Original title: Moody's Corporation: confirm HSBC Holdings PLC (00005.HK) "A2" long-term senior unsecured debt rating, maintain "negative" outlook Source: duration Finance and Economics

Jiuzhi Financial News, March 10, Moody's Corporation confirmed HSBC Holdings PLC Limited (HSBC Holdings plc, referred to as "HSBC Holdings PLC", 00005.HK) rating, including the group's "A2" long-term senior unsecured debt rating and "a2" independent benchmark credit assessment (BCA), and maintained a "negative" outlook.

The HSBC Bank plc rating (long-term debt and deposit ratings are both "Aa3" and outlook is "negative"; BCA is "baa2") and the non-ring-fenced bank HSBC UK Bank plc rating (long-term issuer and deposit rating is "Aa3" and outlook is "negative"; BCA is "a2") are not affected by the rating action.

On February 18th, HSBC Holdings PLC announced the most radical reform in many years. The 'negative' outlook of HSBC Holdings PLC rating reflects the implementation risks associated with the repositioning of HSBC and the Group's US business plan, as well as our expectations for a decline in profitability of the Group and these entities in 2020 and 2021. Weaknesses in succession planning and uncertainties associated with the appointment of long-term chief executives exacerbate implementation risks. This also reflects the pressure on asset quality and profitability in Asia, which is due to a more difficult business environment in Hong Kong and elsewhere. " Said Alessandro Roccati, senior vice president of Moody's Corporation.

In the long run, if properly executed, business repositioning may lead to a more focused, leaner group with more efficient capital allocation and higher profitability.

For a list of affected credit ratings, see the end of the article.

Rating basis

The "negative" outlook reflects Moody's Corporation's view of the risks HSBC Holdings PLC's creditors will face in 2020 and 2021 because: 1) repositioning plans in Europe and the United States have been announced; 2) uncertainties associated with the appointment of a long-term CEO; and 3) external factors beyond management control may pose greater execution risks than currently expected.

HSBC Holdings PLC announced a restructuring plan in February this year. The objectives are: 1) to restructure some of the underperforming businesses of non-fenced banks in the US, Europe and the UK; 2) to reallocate capital from global banking and markets to areas with major growth opportunities in Asia and retail banking and wealth management; and 3) to reduce the cost base, simplify operations and improve group efficiency. Management aims to increase the tangible return on equity (RoTE) from 8.4 per cent in 2019 to 10 per cent in 2019, and to keep the CET1 of common shares between 14 per cent and 15 per cent during the restructuring.

Moody's Corporation believes that the group's succession planning process shows some weaknesses. In August 2019, HSBC was unexpectedly ousted less than 18 months after CEO John Flint took office. Noel Quinn has been appointed interim CEO, and so far no long-term CEO has been announced. In February, the group announced a comprehensive restructuring plan. The rating agency believes that Quinn may face challenges in implementing the plan, and that he will not play this role for a long time.

Corporate governance is inextricably linked to HSBC Holdings PLC, just like all other banks. The weak links of corporate governance will lead to the deterioration of bank credit quality, while the strength of corporate governance is conducive to the credit situation of banks. Due to opacity and complexity, HSBC Holdings PLC's BCA was downgraded one sublevel to reflect: 1) the credit risks associated with its global business and complex legal structure; 2) its large capital market franchise; and 3) the enforcement risks it will face during the repositioning of its business. Since the financial crisis, HSBC Holdings PLC's governance framework and related controls and processes have been substantially improved. However, the sudden departure of CEO without appointing a new long-term successor shows that succession planning is flawed. Corporate governance remains a key credit consideration that requires continuous monitoring.

Factors beyond the control of management may also pose greater implementation risks than currently expected. Such factors include the slowdown in China's economic growth, the persistently low interest rate environment, the environment in Hong Kong, China, and the duration and scope of the coronavirus epidemic. HSBC maintains a conservative income assumption of a slight decline in revenue in 2021 and a low single-digit growth rate in 2020-2022, but the severe impact of the operating environment may amplify the risk of a sharp decline in revenue Xiaobai Maimai Inc's risk of deterioration.

HSBC's credit strength is supported by the following factors: 1) the group has a broad footprint and strong retail and commercial concessions in Hong Kong, China and the UK's largest market; 2) its conservative risk appetite; 3) its strong capital base; 4) its conservative capital and liquidity position. However, the Group's BCA is constrained by the following factors: 1) the Group's profitability is weak due to losses in its US retail business and declining revenues from its French retail and European wholesale operations; and 2) its sizeable and mostly more ordinary capital market activities are interlinked, exposing the Group to potential earnings fluctuations and tail risks.

Rating up and down factors

HSBC Holdings PLC has a "negative" outlook, so it is unlikely to be upgraded. If HSBC Holdings PLC's weighted macro position (weighted Macro Profile) is improved, and asset risk and profitability are substantially improved on a sustainable basis, while capital and liquidity remain at high levels, then BCA may be raised. Raising the BCA will have a positive impact on all ratings. If the group significantly increases the amount of capital it absorbs losses to exceed Moody's Corporation's expectations and provides greater protection for its creditors, other factors being equal, HSBC Holdings PLC's long-term senior unsecured debt rating may be upgraded.

HSBC Holdings PLC's rating outlook is likely to return to "stable" if: 1) the announced restructuring plan will expose creditors to only medium implementation risk during 2020 and 2021; 2) the uncertainties associated with the appointment of a new long-term CEO will disappear; and (3) external factors beyond management control may pose greater implementation risks than currently expected.

HSBC Holdings PLC's BCA and its rating may be downgraded, if due to the imminent repositioning of the bank, increased implementation risks, unexpected restructuring costs, serious deterioration of the business environment, a significant increase in risk appetite or a major risk management failure, or a significant deterioration in liquidity or capital position, or if Moody's Corporation determines that the weaknesses of the succession plan will undermine the effective implementation of the new plan, resulting in a significant and sustained decline in profitability. The rating may also be downgraded if the group's tangible bank assets increase or the amount of debt absorbing losses decreases significantly, resulting in an increased risk of losses suffered by the creditors of the holding company.

List of affected ratings

Issuer: HSBC Holdings PLC Co., Ltd.

Confirm rating:

Adjusted benchmark credit assessment, confirm a2

Benchmark credit assessment, confirm a2

Senior unsecured medium-term Notes Plan, confirmation (P) A2

Subprime medium-term note plan, confirmation (P) A3

Other short-term, confirm (P) Pmur1

Non-cumulative preferred stock (local currency), confirmed Baa3 (hyb)

Non-cumulative preferred stock (foreign currency), confirmed Baa2 (hyb) / Baa3 (hyb)

Senior unsecured term bonds, confirm A2, outlook is still negative

Subordinated term bonds / bonds, confirm A3

Priority shelf (shelf) non-cumulative, confirm (P) Baa2

Advanced unsecured storage shelf, confirm (P) A2

Secondary storage shelf, confirm (P) A3

Foresight Action:

The outlook remains negative.

Publisher: HSBC Capital Funding (Dollar 1) L.P.

Confirm rating:

There is support for non-accumulation of preferred shares, confirm Baa2 (hyb)

Foresight Action:

No outlook.