Standard & Poor’s Ratings Services has cut its outlook on British banking giant, HSBC Holdings plc, to negative from stable, amid a series of compliance problems with the firm.
The ratings agency affirmed HSBC’s A-plus/A-1 credit rating, and said the revised outlook was due to recent compliance failures at the bank.
The rating agency notes that, in recent months, HSBC has been censured by regulators and other authorities on both sides of the Atlantic for a series of compliance failures. It notes that these failures include, “most notably, an alleged breakdown in its adherence to U.S. anti-money laundering standards, but also the misselling of payment protection insurance and interest rate hedging products in the U.K., and possible breaches with regard to U.S. mortgage foreclosure practices.”
S&P reports that in the six months to June 30, HSBC made provisions of $2 billion for regulatory fines and associated costs, on top of more than $1.1 billion of similar provisions in 2011.
“In our view, HSBC is by no means alone in facing such problems,” S&P says, “Nevertheless, we consider that these issues could potentially carry some specific rating implications for HSBC.”
In particular, it notes that the effectiveness of the bank’s risk controls is in doubt; and, it says that the allegations concerning money laundering problems may indicate a failure of its risk management and culture.
S&P says that management appears to have made some progress in correcting the underlying problems, however, it notes that, as some of these changes are recent, their effectiveness is relatively unproven, and the reforms remain a work in progress.
“We therefore consider it too early to determine whether the changes made are both sufficiently comprehensive and well-implemented to allow group senior management to exercise consistently strong and effective control over the group,” it says.
Additionally, S&P points out that the full extent of the U.S. regulatory actions is uncertain, and it could also face legal consequences, too. “A particularly adverse outcome for the group could in our view be damaging for the group’s business position, given the importance of its direct access to dollar clearing to its position as a leading institution in trade finance, and self-stated objectives of growing its corporate franchise in the U.S.” it notes.
“We could revise the outlook to stable if, in our view, management is able to clearly demonstrate that the control enhancements are sufficiently comprehensive and well-implemented that they allow group senior management to exercise consistently strong and effective control over the group, and if we believe that the group’s franchise has experienced no meaningful lasting damage from recent events,” it concludes.