Training on Forecasting September 17–18

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

The credit rating of OOO HSBC Bank (RR) (hereinafter, the Bank) stems from the very high likelihood of extraordinary support from the controlling owner, HSBC Holdings plc based in the UK (hereinafter, the Supporting Organization). The Bank's standalone creditworthiness assessment (SCA) is high and is 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 2019, the Bank ranked 71st by equity and 73rd by assets among Russian banks. The Bank is wholly owned by HSBC Europe BV, the Netherlands. The beneficial owner of the Bank is HSBC Holdings plc, a diversified global 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). The relationship 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 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.

Taking into account the Bank's size compared to the size of the Supporting Organization and possible reputational risk that the Supporting Organization may suffer in case the Bank fails to honor any of its obligations, the resulting rating of the Bank is determined at the highest level of the national scale at AAA(RU).

The Strong business profile is determined by the Bank's competitive positions (taking into account, among other things, intra-group transactions) in servicing the largest Russian companies and multinational corporations that have business activities in the Russian market, as well as developed business in financial markets (dealer and brokerage services, trading 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 0.19 for 2018), 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 consistently high capital adequacy ratios (the N1.2 ratio was 23.5% as of July 1, 2019), which allows the Bank to sustain a significant increase in the cost of credit risk (well over 1000 bps) resulting in a probability of the stress scenario that is assessed by ACRA as very low. The Bank demonstrates good profitability (average ROA and ROE were at 1.9% and 10.6%, respectively, in 2016–2018) and operating efficiency (NIM at 3.4% and CTI at 54% in 2016–2018).

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 mostly consists of loans granted to subsidiaries of multinational corporations with high credit quality. 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 82% of corporate funds and 18% of interbank loans, mainly intra-group transactions. The concentration on the largest creditors is high: as of December 31, 2018, the share of the largest creditor (HSBC Group) was 18% of liabilities (excluding derivatives), and the share of the top 10 creditors was about 56%. 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 remains above 12% in the next 12–18 months;
  • NIM level is maintained;
  • The Bank will not materially alter 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:

  • A declining willingness of the parent bank to further develop its business in the Russian Federation;
  • A substantial deterioration of the financial standing of the Supporting Organization.

Rating components

SCA: aa.

Adjustments: none.

Support: SCA +5.

Issue ratings

No outstanding issues have been rated.

Regulatory disclosure

The credit rating has been assigned under the national scale for the Russian Federation 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 of OOO HSBC Bank (RR) was first published by ACRA on September 7, 2018. The credit rating and its outlook are expected to be revised within one year following the publication date of this press release.

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 the Bank of Russia Ordinance No. 4927-U dated October 8, 2018. 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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