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Last week, Fitch Ratings lowered its credit ratings on HSBC Holdings plc . The rating agency lowered the company’s long-term Issuer Default Ratings (IDR) to ‘AA-’ from ‘AA’ while affirming the short term IDR at ‘F1+’. However, the agency upgraded the company’s outlook to ‘Stable’ from Negative.

Further, Fitch took similar ratings action on HSBC’s subsidiaries – HSBC Bank Plc, The Hong Kong and Shanghai Banking Corporation Limited and HSBC Latin America Holdings (UK) Limited. Yet, the rating agency reiterated Hang Seng Bank Limited's credit ratings.

Though Fitch views HSBC’s global reach as a key positive, the company’s expansion into high growth and high-risk markets is one of the primary reasons for the long term IDRs downgrade. The advantage that the company gets from its diversified operations is mostly mitigated by the cost of maintaining and managing huge business globally.

HSBC has to adhere to different sets of compliance standards and various regulations in the countries in which it operates. This leads to higher legal costs with increasing provisions for litigation charges. Going forward, this could negatively impact the company’s profit, brand name and also dent investors’ confidence in the stock.

In addition, Fitch commented that the present credit ratings reflect HSBC’s fundamental strength given its sturdy capital position and solid franchise in its core profitable markets. The company’s overall profitability is driven by solid growth in the Asian market. This is expected to allow the company to absorb various compliance related litigation charges in the U.S. and UK.

As per Fitch, HSBC’s progress in selling its non-core/unprofitable operations will go a long way in boosting capital efficiency. Since the beginning of 2012, the company has announced the divestiture or closure of more than 24 of its non-core/unprofitable operations across the globe. The major completed divestitures include the sale of its U.S. credit card business to Capital One Financial Corporation (COF - Analyst Report) and 195 of its branches to First Niagara Bank, N.A. – a wing of First Niagara Financial Group Inc. (FNFG - Snapshot Report).

Earlier in October, Fitch had reiterated the long and short term IDR of 12 Global Trading and Universal Bank (GTUB) peer group that includes 13 major securities trading and universal banks. However, at that time, the review of HSBC’s ratings was not completed.

Currently, HSBC retains a Zacks #3 Rank, which translates into a short-term Hold rating. We believe that the ratings downgrade will lead to increase in the already high funding cost for the company, which might result in negative estimate revisions. This, in turn, could cause a downgrade in the Zacks Rank.

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