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HSBC Ratings Placed Under Review for Downgrade by Moody's

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Zacks Equity Research
·5 min read
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HSBC Holdings plc.’s HSBC A2 senior unsecured rating has been placed on review for downgrade, along with the a2 notional BCA, by Moody’s Investors Service, a rating arm of Moody’s Corporation MCO, because of the firm’s weak profitability and impending challenges to refine the same. The agency has placed on review for downgrade HSBC’s A3 subordinated debt rating as well.

Rationale Behind Ratings

The review for downgrade on HSBC’s a2 notional BCA highlights the company’s sluggish profitability compared to peers with the same BCA, and the hindrances it might face in refining its bottom line.

During the review process, Moody’s will evaluate the extent to which these challenges might presumably extend the requisite time to enhance profitability to similar levels as its peers, while acknowledging HSBC’s moats of strong retail and wholesale franchises, sound liquidity and capital as well as stable retail deposits, particularly in Asia.

HSBC issued a strategic update this February, according to which it plans to continuously grow in the Asian market over the next three-four years, invest in fee-minting businesses, reduce “business as usual” costs, boost technology investments and also exit the underperforming businesses in Europe and the United States.

HSBC also expects its plan to eventuate a return on tangible equity of at least 10% over the next three-four years from 3.1% in 2020 via a concoction of lower provisions for expected credit losses and through management initiatives, including enhanced cost efficiency and revenue growth, primarily in the wealth management unit and Asia.

HSBC is targeting a dip in capitalization, with the common equity tier 1 (CET1) ratio declining to a range between 14% and 14.5% in three to four years from 15.9% as of December 2020.

Moody's believes that HSBC's altered strategy to refine its profitability will be credit positive but challenging to accomplish. Though provisions for expected credit losses might abate with time, HSBC’s planned cost-cutting and revenue growth will necessitate a comprehensive change in the group's business model, including attaining solid growth in highly competitive markets, while also discarding the mass-market retail operations in the United States and France.

With respect to Moody’s, these strategies need to be fulfilled against a backdrop of low interest rates and recovering economies, reducing HSBC's potential to bring about profits, with the long-standing conflicts between the United States/U.K. and China, adding to the group’s execution challenges.

Moody's advanced Loss Given Failure analysis for HSBC denotes that the bank’s senior unsecured and subordinated debt might face moderate- and high loss-given-failure, respectively. This will lead to senior unsecured debt ratings, in line with HSBC's notional BCA, and subordinated debt ratings one notch below the bank’s notional BCA.

When Can the Rating be Upgraded?

It is unlikely that the company’s ratings will be upgraded, while the outlook is under review for downgrade. Nevertheless, HSBC’s a2 notional BCA might be affirmed if the company can hastily close the profitability gap with its peers, while continuing to maintain its sound asset quality, liquidity and capital positions. A confirmation of the notional BCA will also confirm all the long-term ratings and assessments currently in review for downgrade.

What Could Lead to a Rating Downgrade?

The a2 notional BCA might be downgraded if Moody’s notes that HSBC will not be competent to boost its bottom line as a percentage of the bank’s tangible assets to levels close to those of its peers.

HSBC’s A2 senior unsecured debt ratings can also be downgraded in case of a confirmation of the a2 notional BCA, ceteris paribus, if HSBC issues less senior unsecured debt than it currently intends to.

Over the past six months, shares of HSBC have gained 51.7% compared with the 40.6% rally of the industry it belongs to.

Currently, the company carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Moody’s recently affirmed stable outlooks for SVB Financial Group SIVB and Texas Capital Bancshares, Inc. TCBI.

SVB Financial’s ratings followed SVB Financial’s announcement that it will acquire Boston Private in a stock-cum-cash deal valued at $900 million.

The ratings affirmation for Texas Capital reflects Moody's outlook about the company’s improved capitalization and liquidity position that would alleviate execution risks associated with recent management changes in the company.

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Moodys Corporation (MCO) : Free Stock Analysis Report

Texas Capital Bancshares, Inc. (TCBI) : Free Stock Analysis Report

SVB Financial Group (SIVB) : Free Stock Analysis Report

HSBC Holdings plc (HSBC) : Free Stock Analysis Report

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