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17 Dec 1998
MOODY'S CONCLUDES REVIEW OF HONG KONG BANKS:
Moody's concludes its review of the Hong Kong banks placed on review for possible downgrade in September. The ratings of five banks, Hong Kong and Shanghai Banking Corporation, Hang Seng Bank, Dao Heng Bank, Shanghai Commercial Bank and Wing Lung Bank, have been confirmed. However, the financial strength ratings of both Bank of East Asia and Wing Hang Bank were downgraded, as were Bank of East Asia's long-term debt and deposit ratings. These rating actions conclude Moody's review of the Hong Kong banks.
Moody's said that its actions are based on its view that the Hong Kong economy is still vulnerable to external shocks. Weakness in domestic demand and high property prices, even after the adjustements seen over the last year, suggest that it may be some time before economic growth has returned to its recent pace. As a result, problem loans should continue to accumulate over the medium term, although at a slower pace. Under this scenario, the rating agency said that the system's non-performing loans may reach as high as 8-10%. Moody's now sees a smaller likelihood for the continuation of the region's rapid downward economic spiral, but warned that, should the decline resume, problem loans could be pushed even higher.
Nevertheless, Moody's analysts pointed out, the strong capital and especially the strong earnings of many of the Hong Kong banks will allow them to withstand both a prolonged and/or a deeper downturn without impairing capital levels. The SAR's banks are well-regulated and conservatively managed. Most loans are secured and although collateral values have fallen, the legal system allows for speedy enforcement of claims. Some banks are more vulnerable than others, particularly those that depend on time deposits for a large portion of their funding and banks that have opted to lend out a larger proportion of assets. Ratings and ratings outlooks were adjusted accordingly.
The following ratings were affected:
Bank of East Asia's (BEA) long term foreign currency debt and deposit ratings were downgraded from A3 to Baa1, its long term local currency deposits from A3 to Baa1, and its bank financial strength rating from C to D+ . These downgrades reflect BEA's above average (for a Hong Kong bank) risk profile. BEA is less liquid, relative to the larger sized banks in Hong Kong, and has the highest China exposure among the locally-incorporated banks. Loans comprised 64% of BEA's total assets, as compared to the more typical 50%. This naturally has left the bank less liquid than its peers, but it has not translated into the higher net interest margins that such a strategy should produce. Meanwhile, BEA's lower liquidity leaves it more vulnerable to the recent volatility of Hong Kong's interest rates. Despite being a net placer of funds in the interbank market, BEA's net interest margin dropped form 2.99% in 1996 to 2.66% for the first half of 1998. While interest rates have fallen and currency markets are calmer, the vulnerability remains and the markets cannot be relied on to remain tranquil.
With 2.4% of loans classified NPL on June 30, 1998, evidence of the bank's higher risk strategy is already appearing. BEA has some of the SAR's higher GITIC and other ITIC exposures and about 11%, rather than the usual 5%, of loans to China. We expect BEA to continue to have above average problem loans which, in combination with its below-average loan loss reserves (LLR/NPL = 68%), will keep pressure on earnings. Nevertheless, Moody's expects BEA will remain profitable as it spreads its provisions over the next couple of years, allowing it to maintain its capital ratios and keeping it firmlyinvestment grade. BEA's P-2 short term deposit rating was confirmed. BEA's rating outlook remains negative, reflecting the greater vulnerability its below-average earnings give the bank should the downward economic spiral in the region resume.
Wing Hang Bank's (WHB) bank financial strength rating was downgraded from C to D+, reflecting its somewhat higher risk profile. Although not particularly aggressive by international standards, WHB's lends out a larger portion of its deposits than most Hong Kong banks, leaving it more susceptible to high funding costs and asset quality deterioration. Nevertheless, the bank's strong capital and strong earnings combined with Bank of New York's minority stake in the bank merit maintaining its Baa1/P-2 deposit ratings. WHB's rating outlook, however, is negative reflecting its greater vulnerability should the downward economic spiral in the region resume.
The following ratings were confirmed:
The Hongkong and Shanghai Banking Corporation Limited - All ratings were confirmed. The ratings are: long-term foreign currency deposits and other senior debt rating of A3, long-term foreign currency subordinate debt rating of Baa1, long-term domestic currency deposits and other senior debt rating of A2, the domestic currency subordinated debt rating of A3, short-term foreign currency deposits and other debt of Prime-2, and financial strength rating of B. HKBK's rating outlook is stable, reflecting our view that the bank's very strong earning power and strong parent would mitigate the impact of a resumption of the region's downward economic spiral.
Hang Seng Bank - all ratings were confirmed. The ratings are: long-term foreign currency deposits of A3, short-term foreign deposits of P-2, long-term domestic currency deposits of A2, and financial strength of B. The rating outlook is stable, reflecting the bank's powerful income-generating capacity, strong capital ratios.
Dao Heng Bank - all ratings were confirmed. The ratings are: long-term foreign and local currency deposits and senior debt of A3, long-term foreign currency subordinated debt of Baa1, short-term foreign currency deposits of P-2, and financial strength of C. The rating outlook is negative, reflecting lower-than-average profitability and concerns that should conditions continue to deteriorate in Malaysia, that capital might be shifted to the Hong Leong group. DHB's relatively low risk profile gives it below average earnings, but also significantly reduces the probability of serious asset quality deterioration. Although owned by the Kwek family and related to the Malaysia's Hong Leong group, management views DHB as its crown jewel and has avoided raiding its hefty capital and reserves. NPLs are rising, but remain below average and are comfortably covered by reserves. Although the bank is acquisitive, management has demonstrated that they know what to look for in a banking partner and how to merge banking operations. Although there is nothing to warrant a downgrade, the situation in Malaysia remains a cause for concern, as does the banks below average earnings, therefore a negative outlook is recommended.
Shanghai Commercial Bank - all ratings were confirmed. The ratings are: long-term foreign currency deposits of A3, short-term foreign currency deposits of P-2, and financial strength of C. The rating outlook is stable, reflecting SCB status as one of Hong Kong's more conservatively managed banks, which is evidenced by its still low NPL and past due ratios. NPLs were less than 1% of loans as of June, despite being an active trade finance bank. Although efficiency is below-average, SCB's strong capital and cautious lending would allow it to withstand even a severe downturn with still powerful capital levels.
Wing Lung Bank - all ratings were confirmed. The ratings are: long-term foreign currency deposits of Baa1, short-term foreign currency deposits of P-2, and financial strength of C. The rating outlook is stable, reflecting WLB's conservative management and still low past due loan ratio, which was less than 1% at mid-year. WLB is liquid and has a low risk portfolio. Its China exposure is not significant. Profits have suffered from the bank's low-risk, low-margin lending, but this is keeping -- and should continue to keep -- NPLs well below average. WLB's strong capital and reserves should prove more than adequate to protect its creditors from even a severe downturn.
Moody's also concluded the review on the following related financial institutions, which were put on review for possible downgrade due to their relationships with Hongkong and Shanghai Banking Corporation:
HSBC Holdings Plc - The long term subordinated debt rating of A2 is confirmed and the rating outlook is stable.
HSBC Markets (Netherlands) B.V. - The long-term foreign currency senior debt rating of A3, long-term foreign currency subordinate debt rating of Baa1, and short-term foreign debt of Prime-1 are confirmed. The rating outlook is stable.
HSBC Markets (Bahamas) Limited - The long-term foreign currency senior debt rating of A3, long-term foreign currency subordinate debt rating of Baa1, and short-term foreign debt of Prime-1 are confirmed. The rating outlook is stable.
Hong Kong Bank of Australia - The long-term foreign currency senior debt rating of A3 is confirmed. The rating outlook is stable.
No Related Data.
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