Fitch Ratings has revised the Outlook on HSBC Bank plc's Long-Term Issuer Default Rating (LT IDR) to Stable from Negative and affirmed the IDR at 'AA-'.
Fitch has also affirmed the Short-Term IDR at 'F1+' and Viability Rating (VR) at 'a'. A full list of rating actions is below.
The Outlook revision mirrors the action taken on HSBC Bank's ultimate parent, HSBC Holdings Plc (HSBC; A+/Stable). The Stable Outlook reflects reduced pressure on HSBC's ability to provide support, as risks to the parent's consolidated credit profile have diminished.
At the same time, Fitch has withdrawn HSBC Bank plc's Support Rating of '1' as it is no longer relevant to the agency's coverage under our updated Bank Rating Criteria published on 7 September 2022. In line with the updated criteria, Fitch has assigned HSBC Bank a Shareholder Support Rating (SSR) of 'a+'.
Key Rating Drivers
Support Driven Ratings: HSBC Bank's IDRs, Derivative Counterparty Rating (DCR), SSR and senior debt ratings are driven by potential support from its ultimate parent, HSBC, in case of need. Fitch believes that there is an extremely high likelihood that HSBC would provide support to HSBC Bank if needed, given the bank's key and integral role in the group as a hub for its European wholesale banking business. Fitch also believes that support is extremely likely due to the huge reputational risk to the parent and the wider group from a default of HSBC Bank, and given the agency's view that the UK authorities would favour support for HSBC Bank from HSBC, given the subsidiary's close interconnectedness.
HSBC Bank's LT IDR is rated one notch above HSBC's because Fitch believes that HSBC Bank's external senior creditors will benefit from resolution buffers raised by HSBC and downstreamed to HSBC Bank, which are designed to protect HSBC Bank's senior creditors if the group fails. The Outlook on HSBC Bank's Long-Term IDR mirrors that on HSBC.
Key HSBC Subsidiary; Ongoing Transformation: The restructuring of HSBC Bank, which is a key focus for the HSBC group's 2020-22 strategic plan, is ongoing, with progress being made in respect to de-risking the bank's balance sheet, reducing costs and disposing weaker performing units. Under the transformation plan, HSBC Bank will become HSBC's European corporate and commercial bank, and we believe that HSBC Bank's key role in the group's global strategy supports the bank's business profile.
The group is expected to complete the sale of its French retail banking activities, which have been underperforming for several years, and also branch operations in Greece in 2023. The bank is also looking to sell its subsidiary in Russia, subject to regulatory approvals. However, despite this progress, Fitch continues to see execution risks in the restructuring, as achieving the bank's 6%-8% target return on tangible equity will require the successful sale of the French retail activities, which is unlikely before 1H23, further cost reductions against inflationary pressures, and a ramping up of wholesale banking activities. Nonetheless, higher interest rates in HSBC Bank's major markets will support its performance and help mitigate performance pressures.
Asset Quality Deterioration Expected: HSBC Bank's impaired loans ratio (end-1H22: 2.5%) has improved since end-2020 (2.9%) despite loan deleveraging, reflecting balance sheet de-risking. Loan quality benefits from conservative underwriting standards, but we expect the bank's focus on corporate and commercial lending, which includes some exposures to more cyclical sectors, to result in loan quality deterioration in the tougher economic environment and given slowing economic growth across its major markets, particularly after the sale of its French retail business. However, our assessment of the bank's asset quality also considers the sound quality of its non-loan assets, mostly in the form of securities and derivatives.
Profitability a Rating Weakness: HSBC Bank's profitability is weak and weighs on our assessment of the VR. Its four-year average operating return on risk-weighted assets of 0.3% between 2018 and 2021 is weaker than most peers and drags on the HSBC group's performance. We expect earnings to remain under pressure because of losses coming through on the sale of French retail business, further restructuring costs, and also given earnings volatility from its trading operations.
Strong Capitalisation; Ordinary Support: Capitalisation remains strong, with the bank reporting a 14.7% common equity Tier 1 ratio at end-1H22. We expect moderate pressure on capitalisation, given modest internal capital generation and impacts relating to the restructuring, but our assessment of capitalisation factors in ordinary support from HSBC.
Wholesale Funding Reliance: HSBC Bank's funding and liquidity are stable, robust and prudently managed, but are more dependent on wholesale funding than peers. We believe the risks of wholesale funding reliance are mitigated by the provision of wholesale funding from the parent (including funds to meet the bank's minimum requirement for own funds and eligible liabilities; MREL) and by HSBC Bank's own wholesale funding access.
Shareholder Support Extremely Likely: HSBC Bank's SSR reflects our view of a very high probability of support from its parent, HSBC, in case of need. HSBC Bank's LT IDR is one notch above HSBC's, reflecting our expectation that external senior creditors will benefit from resolution funds ultimately raised by HSBC and that are designed to protect HSBC Bank's senior creditors if the group fails. HSBC has preplaced MREL eligible instruments in HSBC Bank.
Rating Sensitivities
Factors that could, individually or collectively, lead to negative rating action/downgrade:
HSBC Bank's IDRs, DCR, senior unsecured debt ratings and SSR are driven by potential support from HSBC and are therefore primarily sensitive to a downgrade of HSBC's IDRs. HSBC Bank's ratings are also sensitive to negative changes in our assessment of its strategic importance to HSBC, which we do not expect.
HSBC Bank's LT IDR would be downgraded by one notch to the level of HSBC's LT IDR if Fitch believes that the bank's external senior creditors no longer benefit from resolution funds that are preplaced by the parent.
HSBC Bank is rated at the same level as the UK sovereign (AA-/Stable). Negative rating action on the UK could put pressure on HSBC Bank's ratings.
HSBC Bank's VR is primarily sensitive to the bank's ability to execute its strategy and strengthen its earnings on a sustainable basis. The VR would come under pressure if delays in its restructuring prevent the bank from strengthening its profitability towards its targets. HSBC Bank's VR is supported by our expectation that the bank will continue to benefit from ordinary support from HSBC and maintain strong capital ratios. A material erosion of capital buffers over regulatory requirements could, in the absence of strong signs of ordinary support, result in a downgrade of the VR. A material deterioration in the bank's operating environment assessment that weakens our assessment of the bank's asset quality would also be negative for the VR.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
The bank's IDRs, DCR and senior unsecured debt rating would only be upgraded if HSBC's IDRs were upgraded, which we do not expect given the Stable Outlook on HSBC's LT IDR, and the deteriorated economic environment. Upside is also limited by the fact that the bank's LT IDR is at the same level as the UK sovereign rating.
An upgrade of HSBC Bank's VR would require a significantly more diversified business model, while maintaining a conservative risk appetite and materially stronger operating profitability in the bank's businesses. However, upside for HSBC Bank's VR is constrained by its increasing focus on corporate banking and by the high proportion of markets business undertaken by the bank.
HSBC Bank's VR could be withdrawn if the bank's business profile evolves to the extent that it no longer has a meaningful franchise that could exist without the ownership of the parent, including for example, if its business activities almost exclusively relate to clients that have relationships with multiple entities in the HSBC group. HSBC Bank's IDRs would be unaffected by a withdrawal of the VR.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
Senior Unsecured Debt: HSBC Bank's senior debt ratings are aligned with the bank's IDRs.
DCR: HSBC Bank's DCR is at the same level as the bank's Long-Term IDR because derivative counterparties have no definitive preferential status over other senior obligations in a resolution.
Subordinated Debt: The anchor rating used to rate the subordinated debt is one notch below HSBC Bank's LT IDR. We notch once from HSBC Bank's LT IDR to derive an anchor rating to reflect our view that extraordinary support from HSBC is likely to be extended to subordinated debt issued by HSBC Bank, but to be moderately lower relative to HSBC Bank's senior debt.
We notch down from the anchor rating in accordance with our assessment of loss severity and non-performance risk: for Tier 2 debt twice for loss severity; for legacy upper Tier 2 debt three times (two for loss severity and one for incremental non-performance risk) and for its other legacy Tier 1 capital securities four times (two for loss severity and two for incremental non-performance risk). These debt ratings are in line with equivalent securities' ratings at HSBC.
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
HSBC Bank's debt ratings are sensitive to the bank's LT IDR, which are in turn sensitive to any changes in i) HSBC's LT IDR; and ii) our assessment of HSBC's ability and propensity to support the bank and its outstanding debt, in case of need. The debt ratings are also sensitive to our assessment of loss-severity and non-performance relative to their anchor ratings.
VR ADJUSTMENTS
The Earnings & Profitability score has been assigned above the implied score due to the following adjustment reason (s): Historical and Future Metrics (positive)
The Funding & Liquidity score has been assigned below the implied score due to the following adjustment reason(s): Non-deposit funding (negative)
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Public Ratings with Credit Linkage to other ratings
The support-driven rating of HSBC Bank is driven by our view of the likelihood of support from HSBC.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
HSBC HOLDINGS PLC 
