Fitch Ratings has placed HSBC Bank Canada's (HSCA) Long- and Short-Term Issuer Default Ratings (IDRs) of 'A' and 'F1', respectively, on Rating Watch Positive following the announced sale of the company to Royal Bank of Canada (RY).

Fitch also placed HSCA's Viability Rating (VR) and Shareholder Support Ratings on Rating Watch Positive.

In Fitch's opinion, the CAD13.5 billion all-cash transaction (2.5x of tangible book value) should be franchise enhancing as it would further strengthen RY's retail and commercial presence in Western Canada, especially in the province of British Columbia. It would also allow RY access to HSCA's large affluent and higher credit scoring customer base who the bank intends to target and cross sell many of its product offerings to (e.g. wealth management and credit card products and services).

Key Rating Drivers

The Rating Watch Positive on HSCA's ratings reflects Fitch's view the purchase by RY (AA-/Stable) from HSBC Holdings plc (HSBC; A+/Stable) will likely result in stronger shareholder support from a higher rated entity. Fitch believes it is likely HSCA's Long-Term IDR will be equalized with those of RY's at transaction close or shortly thereafter. When HSCA's operations are fully integrated with those of RY (including operating under the same banner), the ratings will likely be withdrawn.

Fitch expects to resolve HSCA's Rating Watches upon the completion of the transaction with RY, which is expected to take place by late 2023 and is contingent on customary regulatory approvals from the competition bureau, OSFI and the Minister of Finance.

Rating Sensitivities

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Negative rating actions could be possible if regulatory approvals are not achieved or execution challenges lead to a termination of the transaction and cause distraction from the bank's own strategic plans, or materially alters the bank's relationship and support with the current parent, HSBC.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

HSCA's ratings will likely be upgraded and equalized with those of RY upon the completion of the acquisition. Supporting the upgrade and equalization would be confirmation of HSCA's role in the RY group, as well changes in branding.

Given this sale is expected to close in late 2023, Fitch expects the resolution of the Rating Watch may occur subsequent to six months in the future, outside of Fitch's normal Rating Watch time horizon.

OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS

SENIOR UNSECURED

HSCA's senior unsecured debt of 'A' was also placed on Watch Positive. It is equalized with HSCA's Long-Term IDR.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

HSCA's subordinated debt of 'BBB+' was also placed on Watch Positive. It is notched two notches from HSCA's IDR for loss-severity.

While subordinated debt and hybrid securities are typically notched from the bank's VR, Fitch believes that the high level of institutional support from HSBC will neutralize the non-performance risk of HSCA's subordinated debt. Therefore, the subordinated debt rating is notched from HSCA's IDR, with the notching reflecting only relative loss severity.

OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES

HSCAs senior unsecured and subordinated debt ratings would be sensitive to changes to HSCA's IDR.

VR ADJUSTMENTS

Business Profile is 'a-' and above the implied score of 'bbb'. This reflects a positive analytical adjustment for Group Benefits and Risks.

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 ratings for HSCA are linked to those of its parent, 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.

(C) 2022 Electronic News Publishing, source ENP Newswire