OREANDA-NEWS. Fitch Ratings has today, affirmed Standard Chartered PLC's (SC) and its subsidiary Standard Chartered Bank's (SCB) Long-Term Issuer Default Ratings (IDRs) at 'AA-'. Their Outlooks were maintained on Negative. At the same time, Fitch affirmed their Viability Ratings at 'aa-'. A full list of rating actions is at the end of this commentary.

KEY RATING DRIVERS

IDRS, VRS AND SENIOR DEBT
The ratings affirmation reflects Fitch's view that the group's credit metrics have remained broadly in line with peers', in particular liquidity and funding due to its shorter-term assets and material local deposit bases in Hong Kong, Singapore and South Korea. It also captures our expectation that SC will improve its regulatory CET1 ratio in line with its announced targets by year-end 2015 and we expect the bank to undertake additional measures in 2016 to support the current rating level.

Fitch maintains the Negative Outlook as we believe that the group's capital profile could become misaligned with our expectations for capital relative to the risks attached to its operations in higher-risk markets, including mainland China. Weaker earnings and internal capital generation are also key considerations. In addition we believe that there is the risk that SC's high management turnover and potential changes to its strategy, negatively impact its franchise.

SC's Fitch Core Capital ratio of 11% remains satisfactory, relative to the rating level and peers. Capital generation has been declining but the dip could be temporary and measures are being undertaken to halt the negative trend. Retained earnings over the last 10 years contributed an average of 93bps per annum to the capital ratio. Net income before dividend payouts averaged 155bps per annum over the same period. At around 47% of its total assets, SC's risk-weighted assets (RWAs) remain broadly in line with similarly rated peers. The composition of SC's RWAs differs from peers, due to a greater exposure to unsecured consumer credit, financial institutions and higher sovereign risk.

SC competes to a large extent on the basis of its far-reaching network which makes earnings generation more difficult if its competitors draw relative strength from their larger local presence. Its widespread presence renders the bank more susceptible to external shocks, including compliance, conduct, reputational and geopolitical risks. Fitch considers the inherent complexity of SC's globally diversified operations to be adequately managed and the robustness of its risk framework should mitigate recent high management turnover.

However, it remains to be seen how the strategy changes under SC's new CEO, who joined the bank in May 2015, and how the bank fills other open key senior management positions.

Impaired loan ratios remain above peers' but volatility is low as a result of early identification and robust diversification across industries, customers and products. Capital encumbrance from unprovisioned nonperforming loans is low.

Fitch assesses SC's largest exposures as concentrated, relative to equity but oversight is tight. Its net China exposure of USD71bn or 1.9x Fitch Core Capital at end-2014 is above peers'. Increasing correlations between its key markets will, in Fitch's view, continue to diminish the geographical diversification benefits of SC's strong franchise.

We maintain the same IDRs and VRs for SC and its main operating entity, SCB as their risk profiles remain aligned and liquidity at the top holding company is adequately managed. SC's USD3.1bn equity investment in SCB at end-2014 created double leverage of 114% (2013: 93%) indicating that excess capital held at the top holding company from the rights issue in 2010 has now been fully deployed.

SCB's IDR is equalised with its VR as we believe that qualifying junior debt is not sufficient to provide protection for senior creditors.

SUPPORT RATING AND SUPPORT RATING FLOOR
SC's and SCB's Support Rating (SR) of '5' and Support Rating Floor (SRF) of 'No floor' reflect Fitch's opinion that UK sovereign support cannot be relied upon.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
Subordinated debt and other hybrid regulatory capital securities issued by SC and SCB are notched down from their VRs. The ratings on SC's capital securities are notched five times, reflecting two notches for loss severity and three notches for non-performance risk. The ratings on SCB's capital securities are notched four times, reflecting two notches for loss severity and only two notches for non-performance risk, taking into account their cumulative coupons. SCB's UT2 securities are notched three times with one notch for loss severity and two notches for non-performance. Subordinated debt is notched once from the respective banks' VRs.

RATING SENSITIVITIES

IDRS, VRS AND SENIOR DEBT
SC's ratings are likely to be downgraded over the next six to 12 months should Fitch conclude that the group's capital position relative to its risks and to other 'aa' rated peers has weakened. The ratings are sensitive to the bank maintaining capital flexibility, which we consider a key attribute for highly rated banks as it helps instil confidence and remain competitive via strategic growth.

Weaker earnings capacity and less diversification may limit SC's ability to offset risks stemming from the more volatile environments it operates in. Increasing concentrations and high reliance on collateral would also be considerations for a downgrade.

In addition, the VR and IDRs of SC are sensitive to an adverse change in relevant factors affecting holding company notching, including high double leverage (above 120%), less prudent liquidity management, more complex group structure or regulatory/legal risk specific to the holding company.

SC's company profile and operating environment make an upgrade unlikely.

SCB's Long-term IDR could benefit from a one notch uplift from its VR depending on the size of its junior debt buffers on a long-term sustainable basis.

SUPPORT RATING AND SUPPORT RATING FLOOR
The SR is sensitive to any change in assumptions around the propensity or ability of the UK sovereign to provide timely support. Any upgrade to SC's and SCB's SR and upward revision to their SRFs would be contingent on a positive change in the sovereign's propensity to support its banks or a holding company. Both are highly unlikely in Fitch's view.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
The securities' ratings are primarily sensitive to a change in the VR. SC's AT1 securities are also sensitive to a change in Fitch's assessment of the probability of their non-performance relative to the risk captured in SC's VR. This could arise due to a change in Fitch's assessment of SC's conservative approach to capital management, reducing SC's flexibility to service the securities, or an unexpected shift in regulatory buffer requirements.

The rating actions are as follows:

Standard Chartered PLC
Long-term IDR affirmed at 'AA-'; Outlook maintained at Negative
Short-Term IDR and debt: affirmed at 'F1+'
Viability Rating: affirmed at 'aa-'
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'No Floor'
Senior unsecured debt: affirmed at 'AA-'/'F1+'
Dated subordinated debt: affirmed at 'A+'
Capital securities (US853254AC43, US853254AB69, US853254AA86, USG84228AT58,): affirmed at 'BBB'
Contingent convertible securities (USG84228CE61, US853254AT77): affirmed at 'BBB'

Standard Chartered Bank
Long-Term IDR: affirmed at 'AA-'; Outlook maintained at Negative
Short-Term IDR and debt: affirmed at 'F1+'
Viability Rating: affirmed at 'aa-'
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'No Floor'
Senior unsecured debt: affirmed at 'AA-'/'F1+'
Dated subordinated debt: affirmed at 'A+'
Upper Tier 2 notes (XS0222434200, XS0119816402) affirmed at 'A-'
Capital securities (XS0129229141): affirmed at 'BBB+'