HSBC Rating Lowered One Step by Fitch on Regulation, Costs

HSBC Holdings Plc (HSBA), Europe’s biggest bank, had its Long-term Issuer Default Rating downgraded by Fitch Ratings to AA- from AA as it braces itself for stiffer regulation and additional compliance costs.

The ratings company also downgraded the lender’s HSBC Bank Plc unit to AA- from AA and its Hongkong and Shanghai Banking Corp. Ltd. unit to AA- from AA, it said in a statement today. The outlook for all three was revised to stable from negative.

Chief Executive Officer Stuart Gulliver’s plans to cut costs and improve profitability are held back by U.S. probes and compensation claims from U.K. clients. A Senate committee said in July that failures in HSBC’s money-laundering controls allowed terrorists and drug cartels access to the U.S. financial system. Fitch said that HSBC’s expansion into “higher-risk markets” such as China and tougher competition in Hong Kong were among the main reasons for the downgrade.

“The agency anticipates that the benefit previously awarded to diversification of businesses and geographies will be neutralized by the group’s increasing cost of managing its diverse operations,” Fitch said. “The latter include legal fees, provisions for litigation and customer redress, expenses to ensure consistent adherence to compliance and governance standards as well as business conduct, and most importantly, complying with numerous and higher regulatory requirements.”

The shares closed little changed at 643.60 pence in London. They’ve gained 31.1 percent this year, giving the company a market value of 118.5 billion pounds ($190 billion).

‘Key Strength’

The bank said last month it may face criminal charges from U.S. anti-money-laundering probes and the cost of a settlement may “significantly” exceed the $1.5 billion it has set aside. HSBC also earmarked $357 million to compensate U.K. clients wrongly sold insurance to cover loan repayments.

Fitch said it continues to see the company’s “global reach as a key strength” and considers “management’s progress in selling non-core businesses to simplify the group and manage capital efficiency positively.” Still, “refocusing the group is necessary for staying competitive and consistent with the restructuring efforts of other large global trading and universal banks,” it said.

HSBC’s sale of its stake in Ping An Insurance (Group) Co. on Dec. 5 is “unlikely to reduce the group’s long-term focus and exposure to China,” the company said. The lender’s exposure to China probably more than doubled to about $115 billion since 2010, according to the statement.

HSBC Latin America Holdings (UK) Ltd. was downgraded to AA- from AA, Fitch said.

To contact the reporter on this story: Howard Mustoe in London at hmustoe@bloomberg.net

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net