Moody’s Investors Service has downgraded HSBC Bank Middle East Limited’s (HBME) long-term deposit ratings to A3 from A2 and short-term deposit ratings to Prime -2 from Prime -1. The bank’s adjusted baseline credit assessment (BCA) was downgraded to a3 from a2 and its BCA was affirmed at baa2.
HBME’s long-term deposit ratings and adjusted BCA incorporate two notches of uplift from its baa2 BCA, reflecting Moody’s assessment of a very high probability of affiliate support from the bank’s parent, HSBC Holdings Plc (HSBCH LT senior unsecured A2 negative) in case of need. This reflects the strategic importance of HBME as the main operating vehicle for the Middle East operations of the HSBC group.
The action on HBME follows the action taken by Moody’s on the parent company HSBC Holdings PLC on September 27, 2017.
On the ratings rationale, Moody’s said the downgrade of HBME’s deposit ratings and adjusted BCA reflects the weakening capacity of HSBC Holdings to provide support, as reflected by the assignment on 27 September 2017 of an a2 notional group Baseline Credit Assessment (BCA), one notch lower than the previous a1 intrinsic financial strength assessment.
HSBC Holdings’ lower BCA reflects deteriorating operating environments in key markets in which it operates including the United Kingdom (Aa2 stable) and Hong Kong (Aa2 stable) as well as other strategic markets such as China, Mexico, Canada and the Middle East. The affirmation of HBME’s BCA at baa2 reflects its solid margins and profitability supported by a strong and diversified franchise, and good funding and liquidity. These strengths are moderated by the bank’s weak asset quality driven by high levels of credit concentrations; high operating costs and (3) lower capital levels than its regional peers. These rating drivers have not been affected by the rating action on the parent.
The outlook on HBME’s long term deposit ratings has been changed to stable from negative. The outlook reflects Moody’s view that the parent entity capacity to provide support to HBME when needed, as indicated by its a2 notional BCA, is likely to remain stable underpinned by the group’s healthy asset risk profile, as well as its strengthened capital position, and good funding profile. The stable outlook also reflects Moody’s expectation that the financial fundamentals of HBME are likely to remain in line with current levels given the supportive operating environment in HBME’s key markets.
