DBRS Confirms Ratings of HSBC Bank Canada

DBRS Limited (DBRS) confirmed the ratings of HSBC Bank Canada (HSBC Canada or the Bank), including the Bank’s Long-Term Senior Debt rating of A (high) and Short-Term Issuer rating of R-1 (middle). In addition, DBRS assigned the Bank a Long-Term Issuer Rating of A (high) as part of a harmonization exercise across bank ratings globally. The trend on all ratings is Stable.

KEY RATING CONSIDERATIONS
Given HSBC Canada’s important position in the global franchise of its parent, HSBC Holdings plc (the Group; rated AA (low) with a Stable trend by DBRS), DBRS assigned a SA1 designation to the Bank, which implies strong and predictable support from the Group, should it be required. As a supported rating, HSBC Canada’s rating will likely move in tandem with the Group’s rating. Accordingly, HSBC Canada’s long-term ratings are notched down by one notch from the Group’s rating of AA (low), reflecting that it operates in a different jurisdiction than its parent.

On an intrinsic basis, HSBC Canada’s local franchise has well established relationships with multinationals, an affluent retail client base and relatively good operating efficiency. These positive attributes are offset by the Bank’s high dividend payout to the Group, the geographic concentration of loans in Western Canada, including high exposure to the real estate and energy sectors and relatively low market shares in retail banking and wealth management.

RATING DRIVERS
Positive rating pressure would likely be linked to improvement in the Group’s long-term debt ratings. Alternatively, a downgrade of the Group’s ratings would also likely negatively affect HSBC Canada’s ratings. In addition, any indication that the potential support from the Group has been reduced or is not sufficiently reliable could affect DBRS’s support assessment and potentially have a negative impact on the Bank’s ratings.

RATING RATIONALE
Canada is a priority market for the Group and as such, HSBC Canada benefits from the support and brand recognition of the parent. This allows the Bank to leverage broad-based capabilities that are international in scope versus some of its Canadian peers. The Bank, which is Canada’s seventh-largest bank (and the largest Schedule II bank) with assets of $96.4 billion as at YE2017, maintains a special focus on its Commercial Banking (CMB) and its Global Banking and Markets (GBM) segments. This is in part due to its ability to utilize the broader network of the parent to bank multinationals and the local affiliates of global companies. Meanwhile, HSBC Canada’s third segment, Retail Banking and Wealth Management, has traditionally catered to globally affluent clients or clients with international businesses. More recently, the Bank has been making a concerted push to capture more market share with these types of clients by acquiring talent from the large Canadian banks and introducing products and technologies that would help attract new clients.

Given its commercial and capital markets focus, HSBC Canada enjoys a steady base of non-interest income, mainly fee and trading incomes, which accounted for 43% of revenue in 2017. In addition, the Bank has the advantage of utilizing the parent’s scale and capabilities to effectively manage its costs, translating into an efficiency ratio commensurate with the large Canadian banks. Although the Bank took several collective and special provisions on its oil and gas exposure in 2016, an improvement in energy prices and workouts of certain loans allowed HSBC Canada to book a $108 million reversal of provisions in 2017. As such, net income was up 27% to $668 million in 2017, despite operating revenues remaining flat at $2.1 billion.

Due to its emphasis on CMB and GBM and in order to support the Group’s overall client base, HSBC Canada may take on larger exposures than an independent bank of its size. As a result, the Bank’s exposure to commercial real estate and energy lending are higher in relative terms versus the larger Canadian banks. Out of the $55.1 billion of loans and advances to customers (including customers’ liability under acceptances) at YE2017, 15% was to the commercial real estate sector while 5% was to the energy sector. DBRS considers the Bank’s wholesale risk profile to be good owing to the robust adjudication process and the strong profile of its clients. Nevertheless, HSBC’s substantial exposure in British Columbia could pose a risk in the event of a real estate market correction.

As of December 31, 2017, HSBC Canada carried $58.8 billion in client deposits, which are its main source of funding. In addition, the Bank achieves diversification through debt issuances and securitizations in the global markets. Liquidity levels remain strong with an average liquidity coverage ratio of 137% for Q4 2017, well above the minimum required by the Office of the Superintendent of Financial Institutions.

The Bank’s Common Equity Tier 1 ratio stood at 10.5% as of December 31, 2017, in line with the large Canadian banks and significantly above regulatory minimums. The Bank has historically maintained a high dividend payout to the parent; however, given its capital buffer of approximately $1.6 billion, DBRS believes that HSBC Canada’s capitalization levels are strong.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (May 2017), which can be found on dbrs.com under Methodologies.

Lead Analyst: Maria-Gabriella Khoury, Vice President, Global FIG
Rating Committee Chair: Michael Driscoll, Managing Director, Head of NA FIG, Global FIG

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

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