On Thursday, Standard & Poor's Ratings Services (S&P)
downgraded its outlook on
HSBC Holdings plc
(
HBC
) and its other rated holding companies to 'Negative' from
'Stable'.
The downward revision was propelled by the company's failure to
abide by regulatory compliances, including the rules related to
U.S. anti-money laundering standards. However, it affirmed the
'A+/A-1' long- and short-term counterparty credit ratings for HSBC
and other units.
Apart from inquiry over anti-money laundering (AML) standards, the
bank was also accused of selling payment protection insurance (PPI)
and interest rate hedging products in the U.K. in a misappropriate
manner. Moreover, the bank has been accused of breaching rules
related to U.S. mortgage foreclosure practices.
After year-long investigations into HSBC's compliance with
anti-money laundering rules, the subcommittee alleged that the bank
failed to meet the rules. This could possibly result in hefty
penalties. Apart from the senatorial committee, the Department of
Justice and the Office of Foreign Asset Control are also probing
the bank.
The investigation revealed substantial lapses in the bank's
anti-money laundering compliance. This resulted in a worldwide
displacement of funds from riskier nations through the bank and
indicates prospective failure of HSBC's enterprise risk management.
According to S&P, the actions on the part of U.S. regulators
are uncertain. Therefore, HSBC has kept aside about $700 million to
meet regulatory fines. As of the six months ended June 30, 2012,
HSBC has also made provisions of $2 billion for regulatory fines
and associated costs over $1.1 billion made in 2011.
Moreover, HSBC is already facing an enquiry related to the London
Interbank Offered Rate, or the LIBOR. Although the bank is not
officially charged for any wrongdoing, it is feared that such
allegations and investigations might tarnish the goodwill of the
company.
Last month, HSBC reported results for the first half of 2012 with
its net income declining nearly 7% year over year. Additionally,
factors that continue to persist include the impact of the
deepening Euro-zone crisis, various investigations related to its
business operations and regulatory restrictions on its financials.
All these negative issues related to the bank, along with S&P's
reassessment of HSBC's capabilities, resulted in a downward
revision.
According to S&P, upgrading the rating outlook to stable
depends on certain factors. These include senior management's full
control over the bank's activities and insignificant after-effects
of the recent issues. Moreover, HSBC's balance sheet position
remains intact, which would facilitate the bank to survive amidst
the volatile global economic conditions.
Moreover, other rating agencies such as Fitch Ratings and Moody's
Investor Service - the rating arm of
Moody's Corporation
(
MCO
) - have a negative outlook on HSBC.
Our Viewpoint
Though HSBC is working to address such issues, further rating
downgrades could be implemented following pressure on the bank's
trading business and profitability from regulatory intrusion or
client discontent. Moreover, this rating downgrade will affect
investors' confidence in the stock, depicting the legal issues
faced by the company.
Currently, the harsh impact of the deepening Euro-zone crisis is
our primary concern. Moreover, HSBC is suffering from a weak
revenue growth in its mature markets, attributable to the ongoing
low interest rates and regulatory restrictions. However, the
company is poised to benefit from its extensive global network,
strong capital position, business re-engineering efforts and strong
asset growth.
HSBC currently retains a Zacks #3 Rank, which translates into a
short-term Hold rating. Considering the fundamentals, we also
maintain a long-term 'Neutral' recommendation on the stock.
HSBC HOLDINGS (HBC): Free Stock Analysis Report
MOODYS CORP (MCO): Free Stock Analysis Report
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