Last week, Fitch Ratings lowered its credit ratings on
HSBC Holdings plc
). The rating agency lowered the company's long-term Issuer
Default Ratings (IDR) to 'AA-' from 'AA' while affirming the
short term IDR at 'F1+'. However, the agency upgraded the
company's outlook to 'Stable' from Negative.
Further, Fitch took similar ratings action on HSBC's subsidiaries
- HSBC Bank Plc, The Hong Kong and Shanghai Banking Corporation
Limited and HSBC Latin America Holdings (UK) Limited. Yet, the
rating agency reiterated Hang Seng Bank Limited's credit ratings.
Though Fitch views HSBC's global reach as a key positive, the
company's expansion into high growth and high-risk markets is one
of the primary reasons for the long term IDRs downgrade. The
advantage that the company gets from its diversified operations
is mostly mitigated by the cost of maintaining and managing huge
HSBC has to adhere to different sets of compliance standards and
various regulations in the countries in which it operates. This
leads to higher legal costs with increasing provisions for
litigation charges. Going forward, this could negatively impact
the company's profit, brand name and also dent investors'
confidence in the stock.
In addition, Fitch commented that the present credit ratings
reflect HSBC's fundamental strength given its sturdy capital
position and solid franchise in its core profitable markets. The
company's overall profitability is driven by solid growth in the
Asian market. This is expected to allow the company to absorb
various compliance related litigation charges in the U.S. and UK.
As per Fitch, HSBC's progress in selling its
non-core/unprofitable operations will go a long way in boosting
capital efficiency. Since the beginning of 2012, the company has
announced the divestiture or closure of more than 24 of its
non-core/unprofitable operations across the globe. The major
completed divestitures include the sale of its U.S. credit card
Capital One Financial Corporation
) and 195 of its branches to First Niagara Bank, N.A. - a wing of
First Niagara Financial Group Inc.
Earlier in October, Fitch had reiterated the long and short term
IDR of 12 Global Trading and Universal Bank (GTUB) peer group
that includes 13 major securities trading and universal banks.
However, at that time, the review of HSBC's ratings was not
Currently, HSBC retains a Zacks #3 Rank, which translates into a
short-term Hold rating. We believe that the ratings downgrade
will lead to increase in the already high funding cost for the
company, which might result in negative estimate revisions. This,
in turn, could cause a downgrade in the Zacks Rank.
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