put pressure on ratings if these negative trends continue for an extended period of time. In addition and as discussed below, any changes to our view of support could also prompt a review of the ratings.
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. 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. 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. HBCA also 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. In addition, given the Financial Action Task Force's identified weaknesses in Canada's anti-money laundering / anti-terrorism financing (AML/ATF) regime, noting that it lacks disclosure requirements critical to ensuring financial institutions' timely and accurate access to customer information, ratings would be sensitive to material and systemic conduct risk findings, particularly as they relate to AML/ATF or sanctions compliance. While this is not currently expected, material findings that suggest broad-based weaknesses or failings in the risk management infrastructure could pressure HBCA's ratings.
SUBORDINATED DEBT
HBCAs 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 maintains the following ratings on Rating Watch Negative: HSBC Bank Canada
--Long-term IDR 'AA-' Fitch affirms the following ratings: HSBC Bank Canada --Short-term IDR 'F1+';
--Viability Rating 'a+'; --Support Rating '1';
--Senior debt 'AA-'; --Subordinated debt 'A+'.
Contact: Primary Analyst Foster Cheng Director +1-416-644-1572 Fitch Ratings, Inc. 120 Adelaide St. West, Suite 2500 Toronto, Ontario M5H 1T1 Secondary Analyst Johannes Moller Director +1-646-582-4954 Committee Chairperson Christopher Wolfe Managing Director +1-212-908-0771 Media Relations: Hannah James, New York, Tel: +1 646 582 4947, Email: hannah.james@thefitchgroup.com; Sandro Scenga, New York, Tel: +1 212 908 0278, Email: sandro.scenga@thefitchgroup.com. Additional information is available on www.fitchratings.com Applicable Criteria Bank Rating Criteria (pub. 12 Oct 2018) https://www.fitchratings.com/site/re/10044408 Short-Term Ratings Criteria (pub. 02 May 2019) https://www.fitchratings.com/site/re/10073011 Additional Disclosures Dodd-Frank Rating Information Disclosure Form https://www.fitchratings.com/site/dodd-frank-disclosure/10078420 Solicitation Status https://www.fitchratings.com/site/pr/10078420#solicitation Endorsement Policy https://www.fitchratings.com/regulatory
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE AT HTTPS://WWW.FITCHRATINGS.COM/SITE/REGULATORY. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2019 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435.
Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001 Fitch Ratings, Inc. is registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (the "NRSRO"). While certain of the NRSRO's credit rating subsidiaries are listed on Item 3 of Form NRSRO and as such are authorized to issue credit ratings on behalf of the NRSRO (see https://www.fitchratings.com/site/regulatory), other credit rating subsidiaries are not listed on Form NRSRO (the "non-NRSROs") and therefore credit ratings issued by those subsidiaries are not issued on behalf of the NRSRO. However, non-NRSRO personnel may participate in determining credit ratings issued by or on behalf of the NRSRO.