PrefBlog

Standard & Poor’s has announced:

• •In our view, the “leave” result in the U.K.’s June 2016 referendum on EU membership (“Brexit”) has increased the risks of adverse economic developments in the U.K. As a result, we now see a negative trend for U.K. banking industry economic risk.
• •We also believe that the U.K. economy has now entered into a correction phase, driven by our revised expectation that imbalances will worsen as credit growth slows and real house prices contract. However, we consider that banks’ underwriting standards, low interest rates, and low unemployment should mitigate the extent of losses in the banking sector.
• •We are therefore revising to negative from stable our outlook on the majority of U.K. domestic banks, as described below, while affirming their ratings.

…
In our opinion, the outcome of the Brexit vote is a seminal event, and will lead to a less predictable, stable, and effective economic policy framework in the U.K. The Brexit result could lead to a deterioration of the U.K.’s economic performance, including its large financial services sector, which is a major contributor to employment and public receipts. As such, we recognize that there is a high degree of uncertainty in the near term. In particular, it is not clear if the U.K. will retain access to the EU single market–the destination of 44% of its exports–on existing terms. Future arrangements regarding the export of services, including by the U.K.’s important financial services industry, are equally uncertain, in our view.
…
HSBC HOLDINGS PLC

We revised the outlook on group NOHC HSBC Holdings PLC, and certain European and North American subsidiaries, to negative from stable. These subsidiaries include HSBC Bank PLC, HSBC France, HSBC USA Inc., HSBC Bank USA N.A., and HSBC Bank Canada (see Ratings List for full details). The stable outlook on The Hongkong and Shanghai Banking Corp. Ltd. (HBAP) and the outlooks on its subsidiaries across Asia-Pacific remain unchanged. This is because potential extraordinary support from the Hong Kong government would maintain the long-term rating on HBAP at ‘AA-‘ if we were to downgrade HSBC Holdings by one
notch.

The negative outlook reflects potential pressures over our two-year rating horizon arising from the U.K.’s vote to leave the EU and China’s economic slowdown. Although HSBC’s highly diversified business profile and strengthening capitalization are significant mitigants, we nevertheless identify risks to asset quality and revenues that may challenge the current ratings. In particular, we expect uncertainty over whether the U.K.’s future relationship with the EU will hinder the U.K. economy. China’s economic slowdown appears to have had little impact to date on HSBC’s risk profile, but we remain alert to signs of credit deterioration in its material exposure across the Asia-Pacific region. Increased market uncertainty could also prevent HSBC from achieving its strategic priorities. The negative outlook also takes account of other factors–the prolonged period of low global interest rates, HSBC’s ongoing U.S. deferred prosecution agreement, and its outstanding litigation cases.

Affected issues are HSB.PR.C and HSB.PR.D , both of which are DeemedRetractibles trading slightly below par.

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