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HSBC Bank Capital Funding (Sterling 1) LP -- Moody's affirms HSBC Bank's A1 long-term deposit and senior unsecured debt ratings

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Rating Action: Moody's affirms HSBC Bank's A1 long-term deposit and senior unsecured debt ratingsGlobal Credit Research - 08 Mar 2021Outlook remains stableLondon, 08 March 2021 -- Moody's Investors Service (Moody's) today affirmed the A1 long-term deposit and senior unsecured debt ratings of HSBC Bank plc (HSBC Bank) and maintained the stable outlook on these ratings. The rating agency also downgraded HSBC Bank's standalone Baseline Credit Assessment (BCA) to baa3 from baa2, and it affirmed the bank's a3 Adjusted BCA, the Baa1 subordinate rating, the Baa2(hyb) junior subordinated rating, and the Baa3(hyb) preferred stock non-cumulative rating related to the perpetual securities issued by HSBC Bank Capital Funding (Sterling 1) LP and guaranteed by HSBC Bank.A full list of affected ratings can be found at the end of this press release.RATINGS RATIONALEMoody's said that the affirmation of HSBC Bank's A1 long-term deposit and senior unsecured debt ratings reflects, on the one hand, a weaker standalone profile of the bank; on the other, a still high level of dependence of the HSBC group on HSBC Bank as indicated by the rating agency's unchanged very high probability of support coming from the group's ultimate holding company HSBC Holdings plc (HSBCH).The downgrade of HSBC Bank's BCA to baa3 from baa2 reflects Moody's view that HSBC Bank's profitability will marginally improve but it will remain weak in the next 12-18 months, and that credit losses will crystallise in the still challenging operating environment.In 2020, HSBC Bank reported a net loss of GBP1.5 billion, which compares with a smaller loss of GBP1.0 billion in 2019 [1]. Moody's believes that HSBC Bank's profitability will improve as business activity increases in the UK and Europe, provisions for expected credit losses moderately decline as the macroeconomic conditions ease and restructuring costs and operating costs reduce as the group executes its strategic plan. At the same time, the net interest margin remains under pressure in a persistently low interest rate environment, and HSBC Bank's efficiency will remain weak.HSBC Bank reported a stock of problem loans as of 31 December 2020 that was equivalent to 2.9% of gross loans, an increase from the 1.9% at the end of 2019 [1]. Moody's believes that the level of problem loans for HSBC Bank will remain elevated as government support measures and bank forbearance taper off in 2021 and 2022.At the same time, Moody's said that the support coming from HSBCH to HSBC Bank will remain very high, leading to the affirmation of HSBC Bank's Adjusted BCA of a3. This is because HSBC Bank will continue to provide capital markets, lending, trade finance and treasury and transaction banking services to wholesale banking clients in the UK and EU with an international footprint, an important part of the core business of HSBCH's global operations.The a3 Adjusted BCA of HSBC Bank is currently below that of other large and strategic subsidiaries of HSBCH that benefit from Moody's assessment of a very high probability of support and affiliate support uplift. This is because of the relatively large size of HSBC Bank which limits the support capacity of HSBCH. Moody's expects HSBC Bank to reduce its risk-weighted assets and allocated capital, in line with HSBCH's strategic repositioning, facilitating the potential extraordinary support from the group.For this reason, the review for downgrade of HSBCH (see press release entitled Moody's places HSBC Holdings' A2 senior unsecured debt ratings on review for downgrade, published on 8 March 2021, https://www.moodys.com/research/--PR_441600) did not also trigger a review for downgrade on HSBC Bank's Adjusted BCA.Given the systemic importance of HSBC Bank, reflecting its sizeable capital market operations, Moody's continues to believe that there is a moderate probability of support coming from the Government of the United Kingdom (Aa3 with stable outlook) for the deposit and senior unsecured debt of HSBC Bank. However, given the proximity of HSBC Bank's long-term deposit and senior unsecured debt ratings to the UK sovereign debt rating, a moderate probability of government support does not result in any uplift.OUTLOOKThe outlook on HSBC Bank's long-term deposit and senior unsecured debt ratings is stable.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSHSBC Bank's long-term deposit and senior unsecured debt ratings could be upgraded following an upgrade of the bank's Adjusted BCA, a significant increase in the stock of more junior bail-in-able liabilities, or a significant reduction in tangible banking assets without a parallel reduction in the stock of bail-in-able debt.The Adjusted BCA could be upgraded following a confirmation of HSBCH's notional BCA, which is currently under review for downgrade.HSBC Bank's BCA could be upgraded following a material improvement in asset quality and profitability. However, an upgrade of HSBC Bank's BCA would not automatically result in an upgrade of the bank's Adjusted BCA if the notional BCA of HSBCH were not confirmed.HSBC Bank's long-term deposit and senior unsecured debt ratings could be downgraded following a downgrade of the Adjusted BCA or following a significant reduction in the stock of bail-in-able liabilities.The Adjusted BCA could be downgraded following a multi-notch downgrade of HSBCH's notional BCA, or a multi-notch downgrade of HSBC Bank's BCA.HSBC Bank's BCA could be downgraded following a continuation of net losses or a material reduction in capital ratios. A one-notch downgrade of HSBC Bank's BCA would not necessarily lead to a downgrade of the bank's long-term deposit and senior unsecured debt ratings, because it may be offset by an additional one-notch for affiliate support uplift from HSBCH or a one-notch uplift for government support. LIST OF AFFECTED RATINGS Issuer: HSBC Bank plc ..Downgrade: ....Baseline Credit Assessment, downgraded to baa3 from baa2..Affirmations:....Long-term Counterparty Risk Ratings, affirmed Aa3....Short-term Counterparty Risk Ratings, affirmed P-1....Long-term Bank Deposits, affirmed A1, outlook remains Stable....Short-term Bank Deposits, affirmed P-1....Short-term Deposit Note/CD Program, affirmed P-1....Long-term Counterparty Risk Assessment, affirmed Aa3(cr)....Short-term Counterparty Risk Assessment, affirmed P-1(cr)....Long-term Issuer Rating, affirmed A1, outlook remains Stable....Adjusted Baseline Credit Assessment, affirmed a3....Senior Unsecured Regular Bond/Debenture, affirmed A1, outlook remains Stable....Senior Unsecured Medium-Term Note Program, affirmed (P)A1....Subordinate Regular Bond/Debenture, affirmed Baa1....Junior Subordinated Regular Bond/Debenture, affirmed Baa2(hyb)....Junior Subordinate Medium-Term Note Program, affirmed (P)Baa2....Commercial Paper, affirmed P-1....Other Short Term, affirmed (P)P-1..Outlook Action:....Outlook remains StableIssuer: HSBC Bank Capital Funding (Sterling 1) LP..Affirmation:....Backed Preferred Stock Non-cumulative, affirmed Baa3(hyb)..No Outlook assignedPRINCIPAL METHODOLOGYThe principal methodology used in these ratings was Banks Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1147865. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.REFERENCES/CITATIONS[1] Public Audited Financial Statements 31-Dec-2020.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Edoardo Calandro Vice President - Senior Analyst Financial Institutions Group Moody's Investors Service Ltd. One Canada Square Canary Wharf London E14 5FA United Kingdom JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Ana Arsov MD - Financial Institutions Financial Institutions Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service Ltd. 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