ACRA Modelling Day - 2018

ACRA assigns AAA(RU) to OOO HSBC Bank (RR), outlook Stable

The credit rating assigned to OOO HSBC Bank (RR) (the Bank) stems from the very high likelihood of extraordinary support from the controlling owner, HSBC Holdings plc based in the UK (the Supporting Organization). The Bank's standalone creditworthiness assessment (SCA) is high, based on its strong business profile, substantial capital reserves, adequate risk profile, and adequate funding and liquidity position.

The Bank provides integrated banking services, including lending, guarantees and letters of credit, trade finance, treasury services, to major Russian companies and subsidiaries of transnational corporations. As of late June 2018, the Bank ranked 74th by equity and 76th by assets among Russian banks. The Bank is 100% owned by HSBC Europe BV, the Netherlands. The beneficial owner of the Bank is HSBC Holdings plc, a diversified banking holding whose assets are located in the EU and the Asia-Pacific region.

Key rating assessment factors

Very high likelihood of extraordinary support from the shareholder. In ACRA's opinion, in case of need the Supporting Organization may provide the Bank with long-term and short-term financing and inject capital (currently, the amount of capital available to the Bank is excessive). ACRA has determined that the resulting assessment of the country risk of jurisdiction of presence of the foreign Supporting Organization against the country risk of Russia is strong and the assessment of the Supporting Organization's creditworthiness is strong. The tightness of relations between the Bank and the Supporting Organization is assessed by ACRA as very strong in view of the following:

  • The Supporting Organization holds 100% equity share in the Bank;
  • The Supporting Organization implements its Russian corporate business strategy through the Bank;
  • High importance of the Russian banking market for the Supporting Organization;
  • Significant operational integration between the Bank and the Supporting Organization in terms of corporate governance, strategy and risk management;
  • HSBC Bank plc, UK, that owns the 100% share in HSBC Europe BV, acts as a guarantor for a range of loans issued by the Bank; in addition, a dedicated trust fund is established to reduce the volume of risk-weighted assets.

Taking into account the Bank's size compared to the size of the Supporting Organization and possible reputational risks the Supporting Organization may face in case the Bank goes bankrupt, the resulting rating of the Bank is determined on par with the Russian Federation (AAA(RU)).

Strong business profile is determined by the Bank's competitive positions (including taking into account intra-group transactions) in servicing the largest Russian companies and transnational corporations operating in Russia, as well as developed business in financial markets (dealer and brokerage services, trade operations). The scale of the group's business in Russia exceeds the assets of the Bank, as part of the credit risks are accounted for on the balance sheet of the parent bank.

The operating income diversification is high (the Herfindahl-Hirschman index was 0.17 for 2017), with the prevalence of income from interbank operations, commercial lending to companies, and derivatives. The corporate governance and strategic planning system of the Bank is assessed as high.

Substantial loss absorption buffer. The Bank maintains stable high capital adequacy ratios (the average N1.2 ratio was 19.3% for the 12 months preceding August 01, 2018), which allows the Bank to sustain a significant growth in the cost of credit risk (over 1000 bps). As a significant share of the Bank's loan portfolio (65% as of June 30, 2018) is secured by the parent bank, the probability of the stress scenario is assessed by ACRA as low. The Bank demonstrates high profitability (average ROA and ROE were at 2.3% and 15.7%, respectively, in 2015–2017) and operating efficiency (NIM about 3% and CTI of 49% in 2015–2017).

Adequate risk profile. The risk management system of the Bank is transparent, adequately regulated and characterized by high underwriting standards and significant control by the Supporting Organization. The basis of the loan portfolio includes loans granted to subsidiaries of transnational corporations with high credit quality. The corporate portfolio concentration on customers is acceptable (the top 10 groups of borrowers comprised 44% of the portfolio as of December 31, 2017) and the share of problem loans is very low (less than 2%). ACRA notes that a substantial part of the loan portfolio is secured by the guarantees issued by the parent bank. The portfolio of securities is represented mainly by investments in Federal Loan Bonds, and the portfolio of loans to banks includes mainly intra-group transactions.
The market risk for derivatives is assessed as low.

Strong liquidity position. The short-term liquidity shortage indicator (STLSI) is positive, with a significant margin, in both the base case and the stress scenarios of ACRA. The long-term liquidity is also assessed as strong: the long-term liquidity shortage indicator (LTLSI) exceeds 100%.

Highly concentrated funding profile. The Bank's liabilities (except derivatives) include 83% of corporate funds and 16% of interbank loans, mainly intra-group transactions. The concentration on the largest creditors is acceptable: as of December 31, 2017, the share of the largest creditor was 6% of liabilities (excluding derivatives), and the share of the top 10 creditors was about 40%. ACRA positively assesses the predominantly stable nature and predictable dynamics of balances on accounts and deposits of the largest corporate creditors.

Key assumptions

  • The Bank will maintain its current business model;
  • N1.2 ratio will be higher than 15% in the next 12–18 months;
  • The cost of credit risk (IFRS) will not exceed 1%;
  • NIM will not exceed 3%;
  • The Bank will maintain its current funding profile.

Potential outlook or rating change factors

The Stable outlook assumes that the rating will most likely stay unchanged within the 12 to 18-month horizon.

A negative rating action may be prompted by:

  • Loss of shareholding or operating control over the Bank by the Supporting Organization or significant decline in the Bank's importance for the Supporting Organization.

Rating components

SCA: aa.

Adjustments: none.

Support: on par with the RF (ААА(RU)).

Issue ratings

No outstanding issues have been rated.

Regulatory disclosure

The credit rating has been assigned under the national scale for the Russian Federation and is based on the Methodology for Credit Ratings Assignment to Banks and Bank Groups under the National Scale for the Russian Federation, the Methodology for Analyzing Relationships Between Rated Entities and Supporting Organizations outside the Russian Federation, and the Key Concepts Used by Analytical Credit Rating Agency within the Scope of Its Rating Activities.

The credit rating has been assigned to OOO HSBC Bank (RR) for the first time. The credit rating and its outlook are expected to be revised within one year following the rating action date (September 05, 2018).

Disclosure of deviations from the approved methodologies. ACRA added one notch up to its assessment of the "funding" sub-factor, because the risks of low diversification of the Bank's liabilities arising out of the high share of corporate funds were taken into account in its assessment of the concentration on the funds of the largest creditors/depositors.

The credit rating was assigned based on the data provided by OOO HSBC Bank (RR), information from publicly available sources, as well as ACRA’s own databases. The rating analysis was performed using the IFRS statements of OOO HSBC Bank (RR) and the financial statements of OOO HSBC Bank (RR) drawn up in compliance with Bank of Russia Ordinance No. 4212-U of November 24, 2016. The credit rating is solicited, and OOO HSBC Bank (RR) participated in its assignment.

No material discrepancies between the provided information and the data officially disclosed by OOO HSBC Bank (RR) in its financial statements have been discovered.

ACRA provided no additional services to OOO HSBC Bank (RR). No conflicts of interest were discovered in the course of credit rating assignment.

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